Development of the Telbor Market

04.05.2010
 
Development of the Telbor Market
 
  In 2006 the Bank of Israel established the inter-agency Telbor Interest Rate Committee for the purpose of supporting the development of the short-term interest rate market. This committee determines the list of contributing banks and the regulations for calculating and publishing the Telbor interest rates. The committee also prescribes obligation frameworks for the execution of transactions on the basis of the bank quotations used in determining the Telbor interest rate.
  In addition to FRA and IRS transactions, the committee is now defining a new obligation, an Overnight Indexed Swap, which takes the form of a daily swap transaction between the one-business-day interest rate and the longer-term interest rate. Accordingly, from June 2010 the contributing banks will undertake to conduct these transactions as well whenever they are so requested on the basis of the interest rates which they quote. This obligation will help to create a new financial market in Israel, which will enable the public in Israel and business companies in particular to manage interest-rate risks more effectively.
  The committee believes that the conditions are now ripe for launching marketable contracts based on the Telbor interest rates, as is practiced in the developed countries. In addition, the commercial banks will be able to offer their customers structured deposits and products based on the Telbor interest rate.
The Telbor interest rate is the Israeli version of the LIBOR interest rate that serves as an underlying asset in the world market for interest-rate futures contracts, which is one of the largest and most liquid financial markets in the developed countries. In order to support the development of such a market in Israel, in 2006 the Bank of Israel established the inter-ministerial Telbor Interest Rate Committee. The committee's principal function is to motivate the commercial banks that quote interest rates in the inter-bank market to operate in a committed and transparent manner. For this purpose, the committee has prescribed definitions and guidelines for quotations, the list of quoting banks, and the regulations for calculating and publishing the interest rates that are based on these quotations—the Telbor interest rates. The contributing banks, those commercial banks operating in Israel which accepted the committee's regulations, began to operate in accordance with these regulations at the beginning of March 2007. The committee monitors developments in the Telbor market, and holds periodic meetings at which current issues are discussed. The Telbor Interest Rate Committee is comprised of representatives from three organizations—the Bank of Israel, Forex Israel and the Tel Aviv Stock Exchange—which work together in a fully transparent manner and apply fair rules that are suited to the development of the inter-bank market.
In order to ensure that the banks fulfill the obligation to conclude transactions at the interest rates which they quote in the Telbor system, the committee has prescribed a number of regulations, primarily the quoting banks' obligation to conclude transactions at the interest rates which they quote at the times specified for this purpose. In addition, sanctions are prescribed against banks that refuse to conclude such transactions or which systematically quote excessive interest rates.
At the committee's most recent meeting, which was held at the beginning of April, a new obligation was defined. This was for an Overnight Index Swap, a daily swap transaction between the one-business-day interest rate and the three-month interest rate, which will be launched at the beginning of June. This is in addition to the FRA and IRS transactions that were defined in the past. As a result of this obligation, which makes a connection between the one-business-day interest rate and the three-month interest rate, the interest rates quoted for three months (and for longer terms as well) will be heavily affected by short-term interest rates, by expectations regarding their development and by liquidity premiums. Credit risks will not be priced at the interest rates quoted, on the basis of which the Telbor interest rate is set. However, the Telbor interest rate can be used as a benchmark for interest rates in the deposit and loan market—interest rates that include premiums matching specific credit risks.
In view of developments in the Telbor market during recent years, the committee believes that conditions are now ripe for launching marketable contracts on the TASE. Accordingly, the committee will most likely recommend to the TASE management to develop trading in interest-rate contracts that are based on the Telbor interest rates, as is accepted practice in the developed countries. In addition, the commercial banks will be able to offer their customers structured deposits and products based on a shekel interest rate, namely the Telbor interest rate.