Area E � Financial Services Area General information about the by jackl17

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									Corporation Businesses Description                Migdal Insurance and Financial Holdings Ltd.




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                            Area E – Financial Services Area

56.   General information about the financial services area

      The Group's activity in the financial services area is performed by Migdal Investments
      Management, whose main holding is Migdal Capital Markets and its subsidiaries
      ("Capital Markets Group"). The asset management activity of the financial services
      area is complementary to the Group's other areas of activity, and is aimed at providing
      overall services and additional financial solutions to customers.
      The Capital Markets Group deals with asset management and investment consulting
      services (portfolio and mutual funds management), execution services in the Stock
      Exchange and in regularized markets (brokerage), various Forex services, underwriting
      and market making in bonds issued abroad by the State of Israel and large Israeli
      companies. Since as of the date of this report, the Capital Markets Group showed
      minor activity in Forex and underwriting services, the chapter's specification about the
      financial services area regarding these activities is limited. Also, Migdal Capital Markets
      is active in the area of provident funds through Migdal Platinum. Information about this
      activity by Migdal Capital Markets does not appear in this part, and is included in the
      framework of the life assurance and long-term savings' area.
      Migdal Capital Markets was established in 1965. On October 28th, 2001, Migdal
      Investments Management purchased some 88.7% of Migdal Capital Markets' shares, in
      return for a total amount of approx. NIS 78 million. On May 29th, 2002, Migdal
      Investments Management completed a full tender offer regarding Migdal Capital
      Markets, and purchased the rest of its shares in return for a total amount of some NIS
      6.75 million.

      Bringing in a strategic partner in the financial services area – engagement with
      Bear Stearns (BS)
      As part of the Group's preparations for the capital market's reform (Bachar Committee),
      and in order to bring in an international partner to the Capital Markets Group to diversify
      and complete its products and extend its activity in the area, Migdal Investments
      Management signed a letter of intent with BS, dated 21.9.04, announcing BS's joining
      in as a strategic partner in the Company by selling 50% of Migdal Capital Markets to
      BS.
      Following the letter of intent, the Group negotiated for the outlining of the sales
      agreement and the shareholder agreement. The latter are undergoing final drafting
      stages and the BoD of Migdal Holdings approved the transaction engagement. When
      signed, the agreements will be subject, inter alia, to the approvals of the Tel Aviv Stock
      Exchange Ltd., the Antitrust Director General and the Commissioner of Insurance.
      In the specified agreements, as opposed to the payment specified in the letter of intent,
      the payment was updated to a total amount of NIS 11.3 million, in light of a total
      dividend of some NIS 10 million that was distributed to Migdal on December 31st, 2004.
      In addition, Migdal Investments Management and BS undertook upon themselves to
      inject a shareholder's loan at a total amount of some NIS 5 million, each.
      In the framework of the shareholders' agreement with BS, it was agreed, inter-alia, to
      have equal representation in the Migdal Capital Markets BoD, as well as upon subjects
      that must be decided by the BoD.
      The agreements include exclusivity arrangements in the area of mutual funds, portfolio
      management and educational funds (together with exceptions defined for both Migdal
      Group and BS), Migdal Capital Markets and BS restraint of trade in the area of mutual
      funds which are neither educational funds, nor the result of social provisions, and an
      arrangement for acquiring provident funds, including educational funds and mutual
      funds according to a mechanism in which every such acquisition will be examined by
      Migdal Group, and Migdal Capital Markets will be given the first refusal right as to
      acquisitions the Group wants to perform.
      The agreement also includes instructions as to transferring Migdal Capital Markets'
      shares, owned by Migdal and BS, alongside CALL and PUT options on Migdal Capital


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      Markets' shares, which will be owned by BS ("BS shares"). Migdal was given a Call
      option in return for 120% of the market worth of BS shares, and BS was given a Put
      option in return for 80% of the market worth of BS shares (subject to exceptions in
      which it was agreed upon different rules for the realization of the options). It was
      agreed upon a blocking period of 3 years from the time of completing the transaction in
      which the exit options cannot be executed (except for exceptions set for BS and related
      to an indemnification arrangement in respect of the acquisition).
      The agreement also includes restraints of trade for the period after selling the BS
      shares, if and when it happens.
      Alumim acquisition
      In 2004, the Capital Markets Group extended its portfolio management and investment
      consulting activity by acquiring Alumim. Alumim is a portfolio management company,
      which focuses on institutional customers, NGOs, companies, Kibbutz and various
      entities. The Capital Markets Group makes continuous efforts to extend the variety of
      products proposed to its customers. This is how in 2004, for example, the Capital
      Markets Group started penetrating the area of different Forex services by establishing
      Migdal Forex, along with Mishkey Hakibbutzim Agricultural Cooperative Society Ltd.
      This engagement is another layer in the Group's preparation for the capital market
      reform (Bachar Committee) and its desire to diversify the products basket by the
      Capital Markets Group.

