Legal and Regulatory Framework of Islamic Capital Market

Prepared for : Ustazah Norizan Prepared by : Nur Aisyah binti Amir Salleh Farazilamasni binti Muslimin Siti Masura binti Puasah Mohd Hanif

Table of Content

Development of Islamic Capital Market Sukuk Structure Local and International Regulatory Authorities of Islamic Capital Market Securities Commission Malaysia Bursa Malaysia Bank Negara Malaysia LOFSA IFSB IFSA Capital Market and Services Act 2007

 Guidelines Equity Capital Market and Instrument

Guideline on Islamic Fund Manager Guidelines on Unit Trust Fund Guidelines for Islamic Real Estate Investment Trust Guidelines n Structured Products
Debt Capital Market and Instruments Guidelines on Islamic Securities Guidelines on Asset Backed Securities Guidelines on Minimum Content of Trust Deed

Introduction
Capital market is the place where long-term financial instruments with maturity exceeding one year are issued and traded. The goal is to channel savings into long term productive investments. Participant in this market consists of government and private sectors. The financial instruments in the capital market may be categorized into: Equity instruments are in the form of share certificates, either common stock or preferred stock. Debt instruments are made up of bonds which may be classed into common bonds and convertible bonds.

Development of Islamic Capital Market

MALAYSIAN ISLAMIC FINANCIAL SYSTEM

Islamic Banking

Islamic Capital Market

Takaful
Bank Negara Takaful Act 1984

Retail
Bank Negara IBA 1983 Islamic Bank BAFIA SPTF SPTF guidelines 1993 etc

Equity Market

Bond Market

Deposit & Investment

Securities Commission Securities Commission Act 1993 Capital Market and Services Act 2007 Companies Act1965 Guidelines for IS 2004 etc

Source: Asst. Prof. Dr. Rusni Hassan

 Is a market transactions are carried out in ways that do not against with the shariah compliance.

Islamic Capital Market (ICM)

Since almost a decade ago when the first Islamic private debt securities (IPDS) was issued, the ICM has developed and produced a wide range of equity products, debt securities and managed funds.
There can be doubt that the government is intent on shaping Malaysia into a leading international Islamic capital market centre. IPDS continued to be a favorite instrument among corporate bodies for long-term financing. Malaysia Rating Corp Berhad says that 77% of the total issues rated in 2002 (going by value) were Islamic papers. Most of the IPDS approved by the Securities Commission (SC) to date were structured based on the principles of Bai Bithaman Ajil (BBA) and Murabahah.

 The SC had, in July 2002, informed relevant industry bodies and associations on the importance of recognizing the SAC as the only body that can make pronouncements to the public on any Shariah matters in relation to the capital market. This was done to ensure harmonization and standardization of Shariah rulings and to avoid possible divergence of Shariah interpretations among Shariah scholars in the country.
The in-house Shariah advisers or committees of the members of industry bodies or associations should provide advice and guidance on internal process only and should not make pronouncements to the public.

The Shariah Advisory Council (SAC) was established in May 1996 to advise the Commission on Shariah matters pertaining to the ICM. Members of the SAC are qualified individuals who can present Shariah opinions and have vast experience in the application of Shariah, particularly in the areas of Islamic economics and finance. Today, various capital market products are available for Muslims who only seek to invest and transact in the ICM. Such products include the SC list of Shariah-compliant securities, Sukuk, Islamic unit trusts, Shariah indices, warrants (TSR), call warrants and crude palm oil futures contract.

Where ICM in Malaysia today?

Islamic capital market is a trillion ringgit industry in Malaysia. Having grown at an average rate of 13.6% per annum over the ten-year period between 2000 and 2010, the size of Malaysias Islamic capital market, or ICM, stood at RM1.05 trillion as at the end of 2010, compared to just RM294 billion as at end-2000. During this period, the market capitalization of Shariah-compliant companies and the value of sukuk outstanding in Malaysia increased at average rates of 11.5% and 22.2% per annum respectively. A similar trend was also observed at the global level, with Islamic finance as a whole registering an average growth rate of almost 15% per annum. Malaysias ICM is projected to increase to RM2.9 trillion in 2020. In comparison, the whole capital market is projected to more than double from RM2.0 trillion in 2010 to RM4.5 trillion by 2020. The Sukuk market has continued to expand impressively in 2011. The total value of Sukuk issued globally from January to August amounted to USD55 billion, representing a 105% increase over the corresponding period in 2010. Malaysia remains at the forefront of the Sukuk market, accounting for 67% or USD37 billion of the total Sukuk issued. Malaysia is also the domicile for 60% of the USD165 billion total Sukuk outstanding globally as at August 2011. Malaysia continues to enjoy a leadership role as an international centre for Islamic capital market activities. Malaysia has successfully developed various capabilities and capacities in virtually all segments and aspects of the Islamic capital market.

Fundamental ofSukuk
Is the plural of Sakk which literally meaning as a certificate. Medieval Times the word cheque or check derived from sak Technically, it refers to securities, notes, papers or certificates, with features of liquidity and tradability. Islamic Financial Services Board (IFSB-2) defines: Certificates that represent the holders proportionate ownership in an undivided part of the underlying asset, where the holder assumes all rights and obligations to such asset. The Accounting and Auditing Organisation for Islamic Finance Institutions (AAOIFI) Shariah standard 17 (Investment Sukuk) definition: Certificates of equal value put to use as common shares and rights in tangible assets, usufructs and services; or equity in a project or investment activity. Guidelines on Sukuk in SC (Chapter 2) define; Certificates of equal value which evidence undivided ownership or investment in the assets using Shariah principles and concepts endorsed by the SAC, but shall not include any agreement for a financing/investment where the financier/investor and customer/investee are signatories to the agreement and where the financing/investment of money is in the ordinary course of business of the financier/investor, and any promissory note issued under the terms of such an agreement.

