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As a total contrast to the vast majority of FX industry participants which experienced low volatility for the first nine months of 2014, Israel experienced a 45% upturn in FX volume when compared to the previous year.
Many sectors across many regions were affected by low volumes last year until volatility was restored in September, resulting in low volumes for a prolonged period of time within the interbank FX businesses, institutional firms, and retail FX segment.
Regardless of this, Israel’s FX market soldiered on undaunted, rising to an average of $6.4 billion in 2014, which, according to a report by Reuters, was assisted by a sharp rise in swap transactions by Israeli participants.
Overseas investors accounted for 31% of daily volume in 2014, which is a reduction from the 40% in 2013, a year in which overall daily volume was down by 16%. These figures make a clear distinction that traders from within Israel’s domestic market were very active last year.
Going back to 2010, overseas participants accounted for 63% of the total market, but the strength of the domestic economy has empowered Israeli investors, plus regulatory constraints on foreign investors have curtailed investment from overseas, much to the benefit of the FX market in Israel.
Former Bank of Israel governor Stanley Fischer’s conservative and prudent fiscal policy which led Israel’s economy from strength to strength during the times of the global financial crises led to an incrementally strengthening Shekel, and a nation with very low exposure to unserviceable debt, as well as more NASDAQ listed start up technology companies than all of Europe combined. Most of these firms specialize in medical science, computer software and water treatment, however Israel is also home to a substantial number of FX technology providers.
Although Israel’s FX market is dominated by the large banks, mainly Hapoalim and Leumi with trading activity regulated by the Bank of Israel, non-bank FX trading is relatively rare, and as yet the regulatory structure has not been finalized.
Currently, the regulatory methodology which had initially been scheduled to be implemented in October 2013, has been sent back to the Knesset Finance Committee for clarification of the language, and therefore is at best many month away from being implemented.
Furthermore, it remains unclear whether certain criteria within the regulatory proposals, for example leverage limitations, will affect brokers who provide services to non-Israeli traders, or only to those who take Israeli traders.
In an interview with LeapRate in October last year, Steven Kruger, General Counsel at FX technology company Leverate explained that “On August 3, 2014, the Finance Committee of the Knesset passed the Regulations (the “Regulations”) that were to govern Amendment 42 of the Securities Law, 1968. Although the legislation had been promulgated a while back the Regulations have been the main source of contention over last couple of years and the source of much speculation”
He continued “It that stage there was lots of frantic activity by FX providers to get clarification as to how they would conduct the business in light of the new regulations, however the regulations have been sent back to the Finance Committee for clarification of the language and so we are back to square one in terms of the time periods.”
“Once the Regulations have been passed onto the finance minister and signed they will enter into force six months after their publication in the Official Gazette. Accordingly the implementation of the Regulations are once again pretty far off.”
Against the currencies of Israel’s main trading partners, in terms of the nominal effective rate, the shekel weakened by 3.1 percent in 2014 and 5.7 percent since August, however major electronic trading networks and exchanges such as ICE are adding the Shekel to their trading instruments as this year begins, following an analysis by LeapRate’s Andrew Saks-McLeod in a TV interview during the summer of 2014, Israel’s economy continued to grow, with the strength of the currency and its desirability as a purchasing tool being as paramount as the demand for housing as construction booms in Israel.
According to data from Reuters, The central bank noted that swap transactions surged 87 percent to an average monthly level of $79 billion in 2014, and the Bank of Israel itself bought $7 billion in spot and forward transactions, $3.5 billion on which were part of a programme intended to offset the effects of natural gas production in the exchange rate.