THE TEL-AVIV STOCK EXCHANGE LTD. CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2014
THE TEL-AVIV STOCK EXCHANGE LTD. CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2014
CONTENTS
Page Auditors' Report on Components of Internal Control over Financial Reporting
2
Auditors' Report
3
Financial Statements: Consolidated Statements of Financial Position
4-5
Consolidated Statements of Profit or Loss and Other Comprehensive Income
6
Consolidated Statements of Changes in Equity
7
Consolidated Statements of Cash Flows
8
Notes to the Consolidated Financial Statements
9 - 87
AUDITORS’ REPORT TO THE MEMBERS OF
THE TEL-AVIV STOCK EXCHANGE LTD. ON COMPONENTS OF INTERNAL CONTROL OVER FINANCIAL REPORTING PURSUANT TO SECTION 9 B (c) OF SECURITIES REGULATIONS (PERIODIC AND IMMEDIATE REPORTS), 1970. We have audited the components of internal control over financial reporting of The Tel Aviv Stock Exchange Ltd and its subsidiaries (together "The Company") as of December 31, 2014. These control components were determined as explained in the following paragraph. The Company's Board of Directors and Management are responsible for maintaining effective internal control over financial reporting and for their assessment of the effectiveness of the components of internal control over financial reporting included in the report of events and changes, which occurred in the Company's business and affected the Company as of said date. Our responsibility is to express an opinion on the components of internal control over financial reporting of the Company based on our audit. The components of internal control over financial reporting that we have audited are pursuant to Auditing Standard 104 "Audit of Components of Internal Control over Financial Reporting" of the Institute of Certified Public Accountants in Israel, ("Auditing Standard 104"). These components consist of: (1) entity level controls, including controls over the process of preparation and closing of financial reporting, and general information technology controls, (2) controls over the process of intangible assets (3) controls over the process of new building, (4) controls over the process of employee payments and liabilities and (5) controls over the process of revenue from trading and clearing commissions and Clearing House services (jointly referred to below as "Audited Components of Control"). We conducted our audit in accordance with Auditing Standard 104. This Standard requires that we plan and perform the audit with the purpose of identifying the Audited Components of Control and obtaining reasonable assurance about whether these components of control were maintained effectively in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, identifying the Audited Components of Control, assessing the risk that a material weakness exists in the Audited Components of Control, and testing and evaluating the design and the operating effectiveness of those components of control based on the assessed risk. Our audit, with respect to those components of control, also included other procedures, as we considered necessary in the circumstances. Our audit only referred to the Audited Components of Control, rather than internal controls over all material processes related to financial reporting, and, accordingly, our opinion refers only to the Audited Components of Control. In addition, our audit did not refer to the reciprocal impact between the Audited Components of Control and those that are not audited, and accordingly, our opinion does not take into consideration any such possible impact. We believe that our audit provides a reasonable basis for our opinion in the context noted above. Due to inherent limitations, internal control over financial reporting in general, and its components in particular, might not prevent or detect misstatement. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies and procedures may deteriorate. In our opinion, the Company effectively maintained, in all material respects, the Audited Components of Control as of December 31, 2014. We have also audited, in accordance with generally accepted auditing procedures in Israel, the consolidated financial statements of the Company as of December 31, 2014 and 2013, and its operating results for each of the three years in the period ended on December 31, 2014, and our report dated March 29, 2015 expressed an unqualified opinion on the said financial statements, and drawing the attention to requests for approval of class action suits claiming alleged overcharges of commission, and the illegality of TASE’s Regulations. Brightman Almagor Zohar & Co. Certified Public Accountants Tel Aviv, Israel, March 29, 2015
2
AUDITORS’ REPORT TO THE MEMBERS OF THE TEL-AVIV STOCK EXCHANGE LTD.
We have audited the accompanying consolidated statements of financial position of The Tel-Aviv Stock Exchange Ltd. ("The Company"), as of December 31, 2014 and 2013, and the consolidated statements of profit or loss and other comprehensive income, the statements of changes in equity and the consolidated statements of cash flows for each of the three years in the period ended on December 31, 2014. These financial statements are the responsibility of the Company’s Board of Directors and Management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards in Israel, including those prescribed by Auditors’ Regulations (Auditor's Mode of Performance), 1973. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Board of Directors and Management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, based on our audits, the financial statements referred to above, present fairly, in all material respects, the financial position of the Company and its subsidiaries as of December 31, 2014 and 2013, and their operating results, changes in equity and cash flows for each of the three years in the period ended on December 31, 2014, in accordance with International Financial Reporting Standards (IFRS) and Securities Regulations (Annual Financial Statements), 2010. Without qualifying our opinion, we draw the attention to notes 13 D and 13 E regarding the requests for approval of class action suits against the Company claiming alleged overcharging of minimum commission, and the illegality of TASE’s Regulations and the price lists attached thereto. We have also audited, in accordance with Auditing Standard 104 "Audit of Internal Control Components over Financial Reporting", of the Institute of Certified Public Accountants in Israel, as amended, the components of internal control over the Company’s financial reporting as of December 31, 2014, and our report dated March 29, 2015, included an unqualified opinion on the effectiveness of said internal control components.
Brightman Almagor Zohar & Co. Certified Public Accountants Tel Aviv, Israel, March 29, 2015
3
THE TEL-AVIV STOCK EXCHANGE LTD. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Note
December 31, 2014 2013 NIS in thousands
Assets: Current assets: Cash and cash equivalents Financial assets at fair value through profit or loss - held for trading Trade receivables Assets derived from clearing operations with respect to derivative open positions Other receivables Current tax assets
Investment in associate, under voluntary liquidation
4 6
702,9 8,70881 880,89
8,0,71 8980192 70,99
5
8017,0799 ,089, 880,88
20,810292 ,08,9 20712
20,1,0,17
202990211
80,,2
9011,
20,180828
202120892
2920991 180888 220818
2270881 990897 290298
2980,2,
2,20881
20,820998
2082901,,
82
7B
Total current assets
Non-current assets: Property and equipment, net Intangible assets, net Deferred tax assets
3 C, 8,9 10 3 D, 12
Total non-current assets Total assets
The accompanying notes are an integral part of the financial statements.
4
THE TEL-AVIV STOCK EXCHANGE LTD. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Note
December 31, 2014 2013 NIS in thousands
Liabilities and Equity: Current liabilities: Trade payables Liabilities derived from clearing operations with respect derivative open positions Current liabilities for employee benefits Other payables Current tax liabilities Total current liabilities
5 11 12
29089,
2,0,28
1,894,957 280979 20,12 299 807990282
2,068,253 290979 20,88 99 2082,0999
14,385 1,293 15,678
17,451 1,004 18,455
(6,242) 3,200 492,553 489,511
(9,480) 3,200 483,108 476,828
2,462,551
2,625,840
Non-current liabilities: Non-current liabilities for employee benefits Deferred tax liabilities Total non-current liabilities
11 3D, 12
Equity: Reserve for re-measurement of net liabilities with respect to defined benefits Other capital reserves Retained earnings Total equity Total liabilities and equity
March 29, 2015 Date of Financial Statements Approval
Amnon Neubach Chairman of the Board of Directors
Yossef Beinart David Deri Chief Executive Officer Senior Vice President for and Director Finance and Administration
The accompanying notes are an integral part of the financial statements.
5
THE TEL-AVIV STOCK EXCHANGE LTD. CONSOLIDATED STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
Note
Revenue from services: Trading and clearing commissions Securities registration for trading fees and annual levies Clearing House services Distribution of trading and other data Other Total revenue from services
Year Ended December 31, 2014 2013 2012 NIS in thousands
14
Cost of revenue: Expenses in respect of employee benefits Computer and communications expenses Rent, property taxes and building maintenance expenses General and administrative expenses Relocation to the new building expenses Marketing expenses Fee to the Israel Securities Authority Depreciation and amortization expenses Loss - impairment of a building under construction Premiums for providing collateral to the MAOF Risk Fund Market makers' compensation and other expenses, net Total cost of revenue
15 A
15 B
15 C 3 C, 9 (4)
Profit (loss) before financing income, net Financing income Financing expenses Total financing income, net
16 16
Profit (loss) after financing income, net Company's share of an associate's income
7B
Profit (loss) before income tax Income tax (tax benefits)
12
Profit (loss) for the year
8,8029, ,20192 220,9, 29027, 80,8, 244,396
82,0928 ,20878 25,292 290218 80922 238,913
8270,,, 2,0,2, 27,288 36,655 80271 2270289
82208,9 2,0292 8907,, 890989 90129 90,91 90,29 290929 80,,2 2280,82
82,0272 22079, 820292 820928 20,2, 90828 90211 2,087, 7209,, 298 8017, 28,0721
8,708,1 220992 820,27 8,0979 20,,1 90999 80891 220719 ,0229 20,,, 28,0,22
8,383
(76,025)
810912
5,741 (115) 5,626
10,728 (475) 10,253
8,0122 )229( 8,0979
14,009
(65,772)
220297
158
1,377
927
14,167
(64,395)
2207,1
4,722
(18,916)
8,046
9,445
(45,479)
290182
3,238
1,231
(4,943)
12,683
(44,248)
20,919
Other comprehensive income (loss): Amounts that will not be reclassified in the future to profit or loss, net of tax: Reserve for re-measurement of net liabilities with respect to defined benefits, net of tax Comprehensive income (loss) for the year
The accompanying notes are an integral part of the financial statements.
6
THE TEL-AVIV STOCK EXCHANGE LTD. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Reserve for ReMeasurement of Net Liabilities with Respect of Defined Benefits
Balance as of January 1, 2012
Balance as of December 31, 2012
3,200
502,725
500,157
-
-
25,862
25,862
(4,943) (4,943)
-
25,862
(4,943) 20,919
(10,711)
3,200
528,587
521,076
1,231 1,231
-
(45,479) (45,479)
(45,479) 1,231 (44,248)
(9,480)
3,200
483,108
476,828
3,238 3,238
-
9,445 9,445
9,445 3,238 12,683
(6,242)
3,200
492,553
489,511
Loss for the year Other comprehensive income for the year Total comprehensive loss for the year Balance as of December 31, 2013
Profit for the year Other comprehensive income for the year Total comprehensive income for the year Balance as of December 31, 2014
Total
(5,768)
Profit for the year Other comprehensive loss for the year Total comprehensive income for the year
Capital Retained Reserves Earnings NIS in thousands
The accompanying notes are an integral part of the financial statements. 7
THE TEL-AVIV STOCK EXCHANGE LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 2014 2013 2012 NIS in thousands CASH FLOWS FROM OPERATING ACTIVITIES: Profit (loss) for the year Tax expense (tax benefits) recognized in profit or loss Net financing income recognized in profit or loss Depreciation and amortization Loss - impairment in value of a building under construction Capital loss from disposal of property and equipment, and intangible assets Company's share of undistributed income of an associate
9,445 4,722 (5,626) 27,735 -
(45,479) (18,916) (10,253) 24,194 92,500
290182 10,,8 )8,0979( 220719 -
1,061 (158) 37,179
1,520 (1,099) 42,467
80,98 )29,( ,20,97
(2,059) 173,296
3,613 (323,626)
)20282( )87207,,(
4,672 (173,296)
(666) 323,626
2,0297 )8908,2( 87207,,
(2,661) 37,131
10,561 55,975
)2,0297( (1,903) 22098,
Interest received Interest paid Tax receipts (payments) - operating activities
4,175 (115) (7,235) (3,175)
4,591 (476) 1,109 5,224
90212 )229( )1027,( )80228(
Net cash provided by operating activities
33,956
61,199
28029,
CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of property and equipment Proceeds from disposal of property and equipment Acquisitions of intangible assets Costs capitalized to tangible and intangible assets Disposal of held for trading financial assets, net Tax receipts (payments) - financial assets held for trading Net cash used for investing activities
(47,307) 18 (8,778) (12,042) 29,389 (561) (39,281)
(66,275) 20 (8,635) (11,966) 29,932 (1,151) (58,075)
)1,0889( )80272( )7097,( 880928 727 )270,29(
Net increase (decrease) in cash and cash equivalents
(5,325)
3,124
)90898(
Cash and cash equivalents, beginning of the year Effect of changes in exchange rates on cash balances held in foreign currency
14,498
11,405
870822
34 9,207
(31) 14,498
)99( 880,,9
12,814
13,685
220198
Changes in asset and liability items: Decrease (increase) in trade receivables and other receivables Decrease (increase) in receivables with respect to derivative open positions Decrease in assets with respect to securities that were not transferred to the Tel Aviv Stock Exchange Clearing House on time Increase (decrease) in trade payables and other payables Increase (decrease) in payables with respect to derivative open positions Decrease in liabilities with respect to securities that were not transferred to the Tel Aviv Stock Exchange Clearing House on time Increase (decrease) in liabilities for employee benefits
Cash and cash equivalents, end of the year
APPENDIX A - NON-CASH ACTIVITIES: Acquisition of tangible and intangible assets, under short term credit
The accompanying notes are an integral part of the financial statements.
8
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 1
- GENERAL: A.
The Tel Aviv Stock Exchange ("TASE") is a company limited by the guarantee of its members, was incorporated in Israel, in 1953, and its registered office is located at 2 Ahuzat Bayit Street, Tel Aviv. TASE is engaged in managing a securities stock exchange and in related activities. The TASE Clearing House Ltd. ("TASE-CH") is wholly owned by TASE (see note 7 A below). TASE-CH was acquired by TASE in September 2006 from TASE-CH members and is engaged mainly in clearing and settlement of securities, other than derivatives, and providing services as a Central Securities Depository. The MAOF Clearing House Ltd. ("MAOF-CH") is wholly owned by TASE (see note 7 A below) and is engaged mainly in issuing options and futures ("derivatives") and providing clearing services for these derivatives. All that reported in these statements regarding the activity of both TASE-CH and MAOF-CH is subject to the By-Laws of each Clearing House. With respect to clearing house operations, the terms used in these financial statements shall have the meaning they have in Securities Law, 1968, TASE’s Rules, the Regulations thereunder, and the Clearing Houses’ By-Laws. With respect to the allocation of income and expenses of the Group, between Group companies, see note 17 C (2).
B.
The text in these financial statements is an English translation of the original Hebrew financial statements. In the event of any discrepancy between the original Hebrew and this translation, the Hebrew alone will prevail.
C.
Definitions: Company or TASE
-
The Tel-Aviv Stock Exchange Ltd.
Group
-
The Company and its subsidiaries (as defined below).
Consolidated Subsidiaries
-
Companies controlled (as defined by IFRS 10) by the Company, whose financial statements are fully consolidated with those of the Company.
Associate
-
A company over which the Group exercises significant influence.
Investees
-
Consolidated subsidiaries and associate. See note 7 below - list of investees.
Related parties
-
As defined by IAS 24 “Related Parties”.
Interested parties
-
As defined by Securities Law, 1968 and regulations thereunder.
9
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 2
- SIGNIFICANT ACCOUNTING POLICIES: A.
Declaration on the Implementation of International Financial Reporting Standards (IFRS): The consolidated financial statements of the Group were prepared in accordance with International Financial Reporting Standards ("IFRS") and respective interpretations, as published by the International Accounting Standards Board ("IASB"). The significant accounting policies set out below have been applied consistently for all periods reported in these consolidated financial statements.
B.
The financial statements were prepared in accordance with Securities Regulations (Annual Financial Statements), 2010 ("Financial Statements Regulations").
C.
Operating Cycle: The Group's Operating Cycle is 12 months.
D.
Format for Reporting Expenses in the Consolidated Statements of Profit or Loss and Other Comprehensive Income: Group expenses in the Statement of Profit or Loss and Other Comprehensive Income are reported based on the nature of the expenses. The Group estimates, because of its organizational structure, that the classification of expenses in this manner is more reliable and relevant than any classification by expense function.
E.
Foreign Currency: (1)
Functional Currency and Presentation Currency: The consolidated financial statements are reported in New Israel Shekels (“NIS”), which is the functional currency of the Group, and are rounded to the nearest thousand. The NIS is the currency of the primary economic environment in which the Group operates.
(2)
Translation of Transactions not in the Functional Currency: In the preparation of the financial statements of each Group company, transactions in currencies other than the functional currency of the company ("foreign currency") are accounted for at exchange rates prevailing on the transaction date. At the end of each reporting period, monetary items denominated in foreign currency are translated using the exchange rate prevailing on said date. Non-monetary items measured at historical cost are translated using the exchange rate prevailing on the date of the transaction related to the non-monetary asset.
)3(
Manner of Recording Exchange Rate Differences: Exchange rate differences are recognized in profit or loss in the period incurred.
F.
Cash and Cash Equivalents: Cash and cash equivalents include cash available for immediate use, bank deposits held at call and short-term unrestricted bank deposits, with maturity dates not exceeding three months from the date of deposit.
10
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 2
- SIGNIFICANT ACCOUNTING POLICIES (CONT.): G.
Consolidated Financial Statements: The consolidated financial statements of the Group include the financial statements of the Company and the entities that the Company controls, either directly or indirectly. An investor company controls the investee company, when it is exposed, or has rights, to variable returns from its interest in the investee and when it can affect those returns through the force on the investee. For consolidation purposes, inter-company transactions, balances, income, and expenses have been fully eliminated.
H.
Investment in an Associate under Voluntary Liquidation: An associate is an entity over which the Group has significant influence and is not a subsidiary. Significant influence is the power to participate in the financial and operating policy decisions of the investee company but does not constitute control or joint control of said policy. The investment in the associate under voluntary liquidation is stated under current assets in accordance with IFRS 5 regarding non-current assets held for sale and discontinued operations. At the end of 2013, the associate began the process of voluntary liquidation. As of reporting date, said liquidation process is, in the Company's estimate, at the final stage. Extension of the period required to complete said liquidation was caused by events and circumstances that are beyond the control of the Group. For further information regarding the investment in this associate, see note 7 B.
I.
Property and Equipment: (1)
General: Property and equipment are tangible items that are held for the supply of services, which are expected to be used over more than one period. Property and equipment assets are reported at cost in the Statements of Financial Position less accumulated depreciation and any impairment losses. Cost comprises the purchase price of the asset, and any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Regarding the impairment assessment of the building under construction, see note 3 C.
(2)
Depreciation of Property and Equipment: Each part of an item of property and equipment with a cost that is significant in relation to the total cost of the item is depreciated separately. Depreciation is systematically allocated using the straight-line method over the expected useful lives of components of an item beginning when the asset is ready for its intended use.
11
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 2
- SIGNIFICANT ACCOUNTING POLICIES (CONT.): I.
Property and Equipment (Cont.): (2)
Depreciation of Property and Equipment (Cont.): The useful lives and the depreciation rates used for the calculation of depreciation are as follows:
Land (*) Building (**) Computers systems and auxiliary equipment Equipment and systems Furniture (*) (**)
Useful Life
Depreciation Rates
0-999 years 50 years
0% - 0.1% 2%
2 - 15 years 3 – 20 years 3 – 30 years
6.7% - 50% (mainly 20%) 5% - 33.3% (mainly 6.67%) 3.33% - 33.3% (mainly 12.5%)
For information on leased land, see paragraph K below. The building and related fixtures have been depreciated since their occupancy date of July 2014.
The depreciation method and the useful lives of the assets are reviewed by management at year-end. Changes are accounted for as a change in an accounting estimate and are recognized prospectively. Any gain or loss arising from disposing of or retiring an item of property and equipment is determined as the difference between the net disposal proceeds, if any, and the carrying value of the item, and is recognized in profit or loss, under other expenses. J.
Intangible Assets: (1)
General: Intangible assets are identifiable non-monetary assets with no physical substance. The useful lives used to amortize intangible assets with definite useful life are as follows: Software and licenses - mostly 5 -10 years.