     56.1    The financial services area structure and its changes
             The financial services area is characterized by high volatility as a result of local
             and global political and economic events, affecting the securities rates in the
             Stock Exchanges and regularized markets, the scope of activity in the capital
             market, affecting, in turn, the results of the Capital Markets Group activity, its
             assets, and its business results. The financial services area is characterized by
             high regulation, and is affected by the different regulatory decisions in the
             capital market, including the Securities Authority, the Tel Aviv Stock Exchange
             Ltd. ("the Stock Exchange"), the Bank of Israel etc. This area is also
             characterized by continuous harsh competition, both on the part of the banking
             corporations and of the non-banking entities.
             The activities of the financial services area in the Capital Markets Group are as
             follows:
             The assets management and investment consulting activities includes
             investment portfolio management and investment consulting, mutual funds,
             provident funds and educational funds management. The activity is performed
             through 5 different companies – Migdal Capital Markets, Migdal Asset &
             securities Management (1998) Ltd. ("Migdal Asset Management"), Migdal
             Alumim Investment House Ltd. ("Alumim"), Migdal Trust Funds Ltd. ("Migdal
             Funds") and Migdal Platinum – see henceforth.
             The brokerage activity is performed by the Central Co. Stock Exchange
             Services (N.E.) Ltd. ("the Central Company"), which is a Stock Exchange and
             Stock Exchange clearinghouse company, which manages transaction rooms
             and trading room specialized in international activity.
             Different Forex services activity is performed by Migdal Forex Matach
             Services ("Migdal Forex"). As mentioned, Migdal Forex's activity at this stage
             is minor.
             The underwriting activity is performed by Migdal Underwriting and Business
             Promotion Ltd. ("Migdal Underwriting"). As mentioned, Migdal Underwriting's
             activity at this stage is minor.
             The provident funds management activity is performed by Migdal Platinum.
             As mentioned, information about this activity is not detailed in this part, and is
             included in the life assurance and long-term savings area.
             The market making activity in bonds issued abroad by the State of Israel
             and large Israeli companies is performed by Migdal Capital Markets. This
             activity started in the second half of 2003, and its scope is not yet material.




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     56.2 Restrictions, legislation, standardization and special constraints applied to
          the area of activity
          The financial services area activity is subject to intense and unique regulation,
          and to receiving permits and licenses from the different State's authorities, mainly
          the Securities Authority and the Stock Exchange. Each of the Capital Market
          Group's companies is subject to a different set of laws, rules, instructions and
          orders. For further details see item 67 henceforth.

