The Principles of the Clearing System

As aforesaid, all the certificates in respect of the shares which are traded on the TASE are kept in the vaults of the Coordinating Banks. These securities are generally the majority of the particular company's securities, but not necessarily all of them. The exception is in the case of a shareholder who wishes the shares to be registered in his own name and not deposited with the coordinating bank. Such shares, which are registered directly in the company's books, cannot be traded on the TASE until the certificates have been transferred to the vault of a coordinating bank and the shares registered in the name of a Nominee Company. Such registration, which is called "deposit", is also effected through the Clearing House. Similarly, the reverse act of "withdrawal", namely the registration of a share in the name of its and the de registration of the Nominee Company, is also performed real holder through the Clearing House. Withdrawals are only performed very occasionally. Shares which are not registered in the Clearing House, in respect of which physical certificates have been issued, are generally those belonging to the company's interested parties, which are held directly by them.

The credits (deposits) and debits (withdrawals) in the "coordinating bank", the Nominee Company and the Clearing House to the credit of the Clearing House members are conditional until approval is obtained from the listed company.

According to the by-laws of the Clearing House, the registrations in the Clearing House and Nominee Company become final and absolute on receiving approval or within three weeks, in default of response by the company.

Securities, the registration of which is conditional, cannot be sold if their value exceeds $25,000 or they constitute more than 1% of the listed capital, whichever is the lesser. A smaller quantity can be sold with the approval of a TASE member.

When investors buy or sell shares on the TASE, no change is made in respect of the share certificate in the books of the Nominee Company. If the transaction is performed through the same Clearing House member, there will only be a change in the books of that member, and the balances of the other Clearing House members will remain unchanged. If the transaction is made between customers of different members, the balances of the involved Clearing House members will be changed in the Clearing House's records.

At the same time as clearing the shares, the Clearing House credits or debits the TASE members with the financial consideration in respect of the clear transactions. This is performed on the first business day after execution.

The financial debit is made in the accounts of the members at the Bank of Israel. Clearing House members which are not banks perform clearance through "a leading financial clearance member", which is a bank member.

The clearing is therefore effected without any actual transfer of certificates. The only change is to the balances of the members in the books of the Clearing House. This enables the rapid clearance of both the securities and their financial proceeds.

The securities are cleared on the same trading day (T) and the financial clearance is effected on the next business day (T+1), afternoon. Because of the different times of clearance, the clearance is "conditional" until payment of the financial clearance, which completes the transaction's execution.

It should be noted that the banks and also some of the non-bank Clearing House members debit and credit their customers with the financial consideration on the transaction date (T) and they bear the differences which derive from accelerating the value dates.

The Clearing House sometimes performs other clearances during the day. These are clearances which are designed to correct errors (trading errors, errors of the Clearing House and other errors) which have come to light during the morning after the trading day or clearance designed to cover a Clearing House member's "short position" in the Clearing House.

The Clearing House activity described above is different from that of many Clearing Houses elsewhere in the world, where a major part of the share transfers - even if deriving from trade on the exchange - are effected by registration in the company's books, which delays the actual transfer and prolongs clearance to between three and five days after the transaction's execution (T+3 to T+5) or sometimes even longer.

Set out below is a schematic chart which describes the acts performed when a new company (company X), lists shares on the TASE.

The company's capital is composed of 1,000 shares; 900 shares are held by investors who act through TASE members and the remaining 100 shares are held by Mr. Israeli directly with the company.

(2) The description therein relates to shares and debentures. The description also supplies to warrants and participation units in limited partnerships, except that there are no physical certificates but merely letters of allotment.

<3> Another Nominee Company is the Bank of Israel Nominee Company, with which Government bonds are registered.

According to the chart, the 900 shares of customers A, B, C and D are held through Clearing House members. Those shares may be traded on the TASE immediately and they are held at bank Y (the Coordinating Bank) and registered in the name of the bank Y Nominee Company. The other 100 shares are held directly by Mr. Israeli, who, as aforesaid, preferred his shares to be registered in company X's books in his own name and he physically holds the share certificate.

If Mr. Israeli wishes to sell his shares on the TASE, he will have to deposit the certificates with a TASE member and register them in the name of the Nominee Company.

