BoI tightens foreign-exchange rules for swaps, forwarwards

Israelis will have to report transactions over $10 million per day.

us currency 88 224 (photo credit: AP)
us currency 88 224
(photo credit: AP)
The Bank of Israel on Wednesday announced new reporting requirements for Israeli residents and nonresidents who make foreignexchange swaps and transactions of more than $10 million a day.
“In recent months there has been a marked increase in the volume of transactions in foreign- exchange derivatives and Makam [government bonds],” the central bank said in a press statement. “To improve the ability to analyze transactions and trends in these instruments, as part of its monitoring of developments in the foreignexchange market, the Bank of Israel will issue an order imposing a reporting obligation on Israeli residents and nonresidents who perform transactions in foreignexchange swaps and transfers of more than $10 million in one day.”
The measure is intended to help the central bank achieve the goals of its monetary and foreign-exchange policies, the statement said. The required reporting will include details of the transactions and their balance of holdings of such assets.
Nonresidents who perform transactions in Makam and short-term government bonds of more than NIS 10m. in one day will be required to report details of the transactions and their balance of holdings of such assets.
Foreign-currency swaps are transactions converting Israeli currency into foreign currency or vice versa with a commitment to perform a conversion in the future on a predetermined date under conditions stated in advance in an agreement.
“With this measure, the central bank is trying to understand what is driving the shekel strength and which part can be attributed to activity by speculators,” Amir Kahanovich, chief economist and market strategist at Clal Finance, said Wednesday.
“Greater transparency of the players operating in the foreign- exchange market will enable the central bank at a later stage to impose other restrictions such as a tax levy, capital controls or additional intervention through the purchase of foreign currency.”
The new regulations could have an impact on the reputation of the shekel being viewed as a currency that is being manipulated, while it might result in additional operational costs that burden market players, he said.
Last year, the shekel strengthened against the dollar by about 6 percent as the country’s strong economic fundamentals remained conducive to long-term exchange-rate appreciation.
In 2008, Bank of Israel Governor Stanley Fischer started to buy foreign currency in an effort to slow down the shekel’s pace of appreciation, which is eroding exporters’ profits and reducing economic growth. Over the past three years, the central bank continued with discretionary direct interventions in the foreign-exchange market, acting to moderate changes in the exchange rate, while shoring up the country’s currency reserves to $70.9 billion as of the end of December.
“The move by the Bank of Israel could be a frontrunner for taxes on capital gains or taxes on short-term capital inflows,” Michael Sarel, head of the economics division at Harel Insurance and Financial Services, said Wednesday. “It could also simply be a measure to deter the activity by foreigners in the Makam market, where they take advantage of the gap in short-term interest rates between Israel, the US and Europe.”
Fischer was the first centralbank governor in the world to raise the base lending rate, to 0.75% last August, while interest rates in the US and Europe have stayed at nearzero levels. The current rate is 2%.
The Bank of Israel on Wednesday distributed the draft order to banks, financial intermediaries and others for comments and reviews, which need to be received by next Wednesday. The requirements will become effective shortly after the comments are received.