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13th of Elul 5767

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					                                        ‫מדינת ישראל‬
                    ‫משרד האוצר - אגף שוק ההון, ביטוח וחסכון‬


                                                                                      13th of Elul 5767
                                                                                      August 27, 2007

                                                                      Institutional Bodies 2007-9-15
                                                                               Classification: General



    Managing Risk from Credit via Investment Activities
By virtue of my authority pursuant to sections 2(b), 41e(c) and 41f(b) of the Control
of Financial Services (Insurance) Law 5741-1981 (hereinafter: “the Control Law”),
and pursuant to sections 11(b)(10) and 39(b) Control of Financial Services (Provident
Funds) Law 5765-2005 (hereinafter: “the Provident Funds Law”) and after
consulting with the Advisory Committee, I hereby order as follows:

    1. General

         Credit risk is the risk of a financial loss resulting from a debtor’s inability to
         repay. Credit risk, and especially risk from credit resulting from investment
         activity, is one of the principal risks to which institutional bodies are exposed.
         It is therefore extremely important to ensure the existence of management,
         professional and operational support and of proper control and supervision
         mechanisms within the institutional body for the management of the credit
         risks to which it is exposed via its investment activity. It is also important that
         the board of directors of an institutional body and its audit committee act to
         ensure the existence of control tools to manage the credit risk, tools for
         measuring the credit risks and rules for pricing the credit, taking into
         consideration the risk involved in the transaction.

         This Circular deals only with the credit risk resulting from investment activity. At
         the same time, in light of the fact that the risk from credit resulting from
         investment activity is accompanied by other risks, it is very important to ensure
         that the credit risk in institutional bodies is managed in the context of an overall
         approach to management of all risks to which the institutional body is exposed.1

    2. Purpose

         The purpose of this Circular is to ensure the existence of proper control and
         supervision mechanisms for the management of credit via investment activity.

1
  For example, an increase in the interest rate can affect the ability of a bond issuer to repay and will
thus increase the credit risk to which an institutional body holding the bonds will be exposed. AT the
same time, a decrease in the value of the bonds also increases the market risk to which the institutional
body is exposed.

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   3. Definitions

      “Credit via investment activity” - an investment which involves either direct or
      indirect exposure of the institutional body to the debtor’s ability to meet its
      obligations – including a granting of a loan, acquisition of a loan, investment in a
      bond, lending of a security, financing of projects, transactions in derivatives and
      future transactions, and – with respect to non-yield dependent liabilities of an
      insurance company – including the payment of advance payments, other than
      advance payments to suppliers, and the giving of guarantees, including a
      guarantee in the context of an insurance contract.

      “Excluded credit” - credit via investment activity which is one of the following:

         (a) A loan secured by a life insurance policy pursuant to the terms
             established in Regulation 8 of the Investment Regulations, or a loan
             given in accordance with Regulation 30 of the Income Tax Regulations;
         (b) A loan to a borrowing agent secured by a flow of future commissions, in
             accordance with the terms set in Supervisor’s Circular 2005-1-2;
         (c) A deposit in a bank or a deposit in the Accountant-General’s office;
         (d) A government security or a security issued by the Bank of Israel;
         (e) A security issued by an approved foreign country;
         (f) A loan given by an insurance company to an employee of the insurance
             company, provided that it meets all the conditions established in the
             Investment Regulations;
         (g) The lending of a security to a stock exchange member or a bank;
         (h) A transaction in which the counterparty is a central counterparty, a stock
             exchange member, bank or insurer, unless the transaction involves the
             institutional body being directly or indirectly exposed to the ability of
             another debtor – which is not the State of Israel, the Bank of Israel or an
             approved foreign country – to meet its obligations;
         (i) Amounts that become immediately collectible if the borrower does not
             meet the terms of the debt, which are secured by an irrevocable and
             unconditional indemnification undertaking given by a bank, insurance
             company, the State of Israel or an approved foreign country.

