Israel Securities Authority's Staff Position Regarding Equity Swaps And Reporting With Respect To Underlying Shares

Author:Herzog Fox & Neeman
Profession:Herzog Fox & Neeman

On 28 February 2019, the Israel Securities Authority (the "ISA") published position paper no. 101-22, regarding reporting obligations with respect to shares that are the underlying assets in Swap transactions (the "Position Paper"). This Position Paper cancels the previous ISA position with respect to minimum public holding requirements.

Pursuant to the Position Paper, swap transactions are defined and described as transactions that separate between the exposure to the variable yield of the underlying shares, and the other rights attached to such shares, for the duration of the transaction. At the end of such swap transactions, there would be a financial settlement between the parties to the transaction in respect of the yield differentials of the underlying shares ("Swap Transactions").

According to the Position Paper, in some cases, a Swap Transaction involves a purchase or sale of shares (as the case may be), which constitutes an integral part of the Swap Transaction. Under this structure, the originator sells the shares held by it, through a financial institution acting as an intermediary, to a third party which is unrelated to the seller. The sale of the shares is characterised as a true sale transaction with no recourse to the seller, in return for a purchase price, that is paid by the intermediary to the seller. At the termination date of the Swap Transaction, the shares are to be sold and a cash settlement will occur.

Generally, according to the Position Paper, the result of such Swap Transaction structure, is that the listed shareholder is indifferent to the performance of the underlying shares because at the termination of the transaction, such shareholder is usually obliged to sell the shares without having any exposure to the variable yield resulting from the sale. As a consequence, according to the Position Paper the party holding the shares appears to have no economic incentive to realise the rights conferred upon it, and in particular the voting rights that are attached to the shares.

In light of the above, the ISA examined the question of how to relate to the "holding" of the shares that are the...

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