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Minutes of the Telbor Committee meeting held on January 5, 2010

Present: Committee Members - Sharon Lavi, Harel Cordova, Guenia de Mayo, and Roy Stein

In accordance with the conclusions reached at the last meeting, which discussed the need for creating an anchor for long-term Telbor interest rates, the Committee proposed that the Telbor interest rate be defined as a base rate for interbank loans, to be used only as a benchmark for interest rates calculated for money market transactions––rates which include appropriate premiums for specific credit risks––and to set the anchor for the one-business-day interest rate by imposing an obligation to execute a 3-month Overnight Index Swap (OIS). As a result of this obligation––which links the Telbor interest rate for one business day to that for three months—the three-month quoted interest rate will be affected to a large extent by the short-term interest rate, by expectations of it, and by the liquidity premium. The quoted interest rates used to determine the Telbor rate will not price in the specific credit risks mentioned.
In the current meeting the Committee members reviewed the reactions of seven contributing banks, and examined in closer detail the difficulties that could arise as a result of implementing the proposal. The main conclusions were:

1. The majority of contributing banks apparently support the proposal.

2. Some of the contributing banks report technical problems which are likely to delay the implementation of the proposal.

3. The Banking Supervision defines the foreign contributing banks (Deutsche Bank and Barclays) as customers, so that their one-business-day deposits in domestic banks are subject to the reserve requirement, which makes them more expensive. In the past this prompted the members of the Committee to absolve the domestic banks from the obligation to accept deposits from foreign banks, which is likely to affect the pricing of OIS in the future. The Committee will examine in greater detail the effect of this exemption on the pricing of OIS transactions, before putting forward a final proposal.

4. The Committee will look into the possibility of increasing the obligation to quote for overnight transactions, a possibility raised by several banks. This would increase confidence in quotations for all terms, short and long.

To summarize: the Committee will formulate a detailed proposal regarding the new quotation obligation, which will include, among other things, a timetable that would enable technical preparations to be made and a satisfactory solution found for the problem mentioned in item 3 above. The intention is to give real meaning to the determination of a 3-month Telbor interest rate, an issue that has been discussed in the past by Committee members and the banks. The proposal will be submitted to the contributing banks by the end of the first quarter of 2010.

In light of the latest developments, which provide an anchor for 3-month interest rates, the representative of the Tel Aviv Stock Exchange on the Committee, Sharon Lavi, will bring to the next Committee meeting a draft of the features of interest rate contracts based on the Telbor interest rates. The Committee will send the draft to the contributing banks' representatives for their comments by the end of the first quarter of 2010


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