      “Institutional body,” “Commissioner” “Yield dependent liability” – as
      defined in the Control Law;

      “Capital” – as defined in the Insurance Business (Control) Regulations
      (Minimum Equity Required Of Insurer), 5758-1998;

      “Non-yield dependent liability” – an insurance company’s liability which is not
      a yield dependent liability, including the insurance company’s equity;




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      “Non-yield dependent investments committee,” “Yield dependent
      investments committee” – as defined in section 41e of the Control Law;

      “Investments committees” – the non-yield dependent investments committee,
      yield dependent investments committee of a provident fund and the investment
      committees of a pension fund, whichever is relevant;

      “Overall exposure to a debtor” – the direct or indirect exposure of an
      institutional body to the ability of a debtor to meet its obligations with respect to
      credit via investment activity, as well as the exposure of the institutional body
      due to an investment in the debtor’s share capital, and with regard to non-yield
      dependent liabilities of an insurance company - also the insurance company’s
      exposure, through a retention, of the debtor’s ability to meet its obligations
      resulting from credit insurance transactions or from the giving of a guarantee in
      the context of an insurance transaction;

      “Deposit in the Accountant-General’s Office” – as defined in the first
      supplement to the Insurance Business (Control) Regulations (Minimum Equity
      Required Of Insurer), 5758-1998;

      “Investment regulations” – The Insurance Business (Control) Regulations
      (Ways Of Investing An Insurer's Capital And Reserves And Management Of His
      Obligations), 5761-2001 – or any regulations that replace them;

      “Income Tax Regulations” – the Income Tax Regulations (Rules for approval
      and management of provident funds), 5724-1964 or any regulations that replace
      them;

      “Stock exchange,” “Bank,” “Borrower,” “Approved foreign country,”
      “Securities” “Government security,” “Deposit,” “Related parties,”
      “Borrowing group” – as defined in the Investment Regulations.

   4. Credit provision policy

          (a) The board of directors must, in establishing an overall investment policy,
              relate to all of the following, inter alia:

              (1)   Establishment of the types of activity in which the institutional
                    body will provide credit via investment activity, with reference to
                    the various types of credit and of borrowers;
              (2)   Establishment of exposure limits for the various risks resulting
                    from the provision of such credit, with reference to the various
                    types of credit, collateral, borrowers, industries and sectors and
                    geographical regions in Israel and in other countries, and
                    regarding non-yield dependent liabilities of an insurance company



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                           such exposure limits will also be established with regard to the
                           insurance company’s equity;
                  (3)      Establishment of a credit risk profile for various relevant cross-
                           sections in the institutional body’s overall credit portfolio, 2
                           including the establishment of maximum limits for the
                           management of overall exposure to a single debtor or borrowing
                           group and the institutional body’s preparation for its management,
                           subject to the limits and conditions established in the Investment
                           Regulations or the Income Tax Regulations, whichever is
                           relevant, and to the provisions of any relevant law; regarding non-
                           yield dependent liabilities of an insurance company, such
                           exposure limits will also be established with regard to the
                           insurance company’s equity;
                  (4)      Establishment of rules for prior approval of any provision of a new
                           type of credit via investment activity;
                  (5)      The institutional body’s preparation for management of the
                           exposure limits that the board of directors has established
                           pursuant to the provisions of sub-sections (2) and (3) and for
                           ongoing control of the execution of the said exposure limit
                           management.

             (b) The investment committees, in the context of carrying out their functions,
                 must relate to all of the following, inter alia:

                1)      A determination of the maximum percentage of credit in the
                        investments portfolio and the establishment of maximum exposure
                        limits, with regard to, inter alia, types of credit and types of
                        borrowers, all in the framework of the overall investments and
                        credit policy established by the board of directors;
                2)      The establishment of mechanisms and procedures for the
                        identification of all the institutional body’s exposures to a single
                        borrower and borrowing group and for the identification of all
                        significant financial relations between borrowers;
                3)      The establishment of rules for the identification of exposure
                        resulting from a borrower’s failure to obey laws and regulations,
                        including in the area of environmental protection;
                4)      The establishment of rules for pricing credit, taking into
                        consideration the transaction’s risk, especially in the absence of an
                        objective index for checking the quality of the credit;
                5)      The establishment of a policy and rules for the assessment and
                        approval of collateral, ongoing control of the quality of the
                        collateral presented, updated assessment of such collateral’s value
                        and the preservation of information relating to all these;
                6)      The provision of credit to related parties, subject to the limits and
                        conditions established in the Investment Regulations or in the

2
 Total credit exposure of the institutional body from credit via investment activity and any other
activity.

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                Income Tax Regulations, whichever is relevant, and subject to the
                provisions of any relevant law, and the establishment of
                procedures for the ongoing identification of related parties.

         (c) A board of directors policy such as described in sub-section (a) will be
             separately established in an insurance company for yield dependent
             liabilities and for non-yield dependent liabilities.

         (d) A board of directors and investments committee policy such as
             described in sub-sections (a) and (b) will be separately established in a
             managing company for each provident fund and pension fund that it
             manages.