(2)
Intangible Assets are Recognized and Measured According to the Manner of their Creation According to the Following Groups: (a)
Intangible Assets that are Acquired Separately: Intangible assets (software and licenses) acquired separately are reported at cost less amortization and any cumulative impairment losses. Amortization is calculated using the straight-line method over the estimated period of useful life. The estimated useful life and amortization method are evaluated at the end of each reporting year with the effect of changes in estimation accounted for prospectively.
12
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 2
- SIGNIFICANT ACCOUNTING POLICIES (CONT.): J.
Intangible Assets (Cont.): (2)
Intangible Assets are Recognized and Measured According to the Manner of their Creation According to the Following Groups (Cont.): (b)
Internally Generated Intangible Assets - Development Costs of Computer Software for Internal Use: Costs incurred during the preliminary phase of software development for internal use are recognized in profit or loss as incurred. An internally generated intangible asset, during the development phase of software and computer systems recognized if, and only if, all of the following terms are complied with:
The ability to measure reliably the expenditure attributable to the asset during its development; The technical feasibility of completing the asset so that it will be available for use; The Group's intention to complete the asset and use it; The Group's ability to use the asset; How the asset will generate future economic benefits can be determined; and, The availability to the Group of adequate technical, financial and other resources to complete the development and to use the asset.
When an internally generated intangible asset cannot be recognized, software development costs are recognized in profit or loss as incurred. Internally generated intangible assets with defined useful lives are amortized using the straight-line method over their useful lives, and are reported at cost less accumulated amortization and any impairment losses. The estimated life and method of amortization are evaluated at the end of each reporting year with the effect of changes in estimations accounted for prospectively. K.
Leases: Land leases are classified as financing leases and reported in the statements of financial position under property and equipment, net. Lease payments are amortized on a straight-line basis over the lease period. Land is leased for periods of 98 years to 999 years (mainly 140 years).
L.
Impairment of Assets (Except for Financial Assets): At the end of each reporting period, the Group reviews the book value of its assets to determine whether there is any indication of impairment loss. If such indications exist, the recoverable amount of the asset is estimated to determine the extent of any impairment loss. If it is not possible to measure the recoverable amount of a specific asset, the Group estimates the recoverable amount of the cash-generating unit's recoverable amount, to which the asset belongs. The recoverable amount is the highest of the fair value less costs to sell, and value in use. To assess value in use, estimated future cash flows are discounted to present value using the pretax discount rate that reflects current market assessments of the time value of money and the risk specific to the asset with no estimated future cash flows.
13
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 2
- SIGNIFICANT ACCOUNTING POLICIES (CONT.): L.
Impairment of Assets (Except for Financial Assets) (Cont.): Where the recoverable amount of an asset (or of the cash-generating unit) is estimated to be less than its book value, the book value of the asset (or of the cash-generating unit) is reduced to its recoverable amount. An impairment loss is immediately recognized as an expense in profit or loss. Where an impairment loss recognized in prior periods is cancelled, the book value of the asset is increased to the revised estimate of its recoverable amount, but not more than the book value that would have been determined, had no impairment loss been recognized for the asset in prior years. A reversal of an impairment loss is immediately recognized in profit or loss. Regarding the publication of IAS 36 "Impairment of Assets" (regarding disclosures of recoverable amount) - see paragraph S below. Regarding the impairment assessment of the building under construction, see note 3 C.
M.
Financial Assets and Financial Liabilities: (1)
Financial Assets and Financial Liabilities (Except for Clearing Operations): (a)
Financial Assets - General: Financial assets of the Group are classified into the following categories. These categories are dependent on the nature and the purpose for holding financial assets and are determined at the time of initial recognition of the financial asset:
Financial assets at fair value through profit or loss; Loans and receivables.
Loans and receivables are recognized in the Statement of Financial Position when the Group becomes a party to the contractual provisions of the instrument. Financial assets at fair value through profit or loss are recognized in the Statement of Financial Position on settlement date, similar to financial assets from clearing operations. (see paragraph M (2) (a) below). Investments in financial assets are initially recognized at fair value. Regarding the publication of IFRS 9, "Financial Instruments", see paragraph T below. (b)
Financial Assets at Fair Value through Profit or Loss: Financial assets are classified as “financial assets at fair value through profit or loss” when said assets are held for trading purposes. This category includes securities acquired for trading purposes. A financial asset in this category is stated at fair value. Any gain or loss arising from changes in fair value, including that resulting from changes in exchange rates, is recognized in profit or loss during the period when the change occurs. The net gain or loss reported in profit or loss includes any dividend or interest earned on the financial asset. The fair value of the financial instruments is based on market prices (determining price) on TASE at the end of the reporting period.
14
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 2
- SIGNIFICANT ACCOUNTING POLICIES (CONT.): M.
Financial Assets and Financial Liabilities (Cont.): (1)
Financial Assets and Financial Liabilities (Except for Clearing Operations) (Cont.): (c)
Loans and Receivables: Trade receivables, deposits and other receivables, which have fixed or determinable payment terms, not quoted in an active market are classified as loans and receivables. Loans and receivables are measured at amortized cost using the effective interest method less any impairment. Interest income is recognized using the effective interest method, except for certain short-term balances, when the interest amount to be recognized is immaterial.
(d)
Other Financial Liabilities: Trade payables and other payables are classified as other financial liabilities. Other financial liabilities are initially recognized at fair value. After initial recognition, other financial liabilities are not re-measured using the effective interest method, as any interest to be recognized is immaterial.
(2)
Financial Assets and Financial Liabilities from Clearing Operations: (a)
General: TASE-CH, which is wholly owned by TASE, is a Central Counter Party ("CCP") for transactions in securities (other than derivatives) that are executed on TASE, transfers to a custody (custodial activities) that follow a transaction executed on TASE, as well as for repo transactions and spot transactions in government bonds that are executed through a European trading system for government bonds ("MTS System"), and cleared by TASE-CH. As a CCP, TASE-CH is responsible for compliance with the obligations of a TASECH member that is a party to a transaction on TASE and did not carry out its part of the transaction, towards another TASE-CH member that is the counterparty to the transaction that has carried out its part of the transaction. Accordingly, TASE-CH has assets and liabilities (in respect of the selling party and the buying party, respectively) for each of said transactions executed. TASE-CH is not exposed to any price risk (except in cases of a member default), as for each transaction, the value of TASE-CH assets arising from the obligation of the selling party is equal to the value of the liability of TASE-CH towards the buyer. The MAOF Clearing House Ltd ("MAOF-CH"), which is wholly owned by TASE (see note 7 A below), issues derivatives traded on TASE and clears them. MAOF-CH is a CCP for options and futures cleared by MAOF-CH. As a CCP, MAOF-CH is responsible for fulfillment of the obligations of a MAOF-CH member that is party to an option or futures and did not carry out its part in accordance with the option or futures terms and conditions, towards another MAOFCH member that is the counterparty to the option or to the futures that has carried out its part of the option or the futures. Accordingly, MAOF-CH has assets and liabilities (in respect of the selling party and the buying party, respectively) for each option and futures cleared by MAOF-CH. MAOF-CH is not exposed to any price risk (except in cases of a member default), as for each option and futures the value of MAOF-CH assets arising from the obligation of the selling party is equal to the value of the liability of MAOF-CH towards the buyer.
15
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 2
- SIGNIFICANT ACCOUNTING POLICIES (CONT.): M.
Financial Assets and Financial Liabilities (Cont.): (2)
Financial Assets and Financial Liabilities from Clearing Operations (Cont.): (a)
General (Cont.): The Clearing Houses complete the clearing and settlement of securities transactions on the next business day after the transaction date. Assets and liabilities derived from clearing operations, as noted, are recorded in the financial statements (recognized or derecognized) on settlement date and not on the transaction date, as these are transactions executed in the regular way. Transactions executed in the regular way are transactions to buy or sell a financial asset under contract, whose terms require the delivery of the asset within a period of time, which, generally, is determined by the rules or practice in the relevant market. Accordingly, transactions executed on December 31, but not yet settled, are not reported as assets or as liabilities in the Statements of Financial Position. Financial assets and liabilities with respect to clearing operations of options and futures include receivables and payables relating to derivatives open positions. (see note 5). These positions are measured in each reporting period at fair value. Since the asset and liability positions are identical, the same amount is recognized for both assets and liabilities, and no gains or losses from fair value adjustments are recognized in profit or loss.
(b)
Fair Value of Financial Instruments: The fair value of financial instruments is based on market prices (determining price) on TASE at the end of the reporting period. If a certain instrument is not traded on the last trading day of the year, the Group uses valuation techniques based on common economic models for pricing derivatives, using assumptions that are based on the economic conditions existing at the end of the reporting period (see also note 6 C below).
(c)
Offset of Financial Instruments: Financial assets and financial liabilities are reported in the Statements of Financial Position at net, only if there is a legally enforceable right to offset and the entity intends to settle on a net basis, or to realize an asset and settle the liability simultaneously. In order to meet the conditions of offsetting financial assets and financial liabilities, the offset right cannot be dependent on any future event and must be enforceable in the ordinary course, in the event of bankruptcy, insolvency or credit default. Regarding the publication of IAS 32 "Financial Instruments: Presentation", (Offsets of Financial Assets and Financial Liabilities), (Revised), see paragraph S below.
16
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 2
- SIGNIFICANT ACCOUNTING POLICIES (CONT.): N.
Income Tax: (1)
General: Income tax expenses include current tax and any changes in deferred tax balances, except for deferred tax resulting from transactions recognized directly in equity.
(2)
Current Tax: Current tax expense is calculated based on the taxable income of the Company and its consolidated subsidiaries for the reporting period. Taxable income differs from pretax income, due to the inclusion or exclusion of income and expense items that are taxable or deductible in other reporting periods, or are not taxable or deductible. Current tax assets and liabilities are calculated using tax rates and tax laws that have been enacted or substantively enacted by reporting date.
(3)
Deferred Tax: Group companies recognize deferred tax with respect to temporary differences between the tax basis of assets and liabilities and their carrying amount in the financial statements. Deferred tax balances (asset or liability) are calculated using tax rates that are expected to apply in the period when the asset is realized, based on tax rates and tax laws that have been enacted or substantively enacted by reporting date. Deferred tax liabilities are recognized generally for all temporary differences between the tax bases of assets and liabilities and their carrying amount in the financial statements. Deferred tax assets are recognized for all temporary differences that are deductible, up to the amount of expected taxable income that will be available, against which the deductible temporary difference can be utilized. In computing deferred tax, any tax that would have applied when disposing the investment in consolidated subsidiaries was not taken into account, since it is the intention of the Group to hold and develop these investments. In addition, no deferred tax is recognized for income distributions from these companies since the dividends are not taxable. The deferred tax calculation does not take into account taxes on the sale of the investment in the associate under voluntary liquidation, as no tax liability is expected upon said event. Deferred tax assets and liabilities are offset if the entity has a legally enforceable right to offset current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to the same taxable entity and the same tax authority, and the entity intends to settle current tax assets and liabilities on a net basis. Regarding the publication of IAS 32, see paragraph S below.
17
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 2
- SIGNIFICANT ACCOUNTING POLICIES (CONT.): O.
Revenue Recognition: Income is measured at the fair value of the consideration received and / or consideration that the Group is entitled to receive in respect of revenue from services in the ordinary course of business. (1)
Revenue from Services: The Group records revenue from services when providing the service.
(2)
Interest Income: Interest income is recorded periodically, based on any outstanding principal for repayment and using the effective interest method.
(3)
Dividend Income: Dividend income from investments in marketable securities held for trading is recognized at the time of entitlement to receive the dividend.
P.
Provisions: Provisions are recognized when the Group has a present legal or constructive obligation because of a past event and it is probable that a transfer of economic resources will be required to settle the obligation, and a reliable estimate can be made of the obligation. The amount recognized as a provision is management’s best estimate of the consideration required to settle the present obligation on reporting date, taking into account the risks and uncertainties surrounding the obligation. When a provision is measured using the cash flows estimated to settle the present obligation. When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the Group recognizes an asset for the recovered amount if it is virtually certain that the reimbursement will be received and that it can be measured reliably.
Q.
Employee Benefits: (1)
Post-Employment Benefits: Post-employment benefits granted by the Group include mainly a severance pay liability and pension liability to the widow of a retired manager. Post-employment benefits are partially defined contribution plans and defined benefit plans. Expenses for the obligation for contributing to defined contribution plans are recognized in profit or loss or capitalized (mainly under the cost of intangible assets within the framework of self-development costs of computer software) on the date of providing the work services for which the obligation to make a contribution arises. Expenses with respect to defined benefit plans are recognized in profit or loss or capitalized under the cost of assets (mainly within the framework of selfdevelopment costs of computer software) using the projected unit credit method, based on actuarial studies conducted at the end of each reporting period.
18
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 2
- SIGNIFICANT ACCOUNTING POLICIES (CONT.): Q.
Employee Benefits (Cont.): (1)
Post-Employment Benefits (Cont.): The present value of the Group's liability in respect of the defined benefit plan as of December 31, 2014 is determined by discounting the plan's expected future cash flows, using a discount rate that conforms with market returns on high quality corporate bonds (see note 11 regarding Accounting Staff Position Number 21-1 of the Securities Authority: Existence of a Deep Market in Corporate Bonds of High Quality in Israel, Including the Accounting Treatment During the Transition from a Discount Rate that Conforms with Market Returns on Government Bonds to a Capitalization Rate that Conforms with Market Returns on High Quality Corporate Bonds as of December 31, 2014), denominated in the currency in which the benefits will be paid in respect of the plan, and having maturity periods closely identical to the expected settlement dates of the plan. The present value of the Group's liability in respect of the defined benefit plan as of December 31, 2013 was determined by discounting the expected future cash flows for the plan using a discount rate compatible with market returns on government bonds having maturity periods closely identical to the expected settlement dates of the plan. In accordance with the Group's accounting policies, net interest cost is included in expenses in respect of employee benefits, in profit or loss. Actuarial gains and losses are recognized in other comprehensive income, as incurred, or capitalized to the cost of the asset (mainly within the framework of self-development costs of computer software). Actuarial gains and losses recognized in other comprehensive income will not be reclassified to profit or loss later. Plan assets are measured at fair value. Interest income on plan assets is determined using the discount rate of the commitment (at the beginning of the period, that is, 2014, in accordance a discount rate compatible with market returns on government bonds) and is recognized in profit or loss as part of net interest cost. The difference between the interest income on plan assets and the total return on plan assets is recognized in other comprehensive income and will not be reclassified to profit or loss later on.
(2)
Other Long-Term Employee Benefits: Other long-term employee benefits are benefits which are not expected to be fully paid before 12 months after the annual reporting period in which the employee provides the related service and do not constitute a post-employment benefit or termination benefits. Other employee benefits of the Group include accrued vacation and seniority grants. Expenses in respect of these benefits are recognized in profit or loss or are capitalized to the cost of assets (mainly within the framework of self-development costs of computer software) in accordance with the projected unit credit method using actuarial valuations carried out at the end of each reporting period. The present value of the Group's obligation for these benefits is determined by discounting the expected future cash flows in respect of the benefits by market returns on high quality corporate bonds (See note 11 regarding Accounting Staff Position Number 21-1 of the Securities Authority: Existence of a Deep Market in Corporate Bonds of High Quality in Israel, Including the Accounting Treatment During the Transition from a Discount Rate Compatible with Market Returns on Government Bonds to a Capitalization Rate that Conforms with Market Returns on High Quality Corporate Bonds as of December 31, 2014), denominated in the currency to be used to pay benefits to other long-term employees, and having maturity periods closely identical to the expected settlement dates of these benefits.
19
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 2
- SIGNIFICANT ACCOUNTING POLICIES (CONT.): Q.
Employee Benefits (Cont.): (2)
Other Long-Term Employee Benefits (Cont.): The present value of the Group's liability in respect of the defined benefit plan as of December 31, 2013 was determined by discounting the expected future cash flows for the plan using a discount rate that conforms with market returns on government bonds having maturity periods closely identical to the expected settlement dates of the plan. Actuarial gains and losses are recognized in profit or loss when incurred or are capitalized to the cost of the asset (mainly within the framework of self-development costs of computer software).
(3)
Short-term Employee Benefits: Short-term employee benefits are benefits, which are expected to be fully paid before 12 months after the end of the period in which the employee provides the related service. Short-term employee benefits include, mainly, Company liabilities for bonus and wage payments (including social benefits). These benefits are recognized in profit or loss or capitalized under the cost of assets (mainly self-development costs of computer software) on the date they arise. The benefits are measured on an undiscounted basis the Company is expecting to pay. The difference between the sum of short-term benefits the employee is eligible to receive and the amount paid in their respect is recognized as a liability.
(4)
Termination Benefits: Termination benefits are benefits payable as a result of either a decision of the Group to terminate an employee's employment before normal retirement date or an employee's decision to accept voluntary redundancy in exchange for those benefits. The Company's obligation for these benefits is initially recognized in profit or loss when the Group cannot withdraw the offer.
R.
Classification of Interest Paid, and Interest and Dividends Received, in the Statement of Cash Flows: The Group classifies cash flows from interest and dividends as received, and cash flows in respect of interest paid, as cash flows that were used for, or provided by, operating activities. Cash flows in respect of income tax, as a rule, are classified as cash flows used for operating activities, except for those that are readily identifiable with cash flows that were used for investing or financing activities.
20
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 2
- SIGNIFICANT ACCOUNTING POLICIES (CONT.): S.
Adjustments to Standards that Affect the Current Reporting Period and /or Previous Reporting Periods: •
Amendment to IAS 32 "Financial Instruments: Presentation" (Financial Assets and Financial Liabilities Offsets): The Amendment states that in order to meet the terms of offsetting a financial asset and a financial liability, the right of offset cannot be dependent on any future events and must be enforceable in the ordinary course of business, in the event of bankruptcy, insolvency or credit default. The Amendment is applied retrospectively for annual reporting periods beginning on or after January 1, 2014. The impact of the Amendment on the Group's financial statements is not material.
•
Amendment to IAS 36 "Impairment of Assets" (Regarding Disclosures of the Recoverable Amount): The Amendment clarifies the extent and the scope of the disclosure requirements required for assets (including goodwill) or cash-generating units that have been recognized (or canceled) following any decline in value, and states that the required disclosures for said assets or cash-generating units, whose recoverable amount is determined based on their fair values, will be similar in nature to the disclosures required for fair value measurements in accordance with International Financial Reporting Standard IFRS 13 "Fair Value Measurement". The Amendment is applied retroactively to annual reporting periods beginning on or after January 1, 2014. The impact of the Amendment on the Group's financial statements is not material.
T.
New Standards Issued but Not Yet Effective and Not Early Adopted by the Group, Which are Expected to Have or Might Have an Impact on Future Periods: •
IFRS 9 "Financial Instruments": International Financial Reporting Standard IFRS 9 (2014), "Financial Instruments" ("Standard") is the final standard issued as part of the financial instruments project. This Standard supersedes the earlier stages of IFRS 9, originally issued in 2009, 2010 and 2013. The final Standard includes provisions for the classification and measurement of financial assets that have been amended vis-à-vis those issued in the first stage (in 2009) and, also includes provisions for classifying and measuring financial liabilities issued in the second phase (in 2010) and presents a new model for considering any expected loss from impairment. The Standard requires that financial assets be recognized and measured as follows: •
Debt instruments will be classified and measured after initial recognition under one of the following alternatives: amortized cost, fair value through profit or loss, or fair value through other comprehensive income. The determination of the measurement model will be after considering the entity's business model vis-à-vis managing financial assets and depending on the characteristics of the contractual cash flows generated by these financial assets.
21
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 2
- SIGNIFICANT ACCOUNTING POLICIES (CONT.): T.
