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Murat Yas

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Shariah and Conventional Law Objections to Derivatives: A Comparison Presented By Murat Yaş (MIF) 1200385 Syed Adnan Quadri (MIF) 1200378
Bilal İlhan (PHD) 1200349 Hissam Kamal (MIF) 1200353 And He(Yaqoub) said, "O my sons, do not enter from one gate but enter from different gates; and I cannot avail you against [the decree of] Allah at all. The decision is only for Allah ; upon Him I have relied.
(Yusuf ,67) Shariah and Conventional Law Objections to Derivatives: A Comparison Introduction Red Lines of
Islamic Finance Shari'ah Objections to Derivatives Objection of Conventional
Finance to
Derivatives Conclusion About the Paper Derivatives in Conventional Finance Derivatives are ‘powerful’ financial instruments to deal with market risks ; equity risk, interest rate risk, currency risk and commodity risk

Thus,there has been huge expansion in derivative product trading around the world by promoting the creation of new specialized exchanges in many countries despite first foreign currency future have been issued in 1972.

In turn, the existence of publicly traded and liquid derivative contracts helped banks to promote new, more complex, OTC products—and encouraged additional financial institutions to participate in the new markets. 1972 Foreign
Future 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 Equity
Futures Futures on
Back Bonds T-Bill
Futures T-Bond
Futures Over-the-Counter
Curreny Options Curreny
Swaps Bank CD Futures Interest
Swaps Euro Dollar
Futures Equity
Futures Interest Rate Caps and Floor Eurodollar
Option Swaptions Commodity
Swaps Futures on
Interest Rate
Swaps Average
Options Equity Index
Swaps Portfolio
Swaps Differential
Swaps Credit Default Swaps OTC Equity
Derivatives Derivatives in Islamic Finance Assets in Islamic Finance have reached from $150 bln in 1990s to $1.3 trn in 2012 with annually %20 growth in last few decades by expanding to more and more countries.

Since the role of risk management have been increasing importantly for ensuring sustainability of IFIs, it is no surprise that there is currently more focus on offering Shariah Compliant Derivatives equivalent hedging and investment products by IFIs.

Therefore,large number of shariah compliant derivatives have been innovated by aiming to replicate swaps,options,futures and forwards to have the same economic effect of its conventional conterparts. 2000 2002 2004 2006 2008 2010 2012 Forward FX
Swaps Equity
Options Islamic
Profit Rate
Swap Total Returns Swap Equity
Derivatives Platform Based
FX Options Credit Default
Protection Motivation of the Paper Existing literature about Islamic as well as conventional finance discusses the legality of derivatives.

However, a gap exists where little research has been undertaken to compare the legal objections held in the fields of Islamic and conventional finance.

This article attempts to fill this gap by comparing legal objections to derivatives in Islamic finance with historical legal objections in conventional finance. About the Paper and Authors Shari'ah and Conventional Law Objections to Derivatives:A Comparison Professor of Finance, Taylor’s University Malaysia
Independent Consultant to World Bank
Advisor, Malaysian Institute of Economic Research
PHD, National University of Ireland Published:Arab Law Quarterly 24 (2010), 319-360
Senior Lecturer,University of Malaya
Researcher, International Sharīah Research Academy (ISRA)
PHD, Monarsh University Dr. Sherin Kunhibava Dr. Balachandran Shanmugam Qimar is generally described as Maisir which means something attained without effort, as one of the main reasons that Islam forbids gambling. Other reasons state that gambling can result in the loss of one’s property without legal or proper exchange, in anger and frustration caused by loosing, in addictive and compulsive behaviours leading to bankruptcy, and in forgetting one’s duties as a Muslim.

Jahalah, which means ignorance, can cause a sale to be declared invalid. For example, if the object of sale or its price were unknown to a buyer, due to ignorance, then it would be impossible to buy, sell of exchange money for the goods due to Jahalah.

Gharar, also forbidden in Islam, is more difficult to define.The term is more general and encompasses other elements, such as Maisir and Jahalah. Gharar has been defined as ‘danger’ and ‘risk’ but also as a transaction equal to a ‘zero-sum game with uncertain payoffs’.

