Reporting Requirements of NIS OTC FX Derivatives Applicable to Non-Israeli Financial Institutions

A new regulation promulgated by the Central Bank of Israel changes the reporting regime applicable to non-Israeli financial institutions regarding NIS OTC FX derivatives, effective as of January 1, 2017

On June 19, 2016 a new regulation was promulgated by the Central Bank of Israel – the Bank of Israel Order (Information Regarding Transactions in Foreign Currency Derivatives, Index Derivatives, and Interest Rate Derivatives), 5776–2016.

In addition, the current reporting regulation (the Bank of Israel Order (Data on trades in foreign currency derivatives and in short-term debt instruments), 5771-2011) was revoked.

The Order imposes a reporting requirement applicable to Non-Israeli residents and Financial Intermediaries regarding OTC FX derivative transactions that involve New Israel Shekel as one of the underlying currencies.

Under the Order, the reporting requirement is triggered if during the period of the 12 preceding months the Reporting Institution executed (whether on its behalf or on behalf of others) eligible currency transactions, the daily average of which is at least USD 15 million. The reporting requirements will continue to apply until the lapse of 12 months following the last day on which such trigger was last triggered.

The Order and the revocation of the previous order will become effective on January 1, 2017.

Preamble

1. On June 19, 2016 a new regulation was promulgated under the Bank of Israel Law – the Bank of Israel Order (Information Regarding Transactions in Foreign Currency Derivatives, Index Derivatives, and Interest Rate Derivatives), 5776–2016 (the “Order“). The Order imposes a reporting requirement applies to non-Israeli residents and to Financial Intermediaries regarding OTC FX derivative transactions which involve New Israel Shekel as the underlying currency.

2. In addition, the Bank of Israel Order (Data on trades in foreign currency derivatives and in short-term debt instruments), 5771-2011, (the “The Previous Order“) was revoked.

3. The Order and the Previous Order will become effective on January 1, 2017.

Reportable Transactions

4. The Order defines the type of financial products which a Reporting Institution (as defined below) is required to report to the Bank of Israel (“Reportable Transactions“). These include the following types of OTC transactions, provided they involve New Israeli Shekel as one of the underlying currencies of the transaction: Option Transactions (FX Options), Swap Transactions (FX Swaps and IRS Derivatives, including Coupon Swaps and Basis Swaps) and Currency Conversion Transactions (Forward Transactions, including Forward Rate Agreements (FRAs), and Spot Transactions). The Order includes the specific types of financial instruments which fall within each category.

5. Note that debt instruments (Bonds issued by the Government of the State of Israel, including Traded Short Term Government Loans (Makam)) are not included within the Reportable Transactions (whereas under the Previous Order, debt instruments were subject to reporting requirement).

6. Further note, that Reportable Transaction include Spot Transactions (whereas Spots were not included in the Previous Order).

To whom does the Reporting Requirement apply?

7. The reporting requirement applies to (each, a “Reporting Institution“):

7.1. all non-Israeli residents (other than foreign banks licensed by the Bank of Israel, portfolio managers and members of the Tel-Aviv Stock Exchange); and

7.2. Financial Intermediaries, namely entities whose business is selling or buying of foreign currency against Israeli Shekel, for their own accounts or on behalf of others, and which are not licensed under Israeli law as certain financial institutions[¹].

8. In accordance with the Order, the reporting requirement is triggered if, during a period of the preceding 12 month a Reporting Institution executed (whether on its behalf or on behalf of others) certain types of Reportable Transactions[²], the daily average of which (which is defined under the Order as the gross total amount of transactions in any 12 preceding months divided by 250) is USD 15 million or more (the “Trigger“).

9. If the Reporting Institution triggers the Trigger, the reporting requirement applies thereto until 12 months have passed from the last day on which the Trigger was triggered.

Content and frequency of the report

10. The Order set forth two types of reports:

10.1. Daily report – a daily report of executed Reportable Transactions, which should be filed no later than the following trading day.

10.2. Monthly report – a monthly report of executed Reportable Transactions and open positions of Reportable Transactions, which should be filed no later than the trading day following the end of the respective month.

11. An addendum of the Order includes the exact information which the report must include. The Bank of Israel published an example report format [Link] and Q&As [Link].

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[¹] Primarily Banking Corporations, Provident and Pension Fund Management Companies, Insurance Companies, Mutual Funds, Depositories and the Israel Postal Company.

[²] Excluding IRS Transactions and certain Conversion Transactions.

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The Order includes comprehensive and rather complex specifications of the Reportable Transactions and the manner and format of the report. Kindly be advised, that this legal update is for general information and does not purports to be a full analysis of the matters presented.

Our firm has unique expertise in FX derivatives and advises global financial institutions in the process of establishing compliance procedures and modifying their systems for complying with the new reporting requirements imposed under the Order.

For more information please contact your regular GKH contact or any of the lawyers listed below: Adv. Ran Ben-Ari, Partner (RanB@gkh-law.com), or Adv. Dikla Peleg, Partner (DiklaP@gkh-law.com).

Gross, Kleinhendler, Hodak, Halevy, Greenberg & Co. (GKH), is one of the leading law firms in Israel, with some 150 attorneys. GKH specializes, both in Israel and abroad, in various fields of law including Mergers and Acquisitions, Capital Markets, Technology, Banking, Project Finance, Litigation, Antitrust and Competition, Energy and Infrastructure, Environmental Law, Intellectual Property, Labor Law and Tax.

This Legal Update is prepared as an informational service to clients and colleagues of Gross, Kleinhendler, Hodak, Halevy, Greenberg & Co. (GKH) and the information presented is not intended to provide legal opinions or advice. Readers should seek professional legal advice regarding the matters about which they are particularly concerned.