The issuance of Sukuk is regulated by the Securities Commission Malaysia, through the framework provided under the Guidelines on Sukuk. The structure of sukuk must be confirmed and approved by a Shariah Adviser who is appointed by the issuer. A Shariah Adviser can be an independent Shariah Adviser approved by the SC or a Shariah Committee attached to a financial institution that operates Islamic banking activities approved by Bank Negara Malaysia. Malaysia pioneered the development of the global sukuk market with the launch of the first sovereign fiveyear global sukuk worth US$600 million in 2002. Since then our sukuk market has experienced unprecedented growth with Malaysia firmly established as one of the largest issuers of sukuk over the years. As of the year 2007 - Malaysia is the largest sukuk market in the world with achieving 68.9% or USD62 billion of the global outstanding sukuk. Malaysian corporation issued the largest sukuk offering in the world amounting to USD4.7 billion Presently, The Deputy Prime Minister Tan Sri Muhyiddin Yassin in 10th Kuala Lumpur Islamic Finance Forum 2013 said that Malaysia had grown its sukuk from US$1.5bil (RM4.8bil) of the global outstanding amount in 2001 to over US$148bil (RM473.7bil) in June 2013. It is accounted for 60.4% of the outstanding global sukuk. Despite the volatility in global bond markets and concerns over monetary policy in the United States, the global sukuk market had shown resilience in the first half of this year with US$61.2bil (RM194.7bil) worth of sukuk papers domiciled in more than 20 countries. Malaysia has grown its sukuk rapidly and is now leading in global sukuk. Sukuk market had become a major contributing factor in the internationalization of Islamic finance.

Sukuk In Malaysia

Sukuk Structures
Murabahah (Mark-Up Sale) Istisna (Manufacturing Sale)

Sukuk Based on Shariah Contracts

Sales-Based

Salam (Forward Sale)

Ijarah Muntahiah Bit Tamleek (Lease Ended With Transfer of Ownersip) Ijarah Mawsufah fi Dhimmah (Forward Lease)

Lease Based
Agency Based

Wakalah lil Istihtmar (Agency for Investment)

Partnership

Mudharabah Musharakah

Sukuk Ijarah Malaysia Global Sukuk Incorporated

Government of Malaysia
2. SPV enters into a Master Ijarah Agreement with GOM (lease of land parcels) 7. At maturity, SPV sells the land to GOM at an agreed price.

5. Proceeds

9. Payment of rental and at maturity pay cash for sukuk redemption

Federal Land Commissioner

SPV (Malaysia Global Sukuk Inc.)

Sukuk Ijarah Owners

4. Payment of proceeds from sale of Sukuk

1. Sells beneficial interest in land parcels to SPV for USD600 million (transfer of beneficial title)

Sukuk Ijarah Shariah Requirements

The rental payments maybe structured such that it comprises of (i) profits on the rental and (ii) redemption amount on the principal. Sukuk Ijarah does not represent debts; but undivided proportionate ownership of the leased asset (participatory certificates).

Because the Sukuk Ijarah are not debts nor monetary, the issue of sale of monetarydebts with a discount do not arise. Hence Sukuk Ijarah maybe traded in the secondary market freely.

Sukuk Istisna
Structured to finance projects which will be completed in the future e.g. power plant, highways etc.
Under parallel Istisna, the Issuer, being awarded the project by awarding party, will enter into Istisna 1 with the Investors i.e. Investors to deliver the completed project to the Issuer and the Issuer is supposed to pay the Istisna Price + Profit Margin to the Issuer, to be paid deferred at an agreed maturity date.

The Issuer, being indebted to the Investors, will issue Sukuk Istisna to the Investors.
The Issuer will create an SPV for project management purposes. The Investor will then enter into Istisna 2 with SPV where the payment of the purchase price (equivalent to construction cost) is paid by Investor based on the contractually agreed terms e.g. progressive payment, one lump sum etc.
Istisna 1 (Construction Cost + Profit Margin)

ISSUER
Issue Sukuk Istisna

INVESTOR
Istisna 2 (Construction Cost)

Creates Special Purpose Vehicle (SPV)

SPV

Sukuk al-Istisna structure

Sukuk holders (investors)
1. SPV issues Sukuk to investors and receive proceeds

5. The returns are distributed among the Sukuk holders

2. Sukuk proceeds are used to pay the contractor/ builder to build and deliver the future project

Contractor/builder
3. Title to assets is transferred to the SPV

SPV

End buyer
4. Property/project is leased or sold to the end buyer.

Sukuk Murabahah (Tawarruq) Structure

Tawarruq (Monetisation) is applied by Cagamas (Malaysias national mortgage corporation) to purchase receivables from Islamic assets (house financings, hire purchase and leasing) of financial institutions.3. Proceeds

2. Issue Sukuk to Investors to evidence ownership of commodity 1. Cagamas, as Agent (Wakil) of Investors purchase commodity on spot basis (Purchase Price)

INVESTOR

4. Purchase Price

9. At maturity, Cagamas pay principal to redeem

Commodity Broker A

5. Trustee (on behalf of Investors) sell the commodity to Cagamas (Deferred Sale Price = P+P) on deferred basis

Trustee
8. Periodic Profit Payment

Commodity Broker B

6. Cagamas sells commodity to Broker B on spot basis (P) 7. Selling Price used to fund Cagamas Islamic operations

Sukuk al-Musharaka structure

Originator/ Corporate
4..Periodic profits +incentive fees
6. Musharaka Arrangement- Undertaking to buy Musharaka shares of the SPV on a periodic basis

1.Physical asset contribution

Musharakah

Investors

3. Periodic profits

2b. Sukuk proceeds

2a. Sukuk proceeds

SPV
5. Issues sukuk musyarakah + Periodic distribution of profit

Corporate and the SPV enter into Musyarakah arrangement for fixed period and agreed profit sharing ratio and the appointment of the corporate as an agent to develop the land. Any losses will be apportioned based on the capital contributed. The corporate undertakes to buy Musyarakah sahers of the SPV on a periodic basis.

1. Corporate As a (Musharik A) contribute land or other physical assets to the Musyarakah

2. SPV (Musharik B) Contribute cash, i.e the issues proceeds received from the investor to the Musyarakah 3. The corporate as an agent of the Musyarakah to develop the land with the cash injected into the Musyarakah and sell/lease the developed assets on behalf of the Musharik B. 4. In return, the agent (corporate) will get a fixed agency fee plus a variable incentive fee payable.