Containing any such element in any Islamic Financial instrument makes product incompatible with Shariah law. Red Lines of Islamic Finance; Qimar,Maisir,Jahalah & Gharar Shari'ah Objections to Derivatives Under Shariah law, the main grounds upon which contemporary Islamic scholars base their objections to financial derivatives may be summarized as follows:

1)In futures transactions, because neither counter-value, i.e., money or goods, is present at the time of contract, the sale is actually an exchange of promises. A sale is only valid under Shariah law as long as only the price or delivery, but not both, is postponed.

2)For a sale to be valid, ownership of the item sold must exchange hands. Therefore, a seller who does not own the item cannot transfer ownership. The rationale behind ‘taking possession’ is to prevent Gharar.

3)Futures and option trading that involve speculation verge on Maisir, Qimar and Gharar.

4)Option trading is merely the right to buy or sell, for which charging fees is impermissible.

5)Futures trading, where both counter-values are deferred, is the illegal exchange of one debt for another Since only contracts in which either one counter-value is deferred and non-existent are permissible such as salam and istisna in Islamic finance, there is a strong objection to the legality of derivatives when both counter-values are deferred and non-existent at the time of contract such as futures and option.

Mejelle, the Ottoman Civil Code, Art. 197 provides that “the thing sold must be in existence”. Art. 205 provides that “the sale of a thing which is not in existence is void”.

Mahmasani, Usmani and Al-Zuhayli oppose to the legality of futures and options based on number of Hadith and the opinions of classical Shafi’I, Hanbali, and Hanafi fiqh jurists. The reason behind it that those financial instruments cause gharar (uncertainty) and jahalah (ignorance about quantity and quality of the commodity) 1)Both Counter-values in Futures and Options Trading Are Non-existent or Deferred at the Time of Contract In futures and option transactions, majority of buyers and sellers reverse their positions before delivery or maturity of the contract.e.g. 99%

A. Khan: Intermediaries make money without putting time and energy into the commodity itself. Actual delivery of goods would be beneficial to the community by creating jobs from storage, transport and packaging.

Naughton and Naughton and Chapra: Short selling, i.e., the sale of securities that the seller neither owns at the time of sale nor intends to deliver, serves no proper function in the economy.

Usmani and El-Gari: Delivery or possession of the commodity is not intended. In most cases, a transaction is finalized by settlement of the price difference only.

The hadiths are:
i.Do not sell what you do not have.
ii.He who purchases food should not sell until he takes possession of it. 2)Futures Transactions Fail to Meet the Requirement of Taking Possession of Goods Prior to Resale A.Khan: Speculation per se is not unlawful. But “Each transaction requires physical delivery”. Speculation often requires borrowed funds on interest.

R.Wilson: Speculative behavior “both unproductive and socially undesirable because of its potentially exploitative nature.” Dealing in forwards, futures and options is “potentially corrupting” and “options and futures contracts cannot be traded under Shariah, as they are too remote from the underlying assets.”

M. Obaidullah: Buyer’s gain equals to the seller’s losses and vice versa. Speculating on where random fluctuations will move the price of an underlying asset or commodity in the future so that dealing in option contracts is nothing more than a game of chance. Gains are therefore in the nature of maisir, while the possibility of suffering default after incurring massive losses indicates gharar. Presence of large-scale speculation is tolerated on the grounds that it provides liquidity and ensures market activity. However, such a trade-offs between tolerance of qimar and maysir with hedging facilities will not apply within an Islamic framework.  3)Futures and option Trading Involves Speculation and Verges on Maysir, Qimar and Gharar The foregoing discussion on gharar has shown that it is the underlying reason why scholars object to the sale of
(1) non-existent objects, and
(2) items not in ones possession.

The following discussion on gharar in contrast focuses on the issue of gambling, the zero-sum nature of derivatives, and pure uncertainty regarding the outcome of a contract. F. Khan: Farmers are forced to compete with pure speculators and futures markets are independent industry where traders can earn income by trading risks without getting involved in the actual production or delivery of a commodity. Such profit through speculation discourages producers and farmers, when it is possible to make a profit in such a manner. Islamic economic philosophy does not permit pure speculation; here the primary concern is the commodity itself, not merely the trade for the purpose of financial gain! The Islamic spirit of exchange is totally against a philosophy that isolates producers from the markets.  3)Futures and option Trading Involves Speculation and Verges on Maysir, Qimar and Gharar (cont.) Bacha: Elimination of speculative activity would hurt rather than help, because without speculators hedgers would suffer.

