'Corporate-bond market needs more supervision'

Finance Ministry commission recommends more transparency to safeguard public’s savings.

Rony Hizkiyahu 248.88 (photo credit: Ariel Jerozolimski)
Rony Hizkiyahu 248.88
(photo credit: Ariel Jerozolimski)
Israel’s corporate-bond market needs more supervision to better protect the public’s pension savings and adhere to global investment standards, a commission set up by the Finance Ministry said in a report Tuesday.
“Our intention is not to manage savings invested by institutional entities or tell them how or where to invest, but to determine rules in the corporate-bond market setting out clear standards and codes of best practice for institutional bodies and their managers,” Finance Minister Yuval Steinitz said Tuesday at a press conference in Jerusalem.
The Hodak Committee’s report on regulation in the corporate-bond market provided a tool kit for institutional bodies to improve the investment process and manage risk to better protect the public’s pension savings, he said.
The Hodak Committee was set up in May in response to the global financial crisis and risky investments in corporate-debt securities by Israeli institutional investors that had led to huge losses in pension funds.
The committee’s recommendations come against the background of fast growth in the corporate-bond market over the past five years providing an alternative for companies to raise capital from other sources than banks. The corporate-bond market now provides about 50 percent of all capital raised.
The committee found shortcomings in the information a private company issuing debt securities must provide to institutional investors and portfolio managers who manage the public’s pension savings.
Currently there is no regulation in Israel of the information a private company issuing debt securities must provide to institutional investors.
“The financial market in Israel is a very young market and needs better regulation,” committee chairman David Hodak said in the report. “Institutional bodies in Israel have been lending money without requiring sufficient security and information from bond issuers, as is the practice in other developed financial markets in the US or Europe.”
The report recommends regulations for institutional investors when investing in nongovernmental Israeli debt securities. It calls for implementation of conditions that should be demanded by institutional entities from bond issuers, including minimum covenant requirements and “best practice” guidelines.
Supervisor of Banks Rony Hizkiyahu welcomed the recommendations but cautioned that codes of conduct needed to be more comprehensive.
“It is good that this issue is being dealt with, and we will study the recommendations made in the Hodak report,” he said Tuesday at a conference on financial markets held at Tel Aviv University.
“Recommendations should also deal with proper risk management, conflicts of interest and a system of pricing,” he said.
Bloomberg contributed to this report.