New Standards Issued but Not Yet Effective and Not Early Adopted by the Group, Which are Expected to Have or Might Have an Impact on Future Periods (Cont.): •
IFRS 9 "Financial Instruments" (Cont.): •
An entity may designate a debt instrument that according to criteria, is measured at amortized cost, or at fair value through other comprehensive income, to fair value through profit or loss only when the designation cancels any inconsistency in recognition and measuring that would have occurred if the asset was measured at amortized cost, or at fair value through other comprehensive income.
•
In general, equity instruments are to be measured at fair value through profit or loss.
•
An entity may designate, upon initial recognition equity instruments at fair value through other comprehensive income. Instruments designated as said, will no longer be subject to any impairment testing, and any gain or loss in respect of said, will not be transferred to profit or loss, including on exercise.
•
Embedded derivatives will not be separated from a host contract, which is within the scope of the Standard. Instead, "hybrid contracts" in general will be measured at amortized cost or fair value, depending on the business model tests and contractual cash flows.
•
Debt instruments will be reclassified only if the entity changes its business model for managing financial assets.
•
Investments in equity instruments that do not have a quoted price in an active market, including derivatives on these instruments will be measured at fair value. The alternative of measuring at cost under certain circumstances was canceled. However, the Standard states that under certain circumstances, cost may be an appropriate estimate of fair value.
The Standard takes effect vis-à-vis annual reporting periods beginning on or after January 1, 2018. Earlier application is permitted. In general, provisions of the Standard for financial assets and liabilities will be applied retrospectively, with certain exceptions specified by the transitional provisions of the Standard. It was also provided that despite the retroactive application, companies adopting the Standard for the first time will not be required to adjust their comparative figures for prior periods. Moreover, the comparative figures will be adjusted only when their adjustment, as noted, does not make use of hindsight. Company management is evaluating the impact of this Standard on the Group's financial statements.
22
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 2
- SIGNIFICANT ACCOUNTING POLICIES (CONT.): T.
New Standards Issued but not Effective and not Early Adopted by the Group, Which are Expected to Have or Might Have an Impact on Future Periods (Cont.): •
IFRS 15 "Income from Contracts with Customers": The new Standard provides a comprehensive and uniform mechanism that regulates the accounting treatment of revenue arising from contracts with customers. The Standard supersedes IAS 18 "Revenue" and IAS 11 "Construction Contracts" and any related interpretations. The core principle of the Standard is that the recognition of revenue reflects the transfer of goods or services to customers in an amount reflecting the economic benefits that the entity expects to receive in return. To this end, the Standard stipulates that revenue will be recognized when the entity transfers to the customer the goods and / or services listed in the contract, and the customer obtains control of those goods or services. The Standard provides a five-step model for implementing this principle: 1. Identify the contract (or contracts) with the customer. 2. Identify the contract's performance obligations. 3. Determining the transaction price. 4. Allocation of the transaction price to performance obligations. 5. Recognition of revenue when the entity complies with any performance obligations. The model depends on the specific facts and circumstances of the contract and at times requires extensive use of judgment. The Standard also provides extensive disclosure requirements for contracts with customers, the significant estimates and changes that were used in applying the provisions of the Standard, said in order to enable users of the financial statements to understand the nature, quantity, timeliness and reliability of revenue and cash flows arising from contracts with customers. The Standard will be required for annual reporting periods beginning on or after January 1, 2017. Earlier application is permitted. In general, the Standard will be applied retroactively; however, entities will be allowed to choose certain adjustments under the transitional provisions of the Standard regarding any implementation vis-à-vis previous reporting periods. At present, the Company is studying the impact of the Standard on its contracts with customers and the recognition of revenue from them. This study has not yet been completed.
•
Amendment to IAS 24 "Related Party Disclosures" (Concerning Key Management Personnel): The Amendment clarifies that a management company that provides key management services to a reporting entity is considered a "related party" of the reporting entity. The Amendment will be applied for annual reporting periods beginning on or after July 1, 2014. Earlier application is permitted. The Company estimates that this Amendment will not have a material impact on its financial statements.
23
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 2
- SIGNIFICANT ACCOUNTING POLICIES (CONT.): U.
Standards, Amendments to Standards and Interpretations Issued that are not Applicable to the Group: In addition to said amendments, as of financial statement date, other interpretations and amendments to standards were issued, which Company management estimates are not applicable to the Group.
NOTE 3
- CONSIDERATIONS IN APPLYING UNCERTAINTY IN ESTIMATE:
ACCOUNTING
POLICIES
AND
KEY
FACTORS
OF
Key Factors of Uncertainty in Estimate: When preparing the financial statements, management is required to use estimates or approximations regarding transactions or matters whose ultimate impact on the financial statements cannot be established accurately at the time of preparation. The main basis for determining the quantitative value of such estimates are the assumptions that management decides to adopt, considering the circumstances of the object of estimation, as well as the best information available at the time. Naturally, since these estimates and approximations are the result of exercising judgment in an environment of uncertainty, which may be at times especially significant, changes in the basic assumptions arising from changes that are not necessarily dependent on management, as well as additional information that may become available to the Company only in the future, that was not available to the Company when preparing the estimate, might lead to changes in the quantitative value of the estimate, and accordingly, also affect the Company’s financial position and operating results. The estimates and underlying assumptions are regularly reviewed by management. Changes in accounting estimates are recognized only in the period in which there was a change in the estimate, to the extent that the change affects only that period, or is recognized in said period and in future periods, when the change affects both the current period and future periods. The Following are Areas, the Valuation of Which in the Financial Statements Requires Estimations and Approximations, and which Group Management Estimate May Have a Significant Effect: A.
Employee Benefits: The present value of the Group's severance pay obligation to its employees is based on a number of factors, which are determined using actuarial estimation, which is based on a number of assumptions, including a discount rate and an expected rate of salary increases. Changes in the actuarial estimates may affect the book value of the obligation of the Group to make retirement, severance and pension payments. The Group estimates the discount rate once a year, based on the return on high- quality corporate bonds (the discount rate as of December 31, 2013 was based on the returns on government bonds). Other key assumptions are determined on the basis of past experience of the Group. For more information on the assumptions used by the Group, see note 11.
B.
Provisions for Contingent Liabilities and Legal and Tax Proceedings: To assess the legal validity of lawsuits and tax processes, and to determine the likelihood of any adverse outcome vis-à-vis the Group, Group management relies on the opinion of legal and professional consultants. After these consultants form their legal opinion and the likelihood of the Group, vis-à-vis the lawsuit or process, if the Group will have to bear any outcomes or has the ability to defer them, Group management estimates the amount that needs to be recorded in the financial statements, if any.
24
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 3
- CONSIDERATIONS IN APPLYING ACCOUNTING UNCERTAINTY IN ESTIMATE (CONT.):
POLICIES
AND
KEY
FACTORS
OF
The Following are Areas, the Valuation of Which in the Financial Statements Requires Estimations and Approximations, and which Group Management Estimates May Have a Significant Effect (Cont.): B.
Provisions for Contingent Liabilities and Legal and Tax Proceedings (Cont.): A different opinion than that of the Group's legal counsel of the existing legal situation, a different understanding than the Group's contractual engagements and changes arising from relevant legal precedence or new facts, may impact the amount of the overall provision for legal and tax proceedings against the Group and thus materially impact the financial position and operating results of the Group. Under certain circumstances, such as a request to approve a class action or a complex action, during the early stages of the proceedings, the Group cannot reliably estimate the outcome of the proceedings.
C.
Impairment Assessment of Property and Equipment: Under IFRS, the Group must examine at the end of each reporting period if there are any signs indicating impairment losses in respect of its fixed and intangible assets. If any indication exists, it must estimate the recoverable amount of the asset to determine the amount of impairment loss, if any. Recoverable amount is the highest of the asset's fair value less costs to sell, and value in use. A key feature of possible impairment in connection with the construction of TASE's new office building ("property") that was identified by the Group in 2013, involves excess cash outflows that were used for the construction of the property, which were significantly highest than that originally budgeted. To determine the recoverable amount of the property, the Group examined the recoverable amount using the two methods. The recoverable amount of the property was determined according to fair value less costs of disposal. To determine the fair value of the property, Group management based mainly on an assessment prepared by an independent, external and knowledgeable real estate appraiser, who had the required experience and expertise. Group management determined the fair value according to accepted valuation methods for assessing buildings for employment and / or offices, such as discounted cash flows and comparison of selling prices and demand for similar properties in the immediate vicinity. For this purpose, an external real estate appraiser prepared a detailed price survey based on sales transactions and rental data for offices and stores in sought after and prestigious office towers in Tel Aviv. When use was made of the discounted cash flows method, the discount rate used to discount the net cash flows expected from the property and the amount of rental fees appropriate for the property, a significant impact on fair value was noted. As of December 31, 2013, the fair value of the property group was tested using a combination of these two valuation techniques that led to similar evaluation results: •
•
The discounted cash flow method, with the annual discount rate in a situation when the property was available, used in determining the fair value of the property, as determined by the external real estate appraisers was 8%. The method of comparison of prices for similar properties while making the necessary adjustments to the property group. 25
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 3
- CONSIDERATIONS IN APPLYING ACCOUNTING UNCERTAINTY IN ESTIMATE (CONT.):
POLICIES
AND
KEY
FACTORS
OF
The Following are Areas, the Valuation of Which in the Financial Statements Requires Estimations and Approximations, and which Group Management Estimates May Have a Significant Effect (Cont.): C.
Impairment Assessment of Property and Equipment (Cont.): In determining fair value, the location of the property and its physical condition, its characteristics, its planning situation, additional building rights, the possibilities for using the property, rental prices for similar properties, the degree of actual and projected occupancy of the property and operating costs, were considered. Changes in any of these elements, or all, can significantly affect the fair value of the property as estimated by the Group management. The Group seeks to determine fair value objectively as possible, yet the process of estimating the fair value of an office property also includes subjective elements. Accordingly, and in light of the above in the previous paragraph, the determination of the fair value of the Group's new building requires consideration. Changes in the assumptions used to determine fair value could materially affect the financial condition and operating results of the Group. The fair value of the property, when finished and ready for occupancy, totaled NIS 260 million. Costs of disposal (such as selling expenses, estimated land betterment levies, removal costs, etc.) as of December 31, 2013 totaled NIS 4.9 million. To determine the fair value of the property, the Group used observable market data, to the fullest extent. The data used in determining the fair value of the property belonged to Level 3 of the rating of fair value, that is, observable market data, either directly or indirectly, that are the rental prices for similar properties with the necessary adjustments to the property group, and data that is not based on observable market data, but rather on the cash flow method. The following sensitivity analysis has been determined based on reasonably possible changes in key assumptions that were used in determining the fair value of the property at the end of the reporting period. The sensitivity analysis does not consider any existing interdependence between assumptions: (1)
If the discount rate were reduced by 0.5%, the fair value of the property would increase by NIS 17 million. If the discount rate were increased by 0.5%, the fair value of the property would decrease by NIS 15 million.
(2)
If the appropriate property rental fees were increased by 10%, the fair value of the property would increase by NIS 24 million. If the appropriate property rental fees were reduced by 10%, the fair value of the property would decrease by NIS 24 million.
For more information on the amount of impairment loss recognized in Group profit or loss in 2013, see note 9 (4). In accordance with IAS 36, Group management is required to evaluate at the end of each reporting period whether there is any substantial sign indicating any change in the amount of the impairment loss of the asset recognized in previous periods. Group management re-examined the primary indicators, as relevant to the reasonableness of the recoverable amount of the property. In accordance with said examination, as of December 31, 2014, there was no material change in the recoverable amount of the property.
26
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS NOTE 3
- CONSIDERATIONS IN APPLYING ACCOUNTING UNCERTAINTY IN ESTIMATE (CONT.):
POLICIES
AND
KEY
FACTORS
OF
The Following are Areas, the Valuation of Which in the Financial Statements Requires Estimations and Approximations, and which Group Management Estimates May Have a Significant Effect (Cont.): D.
Deferred Tax Assets: The Group recognizes deferred tax assets and deferred tax liabilities based on differences between the carrying amounts of the assets and liabilities and the amounts used for tax purposes. The Group regularly reviews the recoverability of the deferred tax assets in its accounts based on historical taxable income, projected future taxable income and anticipated timing of the reversal of the temporary differences. If the Group will be unable to generate sufficient taxable income in the future, or in the case of a material change in effective tax rates in the period when the underlying temporary differences become taxable or deductible, the Group may be required to cancel some of its deferred tax assets or increase some of its deferred tax liabilities, and thus its effective tax rate may increase and adversely affect operating results.
E.
Useful Lives of Property and Equipment: The Company began to depreciate the components of the new building, from the date of its occupancy in July 2014. In order to determine the useful life of the new building costs, Group management based its determination mainly on independent external experts with the knowledge, experience and expertise required. Regarding the depreciation of property and equipment, see note 2 I.
NOTE 4
- CASH AND CASH EQUIVALENTS: A.
Composition: Interest Rate, December 31, 2014 % Cash in banks Short-term deposits
B.
NOTE 5
Primarily 0.01
December 31, 2014 2013 NIS in thousands 3,011 6,196 9,207
5,177 9,321 14,498
Regarding liquidity risk management- See note 6 D (4) (c).
- RECEIVABLES AND PAYABLES RELATING TO DERIVATIVE OPEN POSITIONS: The following is additional information with respect to derivative open position balances and respective collateral: A.
As a Central Counterparty ("CCP"), MAOF-CH has assets and liabilities for each futures and options cleared by MAOF-CH (see also note 2 M (2) (a)).The amount of assets reflects the fair value of the total liability of MAOF-CH members to MAOF-CH. The amount of liabilities reflects the fair value of all liabilities of MAOF-CH to its members. The amount of these assets and liabilities is calculated, after offsetting the fair value of the amounts of liabilities of a MAOF-CH member, to MAOF-CH against the fair value of the amount of liabilities of MAOF-CH to that member, arising from open positions of the member as of that particular expiration date. 27
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 5
- RECEIVABLES AND PAYABLES RELATING TO DERIVATIVE OPEN POSITIONS (CONT.): A.
(Cont.) The amounts of assets and liabilities, as above, do not include such offsets relating to open positions of that member with different expiration dates. Regarding the fair value of the assets and liabilities that arise from the open positions of all members of MAOF-CH, which also takes into account the offsetting of debits and credits resulting from the member's open positions with different expiration dates, see note 6 D (4) (a) below.
NOTE 6
B.
The final expiry date of derivatives issued by MAOF-CH, up to reporting date is December 2015 (the expiry date of most derivatives is up to the end of February 2015).
C.
Regarding the MAOF-CH Risk Fund, and related collateral, and collateral for derivative transactions of MAOF-CH members or under their responsibility, see note 6 D (4) (a) below.
- PURPOSES AND POLICIES OF FINANCIAL RISK MANAGEMENT: A.
Significant Accounting Policies: The significant accounting policies and methods adopted with respect to financial assets and financial liabilities, including recognition criteria, measurement bases and recognition in profit or loss, are reported in note 2.
B.
Financial Instruments Balances, by Category: December 31, 2014 2013 NIS in thousands Financial assets (*): Cash and cash equivalents Financial assets at fair value through profit or loss: Assets derived from clearing operations - receivables with respect to derivative open positions Financial assets at fair value through profit or loss - held for trading Loans and receivables Financial liabilities: Financial liabilities at fair value through profit or loss: Liabilities derived from clearing operations - payables with respect to derivative open positions Financial liabilities
(*)
9,207
14,498
1,894,957 149,118 12,944 2,066,226
2,068,253 176,872 12,188 2,271,811
1,894,957 30,150 1,925,107
2,068,253 26,361 2,094,614
The book value of the financial assets reported above reflects the Group's maximum exposure to financial assets' credit risk as of Statement of Financial Position date.
28
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 6
- PURPOSES AND POLICIES OF FINANCIAL RISK MANAGEMENT (CONT.): C.
Fair Value of Financial Instruments: (1)
The financial instruments of the Group include mainly cash and cash equivalents, marketable securities, trade receivables, other receivables, trade payables, other payables, and assets and liabilities with respect to derivative open positions. The balances of the Group's financial instruments in the Statement of Financial Position as of December 31, 2014 and 2013 closely reflect their fair values.
(2)
Financial Instruments Measured at Fair Value in the Statement of Financial Position: Fair value measurements of financial instruments are classified using the following hierarchy: Level 1 -
fair value is based on quoted prices (unadjusted) in active markets for identical financial assets or liabilities;
Level 2 -
fair value is based on inputs other than quoted prices included within Level 1 that are observable for the financial asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices);
Level 3 -
fair value is based on inputs (assumptions) that are not based on observable market data.
This classification reported above, is determined on the basis of the lowest level input (assumption) that is significant to the fair value measurement in its entirety. Below are the Group's financial instruments measured at fair value, based on said levels: Receivables Financial and Payables Assets at Fair with respect Value Through to Derivative Profit or Loss Open Held For Positions Trading NIS in thousands December 31, 2014: Level 1 Level 2 Offset between instruments in level 1, and instruments in level 2, in the position of the same member on the same expiration date (see note 5 A above) Total balance reported in the Statement of Financial Position December 31, 2013: Level 1 Level 2 Offset between instruments in level 1, and instruments in level 2, in the position of the same member on the same expiration date (see note 5 A above) Total balance reported in the Statement of Financial Position
29
1,632,543 292,746 1,925,289
149,118 149,118
(30,332)
-
1,894,957
149,118
802180119 9910,8, 2088,02,8
176,872 176,872
)720,,1(
-
20,810292
176,872
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 6
- PURPOSES AND POLICIES OF FINANCIAL RISK MANAGEMENT (CONT.): C.
Fair Value of Financial Instruments (Cont.): (2)
Financial Instruments Measured at Fair Value in the Statement of Financial Position: (Cont.): Assumptions Used to Measure the Fair Value of Receivables and Payables with Respect to Derivative Open Positions Measured at Level 2: The fair value of derivative open positions in options is measured using the Black and Scholes model based on the following assumptions: the price of the underlying asset, the exercise price, time to expiration, NIS risk-free interest rate, foreign currency risk-free interest rate (in the case of exchange rate options) and the standard deviation of the return of the underlying asset. The use of different assumptions could change the amounts of fair value but without impact on profit or loss since the open positions on the asset side and the open positions on the liabilities side are identical, as per note 2 M (2) above.
D.
Purposes and Policies of Financial Risk Management: (1)
General: The TASE Group's ("Group") operations involve exposure to various financial risks, mainly - counterparty credit risk, liquidity risk, credit risk, market risk with respect to investments of cash balances in securities, and market risk (replacement cost risk), upon a Clearing House member default. The Group's financial risk management policy is designed to establish an effective organization-wide risk management set-up to ensure the Group’s stability, while strengthening its ability to identify, monitor and manage its risks in order to realize its strategic and business goals.
(2)
Processes Adopted During the Reporting Period to Improve and Upgrade the Risk Management Framework: The Group took steps and is taking steps to improve and upgrade its risk management framework and its adaptation to prevailing standards at financial organizations operating in the fields of trade and settlement based on leading international standards. In this context, during the reporting period, a number of key processes were introduced, as follows: a)
The Approval of a Firm-Wide Risk Management Policy ("Policy"): On July 4, 2014 the TASE's Board of Directors approved the Group's firm-wide risk management policy and in September 2014, the Boards of Directors of TASE-CH and MAOF-CH respectively approved said policy. The policy provides and introduces a policy framework for the Group's risk management and includes, inter alia, the following: a definition of principles for risk management; adoption of a corporate culture that reflects a full understanding of the business activities and associated risks; adoption of mapping processes, identification, measurement and on-going controls, a definition of the risk management structure, a definition of the role of each of the lines of defense, etc.
30
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 6
- PURPOSES AND POLICIES OF FINANCIAL RISK MANAGEMENT (CONT.): D.