Kamali: Speculation cannot be altogether eliminated; even Islamic transactions such as mudarabah and musharakah are highly speculative. “speculation deals in risks that are necessarily present, but gambling creates the risk that would otherwise be non-existent.” even if the motivations of a speculator could be identical with those of a gambler, there are differences between the two because futures speculation “reallocates risk from those who do not want it to those who do.” derivatives facilitate price discovery, hedging production planning, create trading vehicles and an arena for profitable commerce that can avert the flight of much needed funds to foreign markets.  3)Futures and option Trading Involves Speculation and Verges on Maysir, Qimar and Gharar (cont.) SAC: To deposit margin does not constitute a bet. Fluctuations in the price of a commodity are brought about by changes in demand in the futures market. This is not gambling since gambling activities depend solely on luck and are not related to demand and offer.

SAC: Stock-index futures contracts do not contain elements of jahalah and gharar as their price and quantity are clearly known. The market that is based on demand and supply determines the price.

SAC: Speculation exists in all forms of business and is not unique to futures transactions.

The authors: The underlying reasons supporting the SAC ruling do not respond to
the scholarly Shariah opinions mentioned above on derivatives. The arguments put
against derivatives were not dealt with appropriately. Furthermore, the SAC did not
discuss the actual nature of futures, although when trading in commodity futures,
most players do not take possession.  3)Futures and option Trading Involves Speculation and Verges on Maysir, Qimar and Gharar (cont.) Continuing with the Shariah objections in Islamic Finance, the next contention is: Charging / Payment of Fees

Question regarding nature of options – Rights or physical assets.

Mufti Taqi Usmani : Promise in itself is binding and permissible.
Options are “rights” & valid until stipulation of fees is introduced & hence cannot be traded.

OIC Fiqh Academy + European Council for Fatwa & Research – “...new type of contracts which do not come under any one of the Shariah nominated contracts...the contract is not permissible in Shariah”

Manfah’ - although trading of intangibles such as usufruct is recognized under Islamic Law - the right given by an option may not be the same as usufruct. Pre-emptive right similar to “right to custody and guardianship”

Hashim Kamali: Concept of ‘al-ikhtiyarah’(with origins in Sunnah)
Classifies as intangible assets which validates option and compensation. Subsequent acceptance by the 4 schools of usufruct
Permissiblity (ibahah) concerning civil transactions & mu’amalat vs ibadat – provided not un-islamic
No compelling evidence in support of the practise. 4)Options Are a Mere Right to Buy or Sell for which Charging Fees Is Impermissible Obaidullah disputes Kamali on the point that some disadvantage must have been faced before payment of compensation is allowed
Does not contradict Kamali on validity of the sale with a condition where the condition is stipulation of an option, ‘khiyar ash-shart’.

In response to the argument that a seller has to face disadvantage for giving rise to compensation can be seen in the options contract as well. A buyer may let the option lapse and the maximum loss borne would be the premium. But in the case of a seller, his/her gain would the premium alone and the losses could be unlimited depending on the price movement of the underlying asset.

The authors’ believe that the deciding factor should be whether a right given in an option is valid under a sale and purchase agreement as the subject matter of the sale.

Yusuf Qardawi & Mustafa al-Zarqa + Imam Ahmad bin Hambal accept Urboun
Urboun can only be used in call option only (Nuradli Ridwan Shah) 4)Options Are a Mere Right to Buy or Sell for which Charging Fees Is Impermissible (cont.) This prohibition is applied to sale of futures contracts, where the parties can offset their transactions by selling the ‘debts’ owed to them before the delivery of the underlying asset, thus resulting in a sale of a debt.

Kamali refutes - on the basis of reliability of Hadith in this regard
further states that futures contract is between the purchaser (or seller) and the clearing house only and there is no uncertainty as to clearance and delivery.

