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Minutes of the Telbor Committee meeting held on October 21, 2009

Present: Committee Members: Sharon Lavi, Harel Cordova and Roy Stein
Guests: Noami Shpirer, Tzahi Shtraks, Amit Lowenstein, Guy Fischer, Michal Rotlevy and Ran Abraham

1. The main topic discussed at this meeting concerned the existing barriers in the money market in Israel and in particular in longer-term inter-bank credit of up to one year. Pursuant to the proposal brought up at the Committee’s previous meeting (in July 2009), two representatives of the Department for Asset and Liability Management at Bank Leumi and Bank HaPoalim––Noami Shpirer and Tzahi Shtraks––were invited to the meeting. Following is a summary of their comments:
The development of the money market in Israel will be beneficial to the banking system in that it will allow the banks to offer their customers new financial products based on shekel interest rates for a period of longer than one business day. The development of the money market and the launch of futures contracts on the Telbor interest rate by the Tel Aviv Stock Exchange will assist the banks in the management of risk. Currently, the banks set the price of money for various periods each day (and sometimes even update the price during the day); however, this information, which is used by the various departments of the bank, is not published outside the banks and therefore cannot be used to maintain an inter-bank credit market. In addition, the limited scope of the credit lines between the contributing banks in Israel prevents the development of an inter-bank credit market. Since there is little prospect of these lines being expanded, in the near future the development of an inter-bank credit market will not be possible without the direct intervention of the Bank of Israel. Furthermore, there exists uncertainty with respect to the validity of the determination of the interest rate––the Telbor interest rate in Israel and in particular the Libor interest rate worldwide––as a result of the financial crisis, which has increased credit risks and their variance, and liquidity risks. Under these conditions, imposing an obligation to execute inter-bank loan and deposit transactions (among contributors) for longer terms at the quoted interest rate is not currently practical in Israel.

On the basis of this discussion, the Telbor Interest Rate Committee reached the conclusion that at present the Telbor interest rate cannot rely on the development of the inter-bank money market and that it is not possible to impose the obligation of executing inter-bank credit and deposit transactions for longer terms. In accordance with this conclusion and conclusions reached in previous meetings, which discussed the need for creating an anchor for long-term Telbor interest rates, the Committee proposed that the Telbor interest rate be used only as a benchmark for interest rates calculated for money market transactions, which include an appropriate credit risk premium. This does not clash with the creation of an obligation to execute a 3-month Overnight Index Swap (OIS) and the members of the Committee are considering the proposal to impose such an obligation. As a result of the obligation to execute an OIS transaction (which links the Telbor interest rate for one business day to that for three months), the three-month quoted interest rate (and accordingly for longer periods) will be affected to a large extent by the short-term interest rate and by expectations of it. But the specific credit risks of each contributing bank will not be fully priced into the quoted interest rates, on which the Telbor is fixed.

The members of the Committee request that the contributing banks submit their opinions on this proposal and in particular on the question of whether they will be prepared to commit to such transactions in the amount of NIS20 million per transaction. The members of the Committee intend to discuss the opinion of each of the contributing banks at the next Committee meeting prior to deciding on the matter.

2. In July, Reuters began operating a warning system: At 10:30, a warning is given if at least one of the eight interest rates for various periods is not updated and at 11:00 a warning is given if there is an usually large gap between the bank’s quote and the temporary theoretical average. We would mention that users have reported a high level of satisfaction with the warning system. The Committee members stress that it is the responsibility of the contributing banks to avoid receiving these warnings and to refresh their quotes before 10:30.

3. The Committee decided to remove Clause 1.7 from the Telbor rules and not to take a position regarding the day-adjustment regulations, both with respect to the “fixing” calculation and the payment calculation. The Committee recommends that these adjustments be defined by each of the sides in a transaction and that they be consistent with the ISDA definitions.

4. The Committee is considering the invitation of Attorney Ronit Rostoker and Moshe Natan from Bank Hapoalim to the next meeting in order to study in-depth the various aspects of defining days on which the contributing banks are obligated to quote and fix the Telbor (Clause 1.6).


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