     56.3 Changes in the scope of activity in the area of financial services and its
          profitability
          Year 2004 was characterized by a trend of economic improvement in the Israeli
          market in general and by low interest rates, which made investors invest in the
          capital market in search of less solid investment channels, which will bring higher
          yields (CPI-linked bonds, bank deposits etc.). According to a public-held financial
          assets portfolio development report, published by the Bank of Israel's Monetary
          Department18, the public-held financial assets portfolio increased from some NIS
          1,365 billion at the end of 2003, to some NIS 1,509 billion at the end of 2004 and
          the public-held shares holdings rate in Israel, out of the total public-held financial
          assets portfolio, increased from some 19% in 2003 to some 22.7% in 2004. The
          above increase was accompanied by a decrease in the CPI-linked investments
          part of the total financial assets portfolio. In 2004 there was a substantial increase
          in the volume of the assets managed by mutual funds managers19, showing a
          preference of non-bank mutual funds over mutual funds managed by bank-
          related-companies.20
          The brokerage scope of activity is affected by the Stock Exchange trading
          turnovers and the capital market volatility. It should be mentioned, that according
          to the annual review for 2004, published by the Stock Exchange (henceforth –
          "Stock Exchange review"), in 2004, the stock market showed the highest annual
          trading turnover in the history of the Stock Exchange, as well as high trading
          turnovers and extensive capital raising (mainly of the business sector) in the
          bonds market. In 2004, the average daily trading turnovers in stocks and
          convertibles and bonds, inside and outside the Stock Exchange dealing, were
          high in relation to the trading turnovers in 2003 by some 75% and some 30%,
          respectively.
          Revenues from the financial services area stem mainly from management fees,
          which are calculated out of the managed assets, and commissions’ revenues in
          respect of brokerage services.
          In 2002-2004, the scope of the financial services area revenues increased from
          some NIS 45 million in 2003 to some NIS 54 million in 2004. This rise stems
          mainly from an increase in the total assets managed by the Capital Markets
          Group and from a more moderate rise in the scope of other activities provided in
          the area, such as brokerage services. In addition, as of April 2004, the
          completion of Alumim's acquisition, the financial statements included Alumim's
          monetary results. However, as of the beginning of 2004, the activity in the
          hedged derivatives area in its Nostro accounts was terminated, which reduced
          this year's revenues.
          The total assets managed by the Capital Markets Group increased from a level of
          some NIS 0.89 billion on 31.12.2002, to some NIS 1.5 billion on 31.12.2003, and
          to some NIS 3.5 billion on 31.12.2004. The increase stems from recruiting new
          customers, including customers referred through agents who work with the

     18
        Government, the Bank of Israel, foreign residents' investments and banks, not included.
     19
        A rise in the volume of mutual funds assets from some NIS 83 billion at the end of 2003 to
     some NIS 98 billion at the end of 2004 (according to data published by the Kranot Meida Zahav
     company).
     20
        According to data published by the Kranot Meida Zahav company, the rate of the mutual funds
     assets managed by private brokers, from the total mutual funds assets in Israel, increased from
     some 10% at the end of 2003 to some 15% at the end of 2004.



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           Group, as well as from Alumim's acquisition (which managed, at the time of
           acquisition, about NIS 1.2 billion).
           Profit before taxes in this area increased from some NIS 1 million in 2002, to
           some NIS 2 million in 2003, and to some NIS 3 million in 2004. This profit is after
           goodwill depreciation at a total of NIS 4 million in each of the mentioned years.
           The relatively moderate rise in the profitability of the area as opposed to the
           higher increase in the area's revenues, stems, inter-alia, from a trend of
           increased costs, mainly personnel costs, which were recruited in order to recruit
           new customers and manage their assets, hence contributing to the growth
           potential and extension of the future scope of businesses.
           For details regarding the Bachar Committee and its expected implications on the
           financial services area – see abovementioned item 7.4 in Part A.

     56.4 Developments in the area of financial services and changes in its
          customers characteristics
           Service providers in the area of financial services are divided into two
           categories: banks and non-bank entities. As mentioned, year 2004 showed
           preference of non-bank mutual funds over mutual funds managed by bank-
           related-companies. It should be mentioned that in the absence of formal
           publications, the Capital Markets Group does not have information about the
           share of these non-bank entities in the portfolio management sector and the
           brokerage sector.
           In 2004, in addition to extending the activity in the assets management area
           and Alumim's acquisition, as abovementioned, the Capital Markets Group
           started to penetrate the Forex trading market (through the establishment of
           Migdal Forex, as mentioned). The penetration into a new market lead to
           recruiting new customers, who were in need of services, which until 2004, were
           not provided by the Capital Markets Group.

     56.5 Main reasons for success in the financial services area and their changes
           There are several main success factors, among which are:
            ! The capital market condition in terms of activity turnovers and yields.
            ! The quality of investment management, including financial risks
               management.
            ! Portfolio persistency.
            ! Providing qualitative service to customers.
            ! Recruiting and maintaining qualitative human capital.
            ! Marketing cost and efficiency.
            ! Distribution channels.
            ! Operational efficiency.
            ! Management fees and commissions rates collected in respect of the
               brokerage services.
            ! Mix and product diversification.
            ! Operating efficient control.

     56.6 Main entrance and exit blocks
          For details about the main entrance and exit blocks – see item 78.11 henceforth.