5. The profits are distributed to the sukuk holder.

Local and International Regulatory Authorities of Islamic Capital Market

Securities Commission Malaysia

Established on 1 March 1993, governed by the Securities Commission Act 1993.

Is a self funding statutory body with investigative and enforcement powers. The functions of the Commission is written in section 15 of the Securities Commission Act 1993. The membership of the commission is spelt out clearly in section 4 consist of the following members who shall appointed by the Minister. Any person who issues, offers for subscription or purchase or makes an invitation to subscribe for or purchase debentures would require the approval of the Securities Commission (SC) under section 32 of the act.

Through this amendments, the SC will act as the sole regulatory authority both in respect of the issuance of securities as well as in respect of the registration of prospectus.

In considering proposals by public companies to undertake an issue of debt securities whether convertible into shares or not:
The company is in need of funds for the expansion of business activities, including expansion by way of acquisition, thereby improving its productive capacity and enhancing its profitability The company is in need of funds for the diversification of business to achieve synergies The company is in need of funds to refinance its existing borrowings, thus reducing its interest cost and thereby improving its profitability.

(d) by way of issue of securities, effect (i) a compromise or arrangement whether or not for the purposes of or in connection with a scheme, compromise or arrangement for the amalgamation of any two or more corporations or for reconstruction of any corporation; (ii) an employee share or employee share option scheme; (iii) an acquisition of securities or assets; (e) apply for the listing of a corporation, or for the quotation of securities, on a stock market of a stock exchange;

(f) distribute the assets of a public company to its members other than distribution in cash or distribution of assets to members of the public company on its winding up; or
(g) acquire or dispose assets (whether or not by way of issue of securities) which results in a significant change in the business direction or policy of a listed public company.

 Under section 32(2) of the Act, a person who propose to do any of the following proposals would have to submit to the SC for approval as provided under section 32(3) and (4) of the Act respectively: (a)make available, offer for subscription or purchase, or issue an invitation to subscribe for or purchase securities in Malaysia; (b) make available, offer for subscription or purchase, or issue an invitation to subscribe for or purchase, outside Malaysia, securities of a public company, or to list such securities on a securities exchange outside Malaysia; (c) make a bonus issue of securities of a public company other than by way of the capitalization of inappropriate profits;

Under section 2 of the Act securities has been defined as ; (a) debentures, stocks or bonds issued or proposed to be issued by any government; (b) shares in or debentures of, a body corporate or an unincorporated body; or (c) unit trusts or prescribed investments, and includes any right, option or interest in respect thereof Also, under the same section of Act ; debenture includes debenture stock, bonds, notes and any other evidence of indebtedness of a corporation for borrowed moneys, whether or not constituting a charge on the assets of the corporation, but shall not be construed as applying to any of the following: (a) any instrument acknowledging or creating indebtedness for, or for money borrowed to defray the consideration payable under, a contract for sale or supply of goods, property or services or any contract of hire in the ordinary course of business; (b) a cheque, bankers draft or any other bill of exchange or a letter of credit; (c) a banknote, an insurance policy or a guarantee; (d) a statement, passbook or other document showing any balance in a current, deposit or savings account; (e) any agreement for a loan where the lender and borrower are signatories to the agreement and where the lending of money is in the ordinary course of business of the lender, and any promissory note issued under the terms of such an agreement; or

 All proposals submit to the SC for its consideration, including the issuance of IPDS, shall conform to the following:

- The application must be a public company.

Listed company which submit a proposals the SC for its consideration must do so through a merchant bank.

- Unlisted companies, with the exception of those making an application for floatation on the stock exchange, may do so either through a merchant bank or an approved firm of public accountants. An application for such waiver should be made prior to submission of a proposals, and a waiver may be granted in appropriate cases. All application for proposals requiring the approval of the SC (Including applications for waiver) should be submitted in three copies and addressed to the Chairman of the SC

The application letter submitted by the principal adviser must be signed by at least 2 authorized signatories.

 Any person who is aggrieved by the decision of the SC may, within 30 days after the aggrieved person is notified of such decision, make an application for a review of the decision to the SC whose decision shall be final. An application for a revision the terms and conditions of an approval given by SC is not subjected to any time limit. The principle adopted by the SC on such application are as follows:
- Such application should be supported by evidence of genuine new grounds of development beyond the control of the relevant parties. - Such application which do not comply with above may be considered by the SC at its discretion based on exceptional reasons.

Any proposals that has been rejected by the SC may be re-submitted but only after a lapse of at least 1 year from the date the application for the proposal or a review of decision, as the case may be, is rejected.

Bursa Malaysia
Is an approved exchange holding company under section 15 of the Capital Markets and Services Act 2007 regarding the Power of Minister to approve an exchange holding company A public company limited by shares under Companies Act 1965. Operates a fully integrated exchange, offering equities, derivatives, offshore, bonds as well as Islamic products and provide a diverse range of investment choices globally. The securities of Bursa Malaysia listed company which is Shariah Compliant Securities classified as shariah permissible for investment, based on the companys compliance with shariah principle in terms of its primary business and investment activities. It was introduces in June 1997 by the Shariah Advisory Council (SAC) of the SC.

 Bursa Malaysia Securities Regulates and operates the securities trading activities in Malaysia. Companies from any economic are listed either on the Main Market for large cap established companies, or the ACE Market for emerging companies of all sizes. The exchange adopts the FTSE Bursa Malaysia KLCI values as its main index.
Bursa Malaysia Derivatives is a subsidiary of Bursa Malaysia Berhad which provides, operates and maintains a future and options market. Its star product, the crude palm oil futures (FCPO) contract has been the global benchmark for the pricing of palm oil and palm oil based product. Bursa Malaysia is the first exchange to establish Bursa Suq Al-sila, the first end to end shariah compliant commodities trading platform.

