Tel Aviv Stock Exchange Tightens Bond Index Liquidity Rules, Raising Issuance Costs for Smaller Firms
The Tel Aviv Stock Exchange (TASE) has introduced new liquidity criteria for corporate bonds to be included in its bond indices, sparking debate between the exchange and underwriting firms. The change requires new bond issuers to participate in a market-making program, where financial entities commit to continuous buy and sell orders to ensure liquidity. This move aims to improve the tradability of bonds heavily invested in by the public but often thinly traded, thus enhancing index quality and protecting investors.
Previously, market-making was voluntary and sometimes recommended by underwriters to boost a bond's chances of index inclusion. However, many bonds worth hundreds of millions or even billions of shekels were included in indices despite minimal trading volumes, which the TASE says harms investors and index-tracking funds. The new rules set a minimum daily trading volume threshold of one to two million shekels for index eligibility, with the exchange gradually raising this bar.
Underwriters argue that the new market-making fees, ranging from about 4,000 to 10,000 shekels per month depending on bond size, significantly increase issuance costs, especially burdening small and medium-sized companies. One underwriter noted that the fees are roughly ten times higher than previous voluntary market-making costs. The TASE counters that these fees reflect the true cost of providing liquidity at the required standards and that the exchange manages and subsidizes the market-making program to ease the burden on issuers.
Yaniv Pagot, TASE Senior Vice President and Head of Trading, Derivatives, and Indices, emphasized that the reform is designed to correct a market distortion and prioritize investor protection. He criticized underwriters for focusing on completing bond issuances rather than ensuring post-issuance liquidity, which ultimately benefits investors and the market. The reform, approved by regulators at the end of 2024, began implementation in 2025 and will fully take effect by August 27, 2026.
The main corporate bond indices on the TASE currently represent hundreds of billions of shekels in bonds: the Tel Bond Composite Index includes about 461 billion shekels, the Tel Bond CPI-linked Index about 288 billion, and the Tel Bond Shekel Index about 162 billion. Assets tracking these indices through ETFs and index funds total approximately 53 billion shekels, underscoring the importance of liquidity for investors.
Summary: The Tel Aviv Stock Exchange has mandated minimum liquidity requirements and market-making participation for corporate bonds to enter its indices, aiming to improve tradability and investor protection. While the move raises issuance costs, especially for smaller companies, the exchange argues it corrects market flaws and benefits investors tracking bond indices.
