Israel: Market upgrade initiated
15 September 2020
The Middle Eastern country’s securities lending market is on the brink of a technological revolution with the launch of a first-of-its-kind DLT trading platform and an influx of international investment
Image: EnginKorkmaz
For many years, Israel’s securities lending has been somewhat of a closed book. But, the Middle Eastern country is about to open a whole new chapter with the upcoming launch of a central blockchain-powered securities lending platform.
The platform, hosted by the Tel Aviv Stock Exchange (TASE), is due to hit the ground running in November and is aimed to give a much-needed shot-in-the-arm to the country’s latent lending market.
Ofer Abarbanel, founder of Contact Prime Brokerage, a firm which specialises in the securities finance sector, explains that since TASE is now a public company, “its top management realised they need to become competitive so they can increase their value to their shareholders, therefore, they invested in improving their technology”.
The blockchain platform will function as a one-stop shop for all securities lending activities, permitting access to larger securities volumes within shorter timeframes.
It has been built on Hyperledger Sawtooth, an open-source enterprise blockchain network, in collaboration with Accenture and with additional testing by Blockchain Technology Partners, a Scottish distributed ledger technology developer.
In March, TASE members were given access to an initial testing environment, to put the platform through its paces with lending transactions and adapt their systems in preparation for the production phase.
Orly Grinfeld, head of clearing at the TASE, describes the new securities lending environment as a “game-changer in the securities market in Israel”, adding that “the blockchain technology will present a new level of safety for securities lending and will support growth for transactions based on this new platform”.
“The new product will open the market and enable direct participation for each player in the market—even the smaller players,” she explains. “The market will be much more efficient and transparent, and the costs will be lower and the volumes will grow higher. We believe it is going to double and triple the volumes of the current securities lending market in Israel.”
This may sound like an ambitious target but activity in both securities lending and short selling markets have remained stubbornly low in recent years, compared to similar-sized markets elsewhere in the world, and there is plenty of untapped potential.
Rony Gitlin, head of securities trading at Bank Leumi Le-Israel B.M, says the number of securities lending trades in Israel is lower than most of the rest of the world. On average, the main market percentage of short compared to long is 2-5 percent whereas Israel sits at around 0.5 percent mark. “We have a long way to go,” he states.
Part of the reason for the below-average activity is regulation.
Rules governing non-institutional clients, in particular, make the option to be short on securities for retail clients “almost impossible,” explains Gitlin.
For non-qualified investors, there is no possibility to be short on a stock unless you buy a short exchange-traded fund, he adds. “The Israeli regulation calls being short, as property at special risk, that means that the non-qualified investors can’t trade it. So there is a large percentage that can’t join the market.”
Although short selling and securities lending are established and approved features of the Israeli market, local investors have traditionally avoided short sales — the cautious culture of investors means they are just not a popular investment option. Gitlin believes there is a big part of the Israeli public that still remembers the big losses of the 1980 years and, 40 years on, investors remember the “traumatic losses”. so investors will not put their money on stocks. Gitlin explains that for this reason, “I do think that the Israeli public are less in the stock markets, and to be short is an even bigger risk in their mind”.
Despite the fact that blockchain platforms are still relatively new to capital markets, TASE’s innovation is not expected to meet any major hurdles. TASE is regulated by the Israel Securities Authority and every new product is coordinated with the market overseer.
“From our point of view,” says TASE’s Grinfeld, “the product is going to decrease the risks for the participants. TASE is going to be obligated as a central counterparty for the new system, which means it gives the full obligation to complete each lending transaction even if the counterparty did not fulfil their part. In terms of regulation, it decreases risks in the market and that is one of the interests of the regulator.”
The COVID factor
Gitlin explains that as the COVID-19 pandemic enveloped the world, that Israel did see “much more flow in general and also in securities lending. We saw more interest from qualified investors but the markets in Israel didn’t do the rally that we saw from NASDAQ”.
During the initial peak of pandemic in March and April, “securities lending TASE numbers rose by around 10 percent only, while flow rose by around 70-80 percent, so the numbers on securities lending are lower than the world numbers,” Gitlin says. “But that means that there is lots of potential in the local market.”
Reinforcing this optimism, Abarbanel argues: “the Israeli securities lending market is becoming well-positioned for growth compared to other markets since securities lending is all about having a great infrastructure to handle increased lending volumes which increases trading volumes.”
Open door policy
Another major change that Tel Aviv is experiencing is the entrance of foreign brokers and trading firms that are now becoming members of the exchange, such as Interactive Brokers Group (IBKR), a major international brokerage firm, part of the NASDAQ Stock Exchange. Tel Aviv announced last year that IBKR and retail clients can now trade stocks on the exchange.
IBKR will connect clients to TASE via a banking intermediary based in Israel. The brokerage firm enables clients to fund their account in 23 currencies and trade assets from a single account in multiple currencies, including the Israeli shekel.
The aim is to provide clients access to the world’s financial markets, including smaller markets that larger financial institutions don’t serve. Thomas Peterffy, CEO of Interactive Brokers, explains: “Due to our international scope and advanced technology, we can offer opportunities for investors to access smaller markets efficiently and cost-effectively.”
Commenting on the addition of IBKR, TASE CEO Ittai Ben-Zeev says: “This is a direct result of our strategic plan and aspiration to encourage international investors to trade on TASE, to expand trading volumes and improve liquidity in the Israeli market.”