Market & Trading Participants

Market participants Stock broking Companies currently, 35 stock broking companies which 14 are categorized as Investment Banks. Offer services in dealing of securities listed on Bursa Malaysia Securities. Trading participants Is a company which owns at least one Preference Share of Bursa Malaysia Derivatives to conduct business as a future broker licensed by the Securities Commission under the Capital Market & Services Act 2007 and carries on trading in Contracts traded on the Bursa Malaysia Derivatives o Investor protection BM maintains 3 compensation funds, (Compensation fund of Bursa Malaysia Securities, Fidelity Fund of Bursa Malaysia Derivatives and Compensation Fund of Bursa Malaysia Depository. o Risk management through the supervision of the Risk management Committee (RMC), aimed at managing and controlling risks appropriately for the Group.

BANK NEGARA MALAYSIA Established on 26 January 1959 under the Central Bank of Malaysia Act 1958 (Revised 2009). The new CBA Act 2009, known as Act 701 was gazetted on 3rd 0f September 2009. Section 3(1) states the notwithstanding the repeal of the Central Bank of Malaysia Act 1958 by section 99, the body corporate established under the repealed Act under the name Bank Negara Malaysia or in English Central Bank of Malaysia shall continue to be existence under and subject to the provisions of this Act. The Act incorporates an explicit mandate, provides comprehensive provisions for heightened surveillance, pre- emptive actions and expanded resolution powers to facilitate the swift and orderly resolution of a financial crisis

The bank also take appropriate intervention to avert risk that stem from unregulated entities. Anything that related with Islamic finance is discussed thorough in part V11 of the Act. Section 5(1) laid down the principle objects of the Bank shall be to promote monetary stability and financial stability conducive to the sustainable growth of the Malaysian economy Section 5(2) function of the Bank

Function of the Bank Negara Malaysia 5(2)

To formulate and conduct monetary policy in Malaysia Issue currency in Malaysia To regulate and supervise financial institutions which are subject to the laws enforced by the bank To provide oversight over money and foreign exchange markets To exercise oversight over payments system To promote a sound, progressive and inclusive financial system To hold and manage the foreign reserves of Malaysia To promote an exchange rate regime consistent with the fundamentals of the economy To act as financial adviser, banker and financial agent of the government.

Labuan Offshore Financial Services Authority (LOFSA)

Is known as one stop agency established in 1996 and located in Labuan Function : Focus on business development and promotion Process application and supervise offshore activities; Develop national objectives, policies and set priorities; Administer and enforce legislation; and Incorporate/register offshore companies.

Section 3 writes :

The authority and its objective of its formation established as a corporate body by the name of Labuan Offshore Financial Services Authority with perpetual succession and a common seal, which may sue and be sued in its name .

Purpose of this Act May enter into contracts and may acquire , purchase , take, hold and enjoy movable and immovable property of every description and may convey, assign, surrender, yield up, charge, mortgage, demise, reassign, transfer or otherwise dispose of, or deal with, any movable or immovable property or any interest there in vested in the authority upon such terms as it deems fit. Section3(2) Spells out the objective of authority are: a) To promote and develop Labuan as a centre for offshore financial services b) To develop national objectives, policies and priorities for the orderly development and administration of offshore financial services in Labuan and to make recommendations to the Minister in respect thereof .

Section 5 state about the Membership of the Authority shall consist of the following members who shall be appointed by the minister: a) Chairman b) Director General c) Not less than three and not more than seven other persons, two of whom shall be form the public sector d) The members appointed under paragraph (1)(c) shall be from amongst persons who possess relevant experience in financial, commercial or legal matters. e) The Director General shall be the chief executive officer of the Authority and shall be entrusted with the day to day administration of the Authority. f) In the event of the Director General being absent or unable to act due to illness or any other cause, the chairman shall appoint any member of the authority to carry out the functions of the Director General

Laws enacted for LOFSA: OBA (offshore Banking Act 1990) An Act to provide for the licensing and regulation of persons carrying on offshore banking business and offshore financial business and for matters incidental thereto or connected therewith. OIA ( Offshore Insurance Act 1990 ) An Act to provide new laws for the licensing and regulation of persons carrying on offshore insurance business and offshore insurance-related activities and to provide for matters incidental thereto or connected therewith. LOSIA An Act provide for the regulation of securities in Labuan , the establishment of an exchange and for other matters related thereto Labuan Offshore Financial services Authority Act 1996 An Act to establish the Labuan Offshore Financial Services Authority and to provide for its functions and powers, and for matters connected therewith.

 Labuan Offshore Business Activity Tax Act 1990 An Act to provide for the imposition, assessment and collection of tax on offshore business activity carried on by an offshore company in or from Labuan and for matters connected therewith. For formation of Labuan Companies in Labuan IBFC: Offshore Companies Act 1990 (OCA) An Act provide for the incorporation, registration, administration, of Offshore Companies and for matters connected therewith Labuan Offshore Limited Partnership Act 1997(LOLPA) An Act to provide new laws for the establishment, regulation and dissolution of offshore limited partnerships and for matters connected therewith or incidental thereto.

 Labuan Offshore Trust Act 1996 An Act to provide for the creation and recognition of offshore trusts; and for matters connected therewith or incidental thereto. Labuan Trust Companies Act 1990 An Act to provide for the registration of offshore companies as trust companies in Labuan, for the prescription of their powers and duties and for matters connected therewith or incidental thereto.

Islamic Financial SERVICES Board (IFSB)

Based in Kuala Lumpur, was officially launched on 3rd Nov 2002 and started operation on 10th March 2003.
An international organizational that issues guiding principle and standards within the banking, insurance and capital market sector in order to promote stability in the Islamic financial services industry.

GOAL

To promote the awareness of issues that could that have an impact on the Islamic financial services industry. It issues shariah compliant standard, hold conference and seminars and provides guidance and supervision, among other initiatives.

Organizational Structure
General Assembly The representative body of all the member of the ISFB namely, Full Members, Associate Members and Observer Member The senior executive and policy making body of the IFSB. It shall consist of one representative from each Full Members who shall be the senior executive officer of that Full Member/ such other senior person nominated to represent him from time to time The body responsible for advising the council on technical issues within its term of reference. It shall consist of up to 15 persons selected by the council and shall have a term of office of 3 years.