     56.7 Alternatives to the financial services area's products and changes they are
          undergoing
          The main alternative to the assets management services provided by the
          financial services area is self assets management, in a way that the customer
          decides how to manage his assets, sometimes through consultation with bank
          investment consultants. The banking system savings accounts also serve as
          some alternative to the assets management services, mainly with relation to solid
          assets management.
          In addition, there are alternatives among some of the area's products –
          customers can purchase assets management services in the capital market both
          by receiving portfolio management services (tailor made services), and by
          acquiring units in mutual funds, in a manner that the mutual funds constitute



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            some kind of alternative to the investment portfolios management services. Also,
            basket certificates of certain indices (including securities indices abroad), are, to
            some extent, an alternative to mutual funds specialized in different indices (index
            funds). Until now, the Capital Markets Group has not yet issued such basket
            certificates.

      56.8 The structure of competition in the financial services area and the changes
           it is undergoing
           The financial services area is characterized by continuous harsh competition,
           both on the part of the banking corporations, including foreign banks operating in
           Israel, and both on the part of the non-banking entities, including companies held
           by insurance companies. The factors which lead to competition in the area of
           financial services are the achieved yield (in relation to the risk level), the rate of
           management fees, the commission rate in respect of different activity types and
           the quality of service.
           In the sector of portfolio management there is high competition, since in 2004 the
           number of competitors in this sector grew, and competition arose against other
           portfolio management companies, part of which are owned by other insurance
           companies, whose weight as a source for customers referral is growing.
           According to data published by the Kranot Meida Zahav company, it turns out
           that bank entities dominate the sector of mutual funds, that the mutual funds
           managed by them constituted about 85% of the total mutual funds assets in Israel
           at the end of 2004. The mutual funds are highly dependent on the banking
           distribution array. However, 2004 showed an increase in the scope of non-bank
           mutual funds assets at the expense of the bank-managed mutual funds (similar to
           the rise in the scope of non-bank provident funds assets at the expense of the
           bank-managed provident funds assets), when on December 31st, 2004, the non-
           bank mutual funds managers some 15% of the total mutual funds assets in Israel,
           as opposed to 10% on December 31st, 2003. The scope of the Capital Markets
           Group-managed mutual funds assets increased from NIS 729 million on
           December 31st, 2003 to NIS 910 million on December 31st, 2004.
           The brokerage activity is characterized by competition between all members of
           the Stock Exchange, mainly on the part of the banks.


57.   Products and services

      Following are the main services provided by the Capital Markets Group:
          ! Investment portfolios management and investment consulting – in this
              framework the customers assets are managed according to an agreed-upon
              investments policy, vis a vis the customer, and to instructions of the law
              regulating the investment consulting and investment portfolio management
              practice, 1995 and the regulations in its virtue. The portfolio management and
              investment consulting is usually characterized by direct and personal contact
              with customers who are mainly customers holding assets that exceed a certain
              minimum.
          ! Mutual funds management – in this framework, as of the time of this report,
              27 mutual funds are managed, which differ in their investments policy or their
              tax bracketing. Mutual funds enable investments in multiple various basic
              assets, while maintaining high liquidity. The mutual funds management activity
              is characterized by distance between the customers and the funds manager,
              when most of the public investments in mutual funds are made through the
              banks.
          ! Brokerage services - this framework provides execution services (during and
              outside dealing) in securities and financial derivatives, traded in the Stock
              Exchange and in stock exchanges and regularized markets abroad, as well as
              providing credit to customers for acquiring securities and financial derivatives.
              In addition, it provides execution services to institutional customers, a trading
              platform for independent portfolio managers, and operates transactions rooms
              and a trading room for international activity.


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      The macro-economic trends detailed in abovementioned item 56.1, alongside the trend
      of enlarging the clientele of the Capital Markets Group and Alumim's acquisition, as
      mentioned, lead to an increase in the scope of assets managed by the Capital Markets
      Group. The following table displays the development in the scope of assets managed
      by the Capital Markets Group (in NIS million), divided between mutual funds and
      portfolio management, in 2002-2004:

                                              2004                 2003                 2002
       Portfolio management                   2590                 761                  340
       Mutual funds                            910                 729                  547
       Total                                  3500                 1490                 887


58.   Revenues and products and services' profitability breakdown

      The financial services area does not include a set of products, whose revenues
      constitute 10% or more of the total Group's revenues.


