Dei'ah veDibur - Information & Insight

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12 Iyar 5766 - May 10, 2006 | Mordecai Plaut, director Published Weekly










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The Chicago Mercantile Exchange Will Trade Shekel Futures Contracts

by Yated Ne'eman Staff

This week a shekel-dollar futures contract was launched on the Chicago Mercantile Exchange (CME). The CME is one of the largest exchanges in the world for futures contracts, and it is the leading foreign currency exchange. The launch signifies that the shekel is considered a convertible currency, and has a place among the international currencies traded on the CME.

"We welcome the start of trading in the shekel on the Chicago Mercantile Exchange," Governor of the Bank of Israel Prof. Stanley Fischer told Globes. "This marks another important achievement in penetrating the shekel into leading financial markets. Trading in the shekel on the CME gives Israeli companies operating in global markets another tool. With the development of the markets, we expect to see growing activity in the shekel on the CME."

Observers said that Fischer's international prestige may have played a role in the introduction of the new contract.

The future contract on the shekel is a standard contract denominated in units of NIS 1 million. Each contract will expire at the end of the quarter. The minimum variation in the price of a contract will be $10.

This is the first time that the shekel will be traded in substantial volumes outside Israel. Trading on the CME will lead to higher liquidity for the shekel, which should reduce the sell/buy spread.

In general, the overwhelming majority of international foreign exchange trading is done by speculators. Up to know, in contrast, most trading in the shekel was done by business parties since there was no forum for speculators to trade the shekel. Speculators and professional traders provide a larger and much more liquid market than business people alone.

One reason that the shekel has not been attractive for speculators is because of its high sell/buy spreads.

The new shekel contracts are expected to boost the shekel's liquidity, and will probably boost the use of the shekel among speculators.

Bank of Israel foreign currency department director Barry Topf told Globes: "Currently, there is no regulation or restriction on foreign exchange trading in Israel, and the shekel is considered a convertible and tradeable currency just like other leading international currencies. This is no trivial matter. For example, there are currencies that are traded more, such as the South Korean won or the Thai baht, that are not as convertible as the shekel. Another significance of the launch is that if the CME bothers to launch futures contracts for the shekel, this means that there's interest in the shekel in the market."

The exchange rate is not expected to be affected.

One man who worked hard to promote the launch of shekel futures contracts is CME chairman emeritus and director Leo Melamed, 76. He has been active on the CME for over 46 years.

Melamed told Globes: "The Bachar committee greatly contributed to [the international reputation of Israel] because the committee undertook significant steps to make competition in the market more sophisticated, and made the Israeli market better vis-a-vis the international markets. I met Governor of the Bank of Israel Prof. Stanley Fischer and Israel Securities Authority chairman Moshe Tery, and we decided that the launch of a futures contract on the shekel would tell the world that Israel was becoming part of the international financial community. . . . For Israel, the launch of shekel futures contracts basically means, `We feel good about the economy, and we're prepared to open the Israeli market to the world. We want to be part of the global economy, and recommend using the shekel because we believe in our future economic strength.' "

Melamed told Globes that the CME was examining the possibility of launching exchange traded funds (ETFs) or futures contracts on the Tel Aviv 25 index.


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