Council Members

Secretariat

Technical Committee

The permanent administrative body of the IFSB. It is headed by a Full time secretary general appointed by the council on such term and condition determined by the council. The secretariat is based in KL

Working Group/ Task Force

Working group is a committee established to be responsible for drafting standard and / guidelines Task Force is a committee established to be responsible for undertaking ad-hoc task.

Full membership is available to the supervisory authority responsible for the supervision of the banking industry, securities and/or insurance/ Takful industries of each sovereign country that recognises Islamic financial services, whether by legislation or regulation or by established practice, and international inter-governmental organisations that have an explicit mandate for promoting Islamic finance. Associate membership is available to any central bank, monetary authority or financial supervisory or regulatory organisation or international organisation involved in setting or promoting standards for the stability and soundness of international and national monetary and financial systems which does not qualify or does not seek to become IFSB Full member. Observer membership will be available to any: i) national, regional or international professional or industry association; ii) institution that offers Islamic financial services; or iii) firm or organisation that provides professional services, including accounting, legal, rating, research or training services to any aforementioned institutions in (a) and (b)

Islamic Financial Services Act 2013

- IFSA section 152-157 (p87-91) - S152 Power of Bank to specify standard or issue codes - S153 prohibited conduct in Islamic money market and Islamic foreign exchange market - S154 Arrangement with relevant supervisory authority - S155 Submission of document or information to Bank - S156 Submission of statistical information - S157 Secrecy requirement under sections 155 and 156 not to apply - Definition Islamic Securities - IFSA page 20 - S2 : Securities which are in accordance with Shariah.

Capital Markets and Services Act 2007

The Capital Markets and Services Act 2007 (CMSA) repeals the Securities Industry Act 1983 (SIA) and the Futures Industry Act 1993 (FIA). The CMSA which takes effect on 28 September 2007 introduces a single licensing regime for capital market intermediaries. Under this new regime, a capital market intermediary will only need one licence to carry on the business in any one or more regulated activities. This will mean less cost and paperwork for capital market intermediaries who carry on more than one regulated
-The CMSA is supported by the Capital Market and Services Regulations 2007, the Licensing Handbook and the Guidelines on Regulation of Market.

A key CMSA measure benefiting capital market intermediaries is the introduction of the single licensing regime. Under this measure, intermediaries hold a Capital Markets and Services Licence as opposed to multiple separate licences, which effectively reduces administrative and compliance costs, and ultimately saves time. The Licensing Handbook explains the implementation of the single licensing regime. This handbook sets out

(a) the single licensing regime under the CMSA; (b) the criteria to be met for applying and varying a licence; (c) the application procedures; and (d) ongoing obligations imposed on licensed persons, including conditions and restrictions attached to a licence

This handbook will replace the following guidelines: (a) Guidelines for Dealers and Dealer's Representatives Under the SIA; (b) Guidelines for Fund Managers and Fund Manager's Representatives Under the SIA; (c) Guidelines for Investment Advisers and Investment Representatives Under the SIA; (d) Guidelines for Futures Brokers and Futures Broker's Representatives Under the FIA; (e) Guidelines for Futures Fund Managers and Futures Fund Manager's Representatives Under the FIA; (f) Guidelines for Futures Trading Advisers and Futures Trading Adviser's Representatives Under the FIA; (g) Guidelines for Submission Through the Electronic Licensing Application System; and (h) Guidelines on Permitted Activities for Stockbroking Companies.

The CMSA provides for two types of licences: Capital Markets Services Licence (CMSL) which entitles an institution to carry on the business in any one or more regulated activities; and

Capital Markets Services Representative's Licence (CMSRL) which entitles an individual to carry on any one or more regulated activities on behalf of his principal.

CMSA PART III CAPITAL MARKETS SERVICES Division 1 Licensing and regulation 58. Requirement for Capital Markets Services Licence 59. Requirement for Capital Markets Services Representatives Licence 60. Application for grant of licence 61. Grant of licence 62. Power of Commission to impose conditions or restrictions on licences 63. Fees 64. Grounds for refusal for the grant of Capital Markets Services Licence 65. Grounds for refusal for the grant of Capital Markets Services Representatives Licence 66. Power of Commission to enquire into transactions in respect of securities and derivatives 67. Minimum nancial requirements 68. [Deleted] 69. Variation or transfer of licence 70. [Deleted] 71. False statements in relation to application for grant or variation of licence 72. Revocation and suspension of licence 73. Effect of revocation, suspension or cessation of licence, etc. 74. Notication of disqualifying event 75. Appointment, election and nomination of directors and chief executive of licensed person, etc. 76. Registered persons 76A. Registration of persons providing capital market services 77. Register of licence holders 78. Notication of change of particulars 79. Publication of names and addresses 80. Appeals 81. Surrender of licence

1. The CMSA enhanced the SCs powers to take civil and administrative actions, and allowed it to recover three times the amount of losses through civil action for the wider range of market misconduct, including market manipulation 2. The new Act also provides greater protection to investors by requiring application monies of sophisticated investors to be held on trust in fund-raising exercises, enhancing the standards of trustees for debenture holders, and extending investor protection provisions to clients of financial institutions. 3. The CMSA increases the efficiency of the fund-raising process where its approval on corporate proposal such as share splits or share consolidation, and entitlement in respect of warrants, option or right will longer be required

4. Islamic banks which carry out the whole range of capital market activities for syariahbased product and services are automatically granted the registered person status.
5. Introduced the capital Markets and Services Regulation 2007 and Guidelines on Regulation of Markets to ensure a smooth transition to the new regulatory framework.

