An Insider's Look at the Tel Aviv Stock Exchange
Since the Milken Financial Innovations Lab 2014 report, “(Re)Inventing Israel’s Capital Markets: Financing the Transition from a Startup Nation to a Global Nation,” the Tel Aviv Stock Exchange (TASE) has been moving forward on several important initiatives to increase the number of global investors as well as the volume of equity traded. Kobi Abramov, the manager of the TASE’s research department, met with the Milken Fellows in July and shared the highlights of these initiatives and offered the opportunity to discuss the challenges and opportunities facing the Tel Aviv Stock Exchange.
The first issue Abramov described is the need to move forward with the demutualization of the stock exchange. When the TASE was formed, it chose to become a mutual stock exchange, which was common at the time. This means that it is owned by its members and that only members have the right to trade on the exchange. There are currently 22 members of the TASE, only 6 of which are international. The current proposal for the demutualization of the TASE, which is waiting for review by the Knesset when it reconvenes for its winter session, would reduce the Israel bank’s current holdings of the TASE from 71% to 35%, and remove special privileges and tax treatment to shareholders with more than a 5% holding. In line with the recommendations in the 2014 Financial Innovations Lab report, demutualization would lead to diversification in the exchange’s shareholder base, potential joint ventures and cross-listing opportunities with foreign exchanges, and incentives for innovations in management and capital investment – all leading to the improvement in the exchange’s financial performance, size, and liquidity.
The second issue Abramov discussed is the volume of equity traded on the exchange. The volume of equity traded in the TASE dropped significantly after 2011 and has not since reached that level. One strategy being proposed is to increase the volume of equity traded is to remove the barriers to entry for small and medium businesses. This would help inject more equity into the TASE as well as encourage the development of an important sector in Israel’s economy: the tech sector. The 2014 Financial Innovations Lab report suggested specific measures to accomplish this objective, including enabling the creation of Business Development Companies (BDC). BDCs are regulated, closed-end investment funds that invest in startups and small businesses, providing private equity securities to investors and asset managers. Abramov described the status of the development of BDCs in Israel. In particular, while a broad definition of the BDCs has not yet been implemented, the Government has established rules for R&D companies to issue shares to the public. Similar to the broader definiation of of BDCs, these new R&D companies, as they called, will not be required to disclose all prior activities and investments,, protecting prior investor interests, ultimately incentivizing a higher volume of shares issued to the public and increasing the volume of equity traded on the exchange.
The third issue Abramov raised is limited foreign exposure and awareness to the companies traded on the TASE, as illustrated by the fact that only 57 of the TASE’s 458 companies are cross-listed on foreign exchanges. One solution to this problem of limited foreign exposure is through the creation of Exchange Traded Funds (ETFs), a security that owns an underlying basket of assets and divides ownership of those assets into tradable shares. ETFs are based on indices, which are portfolios of securities by which the performance of other funds can be measured. There have already been Israeli-based indices (BlueStar Israel Global Index, BlueStar Israel Global Technology Index) and ETFs (ISRA ETF, BlueStar TA-BIGITech Israel Technology ETF) created. As described in the Financial Innovations Report, these ETFs are a conduit for new sources of investment capital, and they will expand foreign exposure to Israeli companies and open the gateway for new investment capital in the underlying securities.
Abramov described other challenges and initiatives underway to increase the competitiveness and growth of the TASE. The Milken Fellows were able to engage in a discussion about these challenges, new approaches, and early results. Clearly, there is more to do and it will require continued focus on practical and appropriate financial technologies.