In the course of the year, the U.S. real estate market tumbled and dragged the U.S. financial services industry down with it, a development, which in turn impacted banks around the globe. These events precipitated a crisis, which placed the global financial system at risk.
Developments in Israel differed from those elsewhere, since in many respects, the state of the economy coming into the crisis was favorable, as reflected in growth, fiscal and balance-of-payment figures. The local real estate market did not suffer from "bubble" conditions nor did the local banks become inordinately entangled in either bad debts or "innovative" financial instruments.
Despite these positive macro-economic conditions, TASE investors were not spared the precipitous decline in share prices, similar to that experienced in Europe and U.S. markets. There are several reasons for this.
First, Israel's economy is oriented towards export markets and other international activity. It is expected that the global crisis will adversely affect exporting firms as well as Israeli entrepreneurs active abroad. These companies, particularly those exporting raw materials or engaging in activities linked to commodities markets, carry significant weight in TASE major indices. Second, foreign investors liquidated substantial holdings since the outbreak of the global crisis. Third, the shockwave endured by the global financial system, to a certain extent, shook confidence in Israel's system as well.
The unprecedented fall of corporate bond prices, is another development that impacted Israel in 2008. This decline was particularly prominent for bonds issued by internationally active real estate companies.
In previous bear markets, members of pension and provident funds suffered losses resulting primarily from the depreciation of share prices. In 2008, however, the decline in corporate bonds, which constituted a key component of many institutional portfolios, left its mark as well.
The Role of Open Markets and Tradable Securities
First, the appropriateness of opening the exchange on days in which extreme stock declines are anticipated was questioned. This issue arose in anticipation of renewed trading on Sunday, October 12, the day preceding the Succoth holiday, following three consecutive days, during which TASE was closed for a long Yom Kippur weekend (Yom Kippur eve, Yom Kippur day and Friday) and during which stock prices in international markets crashed. The TASE Board of Directors took the position that the renewal of TASE trading was imperative. This position was supported by the Minister of Finance, the Governor of the Bank of Israel and the Chairman of the Israel Securities Authority. The necessity of opening TASE stems from the dual role the stock market plays in the economy; it provides liquidity to securities investors and arbitrates the process of "price discovery", by which transparent transaction prices reflect, at any given moment, the trader's valuation of traded securities.
A decision not to open the TASE for trading would prevent it from fulfilling these important functions and would contribute additional uncertainty and unease to already-concerned investors. Very few exchanges around the world closed their gates during this period, and those that did were not among the more advanced markets.
TASE is aware of the repercussions of tumultuous trading and extreme price volatility, and for this reason, it deploys 'circuit breakers', which halt trade for 45 minutes during periods of acute price fluctuations in either direction. The circuit breakers are designed to allow buyers and sellers time to weigh their options and operate under less pressure.
As a matter of fact, the recent intermission provided by the circuit breakers contributed to the mitigation of volatility on days marked by particularly sharp price decreases.
The second issue, which arose during discussions concerning the best way to address the crisis, relates to the liquidity of bonds held by institutional investors. Some called for the reissuance of non-tradable bonds, as a remedy to solve the crisis facing pension and provident funds. We are compelled to reiterate the importance of market liquidity of all classes of securities for the proper functioning of the economy and particularly, of retirement savings schemes. In our opinion, the issuance of non-tradable bonds will adversely affect the economic system, while the problems of retirees can be best addressed by social insurance payments, tax benefits and direct support to affected individuals.
A return to the era of non-marketable bonds constitutes a retreat from the long and momentous road taken by the Israeli economy since institution of the comprehensive stability program undertaken to contain inflation in 1985.
The performance of corporate bonds during the current crisis does not impinge on the importance of maintaining a strong market in exchange-traded bonds. The problematic fluctuations in the corporate bond market and their effects on savers would not have been avoided if institutional investors were to invest in non-tradable bonds, government-issue or otherwise.
Temporary Adjusting TASE Rules
First, the public float thresholds qualifying companies to remain in the leading TASE stock indices were made less stringent. This decision was made with a heavy heart, since in the past, the threshold was raised incrementally to a level of 25% of the issued shares. However, given the new conditions, TASE was compelled to settle for a 20% threshold, with the institution of emergency provisions that will remain in effect until the end of 2009.
Second, a similar temporary provision was adopted, which obviates the need to relegate many companies to the maintenance list, since the ability for small companies to raise equity or the public float has been significantly reduced.