GUIDELINES
Guidelines on Islamic Fund Management
This guideline is issued by the Securities Commission (SC) under section 377 of the Capital Markets and Services Act 2007 (CMSA). Islamic fund manager should state that the Islamic fund management aims to achieve its commercial objectives following Shariah principles. The Shariah principles applicable for an Islamic fund management business are:
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. Wakalah Ujrah Jialah Wadiah yad amanah Wadiah yad dhamanah Mudharabah Musyarakah Murabahah Istisna Hibah Hiwalah Hak Tamalluk Tawarruq

 An Islamic Fund Manager must appoint either:

(a) An individual or a corporation as an independent Shariah adviser, approved and registered by the SC, and meets the following criteria:
i. ii. The person is not an undischarged bankrupt The person has not been convicted for any offence arising from a criminal proceeding iii. The person is of good repute and character iv. The person possesses the necessary qualifications and expertise, particularly in fiqh muamalat and Islamic jurisprudence, and has experience and/or exposure in Islamic finance; or

(b) An Islamic bank or a licensed institution approved by Bank Negara Malaysia to carry on Islamic banking business

 An Islamic Fund Manager must appoint either:

(a) An individual or a corporation as an independent Shariah adviser, approved and registered by the SC, and meets the following criteria:
i. ii. The person is not an undischarged bankrupt The person has not been convicted for any offence arising from a criminal proceeding iii. The person is of good repute and character iv. The person possesses the necessary qualifications and expertise, particularly in fiqh muamalat and Islamic jurisprudence, and has experience and/or exposure in Islamic finance; or

(b) An Islamic bank or a licensed institution approved by Bank Negara Malaysia to carry on Islamic banking business

 An Islamic Fund Manager must appoint either:

(a) An individual or a corporation as an independent Shariah adviser, approved and registered by the SC, and meets the following criteria:
i. ii. The person is not an undischarged bankrupt The person has not been convicted for any offence arising from a criminal proceeding iii. The person is of good repute and character iv. The person possesses the necessary qualifications and expertise, particularly in fiqh muamalat and Islamic jurisprudence, and has experience and/or exposure in Islamic finance; or

(b) An Islamic bank or a licensed institution approved by Bank Negara Malaysia to carry on Islamic banking business

 Where the Shariah adviser is a corporation, it must engage at least one Shariah expert. An Islamic fund manager may also appoint a non-resident Shariah adviser who may be an individual, a corporation or an Islamic bank. The Islamic fund manager should disclose and submit to the SC, information on the Shariah adviser. An Islamic fund manager must notify the SC of any resignation or cessation of services by a Shariah adviser within two weeks of resigning or ceasing of services. A new Shariah adviser must be appointed within one month from the resignation or cessation of services. Where a Shariah adviser is subjected to any disqualification or becomes otherwise unfit to provide his or its services, the Islamic fund manager must ensure that the Shariah adviser vacates the position immediately. The Islamic fund manager must inform the SC of the disqualification and vacation of the post.

 The roles of a Shariah adviser include the following:

a) b) To advice on all aspects of Islamic fund management business in accordance with Shariah principles To provide Shariah expertise and guidance on all matters, particularly in documentation, structuring and investment instruments, and ensure compliance with relevant SC regulations and/or standards, including resolutions issued by the SAC To review reports of compliance officers of the Islamic fund manager or any investment activities are Shariah compliant; and To provide a written opinion and/or periodic report to confirm and certify whether the Islamic fund management business has been managed and/or administered in accordance with Shariah principles

c)

d)

An Islamic fund manager must ensure that its investment activities are limited to Shariah-compliant investments. For investment in listed securities on Bursa Malaysia, an Islamic fund manager should invest only in securities listed on the SACs list of Shariah-compliant securities.

For investment in unlisted securities, an Islamic fund manager is encouraged to follow the SACs methodology in determining the Shariah status of listed securities.
For investment in securities traded on a recognised stock exchange, an Islamic fund manager should only invest in securities endorsed by the Shariah adviser of the recognised stock exchange or by an international Shariah standard setting body. An Islamic fund manager must should ensure that its clients monies and properties are properly safeguarded under the securities law in accordance to Shariah requirements. An Islamic fund manager is encouraged to maintain all accounts with Islamic financial institutions, but it is allowed to maintain the accounts in other financial institutions provided they are maintained in accordance with Shariah principles. To manage risk, an Islamic fund manager is permitted to undertake appropriate risk management techniques and tools in compliance with Shariah principles.

Guidelines on Unit Trust Funds

As prescribed under sections 288(2) and 289(1) of the CMSA, only a management company approved by the SC can act as a management company to a fund. A management company is a company that: (a) establishes a fund (b) issues, offers for subscription, makes an invitation to subscribe for or purchase units of the fund (c) operates and administers the fund

A management company must: (a) be an entity incorporated in Malaysia (b) have a minimum of 30% Bumiputera equity (c) not have more than 49% foreign equity (d) have a minimum shareholders funds of RM10 million at all times

As prescribed under sections 288(1)(a) and 289(1) of the CMSA, a trustee must be appointed for a fund and the appointment must be approved by the SC.

A trustee must: (a) be a trust company registered under the Trust Companies Act 1949 or incorporated pursuant to the Public Trust Corporation Act 1995 (b) be registered with the SC (c) have a minimum issued and paid-up capital of not less than RM500,000
A trustee should: (a) act honestly and in accordance with the deed and prospectus, these guidelines, trust laws and securities laws (b) exercise the degree of care and diligence that a reasonable person would exercise in the position of a trustee (c) act in the best interests of unit holders and, if there is a conflict between unit holders interests and its own interests, give priority to unit holders interests (d) not improperly make use of information acquired through being the trustee to: (i) gain an advantage for itself or other person; or (ii) cause detriment to unit holders in the fund (e) comply with any other duty, not inconsistent with the CMSA and these guidelines, that is conferred on the trustee by the deed

A management company or trustee should ensure that: (a) adequate procedures are in place to monitor the conduct of its delegate or service provider and to ensure that the function delegated or outsourced is performed in a proper and efficient manner (b) there are controls in place to ensure compliance with the deed, prospectus, these guidelines and securities laws A management company or trustee should also ensure that its delegate or service provider is suitable to undertake the particular functions, including that it: (a) is duly licensed or authorised by the relevant authority (where applicable) (b) has adequate financial resources (c) has an adequate track record in the performance of the functions (d) has adequate and appropriate human resources, systems, procedures and processes to carry out the function (including on compliance with applicable requirements and policies and procedures on internal controls) The service agreement between the management company or trustee and its delegate or service provider should, among others, contain clear provisions on: (a) the services to be provided (b) the fees, remuneration and other charges of the delegate (c) any restriction or prohibition regarding the performance of the function to be delegated (d) reporting requirements, including the line of reporting between the delegate and the management company or trustee, and means of evaluating the performance of the delegate (Amended on 18February 2009)

