Deutsche signs record sharia collar trade

The $500 million swap includes a cap-and-floor structure, which refines the ability to hedge underlying rate exposures within a range. Traditional Islamic profit-rate swaps combine both fixed and floating rate sharia-compliant instruments to replicate a fixed/floating interest rate swap. The floating element is reset periodically against a benchmark. Deutsche refused to reveal the benchmark, or the levels of the cap and floor. 

For such a product to be sharia-compliant, and so eligible as an Islamic finance product, it must be more than just a derivative of benchmark or index prices. The instruments are usually commodity or share purchases, with a repurchase price built into the contract and benchmarked to an index.

 As with other products of the same type, the swap may involve a net premium, paid or received depending on the levels of the cap and floor. However, this will affect only recorded cashflow, and the product can be treated as off balance sheet exclusive of these cashflows, as long as the notional amounts of both exposures involved in the trade are linked on the protection buyer’s balance sheet and cancel each other out.