Purposes and Policies of Financial Risk Management (Cont.): (2)
Processes Adopted During the Reporting Period to Improve and Upgrade the Risk Management Framework (Cont.) b)
Formulation of Stabilizing Internal Models for Determining Minimum Capital and Liquidity Adequacy: On January 1, 2015, the TASE's Board of Directors approved two stabilizing models that determine the minimum level of capital and liquidity adequacy required at the level of the Group and at the level of each of the Clearing Houses. In this context, the Board also approved the outline and timetable for implementation and integration of the models by the Group, and the steps required to introduce and comply with said minimum requirements. Formulation and approval of said models, comply with the requests of the Israel Securities Authority's Chairman - in his letter to TASE of June 7, 2012, which required TASE to formulate and implement a methodology for determining the minimum capital and liquidity level that TASE and each of the Clearing Houses must hold - this in accordance with the risks arising from their activities. For an expanded discussion of the models and the results of their application by the Group as of reporting date - see paragraph D (5) below.
c)
Implementation of the Internal Process for Evaluating the Level of Exposure to Risks: During the second half of 2014 and during January 2015, a methodological procedure was developed for mapping the Group's core activities – clearing securities, clearing derivatives, trading, indices, registration for trading, contacts with companies and the supervision of TASE members and Clearing House members. As part of this process, the risks were mapped for each of said focus points, the lines of defenses and the existing control systems were mapped, and the residual risks were rated for each risk center. In accordance with the results – steps were taken and will be taken to adjust the exposure profile to the determined risk appetite (which defines the maximum risk level that the entity is ready to accept).
d)
TASE – CH and MAOF – CH, Gap Survey Compared to Leading International Standards: As part of a gap survey, the compliance of TASE-CH and MAOF-CH with guiding international standards in the field of risk management, with Clearing Houses that operate as a central counterparty ("CCP"), as prescribed by the CPSS-IOSCO core principles of April 2012 1, was tested. Already during 2014, the Clearing Houses began the process of closing the gaps identified and prepared work plans for 2015, both of the Clearing Houses and of the risk management department, targeted to treating and closing the identified gaps.
1
Principles for Financial Market Infrastructures0 CPSS (Committee on Payment and Settlement Systems, Bank for International Settlements: BIS) - IOSCO (Technical Committee of the International Organization of Securities Commission), April 2012. http://www.bis.org/cpmi/publ/d101.htm.
31
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS NOTE 6 -
PURPOSES AND POLICIES OF FINANCIAL RISK MANAGEMENT (CONT.): D.
Purposes and Policies of Financial Risk Management (Cont.): (2)
Processes Adopted During the Reporting Period To Improve and Upgrade the Risk Management System (Cont.): e)
Establishing the Stress Test Infrastructure – as a Supplementary Tool for Challenging the Stability of the Clearing House's Lines of Defense: As part of closing TASE-CH and MAOF-CH gaps vis-à-vis any guiding international standards, various stress tests to simulate a default event by a Clearing House member were formulated, in order to challenge the adequacy of the Clearing House's existing defenses.
(3)
Group Financial Risk Factor Table:
The following table summarizes the financial risk factors identified by the Group and the counter lines of defense available to the Group. Further information in relation to each of the risk factors and the lines of defense taken by the Group is available in paragraph D (4) below: Financial Risk Counterparty Credit Risk
Risk Definition and Description Counterparty credit risk is an existing or future risk that a counterparty to a transaction will not be able to meet its obligations, in full, at the time it is committed to do so, or at any time in the future. The risk results from clearing operations by TASE-CH and MAOFCH, and when the Clearing Houses serve as the central counterparty and are required to fulfill all commitments of the Clearing House member who has defaulted.
32
Group's Risk Location TASE-CH and MAOF-CH.
Existing Lines of Defense TASE-CH: Minimum TASE-CH members qualifications and supervision of members' compliance therewith, settlement of transactions using the DVP (Delivery Versus Payment) approach, monetary clearing through the Bank of Israel's ZAHAV system, Risk Fund, collateral for pending transactions, liquidity balances within the Clearing House's shareholders' equity, legal protection as part of the legislation to promote the Clearing Houses’ stability, defenses as part of the ByLaws upon the default of any member and the default procedure. MAOF-CH: Minimum qualifications for members of MAOF-CH and supervision over members’ compliance with said, current margin requirements while effecting real-time controls over margins, monetary clearing through the Bank of Israel's ZAHAV system, Risk Fund, liquid balances within MAOF-CH’s shareholders' equity, legal protections as part of the legislation regarding the Clearing Houses’ stability, defenses as part of the By-Laws upon the default of any member (including the right to offset)
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS NOTE 6 -
PURPOSES AND POLICIES OF FINANCIAL RISK MANAGEMENT (CONT.): D.
Purposes and Policies of Financial Risk Management (Cont.): (3)
Group Financial Risk Factor Table (Cont.):
Financial Risk
Risk Definition and Description
Group's Risk Location
Existing Lines of Defense
Credit Risk in Respect of Investment of the Group's Monetary Reserves
Credit risk of the Group is the existing or future risk to income and to equity arising from investment of the Group's monetary reserves in securities.
TASE, TASE CH and MAOFCH.
Liquidity Risk
During the ordinary course of business activities: liquidity risk is an existing or future risk that the Group will not be able to provide its liquidity needs, on time and in full. Upon default by a Clearing House member: the liquidity risk stems from the need to quickly supplement the monetary clearing – resulting generally also from the need to quickly realize the assets that serve as collateral, and occasionally even the need to realize some of the Clearing House's equity resources.
TASE, TASECH and MAOFCH.
The investment policy established by the Board of Directors, restrictions on the portfolio managers and a spread of investment management between them, controls over the investment management, supervision by a subcommittee of the Board of Directors, a capital adequacy model for determining a minimum capital cushion against credit risk inherent in the investment of monetary reserves. Lines of defense during the ordinary course of business activities: a liquid mix of assets, a minimum liquidity cushion (a minimum amount of monetary reserves of NIS 150 million), a liquidity adequacy model, which was approved on January 1, 2015, which determines a minimal liquidity cushion and minimum coverage ratios. Lines of defense during any default by a Clearing House member: a liquid mix of risk fund collateral at the Clearing Houses, a liquidity agreement with a financial institution to liquidate the collateral deposited with the risk funds, a liquidity agreement (line of credit) with a commercial bank against collateral (only TASE-CH), a liquidity adequacy model, as above.
33
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS NOTE 6 -
PURPOSES AND POLICIES OF FINANCIAL RISK MANAGEMENT (CONT.): D.
Purposes and Policies of Financial Risk Management (Cont.): (3)
Group Financial Risk Factor Table (Cont.):
Financial Risk Market Risk
Risk Definition and Description Market risks are existing or future risks that changes in market prices (such as exchange rates, the Consumer Price Index, interest rates and margins in the markets), will affect the Group's income and equity or the value of its holdings of financial instruments. During the ordinary course of business activities: the Group is exposed to interest rate risk and to replacement cost risk - arising from the investment of monetary reserves of the Group in securities and bank deposits. Activities of the Group do not involve material exposure to linkage risks. Upon default by a Clearing House member: the Group is exposed to replacement cost risk that may be caused by both a decrease in the value of assets used as collateral, and increase in the value of the position which MAOFCH will be required to handle and change in the value of securities of TASE-CH.
34
Group's Risk Location TASE, TASECH and MAOFCH.
Existing Lines of Defense Lines of defense during the ordinary course of business activities: an investment policy that restricts the duration of the investments and minimizes exposure to interest rate risk, a capital adequacy model that determines the minimum capital adequacy cushion against interest rate risk inherent in the investment of monetary reserves. Lines of defense during any default by a Clearing House member: "Haircuts" on the maximum value serving as security, on collateral deposited by Clearing House members (for current operation in derivatives and the risk funds), the methodology for calculating the required current margin embodying current market prices shocks and extreme conditions.
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 6 -
PURPOSES AND POLICIES OF FINANCIAL RISK MANAGEMENT (CONT.): D.
Purposes and Policies of Financial Risk Management (Cont.): (4)
Exposure to Financial Risks and the Manner of their Management: (a)
Counterparty Credit Risk: General:
Counterparty credit risk is an existing or future risk that a counterparty to a transaction will not be able to meet its obligations, in full, at the time when it is committed to do so, or at any time in the future. This risk to the Group results from clearing operations by the Clearing Houses and for which the Clearing Houses serve as a Central Counterparty responsible for fulfillment of all obligations of the Clearing House member that did not carry out its part of the transaction, towards another Clearing House member who did carry out its part of the transaction.
The Group's exposure to counterparty credit risk also includes exposure to liquidity risk arising from the need to act quickly to supplement any monetary clearance - usually associated with the need to quickly realize the assets that serve as collateral and occasionally even to realize part of the Clearing House's capital resources. In addition, the Group is also exposed to replacement cost risk that may be caused by both the decrease in the value of assets used as collateral and an increase in the value of the exposure that MAOF-CH will be required to handle and any change in the value of securities at TASE-CH. With respect to any exposure to these liquidity risks and market risks, and the lines of defense taken by the Group, see paragraphs 4 (C) and 4 (D) below. TASE-CH: Risk Profile: TASE-CH is a central counterparty for securities transactions (other than derivatives), executed on TASE, transfers to custody (custodial activities), carried out in continuation to a transaction executed on TASE, and repo transactions and spot transactions in government bonds executed through a European system for trading in government bonds. As a central counterparty, TASE-CH is responsible for fulfillment of all obligations of a member of TASE-CH, which is a party to a transaction on TASE, and which did not carry out its part of the transaction, towards another TASECH member, which is the counterparty to the transaction, which did carry out its part of transaction.
35
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 6
- PURPOSES AND POLICIES OF FINANCIAL RISK MANAGEMENT (CONT.): D.
Purposes and Policies of Financial Risk Management (Cont.): (4)
Exposure to Financial Risks and the Manner of their Management (Cont.): (a)
Counterparty Credit Risk (Cont.):
Management of the Exposure to Counterparty Credit Risk and the Lines of Defense Available to TASE-CH: Following are details of the lines of defense and other measures taken by TASE-CH to manage exposure to counterparty credit risk: Lines of Defense Minimum TASECH Members Qualifications and Supervision of Members' Compliance Therewith
•
•
•
•
•
•
Description of the Lines of Defense and Risk Management Measures As of December 31, 2014, TASE-CH had 19 members. 12 of which are banks (including the Bank of Israel), and the others are non-banking corporation members ("NBCM"). A TASE-CH member can only be an entity which complies with the requirements of TASE's Rules in respect of TASE members, and the requirements of the TASE-CH's By-Laws in respect of Clearing House members. Members that are banks must carry out requirements of the Banking Supervision Department at the Bank of Israel – including the requirements for capital adequacy and liquidity adequacy. In addition, members that are banks are subject to other provisions, in their capacity as members of TASE and TASE-CH, as provided in TASE's Rules and the Regulations pursuant thereto, and the By-Laws. With respect to NBCMs, TASE's Rules provide requirements governing all their activities (including capital and liquidity adequacy requirements), including requirements relating to financial stability, requirements in respect of risk management and the control of said risks, requirements relating to corporate governance, requirements in respect of the management of technological information, etc. TASE monitors the compliance of TASE-CH members, with requirements relating thereto, as set forth in TASE's Rules and in TASE-CH's By-Laws. TASE may take disciplinary proceedings against a TASE member, according to TASE's Rules, the Regulations pursuant thereto and TASE-CH's By-Laws.
36
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 6
- PURPOSES AND POLICIES OF FINANCIAL RISK MANAGEMENT (CONT.): D.
Purposes and Policies of Financial Risk Management (Cont.): (4)
Exposure to Financial Risks and the Manner of their Management (Cont.): (a)
Counterparty Credit Risk (Cont.): Management of the Exposure to Counterparty Credit Risk and the Lines of Defense Available to TASE-CH (Cont.): Description of the Lines of Defense and Risk Management Lines of Measures Defense Legislation to In order to protect TASE-CH in case a member is unable to meet Promote the its obligations to it, the Securities Law, has provided, inter alia, Clearing that: Houses’ Stability • A charge of securities given by a TASE-CH member in favor of TASE-CH will be valid against other creditors of a TASECH member, and it shall be regarded as a first ranking fixed charge, if TASE-CH has control over such securities, in one of the manners prescribed in the Securities Law. • Exercise of charge on securities in favor of the Clearing Houses may be carried out by the Clearing House itself, without a Court Order or an Order of the Chief Judgment Enforcement Officer, subject to terms prescribed by said Law. • A TASE member that bought, on TASE, securities that are cleared by the Clearing House, is not entitled to the securities that it bought, unless the Clearing House received the entire consideration for said. If the Clearing House did not receive the entire consideration, the ownership of the securities will be assigned to the Clearing House, all as stipulated in the Securities Law. • A TASE member that sold securities that are cleared by the Clearing House, on TASE, is not entitled to the consideration from sale, unless the Clearing House received the securities that were sold, all as stipulated in the Securities Law. Monetary Cash settlements are effected in the clearing system, for Clearing executing bank transfers of the Bank of Israel: the "ZAHAV" Through the system (a Hebrew acronym for Real Time Credits and Central Bank Transfers). This is an advanced system for clearing payments in local currency, in real time and in absolute terms (RTGS: Real Time Gross Settlement). Settlement of The settlement of transactions is effected using the DVP Transactions approach ("Delivery Versus Payment") so that the clearing of Using the DVP securities is made in full synchronization with the cash Approach settlement through the Bank of Israel's RTGS system, a method that reduces the exposure to clearing risks.
37
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 6
- PURPOSES AND POLICIES OF FINANCIAL RISK MANAGEMENT (CONT.): D.
Purposes and Policies of Financial Risk Management (Cont.): (4)
Exposure to Financial Risks and the Manner of their Management (Cont.): (a)
Counterparty Credit Risk (Cont.): Management of the Exposure to Counterparty Credit Risk and the Lines of Defense Available to TASE-CH (Cont.): Lines of Defense Risk Fund
Description of the Lines of Defense and Risk Management Measures • To protect TASE-CH in case a member is unable to meet its obligations, TASE-CH established a Risk Fund, to deposit assets of its members that have been charged in favor of TASE-CH. • If a member cannot meet its obligations to TASE-CH, TASECH is entitled to use the assets deposited at the Risk Fund to cover the defaulting member's obligations - both the assets deposited by the defaulting member, and the assets deposited by other members. • Assets that members may provide as security to the Risk Fund include government bonds, treasury bills and cash, each member being required to make a cash deposit of at least 25 percent of its share in the Risk Fund. • The size of the Risk Fund is determined according to the highest daily amount of monetary liabilities (net of extreme liabilities), of any member, for a period of six months ending at the end of a calendar quarter, resulting from transactions and operations carried out by the member, on that specific day, and for which TASE-CH serves as the central counterparty. A monetary obligation, for this purpose, is the difference between the monetary value of purchases and the monetary value of sales made by the member on that specific day. Each member's share is determined by the size of the Risk Fund multiplied by the ratio of the member's average monetary liabilities during the measurement period, and the total average monetary liabilities of all members, except the Bank of Israel, during that period. The Risk Fund is calculated four times a year and isupdated at the end of January, April, July and October. • Government bonds and treasury bills provided as collateral by the members are deposited with TASE-CH. A separate account is opened in the name of TASE-CH, for each member. Cash provided as collateral, is deposited with commercial banks – and a separate account is opened in the name of TASE-CH, for each member. TASE-CH members have charged the assets and rights to these accounts, in favor of TASE-CH. • The collateral required by the Risk Fund was deposited during the reporting period as required by TASE-CH members.
38
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 6
- PURPOSES AND POLICIES OF FINANCIAL RISK MANAGEMENT (CONT.): D.
Purposes and Policies of Financial Risk Management (Cont.): (4)
Exposure to Financial Risks and the Manner of their Management (Cont.): (a)
Counterparty Credit Risk (Cont.): Management of the Exposure to Counterparty Credit Risk and the Lines of Defense Available to TASE-CH (Cont.): Lines of Defense Collateral for Pending Transactions
Liquidity Balances Within the Shareholders' Equity Default Procedure and Lines of Defense under the ByLaws upon a Member Default.
Description of the Lines of Defense and Risk Management Measures TASE-CH is exposed to a credit risk in respect of securities transactions, if insufficient securities are transferred in their respect by the date required by the By-Laws ("pending transactions"). To secure the obligations of the TASE-CH members for pending transactions, TASE-CH holds cash as collateral. As of December 31, 2014 liquid balances (cash and cash equivalents, and financial assets at fair value through profit or loss held for trading) as part of shareholders' equity of TASECH totaled NIS 45 million. TASE-CH has a default procedure that sets out the policy on the conduct and response of TASE and the Clearing House in the event of a member default, including the risks that must be protected against, and the manner of how TASE-CH can use the protection mediums available to it. Moreover, under Clearing House By-Laws, various lines of defense were provided to TASE-CH, including the rights of lien and set-off.
39
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 6
- PURPOSES AND POLICIES OF FINANCIAL RISK MANAGEMENT (CONT.): D.
Purposes and Policies of Financial Risk Management (Cont.): (4)
Exposure to Financial Risks and the Manner of their Management (Cont.): (a)
Counterparty Credit Risk (Cont.): TASE- CH's Exposure in Respect of Transactions in Securities as the Central Counterparty: TASE-CH's credit exposure includes the total exposure of each of its members, each exposure is calculated as the total difference between the monetary value of buy transactions, and the monetary value of sell transactions, transacted on any trading day, if the net balance is positive. December 31, 2014 2013 NIS, in millions Exposure with respect to securities transactions, as the central counterparty *
287
2,,
Total collateral required to be deposited at the Risk Fund (of which at least 25 percent is in cash) **
919
991
*
No assets and liabilities are recognized in the financial statements for these transactions as they are recorded on the settlement date of the transaction, and not on the date of executing the transaction, being transactions carried out in a regular way, as noted in note 2 M (2) (a).
** As of financial statement approval date, the collateral required to be deposited at the Risk Fund totaled NIS 574 million. Exposure In Respect of Pending Transactions: In addition, as stated, TASE-CH is exposed to credit risk in respect of pending transactions. This credit exposure represents the difference between the monetary value of the transactions as of reporting date, and the monetary value of the transactions on transaction date - if the monetary value of transactions increased. TASE-CH’s exposure in respect of pending transactions as of December 31, 2014 and December 31, 2013 is not material.
40
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 6
- PURPOSES AND POLICIES OF FINANCIAL RISK MANAGEMENT (CONT.): D.
Purposes and Policies of Financial Risk Management (Cont.): (4)
Exposure to Financial Risks and the Manner of their Management (Cont.): (a)
Counterparty Credit Risk (Cont.): MAOF-CH: Risk Profile: MAOF-CH is a Central Counterparty for options and futures cleared by MAOF-CH. As a Central Counterparty, MAOF-CH is responsible for fulfillment of the obligations of a member of MAOF-CH, which is a party to an option or futures, and that did not carry out its part of transaction, according to terms of the option or futures, towards another MAOF-CH member, which did carry out its part of transaction. Management of the Exposure to Counterparty Credit Risk and the Lines of Defense Available to MAOF-CH: Following are details of the lines of defense and other measures taken by MAOFCH to manage exposure to counterparty credit risk are as follows: Lines of Defense Minimum MAOFCH Members Qualifications and Supervision of Members' Compliance Therewith
•
•
•
•
•
Description of the Lines of Defense and Risk Management Measures As of December 31, 2014, MAOF-CH had 9 members. All members, as of said date, are banks. On December 18, 2014, the Board of Directors of MAOF-CH approved acceptance of a new Clearing House member that is not a bank that is expected to begin operations as a member of the Clearing House in the first quarter of 2015. A MAOF-CH member can only be a member of TASE that complies with the requirements of TASE's Rules. If the MAOF-CH member is also a member of TASE-CH, it must also comply with the requirements of TASE-CH's ByLaws. MAOF-CH By-Laws provide the qualifications for MAOFCH membership. One of the qualifying conditions is shareholders' equity of at least NIS 148 million, or that provided by Part 1 of TASE’s Rules - the greater of the two. A MAOF-CH member that wishes to clear trades of a TASE member that is not a MAOF-CH member ("NMCM") is required to meet more substantial shareholders' equity requirements. According to TASE’s Rules, a MAOF-CH member will not be given the possibility to execute trades for its own account, and for its clients, in a volume that causes the amount of collateral required from him in respect of transactions in derivatives listed for trading on TASE, for its own account, and for its clients, to exceed an amount equal to 150% of its shareholders' equity. See above, under the paragraph relating to the qualifications of TASE-CH members, reference to debts that Clearing House members, banks and NBCM's are required, supervision is undertaken by TASE to ensure adherence to these duties and powers granted to TASE in this regard. 41
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 6
- PURPOSES AND POLICIES OF FINANCIAL RISK MANAGEMENT (CONT.): D.
