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Home Page > Monetary Policy > The Telbor Market > The Telbor Market - Rules and Definitions

The Telbor Market - Rules and Definitions




Maof Unit Trade Department	Forex Israel	Capital Markets Unit Monetary Department

Rules and Definitions

Background

The Tel Aviv Inter-Bank Offered Rate (Telbor) is an average of interest rates offered by a number of commercial banks (hereinafter: the contributors) to lend inter-bank settlement funds to other banks. It is published daily by Reuters. The algorithm for fixing the Telbor for each term to maturity averages the banks' offers (hereinafter: Telbor interest rate quotations) after excluding extreme offers. The prevailing opinion among participates in the capital market was in 2006 that the Telbor didn't provide an indication of the "true" interest rate.
Development of the market for futures contracts on the interest rate improved to some extent during the last two years. This is apparent from the growing volume of FRA (Forward Rate Agreement) transactions and IRS (Interest Rate Swap) transactions where valuation at expiration is based on the Telbor. A broad consensus exists among capital market participants in Israel that the short-term interest rate derivatives market has a vast potential, but that this potential is blocked by the lack of reliable quotations.
In order to support the development of the market for short-term interest rates, the Bank of Israel formed in the beginning of 2007 an inter-organization "Telbor Interest Rate Committee". The committee's main purpose is to ensure that the contributing banks are committed to operating in the inter-bank market that supports the Telbor Fixing, and that their activity in the market is reliable and transparent. To achieve this objective, the committee will determine the definitions, the contributors and the rules for calculating and publishing the fixing Telbor.


1	Definitions
	1.1	Telbor – the daily average interest rate on inter-bank loans (Tel Aviv Inter-Bank Offered Rate).
	1.2	Telbor Interest Rate Committee – a committee for standardizing and developing the Telbor. The committee will be comprised of representatives from each of the following three entities:
		1.2.1	Head of the Capital Markets Unit at the Bank of Israel – the chairman of the committee.
		1.2.2	The representative of Forex Israel.
		1.2.3	The Maof Unit Manager at the Tel Aviv Stock Exchange.
	1.3	Information circulation – Information will be circulated by a number of firms that are defined as suppliers of information to the capital market in Israel. One supplier will be defined as the central distributor which is responsible for publishing the list of the contributors, accepting information from the contributors, presenting the interest rates that are reported, and calculating and publishing the Telbor. The other suppliers will be responsible for receiving the Telbor data and for its proper presentation for each term-to-maturity.
	1.4	The contributors – A limited list of banks, the composition of which will be determined by the Telbor Interest Rate Committee, will quote inter-bank rates via the central distributor for the purpose of fixing the Telbor. The list will be comprised of at least six banks, each of which will be obliged to quote interest rates on every business day in accordance with the rules determined by the committee.
	1.5	The Telbor fixing – the average of the Telbor rate quotations, which will be calculated by means of an algorithm which the committee will determine (see paragraph 3) for each of the term to maturity that is defined by the Committee (see paragraph 4.2.1).
	1.6	The days on which quotations must be made and the Telbor rate set are determined as follows: all business days in Israel excluding Sundays and excluding four other dates--25 and 26 December, 1 January, and the last Monday in May (in 2008 this is 26 May).Thus the days when no Telbor rate will be determined are known in advance.
2	The work of the Telbor Interest Rate Committee
	2.1	The Committee will convene at least three times a year and will discuss current developments in the inter-bank market.
	2.2	The Committee is entitled to change the rules in accordance with current developments in the market, and a notification of any such change will be published 90 days in advance.
	2.3	Placement on the list of contributing banks is dependent on the commercial bank’s commitment to the Committee’s directives concerning Telbor rate quotations.
	2.4	The Committee will examine the extent to which the contributors conform to the criteria and rules which it has determined.
	2.5	The Committee will require a quotation to be amended and may even issue a warning to a contributor bank if a contributor does not adhere to the directives for the quotations. Under the authority vested in it, the committee is also entitled to remove the contributor from the list. In such a case, the committee will publish an announcement of the matter on the same day.
	2.6	Should a new candidate for contributor status undertake to comply with all of the Committee’s directives and the Committee decides at the new contributor’s request to include it in the list of contributors, the Committee will issue an announcement of this 30 days in advance.
3	The algorithm for calculating the Telbor for each term to maturity has been determined as follows: the average of the Telbor interest rate quotations provided by the contributing banks, excluding the highest and the lowest interest rate. The Telbor Interest Rate Committee is entitled to change the calculation algorithm at any time, and a notification of this will be issued 90 days before the change.
4	Telbor interest rate quotations – are based on the interest rate at which the bank is prepared to extend a loan in the inter-bank system in Israel.
	4.1.	The contributors’ commitment:
		4.1.1.	Every contributor must report on a continuous basis the interest rate at which it is prepared to extend a loan in the inter-bank market for the different terms to maturity on Monday through Thursday from 10:00 and until 17:00 and on Friday from10:00 and until 13:00. However, only quotations published on Monday through Friday between 11:30 and 12:00 commit the contributing bank to conclud a transaction at the request of another contributing bank in accordance with the directives determined by the Committee (see paragraph 4.3).
		4.1.2.	The Committee will monitor abnormal Telbor interest rate quotations that are not included in the fixing. In the event of an abnormality in their quotations, which is not one-time in nature, the contributors must justify to the Committee this abnormal rate.
	4.2.	Directives for quotations:
		4.2.1.	Interest rates will be quoted for terms to maturity of one business day (over night), a week, a month, two months, three months, six months, nine months and 12 months.
		4.2.2.	The Telbor interest rate quotations will be a nominal interest rate and will be expressed in annual terms.
		4.2.3.	The Telbor interest rate quotations will be reported in percentage point to an accuracy of two digits after the decimal point (i.e. 6 percent is reported as 6).
	4.3	Binding nature of the interest rates
		The Telbor interest rate quotations between 11:30 and 12:00 for all terms to maturity commit the contributing bank to concluding a transaction in accordance with the following directives:
		4.3.1	For terms of one business day: a loan at the Telbor interest rate quotation or a deposit minus 12 points from the rate in an amount of at least NIS 20 million.
		4.3.2	For a terms of three months to one year--FRA (forward rate agreement) transactions for periods of 6x3, 9x6 and 12x9 months, at a obligatory spread of ±6 basis points from the quoted Telbor interest rate, in the amount of NIS 50 million.
		4.3.3	For a period of a year--An IRS (interest rate swap) transaction for one year at a obligatory interest rate spread of ±6 basis points from the quoted Telbor interest rate, in the amount of NIS 25 million.
		4.3.4	A contributing bank is committed to concluding one transaction with any other contributing bank that wishes to carry out such a deal. This rule limits the number of daily transactions to one less than the number of contributing banks.
		4.3.5	If a contributing bank is not prepared to conclude a transaction as requested, the initiating bank is entitled to send a letter of complaint to the Committee. The Committee will examine the allegations arising from such letters and will decide whether the contributor will remain in the list of contributors, taking into account exceptional cases such as temporary crises in the financial markets.
5	Calculation and circulation of the Telbor fixing
	5.1	The central distributor will calculate the Telbor fixing in accordance with the existing Telbor interest rate quotations separately for each term to maturity, at a point in time that will be selected at random between 11:45 and 11:55.
	5.2	The central distributor will publish the Telbor fixing for each term by 12:00 on Monday through Friday. In addition, the central distributor will enable the other information suppliers to obtain and publish the information.
	5.3	The central distributor will publish the list of contributing banks.

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