59.   New products

      The financial services area, as of the time of this report, does not have any new
      material product. However, it should be noted, that the Group's engagement in the
      letter of intent with Bear Stearns (BS) (as abovementioned in item 1.4 in Part A), is a
      strategic move, which is part of the Group's preparation for the capital market reform
      (Bachar Committee), and whose goals are diversifying the products and services'
      basket provided by the Capital Markets Group, providing better accessibility of the
      Capital Markets Group's customers to the international markets and use BS's vast
      experience and knowledge in these markets.


60.   Customers

      The Capital Markets Group has a large number of scattered customers, divided into
      three main types: private customers – usually households, whose assets portfolio
      scope is relatively small (but still exceeding a certain minimum), private and public
      companies, whose assets portfolio scope is usually medium, and institutional
      customers – insurance companies, provident funds, educational funds, pension funds,
      local authorities, authorities etc. whose assets portfolio scopes is usually relatively
      large, but whose level of management fees is subject to competition. The Group has no
      clear data as to the revenues distribution in this sector. The relative part (in percents) of
      the main customer types in the overall scope of the portfolios managed by the Capital
      Markets Group, as to December 31st, 2003, is as follows:

                   Type of customers                                   Percents
       Institutional                                                      37
       Companies                                                          23
       Private                                                            40
       Total                                                             100

      It should be mentioned that some of the customers are provided with portfolio
      management services only, some are provided with brokerage services only, and
      others are provided with both.
      The Capital Markets Group has many customers and it does not depend on one
      customer only, or on few customers, whose loss would materially harm the area of
      financial services.
      The Capital Markets Group does not have a customer from whom the Group's
      revenues constitute 10% or more from the total Group's revenues, in its integrated


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      reports.
      It should be mentioned that in 2004, the Capital Markets Group's total revenues from
      brokerage activity in other areas of activity in the Group amounted to a total of some
      NIS 4 million.


61.   Marketing and distribution

      The Capital Markets Group uses several marketing and distribution channels in order to
      distribute its products and services, as follows:
      ! Marketing and distribution (except regarding mutual funds) through a large number
           of different mediators, and referral by insurance agents, including agents working
           with the Group's customers. The Capital Markets Group pays these mediators
           commissions at a certain rate out of the management fees it collects from the
           referred customers, and in some cases it is a one-time payment out of the scope of
           assets deposited by the referred customers, followed by commissions payment at a
           lower rate out of the management fees the Capital Markets Group collects from its
           referred customers.
      ! Marketing and distribution through bank investments consultants – this channel
           serves as the main channel for distributing mutual funds. The Capital Markets
           Group's activity against this channel is to inform investments consultants of its
           products and services, and provide them with information and marketing
           documentation, accordingly.
      ! Direct approach to customers, among other things, through taking part in tenders
           published by them.
      ! Gathering professional/marketing conferences.
      ! Press and web-related advertising.
      The Capital Markets Group has no exclusivity agreements with any of the
      abovementioned marketing and distribution channels.


62.   Backlog of orders

      The activity in the financial services area is daily, namely: transactions are usually
      made at the trading day in which instructions for their execution are given, which
      means that the Capital Markets Group has no backlog of orders.


63.   Competition

      The products and services of the Capital Markets Group have to handle continuous and
      harsh competition with several competitors. The factors which lead to competition in the
      area of financial services are the achieved yield (in relation to the risk level), the rate of
      management fees, the commissions' rate in respect of the different services and the
      quality of service.
      Investment portfolios management and investment consulting services – as
      mentioned in item 57 above, the scope of the portfolio assets managed by the Capital
      Markets Group, as of December 31st, 2004 is some NIS 2.6 billion. In the area of
      portfolios management there are several portfolio managers. In the absence of formal
      publications, the Group cannot estimate the scope of the portfolio assets managed by
      portfolio managers in Israel.
      Mutual funds management services – as of the end of 2004, about 40 companies for
      mutual funds management operate in Israel. According to data published by the Kranot
      Meida Zahav company, the scope of the mutual funds assets, as of December 31st,
      2004, is some NIS 98 billion, out of which mutual funds managed by bank-related
      companies, constitute about 85%. As mentioned in above item 57, the scope of the
      mutual funds managed by Migdal Funds, as of December 31st, 2004, is NIS 0.9 billion,
      which constitute 0.9% of the total mutual funds assets in Israel, and which makes
      Migdal Funds fifth among the private mutual funds management companies. As to the