   5. Supervision, control and reporting

         (a) At least once each quarter, the investment committees will review,
             with respect to the investments in the investment portfolio that they
             handle, the exposure from credit via investment activity other than
             excluded credit, including its complexity and the scope of the
             exposure to the various risks, such as: borrowers, industries and
             derivatives, and the matching of the yield to the risk involved in it.

         (b) The investments committee will approve procedures for ensuring the
             early identification of failures that can take place with regard to credit
             that the institutional body provided, as well as procedures for reporting,
             handling and follow-up of the said failures.

         (c) The board of directors of an institutional body and the investments
             committees will approve control procedures for ongoing follow-up
             regarding the implementation of the policy, the procedures and the
             resolutions that they have established and for correction of the
             deficiencies that have been discovered.

         (d) The board of directors of an institutional body and the investments
             committees will approve procedures for periodic reporting to the board of
             directors and to the investments committees of those carrying out the
             policies regarding the procedures and resolutions that the board and the
             committees have established; any deviation from the policies
             established pursuant to this Circular will be reported immediately.

         (e) The investments committees will be responsible for prior approval and
             allocation of any provision to a single borrower or borrowing group of
             credit via investment activity, other than excluded credit, if such credit is
             beyond the amounts or percentages that have been determined. The
             board of directors will be made aware of such a determination or
             amounts and percentages.


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         (f) An investments committee that deals with assets such as are described
             in sub-sections 1) and 2) below, cumulatively, will appoint a committee
             which will be responsible for prior approval and allocation of any
             provision to a single borrower or borrowing group of credit via
             investment activity, other than excluded credit, if such credit is beyond
             the amounts or percentages that have been determined by the
             institutional body’s investments committee (hereinafter: “the credit
             committee”). An investments committee will determine the powers of a
             credit committee that it appoints, as well as the set of relations between
             the two committees – which will include a requirement of a quarterly
             follow-up report from the credit committee to the investments committee
             regarding credit it has approved. The board of directors will be made
             aware of the investments committee’s determination of the credit
             committee’s powers and regarding amounts and percentages requiring
             its approval. The investment committee may establish amounts and
             percentages of credit which, if approved by the credit committee, may be
             provided without the investment committee’s approval.

             1) The total assets handled by the investments committee pursuant
                to section 41e of the Control Law or in accordance with section
                11 of the Provident Funds Law, whichever is relevant, exceeds
                NIS 5 billion;

             2) The total credit via investment activity other than excluded credit
                exceeds 15% of all the assets handled by the investments
                committee.

         (g) Members of the credit committee must have proven expertise and
             experience in the credit field. No person who is involved in the
             institutional body’s management of investments or provision of credit
             may serve on the credit committee.

         (h) The yield dependent liability credit committee and a provident fund’s or
             pension fund’s credit committee will include at least two members who
             are qualified to serve as external directors; without detracting from the
             above, the institutional body’s board of directors will approve the
             composition of the credit committee.

         (i) Without detracting from the provisions of sub-sections (f) and (g), a joint
             credit committee for several institutional bodies controlled by the same
             controlling shareholder may be appointed, including a single credit
             committee for yield dependent liabilities and for non- yield dependent
             liabilities of an insurance company (hereinafter: “a joint credit
             committee”). Such a committee may be appointed provided that the
             allocation of credit approved by the joint credit committee which does not
             require the approval of the investments committees is subject to a ratio


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              of percentages which is fixed in advance. Without detracting from the
              above, the following will also apply:

               1)     The provisions of sub-section (h) above, as relevant, will apply
                      to the joint credit commitment committee;

               2)     The composition of the joint credit committee will be approved
                      by boards of directors of each of the institutional bodies that
                      share the joint credit committee.

   6. Application

      This Circular will apply to all institutional bodies operating in Israel.

   7. Entry into force

          (a) This Circular will enter into force on January 1, 2008, other than with
              regard to what is described below.
          (b) Sections 5(b)-5(d) of the Circular will enter into force on April 1, 2008.

   8. Transition

      Until the regulations pursuant to section 11(c) of the Provident Funds Law enter
      into force, which will enable the delegation of the investments committee’s
      powers as stated in sections 5(f) and 5(i), the credit committees may only
      provide recommendations to the investments committee.

                                                Yadin Antebi
                    Commissioner of Capital Markets, Insurance and Savings




90-3403120 :'‫רח' קפלן 1 ירושלים 91910 ת.ד 9911 טל': 1115113-09 פקס‬

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