In August 21, 1996, the Malaysian Securities Commission Sharia’h Advisory Council passed a resolution confirming the acceptance of the principle of Bai Al Dayn as one of the concepts for developing the Islamic Capital Market Instruments in Malaysia.

In the authors’ opinion, Kamali’s point sufficiently refutes the objections to futures as the clearing house acts as seller for each buyer and buyer for each seller in all futures transactions and every transaction is guaranteed. 5)Futures Trading, Where Both Counter-Values Are Deferred, Is The Illegal Exchange Of One Debt For Another Moving on, it is interesting to note that the prohibition for sale of future goods exists since time immemorial (Mosaic code in 1250 BC + Greece 7th Century). Two legal grounds driving the objections in conventional finance to derivatives are:
1.Futures involve mere sale of promises which is unenforceable (similar to first 3 Shariah objections)
2.Futures are contract for differences which amount to wagering and hence illegal.

1. Non receipt of benefit by the promisor:
Adversely affected the sale of promises or an executionary contract since the early recorded English law. Glanville’s Tractatus – (1185-1190) – first in the series of books on English common law

In Bryan v Lewis, it was held that the non-existence of goods at the time of contract even when in possession at the date of delivery invalidated the contract. (Bryan v Lewis, 1826)

The decision in Bryan v Lewis was reversed in Wells v Porter - judgement based on whether there was a reasonable expectation that the goods in the contract would be obtained at the time of drawing up the contract. (Wells v Porter, 1836) 1)Futures Involve the Mere Sale of Promises Which Is Unenforceable This ‘reasonable expectation test’ is also similar to the second Shariah objection that futures sale fall short of meeting the requirements of taking possession of the goods prior to reselling.

The opinion of Ibn Taymiyya, Al-Suwailem holds that if the product is easily available to the seller, then legally, it is effectively in the seller’s possession and contract is valid.

Hibblewhite V M’Morine further extended the test of reasonable expectation and held the sale of promise is valid as long as the commodity is available and in the seller’s possession at the time of delivery. (Hibblewhite v M’Morine, 1839)

The US law took the same approach in Clews v Jamieson. (Clews v Jamieson, 1900)

The authors’ feel that Kamali’s point that the function of clearing house to guarantee the transaction sufficiently mitigates the non-existence of counter-values in futures and options contract. 1)Futures Involve the Mere Sale of Promises Which Is Unenforceable (cont.) Paper now analyses select case law and legislation from 1828 to 1922 in England and US under this objection

Cases considered where futures evolved to contracts where there was
(i) no delivery and (ii) no intended delivery.

Mere settlement of differences between T0 and T1 price
Wagering……which is ILLEGAL!

Prima facie comparison with gaming/gambling which had almost identical features:
zero-sum/winner takes all (no profit sharing or progressive [middle-man] profits)
probability-based, real events outside of participant’s own economic interest 2)Futures and Gaming UK: Greenland v Dyer (1826) held unenforceable [same judge as Bryan v Lewis]

But..Morgan v Ferber (1837) held enforceable as common law generally allowed wagers (?!), until legislation...

s.18 of 1845 Gaming Act:
18. Wagers not recoverable at Law “..All contracts or agreements, whether by parole or in writing, by way of gaming or wagering, shall be null and void; and no suit shall be brought or maintained in any court of law and equity for recovering any sum of money or valuable thing alleged to be won upon any wager..” [NB we note this s.18 of the 1845 Gaming Act only repealed in under the Gaming Act 2005!]

Intention becomes important:
In 1851 Grizewood v Blane was heard: Jervis CJ (one of the 3 judges) stated:
“..I certainly meant to ask the jury what was the intention of the parties, as understood by both of them, at the time of entering into the contract. That was the whole contest..was clearly gambling..a practise which everyone must condemn.” [their past dealings had no delivery of shares] 2)Futures and Gaming (cont.) Established as a precedent (1851 Barry v Croskey) “bona fide intention”
1896 House of Lords (highest court) re-confirmed the “intent test”
“Intent test” re-affirmed many times in the US:
including Irwin v Williar (1883) [wheat futures through the Baltimore Corn & Flour Exchange where setoff & settlement without delivery was customary]
Intent test thus incorporated in to most States’ legislation in the 1920-1930’s period.