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     growth in the scope of the mutual funds assets in general, and the scope of the mutual
     funds assets managed by non-bank-related entities in particular – see abovementioned
     items 56.3 and 56.8.
     Brokerage services – there are 25 members of the Stock Exchange, out of which 11
     are banks and the rest are non-bank entities.
     According to the trading data published by the Stock Exchange, the average daily
     trading turnover in stock and convertibles, inside and outside the Stock Exchange
     dealing, in 2004, was NIS 658 million, out of which the Central Company executed
     about 3.1%. At the end of 2004, the Central Company is rated 13th among the members
     of the Stock Exchange (banks included) as to stock and convertibles trading.
      According to the trading data published by the Stock Exchange, the average daily
      trading turnover in bonds, inside and outside the Stock Exchange dealing, in 2004,
      was NIS 959 million, out of which the Central Company executed about 4.1%. At the
      end of 2004, the Central Company is rated 11th among the members of the Stock
      Exchange (banks included) as to bonds trading.
     To the best knowledge of the Capital Markets Group's managers, its main competitors
     are as follows:
         ! Investment portfolios management and investment consulting services –
             bank-related companies, as well as non-bank-related entities, such as Israel
             Brokerage & Investments (IBI) Ltd., Tamir Fishman Investments Management
             Ltd., Analyst Stock Exchange & Trading Services Ltd., Clal Finance Batucha
             Investment Management Ltd., Excellence Nessuah Consultants and
             Investments Ltd., and DS Securities and Investments Ltd.
         ! Mutual funds management services – the bank-related managing companies
             of mutual funds, as well as non-bank-related managing companies, such as
             Meitav Mutual Funds Management (1982) Ltd., Afikim Mutual Funds
             Management (1989) Ltd., Analyst E.M.S Mutual Funds (1986) Ltd., and IBI
             Mutual Funds Management (1978) Ltd.
         ! Brokerage services – bank members of the Stock Exchange, as well as non-
             bank members of the Stock Exchange, such as Harel Investment House Ltd.,
             Israel Brokerage & Investments (IBI) Ltd., Clal Finance Batucha Investment
             Management Ltd., and Menorah Gaon Investment House Ltd.
     The Capital Markets Group's best ways to handle the competition are as follows:
          ! Striving towards high yields (relative to risk level) in assets management.
          ! Using the Group's goodwill and its agents as a source for customers referral.
          ! In order to improve customer services quality, the work strength was added
              qualitative human capital, and the computer infrastructure and web site were
              upgraded.
          ! Increasing the awareness to the performances and the quality of the Capital
              Markets Group's products, mainly among the banks' investment consultants,
              who are the main marketing and distribution channel of the mutual funds.
          ! Acquisition and preservation of qualitative human capital.
          ! The Group was engaged in an agreement of intent to sell 50% of the Capital
              Markets Group to Bear Stearns (BS). This engagement is a strategic step for
              the Group, as part of its preparation towards the capital market's reform
              (Bachar Committee), and is aimed, inter-alia, to allow a diversification of the
              products and services basket provided by the Group, and cooperating with a
              leading USA investment house regarding assets management abroad.
     As abovementioned, one of the main distribution channels serving the Capital Markets
     Group is the insurance agents referring customers to Migdal Capital Markets. The
     Group estimates that the market shows a trend of increased competition as to the
     relationship with the insurance agents.
     For the Bachar Committee implications regarding the Capital Markets Group, see
     abovementioned item 7.4 in Part A.




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64.   Seasonality

      The financial services area, as a whole, is not characterized by seasonality. The
      Capital Markets Group managers estimate that there is no indication of a material and
      continuous uniform distribution of the Group's revenues in calendar quarters.