This is a very exciting time for Israel and it may be the beginning of a new market blooming. If this blockchain platform successfully allows Israel to grow then maybe that could be applied to other development markets that need a lightning rod to galvanise growth.
The platform, hosted by the Tel Aviv Stock Exchange (TASE), is due to hit the ground running in November and is aimed to give a much-needed shot-in-the-arm to the country’s latent lending market.
Ofer Abarbanel, founder of Contact Prime Brokerage, a firm which specialises in the securities finance sector, explains that since TASE is now a public company, “its top management realised they need to become competitive so they can increase their value to their shareholders, therefore, they invested in improving their technology”.
The blockchain platform will function as a one-stop shop for all securities lending activities, permitting access to larger securities volumes within shorter timeframes.
It has been built on Hyperledger Sawtooth, an open-source enterprise blockchain network, in collaboration with Accenture and with additional testing by Blockchain Technology Partners, a Scottish distributed ledger technology developer.
In March, TASE members were given access to an initial testing environment, to put the platform through its paces with lending transactions and adapt their systems in preparation for the production phase.
Orly Grinfeld, head of clearing at the TASE, describes the new securities lending environment as a “game-changer in the securities market in Israel”, adding that “the blockchain technology will present a new level of safety for securities lending and will support growth for transactions based on this new platform”.
“The new product will open the market and enable direct participation for each player in the market—even the smaller players,” she explains. “The market will be much more efficient and transparent, and the costs will be lower and the volumes will grow higher. We believe it is going to double and triple the volumes of the current securities lending market in Israel.”
This may sound like an ambitious target but activity in both securities lending and short selling markets have remained stubbornly low in recent years, compared to similar-sized markets elsewhere in the world, and there is plenty of untapped potential.
Rony Gitlin, head of securities trading at Bank Leumi Le-Israel B.M, says the number of securities lending trades in Israel is lower than most of the rest of the world. On average, the main market percentage of short compared to long is 2-5 percent whereas Israel sits at around 0.5 percent mark. “We have a long way to go,” he states.
Part of the reason for the below-average activity is regulation.
Rules governing non-institutional clients, in particular, make the option to be short on securities for retail clients “almost impossible,” explains Gitlin.
For non-qualified investors, there is no possibility to be short on a stock unless you buy a short exchange-traded fund, he adds. “The Israeli regulation calls being short, as property at special risk, that means that the non-qualified investors can’t trade it. So there is a large percentage that can’t join the market.”
Although short selling and securities lending are established and approved features of the Israeli market, local investors have traditionally avoided short sales — the cautious culture of investors means they are just not a popular investment option. Gitlin believes there is a big part of the Israeli public that still remembers the big losses of the 1980 years and, 40 years on, investors remember the “traumatic losses”. so investors will not put their money on stocks. Gitlin explains that for this reason, “I do think that the Israeli public are less in the stock markets, and to be short is an even bigger risk in their mind”.
Despite the fact that blockchain platforms are still relatively new to capital markets, TASE’s innovation is not expected to meet any major hurdles. TASE is regulated by the Israel Securities Authority and every new product is coordinated with the market overseer.
“From our point of view,” says TASE’s Grinfeld, “the product is going to decrease the risks for the participants. TASE is going to be obligated as a central counterparty for the new system, which means it gives the full obligation to complete each lending transaction even if the counterparty did not fulfil their part. In terms of regulation, it decreases risks in the market and that is one of the interests of the regulator.”
The COVID factor
Gitlin explains that as the COVID-19 pandemic enveloped the world, that Israel did see “much more flow in general and also in securities lending. We saw more interest from qualified investors but the markets in Israel didn’t do the rally that we saw from NASDAQ”.
During the initial peak of pandemic in March and April, “securities lending TASE numbers rose by around 10 percent only, while flow rose by around 70-80 percent, so the numbers on securities lending are lower than the world numbers,” Gitlin says. “But that means that there is lots of potential in the local market.”
Reinforcing this optimism, Abarbanel argues: “the Israeli securities lending market is becoming well-positioned for growth compared to other markets since securities lending is all about having a great infrastructure to handle increased lending volumes which increases trading volumes.”
Open door policy
Another major change that Tel Aviv is experiencing is the entrance of foreign brokers and trading firms that are now becoming members of the exchange, such as Interactive Brokers Group (IBKR), a major international brokerage firm, part of the NASDAQ Stock Exchange. Tel Aviv announced last year that IBKR and retail clients can now trade stocks on the exchange.
IBKR will connect clients to TASE via a banking intermediary based in Israel. The brokerage firm enables clients to fund their account in 23 currencies and trade assets from a single account in multiple currencies, including the Israeli shekel.
The aim is to provide clients access to the world’s financial markets, including smaller markets that larger financial institutions don’t serve. Thomas Peterffy, CEO of Interactive Brokers, explains: “Due to our international scope and advanced technology, we can offer opportunities for investors to access smaller markets efficiently and cost-effectively.”
Commenting on the addition of IBKR, TASE CEO Ittai Ben-Zeev says: “This is a direct result of our strategic plan and aspiration to encourage international investors to trade on TASE, to expand trading volumes and improve liquidity in the Israeli market.”
This is a very exciting time for Israel and it may be the beginning of a new market blooming. If this blockchain platform successfully allows Israel to grow then maybe that could be applied to other development markets that need a lightning rod to galvanise growth.
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