The Israel Securities Authority (ISA) recently published an advisory document for public comment ahead of the publication of a legal memorandum for the regulation of the securitization field in Israel.

A securitization transaction is one in which bonds are issued whose repayment is secured by an anticipated and defined cash flow, where such cash flow stems from a credit portfolio that includes asset-backed securities. A designated corporation that received these asset-backed securities from a sponsor through a sales transaction offers the bonds to the public.

Many countries around the world already recognize the importance of a securitization market, due to its advantages in increasing the distribution of risks within the financial market and in increasing the pool of financing sources. Both the sponsor and the investing public share in the benefits securitization transactions offer. The sponsor, for its part, may allocate capital for additional investments while limiting the risk of offering the bonds to the asset-backed securities only. On the other hand, the investing public enjoys the creation of a financing source for small- and medium-sized businesses, as well as the expansion and diversification of investment and savings opportunities in the funds managed by institutional bodies.

Despite the advantages of securitization transactions, it is important to recall that they constituted one of the primary catalysts to the 2008 financial crisis in the United States. Similar past initiatives to develop an Israeli securitization market were frozen in light of the 2008 crisis. Now, though, the ISA is attempting to advance the matter once more, while establishing tight regulatory and monitoring mechanisms to prevent manipulation of this tool by the banks and other players in the capital and credit markets.

The goal of the advisory document is to increase the investing public and sponsors’ familiarity with the main characteristics of securitization transactions, as well as to receive feedback from them as to the primary issues that may arise when executing securitization transactions. The purpose of this is to establish effective regulation in the area.

To review the advisory document published by the ISA, see here.