65.   Suppliers

      Following is the Capital Markets Group's acquisition rate from its main suppliers relative
      to a share out of the overall Group's expenses (which are not wages costs):

                      Suppliers                                           Rate
       F.M.R. Computers and Software Ltd.                                9.96%
       Supplier B (“Maof” clearance)                                     8.25%

      Agreement to receive software services from F.M.R. Computers and Software Ltd.
      (henceforth, "FMR") – the Capital Markets Group engaged with FMR in an agreement,
      according to which FMR provides the Central Company with the software, through
      which the Central Company transfers to the Stock Exchange instructions for execution
      of transactions of securities and financial derivatives, and through which the Central
      Company manages its back office. To some extent, the Capital Markets Group is
      dependent on FMR, since it has no certainty that alternative suppliers' services will be
      immediately available.
      Agreement for "Maof" options clearance through supplier B – the Central Company is
      not a member in the "Maof" clearinghouse. Therefore, it engaged in an agreement with
      supplier B, a bank which is a member in the "Maof" clearinghouse, according to which
      the Central Company will clear the "Maof" options through supplier B.
      It should be noted that the Central Company is a member in the Tel Aviv Stock
      Exchange Ltd. clearinghouse, which performs the transaction clearance for all
      clearinghouse members, whether inside or outside the Stock Exchange dealing. The
      commission payment rate in the Stock Exchange clearinghouse in respect of a
      performed clearance, out of the total Capital Markets Group's expenses in 2004,
      amounted to some 7.96%.


66.   Circulating capital

      Customers' credit: the Central Company provides credit to its customers in order to
      acquire securities and financial derivatives. The scope of credit is limited according to
      the formula set in the Stock Exchange instructions, and calculated according to the
      different types of securities in the customer's portfolio. To guarantee the credit, different
      collaterals are given based on the Stock Exchange instructions. In 2004, the average
      NIS customer credit scope amounted to NIS 14 million. It should be noted that the
      above credit is given to customers on a daily basis, and bears commercial interest.
      Suppliers' credit: in 2004, the average suppliers credit scope was not material.


67.   Restrictions and supervision applied to the financial services area

      67.1 The activity's subordination to specific laws – in this area of activity, the
           products and services of the Capital Markets Group are subject to different laws
           and instructions, among which are the following:
             ! The Securities Law, 1968 – this law regulates, inter-alia, the forms of
                 offering securities to the public, the Stock Exchange establishment, its
                 Articles of Association, instructions and applied changes, limitations applied
                 to the members of the Stock Exchange, instructions aimed at ensuring
                 proper trading etc.



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Corporation Businesses Description              Migdal Insurance and Financial Holdings Ltd.


             !   The Stock Exchange Articles of Association, rules and regulations -
                 the Stock Exchange Articles of Association, rules and regulations regulate
                 the recording of the different securities for dealing, the dealing forms in the
                 Stock Exchange, and the members of the Exchange (eligibility, and
                 member admission terms, areas of activity allowed to members of the
                 Exchange, members of the Stock Exchange's duties towards the Stock
                 Exchange and its other members, as well as towards their customers,
                 control and supervision of the implementation of the Stock Exchange's
                 Articles of Association and instructions by the members, disciplinary
                 offenses, application of certain instructions on a supervised company etc.).
             !   The administration laws of the Tel-Aviv Stock Exchange Ltd.
                 Clearinghouse – these administration laws regulate the membership in the
                 clearinghouse (including equity, minimal capital and insurance demands),
                 the risk fund of the clearinghouse (including collaterals required from a
                 member to guarantee his share of the fund), the clearinghouse services,
                 the member's accounts in the clearinghouse, the clearance of members'
                 activity in the inventory etc.
             !   The administration laws of the Maof clearinghouse - these
                 administration laws regulate the membership in the Maof clearinghouse
                 (including equity, minimal capital and insurance demands), the risk fund of
                 the Maof clearinghouse (including collaterals required from a member to
                 guarantee his share of the fund), clearances of members of the Stock
                 Exchange who are not members in the Maof clearinghouse, members'
                 inventory and clearance of their transactions, transfers to custody trustee,
                 collaterals etc.
             !   The law regulating the practice of investment consulting and
                 investment portfolios management, 1995 and the regulations in its virtue
                 – this law and the regulations in its virtue regulate the eligibility
                 requirements of portfolio managers and investment consultants, including
                 their training period, as well as the licensing, equity and insurance
                 demands from portfolio managers and investment consultants. It also sets
                 instructions in the matter of trust and caution duties of portfolio managers
                 and investment consultants, special rules for the portfolio manager's
                 operation, recording and reporting duties etc.
             !   The Joint Investments Trust Law, 1994 and the regulations in its virtue –
                 this law and the regulations in its virtue regulate the licensing, equity and
                 insurance demands from the fund manager and trustee, the establishment
                 of a mutual fund, the duties imposed on the manager as to the managed
                 fund, the assets allowed to be acquired and held and their rates, the
                 calculation of acquisition and surrender prices of the fund's units, the
                 calculation of the yield etc.
             !   The Securities Regulations (underwriting), 1993 – these regulations
                 regulate the eligibility, equity and insurance demands from the underwriter,
                 restrictions to an underwriter's activity and reporting duties.
             !   Anti-Money Laundering Law, 2000 and the orders in its virtue – this law
                 and the orders in its virtue regulate the way to identifying customers of a
                 member of the Stock Exchange, a portfolio manager and a managing
                 company of provident funds/educational funds (as well as other entities
                 which are irrelevant to the financial services area). The law also regulates
                 the terms for recording currency services provider.
             !   The Privacy Protection Law, 1981 – this law sets instructions in the
                 matter of people's privacy and regulates, inter-alia, the recording of the
                 databases and the duties of a database manager. Due to this law's
                 instructions, the Capital Markets Group's companies recorded the
                 databases in their possession.