Third, trading hours were shortened in order to allow TASE members and the TASE itself to save on operating costs. This decision was made based on data from the period in which trading hours were shortened during the TASE employees' dispute, indicating that shortening the trading day is not likely to adversely affect trading volume.
The tumultuous price fluctuations that have plagued TASE since September 2008 compel it to stress test additional rules and arrangements and to evaluate their operation under extreme conditions: circuit breakers, derivative margins, the clearing systems, regulation of TASE members, etc. These issues will be addressed in 2009.
It is noteworthy that throughout 2008, the routine work load did not decline. Turnover remained high, both in terms of value and the number of orders and transactions on TASE. However, towards the end of the year, there was a decline in the turnover. Service to listed companies increased this year, since treatment of distressed corporate bond issuers entails significant work by the TASE.
Infrastructure Projects
The completion of preparations for the launch of equity options, a product whose absence has been felt for a long time, on a select number of highly liquid shares was the second. Arrangements for opening the new market were completed in December 2009; however their launch was postponed until March 2009 for technical reasons.
The third, in 2008 TASE began preparations for transferring the clearing and settlement of corporate bonds from same-day settlement (t+0) to t+1, following similar measures already taken for government bonds and 'T-bills' (makam). The shift to t+1 clearing in 2007 was necessary as a means to reduce clearing and settlement risks and as a prerequisite to joining the Real Time Gross Settlement (RTGS) system initiated by the Bank of Israel. The transfer of corporate bond clearing and settlement to t+1 is expected to be complete in 2009, and will be followed by similar arrangements for stock transactions, rendering TASE's clearing and settlement to a "delivery versus payment" (DVP) regime, as is customary throughout the world.
Fourth, preparations for constructing a new building for the TASE continued. Unfortunately, approval of the blueprints took longer than expected and actual construction did not begin before the close of the calendar year. The time lapsed was used for detailed planning of the building in the hopes of making up for some of the lost time.
Fifth, at the beginning of the year the Knesset approved amendments to the Securities Law that enhanced the stability of TASE clearing houses.
International Activities
* Cooperation agreements (MOU) were signed with NYSE-Euronext and the Shanghai Stock Exchange;
* TASE co-sponsored two major conferences for foreign investors, in London (with the London Stock Exchange) and New York (with NASDAQ-OMX);
* The TASE Board of Directors approved the application of a subsidiary of Merrill Lynch to become TASE's first remote member;
* An ETF tracking the TA-25 index was launched in the New York Stock Exchange.
Summary
The downturn in world financial markets, which began in 2007, picked up steam in 2008, affecting the Israeli economy and Tel Aviv Stock Exchange (TASE).
It is a matter of course that when a major crisis occurs, attitudes regarding the role of government intervention in economic activity are re-examined. These questions arose in Israel as well; however here in Israel two additional issues, regarding the activity and economic role of the stock exchange were placed in the spotlight of public discussion.
After the outbreak of the crisis, the TASE was required to adjust numerous rules to conform to the new reality, and in the past quarter the TASE Board of Directors adopted resolutions on several important issues.
In addition to the treatment of the crisis and its implications on regular operations, TASE advanced several infrastructure projects designed to enhance Israel's capital market. The first, the creation of the infrastructure required to clear 'repo' transactions in government bonds, was carried out according to principles outlined together with the Ministry of Finance, Bank of Israel and key financial institutions active in the capital market. TASE completed preparations and the launch of the new market is scheduled for the beginning of 2009.
In 2008 the TASE continued its international activities, which aim at consolidating links between Israel's capital market and foreign markets. This activity is designed to enhance the exposure of Israeli companies among the international financial community, attract foreign investor activity in TASE and attract foreign investment houses to become TASE members.
In this respect, the following events were particularly noteworthy:
In summary, Israel's economy and the Tel Aviv Stock Exchange has endured serious crises in the past, which were no less grave than the current crisis. The fundamentals underlying Israel's economy prior to the crisis were positive by many respects, and they constitute a source of hope that, with proper measures, the economic slowdown can be shortened and growth renewed. These developments are not dependent solely on us, since Israel is part of a global system, which is facing one of the largest crises in its history. However, after four months since the outbreak of the crisis, it is the duty of the Israeli leadership to define an action plan and execute it expediently and with consistency.