Purposes and Policies of Financial Risk Management (Cont.): (4)
Exposure to Financial Risks and the Manner of their Management (Cont.): (a)
Counterparty Credit Risk (Cont.): Management of the Exposure to Counterparty Credit Risk and the Lines of Defense Available to MAOF-CH (Cont.): Lines of Defense Legislation to Promote the Stability of the Clearing Houses Current Margin
Monetary Clearing Through the Central Bank
Description of the Lines of Defense and Risk Management Measures In order to protect MAOF-CH in case a member is unable to meet its obligations to it, Securities Law, has provided a number of lines of defense to MAOF-CH, as noted above. In this paragraph – refers to TASE-CH • With respect to their activity in derivatives, MAOF-CH members, deposit current margin. The margin requirement is calculated for various scenarios, as specified in MAOF-CH By-Laws. • Assets that members are entitled to deposit, as margin, include government bonds, treasury bills and cash. • Government bonds and treasury bills deposited as margin with MAOF-CH, are deposited with TASE-CH, where a separate account is opened on behalf of MAOF-CH, for each member. Cash provided as margin is deposited with banks, where for each member, a separate bank account is opened on behalf of MAOFCH. MAOF-CH members have charged, in favor of MAOF-CH, the assets and rights in said accounts. • The margin requirement for members is calculated by the real-time computer system ("MABAT"). The system issues an alert, in real time, when a member is required to provide additional margin, and in such case, the member is required to deposit its margin within 20 minutes to 30 minutes after the alert. • The current margin amount was deposited by MAOFCH members during the reporting period as required. Cash settlements of transactions are effected in the clearing system, for executing bank transfers of Bank of Israel: the "ZAHAV" system (a Hebrew acronym for Real Time Credits and Transfers). This is an advanced system for clearing payments in local currency, in real time and in absolute terms (RTGS: Real Time Gross Settlement).
42
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 6
- PURPOSES AND POLICIES OF FINANCIAL RISK MANAGEMENT (CONT.): D.
Purposes and Policies of Financial Risk Management (Cont.): (4)
Exposure to Financial Risks and the Manner of their Management (Cont.): (a)
Counterparty Credit Risk (Cont.): Management of the Exposure to Counterparty Credit Risk and the Lines of Defense Available to MAOF-CH (Cont.): Lines of Defense Risk Fund
Description of the Lines of Defense and Risk Management Measures • To protect MAOF-CH in case a member is unable to meet its obligations, MAOF-CH established a Risk Fund, to deposit assets of members, which have been charged in favor of MAOF-CH. • If a member cannot meet its obligations to MAOF-CH, it is entitled to use the assets deposited in the Risk Fund to cover the defaulting member's obligations - both assets deposited by the defaulting member, and assets deposited by other members (that have not defaulted), and have charged assets in its favor. • Assets that members may provide as collateral to the Risk Fund include government bonds, treasury bills and cash, each member being required to make a cash deposit of at least 25 percent of its share in the Risk Fund. • The size of the Risk Fund is determined according to the highest of: - The average daily amount of collateral required at the beginning of the trading days, during the previous quarter, from MAOF-CH members, that are not among the five member banks, which have the highest amount of shareholders' equity among MAOF-CH members, - One-third of the average daily amount of collateral required at the beginning of the trading days, during the previous quarter, from all MAOF-CH members. - NIS 200 million. • Each member's share of the Risk Fund is determined according to the greater of: - The amount of the Risk Fund, multiplied by the ratio of the average daily amounts of collateral required, at the beginning of the trading period, from the member, and the average daily amount of collateral required at the beginning of the trading days, from all MAOF-CH members, in the previous quarter. - NIS 5 million. • The Risk Fund size is updated once every calendar quarter, on the 15th of the first month of each quarter. • See the paragraph above on current margin, in respect of the manner of depositing margin, and the charge on the rights in the accounts in favor of MAOF-CH. • The collateral required by the Risk Fund was deposited by MAOF-CH members during the reporting period as required.
43
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 6
- PURPOSES AND POLICIES OF FINANCIAL RISK MANAGEMENT (CONT.): D.
Purposes and Policies of Financial Risk Management (Cont.): (4)
Exposure to Financial Risks and the Manner of their Management (Cont.): (a)
Counterparty Credit Risk (Cont.): Management of the Exposure to Counterparty Credit Risk and the Lines of Defense Available to MAOF-CH (Cont.): Lines of Defense Liquidity Balances Within Shareholders' Equity Lines of Defense, in the Event of a Member Default, Including the Right of Offset
Description of the Lines of Defense and Risk Management Measures As of December 31, 2014 liquid balances (cash and cash equivalents, and financial assets at fair value through profit or loss held for trading) as part of MAOF-CH’s shareholders' equity totaled NIS 80 million. MAOF-CH’s By-Laws provide a series of defenses in the event that a member is unable to meet its obligations towards it - including lien and offset rights. In this context, it was determined that if the member does not meet its obligations to MAOF-CH, and in other cases, as specified in the By-Laws, MAOF-CH has a right of offset of all charges of the member to it, of any kind whatsoever, including for positions with different expiration dates, against all charges of MAOF-CH against that member. See below for information on offsets of financial assets and liabilities as of reporting date at MAOF-CH, according to types of instruments and members.
MAOF-CH Exposure in Respect of Open Positions: The credit exposure of MAOF-CH reflects total open positions in derivative instruments in respect of each of its members: December 31, 2014 2013 NIS in millions 80179
20,81
)92(
)81(
Total current margin required for deposit
,0799
,0899
Total collateral required to be deposited in the Risk Fund (of which at least 25 percent in cash) **
80998
808,2
Exposure in respect of derivative open positions as the central counterparty (fair value after accounting offsets) * Right of offset in the event of a member default, as prescribed in the By-Laws
* Offset of the open positions of a specific member on the same expiration date. ** As of financial statement approval date, the collateral required to be deposited at the Risk Fund totaled NIS 1,823 million.
44
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 6
- PURPOSES AND POLICIES OF FINANCIAL RISK MANAGEMENT (CONT.): D.
Purposes and Policies of Financial Risk Management (Cont.): (4)
Exposure to Financial Risks and the Manner of their Management (Cont.): (a)
Counterparty Credit Risk (Cont.): Offsets of Financial Assets and Financial Liabilities: Financial assets and liabilities are reported in the Statement of Financial Position, in a net amount, only when there is a legally enforceable right of offset and there is an intention to settle the asset and liability on a net basis, or to realize the asset and settle the liability simultaneously. Assets and liabilities with respect of derivative open positions reported in the Statement of Financial Position were calculated, after an offset of the fair value of the liabilities of the MAOF-CH member to MAOF-CH, against the fair value of all liabilities of MAOF-CH to said member, resulting from open positions of said member, on the same expiration date. These amounts do not include offsets arising from open positions of said member on various expiration dates. Following is Information on Financial Assets and Liabilities, Available for Offset, by Instruments: Assets / Gross Liabilities with Amounts Respect of (Before Offset) Derivative of Assets / Open Liabilities, with Amounts Positions, net, Respect of Offset in the in the Derivative Statement of Statement of Open Financial Financial Positions Position Position NIS in thousands
Instrument December 31, 2014: Options Futures
2,474,803 802,, 20,1808,9
)99209,2( )99209,2(
Offset between options and futures, with respect of the same member on the same expiration date Total balance in the Statement of Financial Position December 31, 2013: Options Futures
)8208,1( 8017,0799 201,80,89 80229 201,90292
Offset between options and futures, with respect of the same member on the same expiration date Total balance in the Statement of Financial Position 45
807,80288 802,, 807,90989
)9280,27( )9280,27(
20,870911 80229 20,9,0722
(2,670) 20,810292
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 6
- PURPOSES AND POLICIES OF FINANCIAL RISK MANAGEMENT (CONT.): D.
Purposes and Policies of Financial Risk Management (Cont.): (4)
Exposure to Financial Risks and the Manner of their Management (Cont.): (a)
Counterparty Credit Risk (Cont.): Following is Information on Financial Assets and Liabilities, Available for Offset, by Counterparty to a Transaction: Financial Assets, Available for Offset, by Counterparty to a Transaction:
Counterparty
Assets with Respect of Derivative Open Positions, net, in the Statement of Financial Position
December 31, 2014: Member A' Member C' Other members
December 31, 2013: Member A' Member C' Other members
Amounts to be Offset in the Event of Default Margin (*) NIS in thousands
Net Total
141,272 1,705,220 48,465 1,894,957
7,526 485 43,645 51,656
133,746 1,704,735 4,820 1,843,301
-
2980822 1,773,050 44,080 2,068,253
1,923 486 890919 17,996
249,200 1,772,564 210,72 2,050,257
-
(*) Margin amounts are reported in an amount that does not exceed the balance of assets with respect of derivative open positions, after all offsets in the event of default. The current margin requirement is higher than that shown in the table, and totals, as of December 31, 2014, NIS 4,975 million (December 31, 2013 – NIS 4,155 million).
46
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 6
- PURPOSES AND POLICIES OF FINANCIAL RISK MANAGEMENT (CONT.): D.
Purposes and Policies of Financial Risk Management (Cont.): (4)
Exposure to Financial Risks and the Manner of their Management (Cont.): (a)
Counterparty Credit Risk (Cont.): Financial Liabilities, Available for Offset, by Counterparty to a Transaction: Liabilities with Respect of Amounts Derivative Open to be Positions, net, in Offset in the Statement of the Event Financial Position of Default NIS in thousands
Counterparty
December 31, 2014: Member D' Member F' Other members December 31, 2013: Member D' Member F' Other members
(b)
Net Total
89709,, 1,093,002 142,251 1,894,957
80282 4,394 46,050 51,656
658,492 1,088,608 7802,8 1,843,301
912087, 1,378,391 107,172 2,068,253
90227 789 9,978 17,996
575,461 1,377,602 79087, 2,050,257
Credit Risk in Respect of the Investment of Monetary Reserves: General: As of December 31, 2014, some of the Group's monetary reserves are invested in ETNs on the TA-100 Index, and are consequently, exposed to changes in their value. Thus, the Group is exposed to credit risk in respect of income and equity in respect of said investments. Group risk management policies are based on a diversification of the portfolio and risk management controls, as noted below.
47
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 6
- PURPOSES AND POLICIES OF FINANCIAL RISK MANAGEMENT (CONT.): D.
Purposes and Policies of Financial Risk Management (Cont.): (4)
Exposure to Financial Risks and the Manner of their Management (Cont.): (b)
Credit Risk in Respect of the Investment of Monetary Reserves (Cont.): Management of the Exposure to Credit Risk in Respect of the Investment of Monetary Reserves and the Lines of Defense Available to the Group: Following are details of the lines of defense and other measures taken by TASE to manage exposure to credit risk following any investment of monetary reserves: Lines of Defense Investment Policy Established by the Board of Directors
Restrictions on the Portfolio Managers and a Spread of Investments Management Between Them Control over The Investment Management
Description of the Lines of Defense and Risk Management Measures • The investment policy is approved annually by the Board of Directors of the each company in the Group. A subcommittee of the TASE's Board of Directors assesses from time to time, the investment policy and the limits on risk, and recommends changes if necessary . • TASE reduces its exposure to credit risk in respect of said investments through an investment policy having certain limitations, such as: a solid investment portfolio (80% invested in Government of Israel bonds, and the remaining 20% in Exchange Traded Notes on the TA- 100 Index, the ETNs being distributed among their various fund issuers), setting a maximum limit for management by any particular portfolio manager, etc. • As part of approval of the capital and liquidity adequacy models, as described above and in detail in paragraph 5 below, on February 19, 2015 the TASE's Board of Directors approved changes to the Group's investment policy including changes to the composition of the portfolio and the diversion of all investments in securities to investments only in Government of Israel treasury bills and bonds, and a decision to invest in two types of investment portfolios "a portfolio held for trading" (this portfolio will encompass withdrawals for the Group's ongoing operations) and a "portfolio available for sale" (this portfolio will hold securities, not for the purpose of sale or to buy back in the short term). Monetary reserves of the Group are managed through a blind trust, by 4 portfolio managers, each a licensed portfolio manager, as this term is defined by Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Law, 1995 and provided that said is a TASE member or a company controlled by a TASE member or a "parent company" of a TASE member or a company controlled by the "parent company" of a TASE member. Ongoing control is offered by an external service provider (a Certified Public Accountant), to assess compliance by the portfolio managers with the policy. All audit findings are reported to the Audit Committee of TASE and the Board of Directors' of the Group's companies, once a year.
48
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 6
- PURPOSES AND POLICIES OF FINANCIAL RISK MANAGEMENT (CONT.): D.
Purposes and Policies of Financial Risk Management (Cont.): (4)
Exposure to Financial Risks and the Manner of their Management (Cont.): (b)
Credit Risk in Respect of the Investment of Monetary Reserves (Cont.): Management of the Exposure to Credit Risk in Respect of the Investment of Monetary Reserves and the Lines of Defense Available to the Group (Cont.): Lines of Defense Supervision by a SubCommittee of the Board of Directors Capital Adequacy Model
Description of the Lines of Defense and Risk Management Measures The Financial Reserves Committee of the Board of Directors oversees the management of the monetary reserves.
The capital adequacy model establishes a minimum capital cushion against credit risk inherent in the investment of monetary balances. Further information on the capital adequacy model is available in paragraph D (5) below.
Exposure as of December 31, 2014 and 2013: Following is the Investment Portfolio Breakdown, by Types of Securities and Cash: December 31, 2014 2013 NIS in thousands ETNs on the TA-100 Index Government of Israel treasury bills and bonds Total securities Cash Total
(c)
28,887 120,231 149,118 9,207 158,325
35,122 141,750 176,872 14,498 191,370
Liquidity Risk: General: Liquidity risk is an existing or future risk that the Group will not provide its liquidity requirements, on time and in full. The Group considers liquidity management in a broad perspective which is not only maintaining the ability to meet all Group obligations, but also the ability to do said, without harming the ongoing conduct and without having to sustain unacceptable losses or damage to reputation.
49
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 6
- PURPOSES AND POLICIES OF FINANCIAL RISK MANAGEMENT (CONT.): D.
Purposes and Policies of Financial Risk Management (Cont.): (4)
Exposure to Financial Risks and the Manner of their Management (Cont.): (c)
Liquidity Risk (Cont.): Risk Profile: The mix of operations of the Group in the ordinary course of business, given its balance sheet composition of assets and liabilities, does not trigger, usually, in its opinion, any material exposure to liquidity risk - not in the short run and not in the long run. The Group is characterized by a mix of highly liquid assets, and on the other hand - the Group's liabilities reflect, for the most part, a mix of controlled undertakings in terms of interest payment dates - attributed almost entirely to liabilities to employees and suppliers. Moreover, upon any default by a Clearing House member, the Group is also exposed to a liquidity risk arising from the need to act quickly to finalize the monetary clearance, usually involving the need to quickly realize the assets used as collateral and often even to realize some of the Clearing House's capital resources. Management of the Exposure to Liquidity Risk and the Lines of Defense Available to the Group: Following are details of the lines of defense and other mediums taken by the Group to manage liquidity risk: Line of Defense Liquid Assets Mix
Liquidity Cushion
Description of the Lines of Defense and Risk Management Measures The Group is characterized by a mix of especially liquid assets. As of December 31, 2014 – approximately 68% of the current assets of the Group (net of assets derived from clearing operations with respect of open derivative positions) are immediate liquid assets (cash and Government of Israel bonds), of which 5% are in cash balances. In addition to said, approximately 15% of the current assets of the Group are in ETN's on the TA 100 Index. TASE’s Board of Directors prescribed that if the monetary reserves of the Group (shareholders' equity net of property and equipment, intangible assets , investment in an associate, within the framework of non-current assets, deferred tax assets, plus non-current liabilities for employee benefits) would be less than NIS 150 million, the Board of Directors would discuss the need to obtain external financing. This decision was canceled, after balance sheet date, with approval of the liquidity adequacy model on January 1, 2015, as described below. As of December 31, 2014, the Group's monetary reserves totaled NIS 127.5 million (December 31, 2013 – NIS 151.6 million), as follows: December 31, 2014 2013 NIS in thousands Total shareholders' equity Property and equipment, net Intangible assets, net Subtotal, using the old formula Deferred tax assets Non-current liabilities for employee benefits Total
50
,170988 )2920991( )180888( 8290992 )220818(
,980121 )2270881( )990897( 8880928 )290298(
8,0219 8290,98
890,98 8980888
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS NOTE 6
- PURPOSES AND POLICIES OF FINANCIAL RISK MANAGEMENT (CONT.): D.
Purposes and Policies of Financial Risk Management (Cont.): (4)
Exposure to Financial Risks and the Manner of their Management (Cont.): (c)
Liquidity Risk (Cont.): Management of the Exposure to Liquidity Risk and the Lines of Defense Available to the Group (Cont.): Line of Defense
Liquidity Adequacy Model
Liquidity Mix of Collateral at the Clearing Houses Risk Funds
Liquidity Agreement with a Financial Institution
Liquidity Agreement (Line of Credit) with a Commercial Bank
51
Description of the Lines of Defense and Risk Management Measures On January 1, 2015, the TASE's Board of Directors approved a liquidity adequacy model that determines the minimal liquidity cushion and minimum coverage ratios, at the Group level, and at each of the Clearing Houses. The model will take effect during the second half of 2015. At the same time, the existing liquidity cushion limit, as noted above, will be cancelled. An additional description of the model and the results of its application by the Group, as of financial statements approval date, is available in paragraph D (5) below. Description of the Lines of defense during any default by a Clearing House member • Clearing House members have charged collateral, as noted above, in favor of their Clearing Houses, to secure their share of the Clearing Houses’ Risk Funds. • Each member is required to deposit cash of at least 25 percent of its share in each of the Risk Funds, and the rest in government bonds and treasury bills, thus ensuring a fluid mix of collateral that can be realized fairly quickly in the case of a member default. To provide the Clearing Houses liquidity in the case of a member default, each Clearing House signed an agreement in April 2012, with a financial institution whereby, in the event of a member default, each Clearing House will have the right to demand that the financial institution buy from it government bonds and treasury bills that it received as collateral, and the financial institution is obligated to buy said, subject to terms and conditions as detailed in the agreement. On July 11, 2013, the agreements were extended up to June 30, 2015, or up to 90 days from the amendment taking effect, so that each of the Clearing Houses would be able to realize the collateral that it held, by way of a transfer of ownership therein to the Clearing Houses, whichever is earlier. During the reporting period, the Clearing Houses were not required to make use of said liquidation agreement. A commercial bank provided TASE-CH with a line of credit of up to NIS 30 million against appropriate collateral, to provide immediate liquidity on the occurrence of a member default. During the reporting period, TASE-CH was not required to use said line of credit.