But: Board of Trade of the City of Chicago v. Christie Grain and Stock Company (1904) – Supreme Court held the setting-off or ringing-out did not invalidate the transactions: “The fact [setoff and pay differences].. detracts in no degree from the good faith of the parties, and if the parties knew... and intend to make use of it,...that fact [to set-off and pay differences] is perfectly consistent with a serious business purpose and an intent that the contract shall mean what it says.”

The Federal Grain Futures Act 1922 [not explained by the authors] probably allowed setoff contracts within a licensed exchange but as Dickson v Uhlmann (1933) held, such activity outside an Exchange or Board of Trade was akin to gaming, thus illegal. 2)Futures and Gaming (cont.) Conclusion Conventional law and Islamic law share similar concepts
Especially Gambling/Wagering and Masir/Gharar and Jahalah

Conventional law and Islamic law differ on two aspects
Deferment of two counter values
Fees for rights / options

Call for Islamic finance and conventional finance to learn from each other given:
shared values, especially with respect to gambling and speculation
shared concerns on the vulnerability of the real economy to excessively risky behaviour Critical
Analysis of
the Paper Excellent summary of the salient legal points within a historical framework, giving voice to the spectrum of opinion and illustrating common concerns and methods of dealing with them

However, the paper has several missing links of the progression of conventional law to the present-day:

Rationale for allowing for the establishment of agriculture exchanges

How concerns (of gaming) were addressed in conventional law

Tremendous amount of literature on the subject Issues with the Paper: Evolution of Conventional Legal and Regulatory Shari'ah
Equivalents Islamic Profit Rate
Swaps (IPRS) Currency
Derivatives Structured
Exotics Commodity/Equity
Options Multiple Murabaha
IPRS Wa'ad IPRS Wa'ad Cross
Currency IPRS Wa'ad Total
Returns Swap Credit Default
Derivatives Wa'ad Currency
Option Double Legged
Currency Swap Wa'ad Currency
Swap Murabaha Deposit Total Returns Swap Takaful Credit
Default Protection Sukuk Credit
Default Protection Arboun Sale
(Embedded Option) Wa'ad/Murabaha
Option Shariah Compliant Derivative Equilavents 1800 1800 Individual cases, 1845 Gaming Act, “intent test” vs “serious business purpose” Thanks for Listening Q&A `Allah is the One Who Gives Success` Wa'ad/Murabaha
Currency Option Content of the Paper 1)Introduction

2)Qimar, Maisir, Jahalah & Gharar

3)Shariah Law Objections on Derivatives
3.1)Both Counter-values in Futures and Option Trading Are Non-existent or Deferred at the Time of Contract
3.2) Futures Transactions Fail to Meet the Requirement of Taking Possession of Goods Prior to Resale
3.3) Futures and Option Trading Involves Speculation and Verges on Maisir, Qimār and Gharar
3.4) Options Are a Mere Right to Buy or Sell for which Charging Fees Is Impermissible
3.5) Futures Sale Being the Deferment Of Both Counter-Values Is a Sale of One Debt For Another, Bai Ul-Kālī Bī L-Kālī, which Is Forbidden

4) Legal Objections of Derivatives in Conventional Finance
4.1) Futures Involve the Mere Sale of Promises Which Is Unenforceable
4.2) Futures Sales Being Contracts for Differences Amounts to Wagering and Is Therefore Illegal

5)Further Deductions

6)Conclusion Sources: Syad Farook(2010).Islamic Capital Markets and Investment Banking The Definitive Guide Sources: Syad Farook(2010).Islamic Capital Markets and Investment Banking The Definitive Guide Sources:ISDA Sources:Michel Crouhy,Dan Galai,Robert Mark(2009).Risk Management The history of derivative trading can be traced back to Mesopotamia where primitive forms of forward contracts have been recorded.

The futures trading, as we know it today, began in the 17th century in the Japanese markets of Osaka.

US Chicago Board of Trade (CBOT) in the 19th century started to trade more modern derivatives.

Today most major cities worldwide have derivative markets due to its critical role for risk management. Brief History of Derivatives Brief
History of
Derivatives Method of the Paper When comparing Islamic and conventional finance, the sources of their legal objections to derivatives vary.

