The Finance Ministry and the Tel Aviv Stock Exchange on Tuesday launched the long-awaited new primary dealers trading system for government bonds, which is expected to reduce government financing costs by NIS 1.2 billion annually and boost the global exposure of Israeli bonds.
"The government bond market reform will bring in an increased number of foreign players and major international investment banks as market makers, which will boost competition and reduce the government annual interest rate payments by NIS 1.2b.," said Accountant-General Yaron Zelikha.
The treasury and foreign banks expect a significant increase in government bonds turnover to about NIS 5b. a day. As such, the treasury believes that the shekel interest on bonds will drop and greater liquidity will lower the interest the state pays by an average of 0.3 percent, reducing total annual interest payments of NIS 35b.
Using the new dealer system similar to those used in many Western European countries, including Italy and Germany, the government will reserve 80% of its bond issues for the 18 primary dealers including Citigroup, Goldman Sachs, Deutsche Bank and 15 other financial institutions, who will be obligated to purchase a minimum amount each year to ensure liquidity.
The market for new issues is known as the primary market. The bonds are sold to customers through MTS SpA, the operator of Europe's main government bond trading platform. MTS Israel is a two-way trading system through which Israeli traders will be able to purchase bonds abroad.
The primary dealers will also have to encourage liquidity in the secondary market, where the trading of bonds takes place, and to publicly quote prices for at least five hours a day.
The Bloomberg Bond Auction System is being implemented as the primary market auction system for the government's shekel bonds.
Under the previous system, the government did not use primary dealers but held open tenders, where it didn't allocate minimum amounts to particular groups.
Liquidity is lower than in countries of a similar size to Israel, as purchasers of bonds can't be certain that they will be able to sell them at a reasonable price.