     67.2 Licenses and permits
          Following are the licenses and permits issued for the Capital Markets Group's
          companies:



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Corporation Businesses Description               Migdal Insurance and Financial Holdings Ltd.


             !   Migdal Capital Markets (1965) Ltd. – holds a portfolio management
                 license.
             !   The Central Company – member of the Stock Exchange, member of the
                 Tel-Aviv Stock Exchange Ltd. clearinghouse.
             !   Migdal Management - holds a portfolio management license, supervised
                 by the Stock Exchange.
             !   Alumim - holds a portfolio management license, supervised by the Stock
                 Exchange.
             !   Migdal Funds – serves as the manager of mutual funds in accordance with
                 the Joint Investments Law, 1994.

      67.3 Standardization and control – three of the Capital Markets Group's companies,
           which are supervised and controlled by the Stock Exchange, are committed to
           answer the requirements and standards mentioned in the Stock Exchange
           Articles of Association, its instructions and rules, including instructions in the
           matter of certain computerized systems, credit control systems etc. In addition,
           some of the Capital Markets Group's companies are required to answer the
           requirements and standards set in the above regulations and orders, in the
           instructions of the Securities Authority and the Commissioner of the Capital
           Market, Insurance and Savings in the Ministry of Finance.


68.   Material agreements

      The Capital Markets Group has no material agreements outside the regular course of
      business.


69.   Cooperation agreements

      As of the date of this report, the Capital Markets Group is not a party in any strategic
      cooperation agreements.


70.   Objectives and business strategy

      The strategy of the financial services area is as follows:
      ! Becoming a significant non-bank entity in the area of financial assets management
         in Israel, including the use of the expected structural changes in the capital market.
      ! Expanding the variety of products and services provided by the Capital Markets
         Group, while emphasizing the investments management's products and services
         abroad, with BS assistance, as mentioned.
      ! Provide customers with financial services, which will complement the assets
         management services provided by the Group.

      The objectives of the financial services area are as follows:
      !  Improving the assets management array. Increasing the market share (and
         regarding mutual funds – including the bank branches' framework), while
         increasing the average profitability level.
      ! Establishing additional distribution arrays, and expanding the distribution forms of
         the financial products.
      ! Developing investments management abilities abroad, with Bear and Stearns'
         assistance.
      ! Developing products according to the market's demand.
      ! Acquiring additional entities in the financial services area.
      ! Adjusting foreign products to the Israeli capital market.
      ! Preparation for implementing the Bachar Committee's recommendations.



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Corporation Businesses Description            Migdal Insurance and Financial Holdings Ltd.


      The main projects planned by the financial services area – establishing new mutual
      funds whose investments portfolios will be managed by leading portfolio managers, in
      Israel and abroad; establishing an array of customers' preservation; Establishing an
      array of products in foreign markets.
      For the Bachar Committee's recommendations on the Capital Markets Group – see
      abovementioned item 7.4 in Part A.


     The information included in this chapter includes future forecasting information,
     and it reflects the Group's estimates. These estimates are based, inter alia, on all
     the facts and data detailed in this chapter. Actual results may be different from
     estimates in a material way due to changes that will occur in any of the facts and
     data detailed above, and/or as a result of the changes that will occur in the risk
     factors applicable to the Group in general, detailed in item 80 henceforth.




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