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 6
- PURPOSES AND POLICIES OF FINANCIAL RISK MANAGEMENT (CONT.): D.
Purposes and Policies of Financial Risk Management (Cont.): (4)
Exposure to Financial Risks and the Manner of their Management (Cont.): (c)
Liquidity Risk (Cont.): Exposure as of December 31, 2014 and 2013: TASE-CH: The expected maturity dates of most financial liabilities arising from clearing activities undertaken by TASE-CH are one day from the date of the Statement of Financial Position. MAOF-CH: The expected maturity dates of the financial liabilities arising from clearing activities undertaken by MAOF-CH (payables with respect of derivative open positions) are as follows: December 31, 2014 2013 NIS in thousands Up to one month after the date of the statement of the financial position 1-2 months 2-3 months Up to one year
1,441,972 447,778 4,769 438 1,894,957
1,474,452 559,000 33,822 979 2,068,253
The above amount of financial liabilities from clearing operations and their expected maturity dates, matches the amount of the financial assets from clearing operations and their expected maturity dates.
52
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 6
- PURPOSES AND POLICIES OF FINANCIAL RISK MANAGEMENT (CONT.): D.
Purposes and Policies of Financial Risk Management (Cont.): (4)
Exposure to Financial Risks and the Manner of their Management (Cont.): (d)
Market Risks: General: Market risks are risks of existing or future changes in market prices (such as exchange rates, the Consumer Price Index, interest rates and margins in markets), that will affect the income and equity of the Group, or the value of its holdings of financial instruments. Risk Profile: In the ordinary course of business, the Group is exposed to interest rate risk and price risk arising from investment of the Group's monetary reserves as follows: 1.
The Group has investments in bank deposits, and therefore, there is a cash flow exposure to interest rate changes.
2.
The Group has investments in fixed rate financial instruments measured at fair value through profit or loss, and therefore, there is an exposure to changes in fair value resulting from changes in interest rates.
3.
The Group has investments in ETN's on the TA 100 Index. Therefore, the Group is exposed to changes in the fair value of these financial assets due to changes in their market price. Operations of the Group do not involve material exposure to linkage base risks.
4.
Moreover, upon the default of a Clearing House member, the Group is exposed to a price risk that may be due to a decrease in the value of assets used as collateral, an increase in the exposure that MAOF-CH will be required to handle, and a change in the value of securities held by TASE-CH. It should be noted that in the ordinary course of business, vis-à-vis clearing transactions, the Clearing Houses are not exposed to price risk.
53
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 6
- PURPOSES AND POLICIES OF FINANCIAL RISK MANAGEMENT (CONT.): D.
Purposes and Policies of Financial Risk Management (Cont.): (4)
Exposure to Financial Risks and the Manner of their Management (Cont.): (d)
Market Risks (Cont.): Market Risk Management and the Lines of Defense Available to the Group: Following are details of the lines of defense and other measures taken by the Group to manage exposure to market risk: Lines of Defense in the Ordinary Course of Business: Description of the Lines of Defense and Risk Management Measures Price Risk and The investment policy establishes the investment mix whereby Replacement at least 80% of retained earnings will be invested in Cost Risk Government of Israel bonds, and the remaining 20% in ETN's on the TA-100 Index, with appropriate dispersion – and thus reduces the Group's exposure to erosion in the value of investments in respect of changes in their market value. For further information on changes in said investment policy, see paragraph 6 D (4) (b) above. Interest Rate The investment policy, which restricts the duration of the bonds' Risk portfolio, reduces the exposure to changes in the interest rates. The capital adequacy model establishes a minimum capital cushion against interest rate risk inherent in the investment of retained earnings. Further information on the capital adequacy model is available in paragraph D (5) below. Linkage Base The Group's activities do not involve any material exposure to Risk linkage base risks. Lines of Defense Upon the Default by a Clearing House Member: Description of the Lines of Defense and Risk Management Measures Price Risk and The Clearing Houses deal with price risks relating to their Replacement operations through: Rost Risk • "Haircuts" on the maximum value serving as security, on collateral deposited by the Clearing Houses members (for current operations in the derivatives and Risk Funds). • A methodology for calculating the required current margin embodying current market prices shocks, and extreme conditions, such that the margin requirements reflect proper coverage even in extreme conditions.
54
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 6
- PURPOSES AND POLICIES OF FINANCIAL RISK MANAGEMENT (CONT.): D.
Purposes and Policies of Financial Risk Management (Cont.): (4)
Exposure to Financial Risks and the Manner of their Management (Cont.): (d)
Market Risks (Cont.): Actual Exposure as of December 31, 2014 and 2013: Price Risk: The Group has holdings of ETN's on the TA-100 Index and the ETNs are therefore exposed to changes in the fair value, as a result of changes in their market prices. The following table details the impact of a +/-8% and +/-15% change in the prices of financial assets exposed to said price risk, pre-tax, as follows: December 31, 2014 December 31, 2013 Total Equity Change Change Total Equity Change Change Instruments of +/-8% of +/-15% Instruments of +/-8% of +/-15% NIS in millions 29
2.3
4.3
35
2.8
5.3
Interest Rate Risk: The Group has investments in bank deposits, creating a cash flow exposure to changes in interest rates. The pre-tax effect of a +/-1% and +/-2% change in interest rates on deposits is as follows: December 31, 2014 December 31, 2013 Total Total Variable Variable Interest Interest Bearing Change Change Bearing Change Change Instruments of +/-1% of +/-2% Instruments of +/-1% of +/-2% NIS in millions 6.2
0.06
0.12
9.3
0.1
0.2
In addition, the Group has investments in financial instruments with fixed interest, rates, measured at fair value through profit or loss, and is therefore exposed to changes in fair value, as the result of changes in interest rates.
55
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 6
- PURPOSES AND POLICIES OF FINANCIAL RISK MANAGEMENT (CONT.): D.
Purposes and Policies of Financial Risk Management (Cont.): (4)
Exposure to Financial Risks and the Manner of their Management (Cont.): (d)
Market Risks (Cont.): Interest Rate Risk (Cont.): The following table details the impact of a +/-1% and +/-2% change in the fair value of these bonds, pre-tax, as follows: December 31, 2014 December 31, 2013 Total Total Fixed Fixed Interest Interest bearing Change Change bearing Change Change Instruments of +/- 1% of +/- 2% Instruments of +/- 1% of +/- 2% NIS in millions 120.1
(5)
4.0
8.1
141.7
4.1
8.3
Capital and Liquidity Adequacy: (a)
Background: On January 1, 2015, TASE’s Board of Directors approved two models that determine the minimum level of capital and liquidity adequacy, required at the level of the Group and at the level of each of the Clearing Houses. In this context, the Board also approved the outline and timetable for implementation and deployment of the models at the Group, as well as the steps required to meet the minimum requirements as set forth. Respectively, the Board of Directors approved, that on the entry into force of the models, the Board of Directors' restrictions of November 18, 2010 requiring that the monetary reserves of the Group (equity net of property and equipment, intangible assets, investment in an associate within the framework of non-current assets, deferred tax assets, plus non-current liabilities for employee benefits 2) - not be reduced below NIS 150 million, would be cancelled. Formulation and approval of said models, complied with the Chairman of ISA's requests, as expressed in his letter to TASE on June 7, 2012, which required TASE to formulate and implement a methodology for determining the minimum level of capital and liquidity that TASE and each of the Clearing Houses should hold - this according to the risks arising from their activities.
2
Including updates on the monetary reserves calculation formula, as approved by the Board on June 12, 2014.
56
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 6 -
PURPOSES AND POLICIES OF FINANCIAL RISK MANAGEMENT (CONT.): D.
Purposes and Policies of Financial Risk Management (Cont.): (5)
Capital and Liquidity Adequacy (Cont.): (b)
Methodological Framework That Serves as the Basis for the Models: The guiding rationale that serves as the basis for the adopted methodological framework is that sufficient quantities of capital and liquid resources will be available to ensure the sustained and proper operation of TASE and each of the Clearing Houses also during the ordinary course of business and under stress tests. This plan constitutes, in the Company's opinion, an appropriate framework for the treatment of capital and liquidity risks of the Group, appropriate to the risk profile of the Group and accepted international standards, and includes: -
A demand for the existence of a minimum capital cushion: The purpose of the model is to ensure the existence of sufficient capital resources against the capital requirements, and in a scope that will ensure an appropriate and sufficient capital cushion to absorb losses upon the realization of risks.
-
A demand for the existence of a minimum liquidity cushion: The purpose of the model is to ensure the existence of a net liquidity cushion (balance of liquid resources less current liabilities) to deal with the occurrence of risk and stress scenarios.
-
A demand for a minimum coverage ratio: The purpose of the model is to ensure the existence of a minimum coverage ratio to deal with liquidity requirements, over different time horizons.
The methodology adopted for calculating capital and liquidity requirements, reflects an integrated approach based on leading international standards of capital adequacy, liquidity adequacy and risk management for entities operating in the clearing and trading fields, and includes: -
The Basel Committee's framework 3: the Group has adopted the basic level of said Committee's framework (Level I) for exposure to credit risks, market risks and operational risks.
-
Core principles of CPSS-IOSCO 4: at the level of the Clearing Houses, implementation of all requirements as set forth as part of the core principles of CPSS-IOSCO in relation to Clearing Houses that operate as a CCP in respect of exposure to counterparty credit risks, business risks, liquidity risks, operational risks, and investment and custody risks.
-
At TASE level: the regulatory practice existing at leading Western countries (including the United States and the United Kingdom) with respect to capital and liquidity requirements with respect to stock exchanges and trading venues, is implemented.
3
Basel III: A global regulatory framework for more resilient banks and banking systems http://www.bis.org/publ/bcbs189.htm 4
- revised version June 2011.
Principles for Financial Market Infrastructures0 CPSS (Committee on Payment and Settlement Systems, Bank for International Settlements: BIS) - IOSCO (Technical Committee of the International Organization of Securities Commission), April 2012. http://www.bis.org/cpmi/publ/d101.htm.
57
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 6 -
PURPOSES AND POLICIES OF FINANCIAL RISK MANAGEMENT (CONT.): D.
Purposes and Policies of Financial Risk Management (Cont.): (5)
Capital and Liquidity Adequacy (Cont.): (b)
Methodological Framework That Serves as the Basis for the Models (Cont.): Following is a summary of the capital and liquidity requirements under the approved models and a brief description of the main methodological sources:
Capital Model: Organizational Affiliation TASE and the Clearing Houses
Risk Components Against Which Capital will be Allocated 8 Credit Risk
Demand Source
Methodology for Calculating Capital Requirements
Basel (Level 1)
Allocation of 8% of all risk assets - according to the prescribed risk weightings for each type of asset, as prescribed by Basel. Allocation of capital for interest rate risk (general risk) in respect of an investment in government bonds and for credit risks (specific risk) and market risks (general risk) in respect of investments in ETN's, as prescribed by Basel. Equity allocation of 15% of average income over the last 3 years, as prescribed by Basel.
2
Market Risk
Basel (Level 1)
3
Operational Risk
Basel (Level 1)
+ , Business Risk
• CPS S-IOSCO principles in relation to Clearing Houses. • Com mon approaches in the regulation of stock exchanges in Western countries.
Allocation of equity of 6 months of operating expenses (net of depreciation and amortization, plus capitalized salary expenses)
+ Clearing Houses
9
Counter Party CPSS-IOSCO Equity allocation of 10% of total Credit Risk – Principles equity requirements, as per Contribution by the paragraphs 1-4 above. Clearing House Upon a Member Default
Total Capital Requirements 58
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 6 -
PURPOSES AND POLICIES OF FINANCIAL RISK MANAGEMENT (CONT.): D.
Purposes and Policies of Financial Risk Management (Cont.): (5)
Capital and Liquidity Adequacy (Cont.): (b)
Methodological Framework That Serves as the Basis for the Models (Cont.):
Liquidity Model: Summary of Minimum Liquidity Cushion Requirements Organizational Risk Liquid Resources Requirement Affiliation Component TASE and the Business Risk Requirement for the existence of a liquid cushion Clearing (net liquid resources) of 6-month operating Houses expenses (net of depreciation and amortization, plus capitalized salary expenses). Clearing Counterparty Requirement for the existence of a liquid cushion Houses Credit Risk: (net liquid resources) of 10% of the capital Clearing Houses requirements Contribution Against Default Waterfall Summary of Minimum Coverage Ratio Requirements Organizational Definition Requirements Affiliation TASE and the The relationship between funding Coverage ratio equal to or Clearing sources (remaining net liquid greater than 1, for each defined Houses financial assets + "cash inflows" period – during the ordinary + external financing sources if course of business and under any), and cash flows to repay stress scenarios. liabilities ("cash outflows"). Outline and Timetable for Implementation and Integration of the Models: As part of the resolution of the Board Directors' to approve the models, it was decided that by the end of the first half of 2015, the inter-Group implementation and integration of the models would be completed. Meeting the requirements set forth shall be on an ongoing basis in accordance with a period determined for each of the models. A report will be made to the Board Risk Management Committee and to the Board of Directors on a quarterly basis, except for any deviation, which may arise, which will be reported immediately. By the end of the first half of 2015, proposed moves to close the gaps that exist at the level of liquid assets compared with the requirements of the models and the timetable for their implementation, will be presented for approval of the Risk Management Committee and the approval of the Board of Directors for approval.
59
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 6 -
PURPOSES AND POLICIES OF FINANCIAL RISK MANAGEMENT (CONT.): D.
Purposes and Policies of Financial Risk Management (Cont.): (5)
Capital and Liquidity Adequacy (Cont.): (c)
Application of the Models by the Group as of Reporting Date: The following tables show the results of application of the models by the Group, which would apply as of reporting date - both with respect to the capital requirements and with respect to the liquidity requirements: Capital Adequacy – Capital Requirements, Qualifying Capital Base, and Capital Adequacy, position as of Reporting Date: Capital Requirements Risk Components Credit risk Market risk Legal and operational risk Business risk Contribution against default waterfall Total
Source of the Requirements Basel Basel Basel IOSCO IOSCO
Capital Requirements 2,137 12,922 35,626 109,381 10,730 170,796
Qualifying Capital Base Components Retained earnings Share capital Capital reserves Re-measurement reserve - liabilities with respect to defined benefit Less: Intangible assets Deferred tax Total qualifying capital base
Capital Base 492,553 3,200 (6,242) (81,161) (22,681) 385,669
Capital Adequacy Position Components Capital base Total capital requirements Excess / (lack of) capital
Capital Adequacy 385,669 (170,796) 214,873
Liquidity Adequacy - Liquidity Requirements, Net Liquid Asset Base, and Liquidity Adequacy Position, as of Reporting Date: Liquidity Requirements Risk Components
Business risk
Net Liquid Assets Requirements 109,381
Contribution against default waterfall
10,730
Total liquid assets requirement
120,111
60
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 6 -
PURPOSES AND POLICIES OF FINANCIAL RISK MANAGEMENT (CONT.): D.
Purposes and Policies of Financial Risk Management (Cont.): (5)
Capital and Liquidity Adequacy (Cont.): (c)
Application of the Models by the Group as of Reporting Date (Cont.): Net Eligible Liquid Assets Components
Balance of Liquid Assets 9,207
Cash and cash equivalents Securities portfolio at fair value
149,118
Of which: Government of Israel bonds
120,238
Of which: ETN's
28,889
Securities portfolio after coverage coefficients
138,880
Current liabilities (net of liabilities for clearing operations in respect of open derivative positions) Immediate net liquid assets
(62,405) 85,682
Liquidity Adequacy Components Liquid assets, net
NOTE 7 -
Liquidity Adequacy 85,682
Liquidity requirements
(12,,888)
Excess / (lack of) liquidity
(34,424)
INVESTMENTS IN INVESTEES: A.
Consolidated Companies: (1)
General:
Country of Incorporation
Rate of Holding of Capital and Voting Rights as of December 31, 2014 and 2013
MAOF Clearing House Ltd.
Israel
(*)100%
TASE Clearing House Ltd.
Israel
100%
Name of Company
(*)
(2)
TASE-CH holds 1 share of the 3,000,079 issued and paid up shares of MAOF-CH (the remaining shares are held by TASE).
Regarding TASE's decision to provide a credit line to TASE-CH and to MAOF-CH, see note 17 D (1).
61
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 7 -
INVESTMENTS IN INVESTEES (CONT.): B.
Associate under Voluntary Liquidation: (1)
The Company’s Stock Exchange Offices Ltd. ("SOL") shareholdings grant it 10.29% of the rights to receive earnings and participation in the assets of SOL upon liquidation and 55.88% of SOL's voting rights. SOL was incorporated in Israel, and up to November 26, 2013 was the owner an office building located at 54 Ahad Ha'am Street in Tel - Aviv, which was leased to TASE. At the General Meeting of SOL on July 30, 2013, a resolution was approved for the planned sale of the TASE building, the sale of the land, liquidation of the Company and a distribution of its remaining assets to its shareholders, in accordance with law ("the plan"). On November 27, 2013, an agreement was signed for the sale of all leasing rights of the TASE office building on 54 Ahad Ha'am in Tel Aviv, for NIS 58,350 thousand, plus Value Added Tax, as per law. On November 11, 2014 the lease rights were registered in the name of the purchaser, and thus SOL fulfilled its obligations under the sale agreement. As of reporting date, there is a dispute between Sol and the Land Betterment Tax authorities as to the amount of land betterment tax that SOL must pay in respect of said sale. In light of the sale of the building and the plan that was approved, the Company began, in late December 2013, the process of voluntary liquidation. The directors signed affidavits of solvency of the Company that were delivered to the offices of the Registrar of Companies on December 30, 2013. The General Meeting on March 19, 2014, approved a resolution regarding the liquidation of the Company by way of voluntary liquidation and appointment of a liquidator, in accordance with law, to act to realize the Company's assets and discharge all its obligations (see paragraph 3 below). After realizing the Company's assets and discharging its liabilities, the liquidator will convene a final meeting of shareholders, and will present the Company's shareholders with the liquidation report. Upon closing the final shareholders meeting, the liquidator will send the liquidation report for registration with the Registrar of Companies. Three months after registering said report, the Company will be considered liquidated.
(2)
Dividends Received from an Associate under Voluntary Liquidation: In 2013, a dividend was received from an associate, totaling NIS 278 thousand.
62
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 7 -
INVESTMENTS IN INVESTEES (CONT.): B.
Associate under Voluntary Liquidation (Cont.): (3)
Condensed Financial Information From the Financial Statements of the Associate Under Voluntary Liquidation: December 31, 2014 2013 NIS in thousands
(*)
Cash and cash equivalents Deposit in trust (*) Financial assets at fair value through profit or loss - held for trading Other current assets Other liabilities Net assets less liabilities
5,234 52,504
41,115 7,752 10,774
1,246 (271) 58,713
82 (2,548) 57,175
Group's share of equity of an associate - based on its share of profit
6,042
5,884
As of December 31, 2013, NIS 7,752 thousand of the proceeds from the sale of the land was deposited in a trust account in the name of the associate. During December 2014, after completing the registration of TASE Building in the name of the purchaser, the balance of the deposit was transferred to the associate. Year Ended December 31, 2014 2013 2012 NIS in thousands
Rental income Fair value adjustment of the real estate for investment purposes and capital gain from disposal Other income Total Income
-
20271 820122
20,2, 20,9,
-
,8 190888
5,874
Profit before financing income
-
880729
90920
80921
820297
5,132
158
1,377
927
Net profit Group's share of associate's profit
63
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 8
- LAND RIGHTS: A.
In 2007, the Company signed agreements for the acquisition of title, possession, use and lease rights to land designated for the construction of a new building for TASE. In 2010, the Company signed a lease agreement with the Tel Aviv Municipality for underground space for a period of 49 years with an option for a 49-year extension, and paid lease fees of NIS 2.3 million, according to an appraisal report. The Company relocated to its new offices in July 2014.