Guidelines for Islamic Real Estate Investment Trust

Syariah-compliant assessments must be carried out by the appointed Syariah committee/Syariah adviser to assess any property to be acquired by an Islamic REIT. In general, an Islamic REIT is a collective investment scheme in real estate, in which the tenant(s) operates permissible activities according to the Syariah. However, in the event that the tenant(s) is found to operate non-permissible activities, the fund manager for the Islamic REIT must perform additional compliance activities. The fund manager must obtain the rental from each non-permissible activity operating at the property to be acquired. Rental from each non-permissible activity must be added to obtain the total rental from nonpermissible activities. The list of non-permissible activities, as decided by the Syariah Advisory Council (SAC) of the Securities Commission are:
1. 2. 3. 4. 5. 6. 7. 8. Financial services based on riba (interest) Gambling (gaming) Manufacture or sale of non-halal products or related products Conventional insurance Entertainment activities that are non-permissible according to the Syariah Manufacture or sale of tobacco-based products or related products Stockbroking or share trading in Syariah non-compliant securities Hotels and resorts

 Subsequently, the total rental from non-permissible activities will be compared to the total turnover of the Islamic REIT (latest financial year) to obtain the percentage of rental from non-permissible activities. The percentage amount will be referred to the 20% benchmark as determined by the SAC for the criteria on rental from non-permissible activities.

In the event that the percentage exceeds the benchmark, the Syariah committee/Syariah adviser shall advise the Islamic REIT fund manager not to invest in the said real estate.
However, an Islamic REIT is not permitted to own real estate, for example, a building, even if the percentage of rental from that building to the total turnover of the Islamic REIT is still below the benchmark (20%). The Syariah committee/Syariah adviser must advise the Islamic REIT fund manager not to accept a new tenant(s) whose activities are fully non-permissible. Calculation of the rental of non-permissible activities from a tenant(s) operating mixed activities can be based on the ratio of area occupied for non-permissible activities to the total area occupied. The percentage will be used as the basis for determining the ratio of rental of non-permissible activities to rental paid by the tenant(s) For activities that do not involve the usage of space, such as service-based activities, the calculation method will based on ijtihad of the Syariah committee/Syariah adviser of the Islamic REIT.

 An Islamic REIT must ensure that all forms of investment, deposit and financing instruments comply with the Syariah principles. An Islamic REIT must use the Takaful schemes to ensure its real estate. If the Takaful schemes are unable to provide the insurance coverage, then the Islamic REIT is permitted to use the conventional insurance schemes. An Islamic REIT is permitted to participate in forward sales or purchases of currency, and is encouraged to deal with Islamic financial institutions. If the Islamic REIT deals with Islamic financial institutions, then it will be bound by the concept of wad (only one party is obligated to fulfil his promise/responsibilty). The party that is bound is the party that initiates the promise.

However, if the Islamic REIT deals with conventional financial institutions, it is permitted to participate in the conventional forward sales or purchases of currency.

Guidelines on Structured Products

These Guidelines stipulate the criteria which must be met with regard to any issue, offer or invitation of over-the-counter structured products which comes under the ambit of the Securities Commission Act 1993. For any Islamic structured products which comes within the ambit of these Guidelines, the issuer must appoint an independent Syariah adviser approved by the SC. In addition, any Syariah principle and concept adopted must be based on such principles and concepts as approved by the SCs Syariah Advisory Council and in the event of doubt, clarification should be sought from the SC. The following non-transferable structured products where at least on counterparty is a licensed institution as defined under the Banking and Financial Institutions Act 1989 (BAFIA) or the Islamic Banking Act 1983 (IBA), or a licensed dealer under the Securities Industry Act 1983 (SIA) with a universal broker status, will not require the prior approval of the SC under these Guidelines:
1. 2. 3. 4. 5. Bond options Credit default swaps Credit options Total return swaps Equity swaps/options

In addition, non-tranferable structured product transactions where both counterparties are licensed institutions as defined under BAFIA, licensed institutions as defined under IBA or licensed dealers under the SIA with a universal broker status would not require the prior approval of the SC. The following categories of persons are deemed as eligible issuers:

a)
b) c) d)

A licensed commercial bank or a Special Purpose Vehicle (SPV), on whose behalf a performance guarantee has been issued by a licensed commercial bank A licensed merchant bank or an SPV, on whose behalf a performance guarantee has been issued by a licensed merchant bank A licensed Islamic bank or an SPV, on whose behalf a performance guarantee has been issued by a licensed Islamic bank A licensed dealer with a universal broker status or an SPV, on whose behalf a performance guarantee has been issued by a licensed dealer with a universal broker status

Eligible investors shall be those set out under Schedule 2 and Schedule 3 of the SCA, while the issuer and its adviser, if applicable, must ensure that the investors to whom structured products are issued or offered are persons falling under Schedule 2 and 3 of the SCA.

 The following information must be made available to investors in relation to any issue, offer or invitation of structured products:
a) Risk disclosure statement highlighting risk factors of investing in structured products, including but not limited to the following:
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Credit risk Legal risk Liquidity risk Market risk Operational risk Prepayment & commitment risk Options risk Currency risk Mismatch risk Counterparty risk

b) c) d) e) f) g) h)

Detailed description of the structure of the transaction and all significant agreements relevant to the structure Recent price trends of the underlying reference security Balanced view (upside and downside) on price simulations (if any) Principal terms and conditions of the transaction Information on liquidity provider or other liquidity facilities (if any) Rating for the structured product and the definition of the rating (if any) An explanation of any matter of significance to investors relating to the issue, offer or invitation of structured products that would enable investors to make an informed decision

The following are key measures that the issuer and its adviser, if applicable, are expected to observe to ensure adequate investor protection with regard to any issue, offer or invitation of structured products:

a)

