Bank of Israel imposes fx derivative reserve requirement

TEL AVIV Thu Jan 20, 2011 8:36am EST

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TEL AVIV Jan 20 (Reuters) - Banks in Israel will have to meet a reserve requirement for foreign exchange derivative transactions by non-residents, the Bank of Israel said on Thursday.

The central bank published an amendment to the liquidity directives that will become effective on Jan. 27. A 10 percent reserve requirement will apply to shekel/foreign exchange swaps and shekel/foreign exchange forwards.

"In the last few months the volume of foreign exchange derivative transactions by non-residents has increased markedly," the Bank of Israel said.

"A significant part of the increase in non-residents' transactions is in short-term instruments. This measure will strengthen the Bank of Israel's ability to achieve the objectives of its monetary, foreign exchange and financial stability policies."

The shekel weakened in response to 3.61 shekels per dollar from 3.56 prior to the announcement. A Bank of Israel source said the measure will make this type of transaction less attractive for foreign players.

"It makes the transaction more expensive for local banks," the source said, as the banks will not get interest on the 10 percent reserves and this will carry over to foreign banks.

On Wednesday, the Bank of Israel said it will require Israelis and foreigners to report on transactions in foreign exchange swaps and forwards of more than $10 million in one day to improve its ability to analyse trends in these instruments.

Additionally, non-residents who perform transactions in short-term Bank of Israel bills called makams and short-term government bonds of more than 10 million shekels in one day will be required to report details of the transactions and their balance of holdings of such assets. (Reporting by Tova Cohen; Editing by Toby Chopra)

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