B.
Composition: As of December 31, 2014 2013 NIS in thousands Land title Land under capital lease (lease rights for various periods ending 21,9-3003)
20,172 40,442
20,172 40,442
60,614
60,614
Most land rights have been registered in TASE’s name with the Land Registration Office. The registration of some land rights has not yet been completed due to technical difficulties. TASE is taking steps for the registration.
64
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 9 - PROPERTY AND EQUIPMENT: Composition and Changes: Land and Buildings Under Construction (1),(2),(4)
Computer Systems and Related Equipment
Equipment and Systems Furniture NIS in thousands
Leasehold Improvements
Total
Cost: Balance, January 1, 2014 Acquisitions during the year (3) Disposals during the year Balance, December 31, 2014
8820819 290991 81709,2
820171 820898 )19,( 99022,
,90712 ,0,,9 )809,,( ,20927
90,29 20889 908,,
90,,, )90,,,( -
2120822 ,80171 )8,027,( 2890828
Cost: Balance, January 1, 2013 Acquisitions during the year (3) Disposals during the year Provision for impairment (4) Balance, December 31, 2013
2220291 220,,9 )7209,,( 8820819
980282 820,12 )290279( 820171
2902,1 8802,, )988( ,90712
809,7 20281 90,29
9087, )89,( 90,,,
2,20879 970,,1 )280882( )7209,,( 2120822
Accumulated Depreciation: Balance, January 1, 2014 Depreciation for the year Disposals during the year Balance, December 31, 2014
80,82 80,82
2702,2 8,0279 )9,7( 270,27
90,,1 80892 )80,,2( 20229
828 877 22,
90,22 2 )90,29( -
,2098, 820928 )8,0819( ,20,91
Accumulated Depreciation: Balance, January 1, 2013 Depreciation for the year Disposals during the year Balance, December 31, 2013
-
,,0,8, 8,0227 )2,07,8( 2702,2
90299 289 )98,( 90,,1
828 828
90899 9 )89,( 90,22
910992 8,0988 )29082,( ,2098,
Depreciated Cost: December 31, 2014
8110218
280878
,80272
8018,
-
2920991
December 31, 2013
162,185
33,555
38,974
4,896
8
239,618
(1)
See note 8 for information on land rights.
(2)
For the purpose of completing the construction of the building, additional investment costs of NIS 4.6 million are expected, as of December 31, 2014.
(3)
Includes NIS 2,448 thousand (2013: NIS 1,402 thousand) of capitalized salary expenses.
(4)
During 2013, the Group recognized an impairment loss of NIS 92.5 million for building construction. The loss is mainly the result of special adjustments and the special design of the building under construction, which resulted in increased building costs. The impairment loss was recognized in profit or loss under Loss impairment of a building under construction. For further details regarding valuation techniques in estimating the fair value of the asset, see note 3 C.
65
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS NOTE 10 - INTANGIBLE ASSETS: Composition and Changes: Software and Licenses
Cost: Balance, January 1, 2014 Acquisitions Capitalization of expenses - software development for internal use Disposals during the year Balance, December 31, 2014
Goodwill NIS in thousands
Total
141,735 10,764 9,594
492 -
142,227 10,764 9,594
(4,998) 157,095
492
(4,998) 157,587
144,820 8,098 10,564
492 -
145,312 8,098 10,564
(21,747) 141,735
492
(21,747) 142,227
Accumulated Amortization: Balance, January 1, 2014 Amortization Disposals during the year Balance, December 31, 2014
66,548 14,004 (4,126) 76,426
-
66,548 14,004 (4,126) 76,426
Accumulated Amortization: Balance, January 1, 2013 Amortization Disposals during the year Balance, December 31, 2013
73,615 13,633 (20,700) 66,548
-
73,615 13,633 (20,700) 66,548
Amortized Cost: December 31, 2014
80,669
492
81,161
December 31, 2013
75,187
492
75,679
Cost: Balance, January 1, 2013 Acquisitions Capitalization of expenses - software development for internal use Disposals during the year Balance, December 31, 2013
66
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 11 - EMPLOYEE BENEFITS: A.
Composition: As of December 31, 2014 2 0 13 NIS in thousands Post-employment benefits under defined benefit plans (see paragraph B(1)(f) below): Retirement and termination liability Pension liability Other long-term employee benefits (see paragraph C below): Vacation benefits not utilized Seniority benefits
Short-term employee benefits (see paragraph E below)
11,358 1,486 12,844
18,052 1,638 19,690
12,014 1,540 13,554
13,074 1,521 14,595
19,784 46,182
18,963 53,248
31,797 14,385 46,182
35,797 17,451 53,248
Presentation in the Statement of Financial Position: Employee benefits liabilities: Current Non-current
B.
Post-employment Benefits: (1)
Defined Benefits Plans: (a)
General: Retirement and Termination Benefits Obligation: Labor laws and the Israel Severance Pay Law require the Company to pay retirement benefits to an employee at the time of dismissal or retirement (including employees who leave the Company under other specified circumstances). The calculation of the obligation related to the termination of the employee-employer relationship is effected pursuant to a "special" collective agreement in effect, or any individual employment contract and is based on the latest salary of the employee and also on employee tenure. Such obligation is computed using an actuarial estimate prepared by a qualified actuary. The present value of the obligation for defined benefits and the costs related to current service are measured through the use of the projected unit method. The pension liability represents the Company’s obligation to pay the widow of a former CEO, who retired in 1983 (and died in 2011), a life annuity at 65% of the annuity to the former CEO. The pension liability has been included based on an actuarial computation, capitalized at a real interest rate of 1.48% that conforms to the real market return on corporate bonds for the period calculated (as of December 31, 2013 – capitalized at a real interest rate of 0.94%, that conforms to the real market return on government bonds).
67
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS NOTE 11 - EMPLOYEE BENEFITS (CONT.): B.
Post-employment Benefits (Cont.): (1)
Defined Benefits Plans (Cont.): (b)
Key Actuarial Assumptions with Respect to Retirement and Termination Benefits as of the end of the Reporting Period: As of December 31 2014 2013 % % Discount rate (*), (**) Forecasted rates of salary increases (in real terms): Employees (***) Executives Forecasted inflation rates Rates of turnover: Employees (****) Executives Rate of retirement benefits on resignation (*)
4.52
4.65
2.77 2.00 2.16
3.00 Mainly 2.00 2.65
1 100
1 100
According to Accounting Staff Position Number 21-1 of the Securities Authority regarding the existence of a deep market in corporate bonds, as of December 31, 2014, for the purpose of discounting the liability for employee benefits, the Group uses a discount rate that conforms with market returns on corporate bonds of high quality. During prior reporting periods and during the current period, except for the calculation of the balance of the liability as of December 31, 2014, the company made use of a discount rate that conforms with market returns on government bonds. Accordingly, and in view of the increase in the discount rate derived from said decision stated, during the reporting period, the Company recognized a decrease in the liability for retirement and termination pay, attributable to an increase in the discount rate as stated, in the amount of NIS 11,747 thousand, which was charged to other comprehensive income (net of tax – NIS 8,634 thousand). Details of the change derived from the existence of a deep market for corporate bonds of high quality at the end of the reporting period on retirement and termination benefits: December 31, 2014 Discount Rate Liability NIS in % thousands Assuming a discount rate that conforms with government bond returns 2.,2 2208,, Assuming a discount rate that conforms with high-quality corporate bonds ,.92 880299 Gap due to changes in discount rates
)8.8(
)8809,9(
In addition, and in light of said change in estimate, as of 2015 the Company will recognize a decrease in current service costs, and on the other hand, an increase in interest costs for other long-term employee benefits, which will result in a decrease in profit and loss of the Group, of NIS 419 thousand.
68
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS NOTE 11 - EMPLOYEE BENEFITS (CONT.): B.
Post-employment Benefits (Cont.): (1)
Defined Benefits Plans (Cont.): (b)
Key Actuarial Assumptions with Respect to Retirement and Termination Benefits as of the end of the Reporting Period (Cont.): (**)
The rate of return on plan assets is based on corporate bond returns for the term of obligation (2013 – based on government bond returns for the term of the obligation).
(***) The expected rate of salary increases for employees in nominal terms as of December 31, 2014 is 5%. (****) This rate of turnover represents the Company's estimate of the turnover of employees who have at least 10 years of seniority. Employee turnover in the first ten years of employment is 3% (December 31, 2013 - 3%). (c)
Sensitivity Analysis of the Main Actuarial Assumptions as of December 31, 2014: The following sensitivity analysis has been prepared based on reasonably possible changes in actuarial assumptions at the end of the reporting period. The sensitivity analysis does not consider any existing interdependence between the assumptions:
(d)
(1)
If the discount rate was increased by 1%, the defined benefit obligation would decrease by NIS 9,650 thousand. If the discount rate was decreased by 1%, the defined benefit obligation would increase by NIS 11,634 thousand.
(2)
If the rate of expected salary increases was increased by 1%, the defined benefit obligation would increase by NIS 10,693 thousand. If the rate of expected salary increases was decreased by 1%, the defined benefit obligation would decrease by NIS 8,956 thousand.
Changes in the Present Value of the Obligation with Respect to the Defined Benefits Plans: Year Ended December 31, 2014 2013 2012 NIS in thousands Opening balance Current service cost Interest cost Actuarial losses (gains) in respect of re-measurements: Arising from changes in financial assumptions Arising from past experience Arising from changes in demographic assumptions Benefits paid in respect of severance compensation Benefits paid in respect of pensions Closing balance 69
8,20,21 ,0,22 ,0,,2
8,,029, ,08,7 ,081,
1,02,2 ,0992 ,0898
)90989( )222(
)80,1,( )292(
90,,8 22,
-
197
-
)8908,7(
)90,28(
)282(
)221( 170189
)228( 8,20,21
)222( 8,,029,
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS NOTE 11 - EMPLOYEE BENEFITS (CONT.): B.
Post-employment Benefits (Cont.): (1)
Defined Benefits Plan (Cont.): (e)
Changes in the Fair Value of Plan Assets: Year Ended December 31, 2014 2013 2012 NIS in thousands Opening balance Interest income from plan assets (*) Actuarial gains (losses) in respect of the re-measurement of the return on plan assets Deposits by the employer Benefits paid Closing balance (*)
(f)
83,348 2,832
81,019 2,701
920,29 20892
(1,345) 4,012 (11,826) 77,021
524 4,071 (4,967) 83,348
80,99 ,0,82 )2,7( 180,87
After a transfer of benefits totaling NIS 860 thousand in 2014, NIS 793 thousand in 2013 and NIS 1,074 thousand in 2012.
Reconciliation of the Present Value of Defined Benefit Plan Obligations and the Fair Value of Plan Assets to Assets and Liabilities Recognized in the Statement of Financial Position: Year Ended December 31, 2014 2013 2012 NIS in thousands Present value of funded obligations Fair value of plan assets Present value of unfunded obligations Net liability derived from obligation for defined benefits
70
88,379 (77,021) 11,358 1,486
101,400 (83,348) 18,052 1,638
7108,8 )180,87( 890822 80922
12,844
19,690
870299
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 11 - EMPLOYEE BENEFITS (CONT.): B.
Post-employment Benefits (Cont.): (2)
Defined Contribution Plans: Plans in Respect of Retirement and Termination: Company employees working under the terms of the special collective agreements, are covered by executive insurance plans, by a pension fund or by another provident fund. For some of these workers, the collective bargaining agreement between the Company and the employees' representatives of 2005 provides that pension provisions be in lieu of severance pay under Article 14 of Severance Pay Law, 1963. In addition, agreements with some of the holders of personal contracts, including an agreement with the incumbent Chief Executive Officer from January 1, 2014, states that the Company will operate under the general authorization regarding employers' payments to the pension fund and to the insurance fund in lieu of severance pay under Article 14 of Severance Pay Law, 1963, as amended. Accordingly, Company severance payments for such employees, are in lieu of all severance payments for these employees, and no further accounting, upon employment termination, is made between the Company and the employee with respect to severance pay, and the Company is exempt from the payment of severance pay to these employees or to their survivors, all in accordance with Article 14 of Severance Pay Law, 1963. The total amount of expenses recognized in the profit or loss in respect of the defined contribution plans in the year ended December 31, 2014 amounted to NIS 1,732 thousand (2013 – NIS 1,463 thousand and 2012 – NIS 1,472 thousand).
C.
Other Long Term Employee Benefits: (1)
Vacation: In accordance with Annual Leave Law, 1951, Company employees are entitled to a number of paid vacation days for each year of employment. In accordance with said Law and a Schedule attached to the special collective agreement between the Company and representatives of the employees, the number of vacation days per year each employee is entitled to is determined according to the seniority and age of the employee. In addition, under the agreement between the Company and its employees, the employees are entitled, under certain conditions specified in the agreement, to additional vacation days, some of which cannot be accumulated. The employment agreements with the holders of personal contracts provide for the number of vacation days per year they are entitled to and accumulation limits. The Company expects that unused vacation days at the end of the year when the service is rendered will not be fully utilized before 12 months from that date, and therefore the obligation for said, is measured as other non-current liabilities. Regarding the presentation of liabilities in the Statement of Financial Position, and although this obligation is measured as a long term benefit, the liability for vacation pay is classified under current liabilities, under employee benefits, due to the fact that the Group does not have an unconditional right to defer settlement of the liability after 12 months from the end of the reporting period. The main actuarial assumptions for vacation pay at the end of the reporting period are described in note 11 B (1) (b) above.
71
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 11 - EMPLOYEE BENEFITS (CONT.): C.
Other Long Term Employee Benefits (Cont.): (2)
Seniority Grant: Company employees customarily receive, seniority grants totaling between NIS 1 thousand and NIS 6 thousand, net as follows – NIS 1 thousand upon reaching seniority of 15 years, NIS 2 thousand upon reaching seniority of 20 years, NIS 3 thousand upon reaching seniority of 25 years and so on, and every five years thereafter up to a maximum grant NIS 6 thousand.
D.
Termination Benefits: Personal employment agreements of a group of senior employees entitle them, in certain circumstances of termination of employment, before the end of the employment agreement, to a grant in an amount equal to three months' salary. Regarding the accounting policies - see note 2 Q above.
E.
Short-term Employee Benefits: Short-term employee benefits include, mainly, liabilities to employees in respect of salary and benefits in respect of grant payments. (1)
Remuneration Model: On December 29, 2011, the Company's Board of Directors approved a multi-year remuneration model for its senior executives, which included salary and bonuses, without any equity element. The model is based on a benchmark analysis of the remuneration of the Company's senior executives compared with the remuneration of officers of Israeli public companies that are connected with the financial sphere, including weighting the remuneration of the senior executives of regulatory entities in such way as prescribed for the purpose. The results of the benchmark analysis formed the basis for determining the range of remuneration in respect of the CEO and the range for members of management and vice presidents, in comparison with the remuneration for the CEO. In this respect, it was also resolved that there will be no link between the salary of the Board Chairman and that of the CEO and that their salaries will be reviewed separately and independently. According to the Board resolution, once every three years, the reasonableness of the model will be reviewed, including the need to make changes or with regard to the way in which it is implemented. In the event that significant changes occur in the economy, consideration will be given to the need to accelerate the model's review. In addition, the Board of Directors resolved to hold annual discussions during which, towards the end of each year, the targets, on the basis of which the bonuses to the senior executives will be distributed in the following year, will inter alia, be set. Moreover, at the beginning of each year, the directors will hold discussions and pass resolutions at their discretion with regard to the salary increment payable to each of the senior executives, for the previous year. taking into account, inter alia, the results of the model, as well as regarding the amount of the bonus to be awarded to each of the officials, for the previous year.
72
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 11 - EMPLOYEE BENEFITS (CONT.): E.
Short-term Employee Benefits (Cont.): (1)
Remuneration Model (Cont.): On December 19, 2012, the Audit Committee decided to combine the said annual discussions and to hold them within 30 days of approval of the work plan and budget for the new year, or by January 30 of the new year, the latter of the two. On June 12, 2014 the Board of Directors of TASE decided to postpone the first periodic review of the remuneration model until September 2014. On July 3, 2014, the Audit Committee decided at its meeting, when siting as the Remuneration Committee, that given a notice by TASE management that it intends to submit a strategic plan, under which it is possible that it will consider, inter alia, a new organizational structure, and for the purpose of filling vacancies, it can be based on a remuneration model that exists, to approve and recommend to the Board of Directors to postpone by one year the update of the remuneration model. On September 4, 2014, the Board of Directors of TASE resolved to accept the recommendation of the Remuneration Committee and to charge the Remuneration Committee with choosing an independent entity that will assist the Commission in formulating goals for 2015, including a consideration of the possibility of expanding the scope of work to include advice on determining the remuneration policy and the executive remuneration model. On October 2, 2014, Audit Committee decided at its meeting, when sitting as the Remuneration Committee, to choose an external body to provide advice on the formulation of targets ("KPI") for Company officers.
(2)
Related Parties: For information regarding current liabilities for employee benefits granted to related parties, see note 17.
73
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 12 - INCOME TAX: A.
Deferred Tax Balances: (1)
Composition and Changes: Timing Differences Financial Assets at Fair Value Through Profit or Loss
Property and Equipment Provisions (Including a (Mostly for Provision for Employee Impairment) Benefits) NIS in thousands
Total
Balance, December 31, 2012 Changes during the reporting period: Changes during the reporting period in profit or loss Changes during the reporting period in other comprehensive income Balance, December 31, 2013 Changes during the reporting period: Changes during the reporting period in profit or loss Changes during the reporting period in other comprehensive income
(1,645)
(5,338)
8,615
1,632
189
23,898
799
24,886
(1,456)
18,560
(151) 9,263
(151) 26,367
(26)
(2,871)
(915)
(3,812)
-
-
(1,167)
(1,167)
Balance, December 31, 2014
(1,482)
15,689
7,181
21,388
74
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS NOTE 12 - INCOME TAX (CONT.): A.
Deferred Tax Balances: (Cont.) )2(
Deferred Tax is Reported in the Statements of Financial Position, as Follows: December 31, 2014 2013 NIS in thousands 220818 )80272( 280211
Deferred tax assets Deferred tax liabilities Total deferred tax, net
B.
Timing Differences on Investments in Consolidated Companies, Without Recognition of any Deferred Tax Liability: December 31, 2014 2 0 13 NIS in thousands Consolidated companies
C.
290298 )80,,,( 280289
93,167
87,919
Income Tax Expenses Recognized in Profit or Loss: Year Ended December 31, 2014 2013 2012 NIS in thousands Current tax: Current tax Tax expense (benefit) - prior years Total current tax
D.
833 77 910
6,381 (411) 5,970
80880 58 6,718
Deferred tax: Deferred tax expense (benefit) - recognition and reversal of temporary differences
3,812
(24,946)
1,328
Deferred tax adjustments further to changes in tax rates, to profit or loss Total deferred tax
3,812
60 (24,886)
1,328
Total income tax expense (benefit)
4,722
(18,916)
8,046
Tax Relating to Components of Other Comprehensive Income: Amounts Before Tax
Amounts Effect of tax After-Tax NIS in thousands
As of December 31, 2014: Actuarial loss with respect to the defined benefit plan As of December 31, 2013: Actuarial loss with respect to the defined benefit plan
10,72
)20298(
802,2
820171
)20,81(
70,1,
As of December 31, 2012: Actuarial loss with respect to the defined benefit plan
14,280
(3,569)
10,711
75
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS NOTE 12 - INCOME TAX (CONT.): E.
Effective Tax: The difference between the tax liability based on statutory tax rates and the amount provided for income tax is as follows: Year Ended December 31, 2014 2013 2012 NIS in thousands Pre-tax income (loss) Statutory tax rate Tax expenses, at statutory tax rate Tax increase (savings) in respect of: Income liable to special tax rates Differences between tax laws and accounting principles Expenses which are not allowed for deduction Changes in tax rates in profit or loss Tax - prior years Income tax, as reported in profit or loss
F.