Under Islamic law, derivatives are not covered by the Quran and Hadith so the following discussion on legal objections in Islamic finance will mainly focus on interpretations by fiqh scholars.

As legal objections in conventional finance held in history, UK and US jurisdictions will be taken into account due to two reasons;
1)Both countries have a rich legal history that can be traced for this purpose.
2)The financial markets of both countries are among the largest in the world for derivative trading. Hadiths are;
i.“Forbade the selling of fruits until they ripen.”
ii.The Prophet forbade the sale of dates until they became fit for eating and could be weighed, which means until they are estimated”.
iii.The Prophet prohibited the sale of fruit before its quality is known, the sale of wool on the back of sheep, and the sale of milk in an udder”.

Al-Zuhayli: The sale of non-existence goods and goods that might cease to exist is invalid:e.g. the sale of fruits and plants before they appear…sale of pearls in shell, milk in udder, wool of the back of sheep, and a book before it is printed etc.

OIC Islamic Fiqh Academy (during its 7th session in 9 to 14 May 1992) and The European Council for Fatwa and Research declared the non-permissibility of derivatives. 1)Both Counter-values in Futures and Options Trading Are Non-existent or Deferred at the Time of Contract (cont.) Imam Malik: Sale of milk from the udders of a herd of sheep, over a specified number of days, is valid when the quality of milk is homogenous and the herd’s productivity known. In contrast, the sale of milk from one sheep udder is not allowed. This opinion illustrates that where jahalah and gharar can be minimized, sale of non-existent goods may be allowed.

Ibn al-Qayyim and his teacher Ibn Taymiyyah: No clear prohibition could be found in either the Quran or Hadith. The Hadiths prohibiting the sale of non-existent goods were referring to situations involving excessive risk, uncertainty, and doubt about the delivery. The sale of goods non-existent at the times of contract is permissible, if custom has shown that the items will exist in the future.

Kahf: Due to the nature of businesses, parties need to plan in advance before contracting their products and input, regardless of their need to finance.
(istihsan, maslahah) 1)Both Counter-values in Futures and Options Trading Are Non-existent or Deferred at the Time of Contract (cont.) Kamali: Non-existence of counter-values in futures or option contracts will not lead to gharar because clearing houses function as a guarantee that uncertainty and therefore gharar will be prevented and contracts fulfilled.

SAC resolved (26 November 1997) that the futures contracts for CPO are permissible. Buying non-existent assets (bai’ ma’dum) was actually prohibited due to presence of uncertainty (gharar) whether goods sold could actually be delivered or not. If the gharar can be eliminated, then the non-existence of goods at the time of contract should not be reason for its invalidation. 1)Both Counter-values in Futures and Options Trading Are Non-existent or Deferred at the Time of Contract (cont.) Kamali: During the Prophet’s time, the marketplace in Madinah was so small that regular delivery of supplies could not be guaranteed at any given time. In modern times, a seller can locate goods of sale at almost any time and make necessary deliveries.

The paramount reason for such a prohibition would seem to be gharar about delivery of the purchased goods. However, according to Ibn Taymiyyah, if the commodity or asset is easily available in the marketplace, then prohibition will not apply.

Author: a person prohibited from selling goods that he did not possess, would delay completion of a commercial transaction and hamper international commerce. 2)Futures Transactions Fail to Meet the Requirement of Taking Possession of Goods Prior to Resale (cont.) OIC at its 7th session on 9-14 May 1992 opines that “the contract does not stipulate that it shall end with the actual delivery and receipt of the merchandise…it is not at all permissible… this decision was confirmed by the European Council for Fatwa and Research.

Islamic Fiqh Academy in India objected these instruments since “selling deal before getting possession is prohibited because there is always of rescission. Unless the first buyer actually takes possession of the goods sold, it is possible that the goods might never fall under his ownership and that he might therefore be unable to hand them over to a second buyer”.

