September 6th, 2009
The first signing of an ISDA Master Agreement between two Israeli banks: Mizrachi Tefahot and Leumi
Today, for the first time in Israel, two Israeli banks: Mizrachi Tefahot and Leumi signed an ISDA Master Agreement, which facilitates reducing the risks embodied in over-the-counter derivative transactions.
Senior deputy CEO and head of the Capital Markets Division, Prof. Daniel Zidon, signed the agreement for Leumi and Deputy CEO and head of the Financial Division, Mr. Eldad Fresher, signed for Mizrachi Tefahot.
On signing the agreement, Prof. Daniel Zidon said that the global crisis had stressed the advantages stemming from signing ISDA agreements between banks. "The global crisis taught all of us that banks, which executed derivative transactions pursuant to ISDA agreements, in contrast to banks that had failed, lost less than what they would have in the absence of these agreements. The regulation in the world also recognized the contribution made by these agreements to reducing the risk generated in derivative transactions. Consequently, as a part of the transition to transactions in pursuance of the Basel 2 requirements, banks, that sign these agreements, will be required to hold much less capital against derivative transactions."
Eldad Fresher said that, while reference is to an innovative agreement in the Israeli banking system, in fact, it involves adopting international banking standards that have been conventional in the world for some time. "The agreement will facilitate the signatory banks increasing trading volumes between them, compared with other banks. We intend signing similar agreements with other Israeli banks in order to enable increasing the volume of trading provided as a service to our customers, while monitoring the risks as necessary and reducing the capital employed pursuant to Basel 2."
Information on ISDA Master Agreements
- What is an ISDA Master Agreement?
A legal agreement that facilitates reducing the risks embodied in over the counter derivative transactions: The risk that the second party, with whom the transaction is being transacted, will not meet his commitments because of bankruptcy. Over-the-counter transactions are executed for both clients and the bank itself and are used for the purposes of hedging against risks and speculation. In contrast to the risk involved when extending a loan, when the lender is exposed to the risk that the borrower will not return the loan and the risk is one-sided, in derivative transactions the risk is double-sided as the market value of the transaction could be positive or negative. Consequently, both parties have an interest in safeguarding themselves against the risk that one of them will become insolvent.
- How does an ISDA Agreement reduce risks?
The agreement reduces the extent of exposure between bank A and bank B,which transact with each other in the event that one of them becomes bankrupt. Thus, if bank A fails, bank B, which is the second party to the transaction, is entitled to set off bank A's commitments to it and transfer only the fair value of the net sum of the open commitments. Thus, bank B immediately reduces its potential losses and avoids the need to wait in line with other creditors to receive the sum owed to it by the failed bank.
- What is happening around this subject globally?
Globally, the over-the-counter derivative transactions market is controlled by ISDA Master Agreements, formulated by the International Swaps and Derivatives Association.
- What has been conventional in derivative transactions in Israel up to the present?
Leumi and Mizrachi Tefahot already transact with most foreign banks in pursuant to ISDA Master Agreements. As aforementioned, while this is the global standard, no such agreements have been signed between Israeli banks until now.