The deposit will be effected in the following way: Mr. Israeli, who holds the share certificate, will submit an application form to a member of the TASE accompanied by a share transfer deed and the share certificate. The TASE member will transfer the application together with the transfer deed and share certificate to the "Coordinating Bank". The "Coordinating Bank" will register the securities in its books in favour of the Clearing House and arrange for their registration in the name of the Nominee Company in company X's books. It will then credit the Clearing House with the hundred shares.

The Nominee Company will forward the application form together with the share transfer deed and certificate to company X, which will confirm the validity of the certificate, register the securities in the Nominee Company's name and issue a new certificate.

In the above mentioned example, after the deposit has been completed, all the company's share capital will be registered in the name of the Nominee Company and the share capital which is deposited in the Clearing House to the credit of the TASE members will be increased by the size of the deposit.

Mr. Israeli's shares will be held on trust for him by the TASE member with who he chose to deposit his shares and if he wishes to sell them on the TASE, he will be able to do so immediately by means of a simple transaction.

If Mr. Israeli does deposit all 100 of the shares, which were registered in his name, with Clearing House member Gamma, the picture overleaf will emerge at the end of the process.

The relationship between listed companies and their shareholders

The system whereby the TASE Clearing House operates and securities are registered through Nominee Companies as detailed above is very efficient, saves expenses and enables clearance to be performed quickly. As will be seen in the next section, this system also allows for the efficient and easy transfer of payments between companies and their shareholders. It should nevertheless be borne in mind that there is one major disadvantage of this system - the loss of any direct connection between the company and its shareholders. Since the shareholders hold their shares through the Nominee Company, the company cannot know who its shareholders are and cannot transfer information to them directly. In order to overcome this difficulty, the practice in Israel is that all the information which the company is obligated to publish according to the law (the annual and quarterly statements, the directors' reports and the resolutions of the board of directors) is passed by the company to the TASE, which disseminates it to its members and to the media, and through them the information reaches the company's shareholders and the public at large. The company reports to the TASE enabling the Clearing House and its members to exercise efficiently for their clients the rights attached to the securities, as will be seen in the next section.

Only a shareholder who physically holds certificates will receive information directly from the company. Nevertheless, that shareholder will have to be in direct touch with the company when he exercises the rights attached to his securities, which might involve a great deal of bother.

For this reason, those who hold certificates, other than interested parties as mentioned above, are generally entities which hold large quantities of a security and do not wish to be charged "custodian fees". It is also known that there are shareholders who hold a single share in a company in order to be registered in its books and thereby entitled to information directly from the company.

Clearance of transactions off the TASE and transfers

In Israel it is possible to execute block trading off the TASE. Such transactions are called off the floor transactions. When an off the floor transaction is effected between customers of different TASE members, they apply to the Clearing House for it to clear the transaction. The Clearing House clears the securities and the consideration involved in the transaction in a way which is similar to that in which a transaction on the TASE is cleared.

A transfer is another type of clearance transaction. When a client wishes to transfer his securities which are held through one TASE member to another TASE member, he submits a transfer application to the TASE through the member with whom the account is operated. The application contains the details of both TASE members and a list of the securities being transferred. In the transfer transaction the balance of the transferor member in the Clearing House is reduced and the balance of the transferee member is increased accordingly. The transfer does not involve financial consideration and no financial transaction is therefore cleared in respect of it. A transfer between different accounts of a customer with the same TASE member does not alter the members' balances in the Clearing House and the Clearing House is therefore not involved in such transactions.

Sub-custodian activity on behalf of foreign investors

In recent years the Clearing House has provided a special service to foreign non-resident institutional investors. This service derives from the difference between an Israeli investor and a non-resident institutional investor who both act on the TASE. The Israeli investor generally executes buy and sell transactions in securities through a single TASE member which deals with the routine handling of those securities. The institutional investor sometimes distinguishes between the entity which acts as its broker and the entity which acts as his custodian.

Some of the investors work through two different TASE members: one, broker, and the other, a bank, which is the TASE member which keeps the securities and deals with the routine handling of them (current payments, discharge of taxes, etc.) and performs the role of sub-custodian.

After trade on the TASE, the TASE member broker transfers the securities it has purchased on the TASE for the non-resident investor to the TASE member which acts as the sub-custodian. This transfer of securities is effected immediately through the Clearing House in a transaction similar to an off the floor transaction and it is termed a "Custodian Transaction". It should be noted that such a transfer is rightly not reflected in the statistics on the TASE transactions.