Ibn Taymiyyah: “.. the meaning of what you do not have (referring to the hadith) is what you are unsure that you will be able to acquire. It may be that the product being sold is not readily available in the marketplace or may only be available at a price higher than the one that it is being sold for. In such circumstances, either the buyer or seller will be injured by the sale. If the product is easily available to the seller from some other vendor or supplier at a known price, then from a legal standpoint it is effectively in the seller’s possession. In this case, such a sale does not come under the Prophet’s prohibition. 2)Futures Transactions Fail to Meet the Requirement of Taking Possession of Goods Prior to Resale (cont.) 1859 1900 1922 1890 1936 1968 1974 1982 1986 1990 2000 2000 CBT established as a state chartered private association Farmer protest diffused as prices increasing until WW1. Commodities Exchange Act: regulation of traders on exchanges (Com. Exch. Auth. established), criminalisation Commodity Futures Act: increased regulatory powers further (Com. Fut. Trad. Comm. established) Financial Services Act: cleared the way for enforceable contracts for differences Commodity Futures Modernisation Act: facilitate more competition in markets/exchanges to “reduce systemic risk in..futures and [o-t-c] derivatives…” Onwards: de/re-regulation, GFC – temporary ban on shorting/CDS (AIG), HFT, Tobin tax, Dodd-Frank Act 2010 Explosion in growth, but Barings, LTCM, Enron etc,,, Futures Trading Act: divided regulation between futures exchanges (CFTC) and financial instruments (SEC) Commodity Exchange Act: increased CEA regulatory powers Federal Grain Futures Act: regulation of exchanges Anti-options bills passed by Congress but failed on technicalities between Senate & House Price manipulation of grain prices – petitions to congress (cornering, monopolies), short sales made illegal/criminal, bucket shops! References
1. Muslima Zahan, Ron S. Kenett, Hegding Instruments in Conventional and Islamic Finance, EJASA: DSS (2012). Vol 3, Issue 1, 59-74
This paper presents instruments of hedging and risk management applied in both conventional and Islamic banking market places. It claims that hedging for risk management in these two banking systems are quite similar, although the concept, framework, goals and objectives, as well as risks, are different in their respective business activities.

2. Asyraf Wajdi Dusuki, Principle and Application of Risk Management and Hedging Instruments in Islamic Finance,
He aims to delineate the concept of risk and risk management from Islamic Perspective. The paper focuses on the application of various hedging instruments to address to concern of Islamic financial institutions over financial risk management.

3. Richard Lartey, What did derivative instruments play in the financial crisis of 2007-2008?
Failure of the financial derivative instruments leading to worsening of the global financial crisis is not to suggest that derivatives should not be traded. Derivative markets should be properly regulated and controlled by the appropriate agencies.

4. Michael J.T. McMillen, Richard Fagerer, Michael E. Pikiel, The 2010 Tahawwut Master Agreement: Paving the Way for Shariah-Compliant Hedging Products. (2010), Electronic copy available at: http://ssrn.com/abstract=1670118
In March 2010, the International Swaps and Derivatives Association (ISDA) and International Islamic Financial Market (IIFM) released The 2010 Tahawwut Master Agreement for the standardized effectuation of certain swaps and derivative transactions that are compliant with the principles of Islamic Shariah.

5. IMF Working Paper, Andreas A. Jobst and Juan Sole, Operative Principles of Islamic Derivatives-Towards A Coherent Theory
Islamic finance has already includes a considerable number of contracts and instruments with derivative-like features that can help agents reduce risks or that could form the basis for designing shariah-compatible derivatives. It is in fact the absence of clearly articulated operative principles fro shariah-compliant derivatives transactions that have left the Islamic capital market incomplete. The standardization of the few customized hedging tools now in use into universally comprehensible and accepted terms would establish clarity about the rationale of their restrictive use, ensure consistent application, and thus would attract a wider range of participants and help establish congruence of derivatives in both conventional and Islamic finance. The release of the ISDA/IIFM Tahawwut (Hedging) Master Agreement (TMA) represents a first step in the right direction but it remains to be seen how widespread this transaction standard will be used as other risk management techniques are being devised to better account for shariah principles.

6. Sherin Kunhibava, Derivatives in Islamic Finance, Research Paper, ISRA, 7/2010.

7. Lynn A. Stout, Regulate OTC Derivatives by Deregulating Them, (2009) References
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