KNOW YOUR CLIENT: To ensure that structured products are suitable for clients, the issuer and its adviser, if applicable, should take all reasonable steps beforehand to establish the clients financial position, investment experience and investment objectives
DUTY OF CARE: When issuing structured products to clients, the issuer and its adviser, if applicable, should ensure that clients are informed of and fully understand the financial risks and potential losses that may arise from investing in structured products PROVIDE RISK DISCLOSURE STATEMENT: The issuer and its adviser, if applicable, should provide clients with pertinent information regarding structured products DECLARATION BY ISSUERS/ADVISERS AND CONFIRMATION BY CLIENT: The issuer and its adviser, if applicable, should ensure that a risk disclosure statement has been provided to the client and that the client has been invited to read the risk disclosure statement, ask questions and take independent advice if the client so wishes

b)

c)

d)

Guidelines on Islamic Securities

All necessary approvals from other regulatory bodies would have to be obtained prior to the submission of any written declarations and information to the SC. An indicative rating must have been obtained by the issuer at the time of submission of the declarations and information to the SC. However, a rating is not required if the Islamic securities are non-transferable and non-tradable and whose investors do not require a rating.

As for underwriting, it shall be decided by the issuer and its principal adviser.
In the event that no underwriting or only partial underwriting is required, the alternative is for the issuer to state the minimum level of subscription necessary to achieve the funding objectives of the issue.

This is vital because unless otherwise allowed in writing by the SC, any issue, offer or invitation which is under subscribed and is unable to meet the level of subscription must be aborted.
Subsequently, any consideration received for the purposes of subscription must be immediately returned to all subscribers.

 All issues of Islamic securities must be reported and/or tendered on the Fully Automated System for Issuing/Tendering (FAST) unless a listing is sought to any Malaysian stock exchange.

It is the obligation of the issuers and advisers to ensure that such issues must comply with all rules and requirements of FAST.

In addition to FAST, Islamic securities must be made under the Real Time Electronic Transfer of Funds and Securities (RENTAS) System unless a listing is sought to any Malaysian stock exchange.

Guidelines on Asset Backed Securities

Asset Backed Securities (ABS) means private debt securities that are issued pursuant to a securitization transaction. Such private debt securities shall exclude all debt securities that are capable of being converted into equity whatsoever and whether redeemable or otherwise. Hence, the securitization transaction as defined would mean arrangement which involves the transfer of assets or risks to a third party where such transfer is funded by the issuance of debt securities to investors. Assets that are eligible to be securitized must generate cash flow and be transferred at a fair value. Originators must have a valid and enforceable interest in the assets and in the cash flow prior to the securitization transaction. There should not be any trust or third partys interest which exist in competition with the originators interest over the assets.

The originators must be incorporated in Malaysia. It has to be a going concern at the point of transfer of assets to the Special Purpose Vehicles (SPV).

The transfer of assets from the originator to the SPV must comply with the true sale criteria.
This means that the assets that are transferred to the SPV from the originator must be put beyond the reach of the originator and its creditors even in receivership or bankruptcy to the extent possible.

The originator must effectively transfer all right and obligations in the assets to the SPV and must not retain any residual beneficial interest in these assets.
The risk that a transfer of assets by an originator to an SPV might be re-characterised as a financing transaction rather than a sale of assets should be minimized as far as possible. Conversely, the SPV must have no recourse to the originator for losses arising from those assets. However, in the event of a breach by the originator of any condition, representation or warranty in respect of the securitization transaction, the originator may repurchase the assets from SPV where the originator is under an obligation to do so under the securitization transaction.

 Additionally, where such assets have decline to a level that renders the asset securitization transaction uneconomical to carry on, an originator may retain a first right of refusal to repurchase assets from an SPV at a fair value.
Transfer can also take the form of legal assignment or equitable assignment from the originator to the SPV. In undertaking the transfer, it must be ensured that the necessary regulatory or contractual consents have been obtained in order to effect the transfer of such assets from an originator to the SPV, and that the originator has not done or omitted to do any act which enables a debtor of the originator to exercise the right of set-off in relation to such assets.

 The SPV itself must be bankruptcy remote, in that it should not carry on any other business activity other than in relation to the securitization transaction itself. To do so, the necessary factors are: a) An SPV cannot include, in its objectives, the power to enter into any other activities that are not incidental to its function as a special purpose vehicle in relation to the securitization transaction An SPV must subcontract to third parties all services that may be required by it in order to maintain the SPV and its assets An SPV is not permitted to have employees or incur any fiduciary responsibilities to third parties other than to parties involved in the securitization transactions All the liabilities, present or future of an SPV (including tax) must be quantifiable and capable of being met out of resources available to it

b) c)

d)

Guidelines on Minimum Content of Trust Deed

Approvals and registration of trust deeds rest with the SC. No holder of a Capital Markets Services Licence shall carry on any regulated activity in respect of its licence without the written consent of the Commission if it does not meet the minimum financial requirements as may be specified by the Commission or as may be provided in the rules of a stock exchange or a

derivatives exchange.

 Every person issuing, offering for subscription or purchase, or making an invitation to subscribe for or purchase, any debenture shall: (a) enter into a trust deed that meets these requirements: 1. A trust deed shall contain such provisions, covenants, requirements, information and particulars as may be specified by the Commission A person issuing, offering for subscription or purchase, or making an invitation to subscribe for or purchase, any debenture shall deliver a copy of the trust deed to the Commission together with such other particulars, information or documents as the Commission may specify

2.

(a)

appoint a trustee who is a person eligible to be appointed or to act as trustee in accordance with section 260

(b) comply with the requirements and provisions of this Division

 Every person issuing, offering for subscription or purchase, or making an invitation to subscribe for or purchase, any debenture shall: (a) enter into a trust deed that meets these requirements: 1. A trust deed shall contain such provisions, covenants, requirements, information and particulars as may be specified by the Commission A person issuing, offering for subscription or purchase, or making an invitation to subscribe for or purchase, any debenture shall deliver a copy of the trust deed to the Commission together with such other particulars, information or documents as the Commission may specify

2.

(a)

appoint a trustee who is a person eligible to be appointed or to act as trustee in accordance with section 260

(b) comply with the requirements and provisions of this Division