14,167 26.5% 3,754
(64,395) 25% (16,099)
33,908 25% 8,477
(79)
(66)
(265)
543 427 77 4,722
(2,617) 217 60 (411) (18,916)
(442) 218 58 8,046
Additional Information: Tax Assessments: The Company and its consolidated companies - the MAOF Clearing House Ltd. and the TASE Clearing House Ltd. have received tax assessments that are considered final up to and including the 2010 tax year.
NOTE 13 - CONTINGENT LIABILITIES: A.
Indemnification of Office Holders: TASE is under an obligation to indemnify office holders of TASE, and TASE-CH. MAOF-CH is under an obligation to indemnify its office holders. The total indemnity for all TASE office holders, on an aggregate basis, based on all letters of indemnity now or in future issued, in accordance with said obligation, in respect of one or more of the events detailed in said letters, shall not exceed USD 20 million, in total. The total indemnity for all TASE-CH office holders, on an aggregate basis, based on all letters of indemnity now or in future issued, in accordance with said obligation, in respect of one or more of the events detailed in said letters, shall not exceed NIS 50 million, in total. The total indemnity for all MAOF-CH office holders, on an aggregate basis, based on all letters of indemnity now or in future issued, in accordance with said obligation, in respect of one or more of the events detailed in said letters, shall not exceed NIS 75 million, in total. The obligation to indemnify will apply in respect of any liability or expense that is indemnifiable in accordance with law. The indemnity is subject to provisions of Chapter III, Part 6 of Companies Law.
76
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 13 - CONTINGENT LIABILITIES (CONT.): B.
Exemption from Liability Granted to Office Holders: TASE’s General Meeting resolved, subject to provisions of Companies Law, to relieve TASE's directors and other office holders of liability for any damage caused or to be caused due to a breach of their duty of care to TASE. TASE-CH's General Meeting resolved, subject to the provisions of Companies Law, to relieve TASE-CH's directors and other office holders of liability for any damage caused or to be caused due to a breach of their duty of care to TASE-CH. MAOF-CH's General Meeting resolved, subject to the provisions of Companies Law, to relieve MAOF-CH's directors and other office holders of liability for any damage caused or to be caused due to a breach of their duty of care to MAOF-CH.
C.
On July 31, 2011, TASE was served with a claim in relation to the trading in shares of Orline Development and Investment Ltd. ("Orline"). The claim was filed by the trustee for a shareholders’ and creditors arrangement against TASE, TASE-CH and Mizrahi Tefahot Bank Nominee Co. Ltd ("Nominee Company") claiming approximately NIS 19 million, as of the date of filing the claim. The claimant claimed, inter alia, that because of the negligence (alleged and denied) of TASE, TASE-CH and the Nominee Company; Orline’s controlling shareholders were allegedly able to commit a complex fraud, resulting in listing and selling to the public approximately 9.8 million "fictitious" Orline shares, which exceeded its issued and paid-up capital that was authorized to be listed for trading. The claimant alleged that trading in said shares on TASE caused Orline's shareholders damage estimated at NIS 19 million, as of the date of filing the claim. On June 6, 2014, a ruling in the claim was rendered, and stated in essence, as follows: (1)
The defendants (TASE, TASE-CH and the Nominee Company) were negligent in onnection with the events, the subject of the claim, for the reasons set forth by the Court.
(2)
The Court rejected all damage calculations claimed by the claimant. The damage will be calculated in the manner specified in the judgment. Based on the initial calculation, it appears that the amount of compensation is approximately 42 "agorot" for each share.
(3)
The claimant demanded compensation for approximately 12.39 million shares that were included in the schedule attached to the claim ("List of Shareholders"). The Court accepted the position of the defendants that the List of Shareholders presented by the claimant was not accurate and stated that the List of Shareholders entitled to claim, should be reduced. As stipulated, the claimant must convey for response by the defendants within 14 days, an updated List of Shareholders entitled to compensation.
(4)
The defendants are responsible for the compensable damage, as stipulated in the judgment, jointly and severally.
(5)
The defendants will jointly and severally bear the costs of the claimant in respect of the claim, totaling NIS 100 thousand.
77
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 13 - CONTINGENT LIABILITIES (CONT.): C.
(CONT.) After judgment, the claimant filed a "motion to amend the quantitative error or for reconsideration of the findings of the Court regarding the calculation of the damage". The defendants objected to said motion, and the claimant replied to the defendants' response. The Court rejected the motion. In addition, the claimant and the defendants exchanged letters regarding the method of calculating the damage and its amount, and, in view of the differences in position between the parties in this respect, the matter was brought for the Court's decision, which ruled on November 12, 2014 that the defendants will pay the claimant, jointly and severally, approximately NIS 4 million, plus court costs of approximately NIS 100 thousand, plus interest and linkage from that date onwards. . On September 8, 2014, and afterwards on December 9, 2014, the defendants filed requests for a stay of execution of the judgment until the date of the determination of appeals they intend to file with the Supreme Court. The Court ruled on this request and declared that the judgment amounts will be transferred by the defendants to the claimant, who will hold the funds in trust and not distribute said, until any another decision. On January 20, 2015, TASE and TASE-CH filed an appeal with the Supreme Court against the judgment (including the supplementary decision of the District Court of November 2, 2014). On that date, the Nominee Company and the claimant also filed appeals against the judgment. On February 16, 2015, the Supreme Court Registrar decided that the parties would submit, separately, their summations, as appellants, by September 17, 2015 and would submit, separately, their summations, as respondents, by November 19, 2015. Oral summations are scheduled for December 14, 2015. The Group has full insurance coverage for this claim, and therefore the judgment has no effect on the Group's profit or loss, and its impact on the Group's Statement of Financial Position is immaterial.
D.
The Supreme Court has an appeal pending against a judgment of the District Court in Tel Aviv (Honorable Judge R. Ronen), rejecting an application to approve a class action ("motion for approval"), filed by A. Yeda Finansim Ltd. ("Applicant" or "Yeda Finansim") against TASE. As part of such motion for approval, it was argued, in essence, that the subject matter involves overcharging by TASE (as alleged) of a minimum fee of NIS 1.17, in respect of the purchase / sale of securities. According to the Applicant, in many cases, involving several partial orders, TASE collects a fee, which is higher than the purchase/sale fee agreed upon by the parties. The estimated damage of all members of the group as defined in the motion for approval, amounts to NIS 129 million, in real terms. On March 10, 2014, the District Court rendered judgment, and rejected the motion for approval of a class action, while ordering the claimant (Yeda Finansim) to pay costs. The judgment stated, inter alia, that with respect to the payment of commission, there is no agency relationship between Yeda Finansim and the Stock Exchange member, and therefore no contractual rivalry between Yeda Finansim and the Stock Exchange exists; that there is no rivalry between the Stock Exchange and Yeda Finansim, even under the grounds of unjust enrichment and not under law; and it has not been proven, even at the level required by the motion for approval of a class action, that the Stock Exchange collects an unfair fee.
78
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 13 - CONTINGENT LIABILITIES (CONT.): D.
(CONT.) On May 14, 2014, legal counsel of the Stock Exchange received a notice of appeal filed by Yeda Finansim with the Supreme Court, which petitioned the Supreme Court to cancel the judgment of the District Court and to accept the application for approval, or, alternatively - to state that there is rivalry between the parties and to return the case to the District Court, all on the basis of reasons set out in an appeal. On December 18, 2014, counsel for the TASE received summaries from Yeda Finansim in respect of the appeal. TASE's response is to be submitted by May 14, 2015, while the response of Yeda Finansim should be submitted by June 14 2015. The case was scheduled for hearing oral arguments on July 22, 2015. According to TASE’s estimates, and based on the opinion of legal counsel handling the claim, it is not able to assess the likelihood of the appeal, and accordingly, no provision has been made in this regard in the financial statements as of December 31, 2014.
E.
On June 3, 2013, TASE received a motion for approval of a class action, filed by an applicant (Eran Peter), with the Tel Aviv District Court (Economic Department). As part of such motion it was argued, in essence, that the clear illegality of TASE’s Regulations and pricelist attached thereto, with respect to commission and other fees collected by TASE over the years. According to the applicant, a claim is made for reimbursement of commission and fees that were allegedly collected illegally, less the expenses incurred by TASE in providing the services that were given directly. According to the applicant, the amount for which reimbursement is claimed is estimated at not less than NIS 648 million. On October 28, 2013, TASE filed its response (objection) to the motion for approval , and argued, inter alia, and in essence, that the motion for approval should be rejected outright on grounds of limitation and delay; a lack of personal cause and personal rivalry; a lack of cause under Class Action Law; and a lack of subject-matter jurisdiction. In addition, it was argued that the motion for approval was without fundamental merit, inter alia, due to the fact that TASE’s Rules, which the applicant attacks, were approved by the Knesset Finance Committee (and by the Minister of Finance and the Securities Authority) - and according to case law, in these circumstances, only in rare cases will the Court intervene because there is no room to grant the requested relief in the motion for approval, as TASE acted in reliance on the provision of law, and is within the protections relevant to this matter. It was also argued that the claim is not appropriate for a class action. On November 26, 2013, TASE filed a notice, which included the position of the Securities Authority. In essence, it was noted that the Securities Authority noted in its position, inter alia, that, like TASE, the Authority also believes that the cause of action underlying the motion for approval is not correct. Also noted in the position of the Authority, inter alia, was that it believes that there was not any defect in the rules and regulations and the document entitled "Various Stock Exchange Fees" in connection with the commission and fees that TASE collects, and that the accreditation given in the Rules to TASE's Board of Directors, does not deviate from the provisions of the law on which it relies. On May 8, 2014, July 6, 2014 and July 27, 2014 respectively, summaries by the applicant, the respondent, and the applicant respondent were filed. The suit awaits a ruling on the motion for approval.
79
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 13 - CONTINGENT LIABILITIES (CONT.): E.
(CONT.) The Company estimates, and based on the opinion of legal counsel handling the claim, that TASE has substantial arguments to repel the motion for approval, and the likelihood of its being rejected is greater than the likelihood that it will be accepted, all within the bounds of caution. Accordingly, no provision has been made in this respect in the financial statements as of December 31, 2014.
F.
On July 17, 2013, TASE received a motion for approval of a class action, filed by an applicant (Eran Peter), with the Tel Aviv District Court (Economic Department). As part of such motion it was argued, in essence, that a prohibited collection of Value Added Tax by TASE, which is derived from illegal registration (allegedly), as a "trader" as defined by Value Added Tax Law. According to the applicant, the real classification of TASE should be as a financial institution or alternatively as a non-profit organization, and in any case, not as a trader. According to the applicant, the artificial and unjustified classification (as alleged) of TASE as a trader, entitles it to significant tax advantages. Within the framework of the claim attached to the motion , which the Applicant wishes to have confirmed as a class action, the recovery of VAT, which was allegedly unlawfully, collected, amounts to NIS 360 million. The response (objection) by TASE was supported by an expert opinion prepared by a former Head of Customs and VAT. TASE also filed a request to add the Income Tax Authority as a respondent. On January 21, 2014, the District Court decided to append the Income Tax Authority as a respondent in the case. The State of Israel - Customs and VAT Division, filed its response to the request, arguing to reject the motion for approval, inter alia, for reasons of lack of rivalry and lack of "locus standi" of the applicant, and on its merits, inter alia, as the classification of TASE under VAT law and its registration with the Head of VAT as a " trader" is the right and proper registration under law. On June 19, 2014, the applicant filed a motion to withdraw the motion for approval and the class action suit. On July 8, 2014, the Court ruled that the motion for approval would be struck out, and ordered the applicant to pay costs.
G.
In February 2013, TASE received a request from the employees' committee for arbitration concerning a dispute regarding the calculation of an annual bonus (standard and selective) for 2012, which was agreed upon in the collective agreement dated March 17, 2011. The amount in dispute totals NIS 4 million. The parties exchanged correspondence concerning the arbitration, however, written arguments by representatives of the employees and details of their claims and their interpretation of the collective agreement has not yet been received.
H.
Because of the field of their operations, the Group's companies receive, in the ordinary course of business, inquiries from companies traded and / or shareholders of traded companies, which include various claims. Some of the inquiries may lead to filing lawsuits. The Group's companies may incur amounts with respect to its operations. In cases where the extent of liability in respect of the above is not material and / or cannot be reasonably estimated, no provision is made in the financial statements.
80
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 14 - ADDITIONAL INFORMATION - REVENUE FROM SERVICES: A.
Major Customers: Customer "A" accounted for 16% of total revenue in 2014, while customer "B" accounted for 13% (2013: customer "A" - 16% and customer "B" - 12%).
B.
Composition of Revenue from Trading and Clearing Commission: Year Ended December 31, 2014 2013 2012 NIS in thousands Commission for trading and clearing securities, excluding derivatives Commission for trading and clearing derivatives
110,780 30,590 141,370
105,693 28,833 134,526
97,062 32,378 129,440
NOTE 15 - ADDITIONAL DETAILS - COST OF REVENUE: A.
Employee Benefit Expense: Year Ended December 31, 2014 2013 2012 NIS in thousands Salary (including grants and severance payments) Non-current employee benefits Defined contribution plan expenses Defined benefit plan expenses Less - amounts capitalized – property and equipment and intangible assets - (see notes 9, 10)
B.
127,205 120 1,732 5,592 134,649
124,590 217 1,463 6,088 132,358
111,249 334 1,472 6,383 119,438
(12,042) 122,607
(11,966) 120,392
(9,790) 109,648
Expenses - Move to the New Building: Includes, primarily, expenses for additional outsourcing services in the field of computer infrastructures in respect of the relocation of the systems and employees to the new building, expenses for temporary communications lines during the relocation period and expenses for planning and managing the relocation.
C.
Depreciation and Amortization: Year Ended December 31, 2014 2013 2012 NIS in thousands Depreciation of property and equipment (see note 9) Amortization of intangible assets and goodwill (see note 10)
81
13,731
10,561
10,936
14,004 27,735
13,633 24,194
12,051 22,987
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS NOTE 16 - FINANCING INCOME, NET: Composition: Year Ended December 31, 2014 2013 2012 NIS in thousands Financing expenses: Bank fees and commission Interest and linkage expense - income tax Other financing expenses
Financing income: Net gain - financial assets held for trading Interest income - short-term deposits Interest and linkage income - income tax Interest income - employee loans
(113) (2) (115)
(164) (311) (475)
(201) (24) (225)
5,516 30 140 55 5,741
10,336 88 257 47 10,728
14,138 135 474 75 14,822
5,626
10,253
14,597
NOTE 17 - INTERESTED PARTIES AND RELATED PARTIES: A.
Benefits to Interested Parties (*): Year Ended December 31, 2014 2013 2012 NIS in thousands Short-term benefits Post-employment benefits Salary and related expenses - Chairman of the Board of Directors and the CEO Number of individuals Benefits to the Interim Chairman of the Board of Directors Remuneration to non-executive directors Number of individuals
(**)3,089 87
3,379 277
20821 441
(***)3,176 2
3,656 2
3,569 2
189 1,125 7
239 1,349 5
944 6
(*) These amounts also represent remuneration to key management personnel. (**) These amounts include grants to the Chairman of the Board of Directors and to the Chief Executive Officer and are subject to approval by TASE's General Meeting. (***) The services provided by the Chairman of the Board of Directors are through a management company that he owns.
82
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 17 - INTERESTED PARTIES AND RELATED PARTIES (CONT.): B.
Balances with Interested and Related Parties: (1)
Balances with Interested Parties: As of December 31, 2014 2013 NIS in thousands
(2)
Under current assets (*) Cash and cash equivalents Trade receivables (**) Other receivables - associate Other receivables - subsidiary (***)
6,560 5,037 10 2,478
11,402 4,302 1,413
Under current liabilities (*)(**) Other payables - MAOF-CH members Other payables - TASE-CH members Other payables - associate under voluntary liquidation Other payables - subsidiary (***)
8 3,488
2 5 68 1
(*)
See note 5, on receivables and payables with respect to derivative open positions.
(**)
The balances are interest-free and are not linked to the CPI.
(***)
Balances with subsidiaries are not included in the Company's consolidated statements.
Liabilities for Employee Benefits to Key Management Personnel: As of December 31, 2014 2013 NIS in thousands 667
(*) 5,224
(*) Reported under short term employee benefits, given the retirement of the Chairman of the Board of Directors and of the Chief Executive Officer. C.
Transactions with Interested and Related Parties: (1)
Transactions with Interested Parties: Year Ended December 31, 2014 2013 2012 NIS in thousands Service revenue Cost of revenue - premium for providing collateral to the MAOF Risk Fund (*) Financing income, net (**)
83
160,441
166,989
8910898
-
(349)
(4,212)
(130)
(134)
(327)
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 17 - INTERESTED PARTIES AND RELATED PARTIES (CONT.): C.
Transactions with Interested and Related Parties (Cont.): (1)
(2)
Transactions with Interested Parties (Cont.): (*)
In accordance with a decision of January 2013, of MAOF-CH, said premium was canceled as of January 25, 2013.
(**)
The Company and the consolidated subsidiaries have financing income and expenses from transactions with interested parties, that are banks and other members of TASE, resulting from transactions executed in the ordinary course of business, and under ordinary terms for transactions executed with "non interested parties". These amounts are, for the most part, derived from deposits with banks, administering current accounts and managing securities portfolios and are classified under "financing income, net".
Transactions with Related Parties: Year Ended December 31, 2014 2013 2012 NIS in thousands (a)
(b)
Transactions with an associate: Rent to SOL - associate Transactions with subsidiaries (*): Participation in income - MAOF-CH
(3,298)
(3,424)
4,534
-
)82208,1(
-
Participation in expenses - MAOF-CH
(**) 27,290
26,517
25,794
Participation in expenses – TASE-CH
(**) 101,144
-
-
810,89
-
-
Participation in income – TASE-CH
Development fees – TASE-CH
(*)
-
TASE, and the two Clearing Houses are closely interconnected. This as TASE provides the Clearing Houses with their required operational infrastructures (information technology, human resources, management, etc.). Up to December 31, 2013, TASE-CH’s revenue from securities clearing commission was recorded in TASE’s financial statements, while MAOF-CH’s revenue from derivatives trading and clearing commission was recorded in MAOF-CH’s financial statements. Accordingly, MAOF-CH participated in TASE’s expenses proportionally to its revenue of total revenue of the Company and MAOF-CH, according to an agreement between the companies of June 8, 2005. As agreed between MAOF-CH and TASE on June 12, 2014, MAOF-CH did not participate in the impairment loss in respect of the building under construction that was recorded in TASE’s financial statements as of December 31, 2013, as noted in notes 3 C and 9 (4).
84
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS NOTE 17 - INTERESTED PARTIES AND RELATED PARTIES (CONT.): C.
Transactions with Interested and Related Parties (Cont.): (2)
Transactions with Related Parties (Cont.): (*) (cont.): On February 19, 2015, TASE's Board of Directors and TASE-CH's Board of Directors approved a model for distribution of the income, expense, and the profit between TASE, TASE-CH and MAOF-CH for 2014 ("distribution model"). Said distribution model was approved by the Board of Directors of MAOF-CH on March 12, 2015. Following the adoption of said distribution model, the agreement on the allocation of expenses between TASE and MAOF-CH, as noted above, of June 8, 2005 was cancelled. It was also decided that the 2014 financial statements would be prepared reflecting the distribution model. In addition, TASE's Board of Directors resolved to prepare an agreement for 2014, which would adopt the principles of the distribution model, and as well, an agreement in accordance with the distribution model outline for 2015 and 2016 that would be brought before the Board of Directors for approval. Consequently, the allocation of income and expenses of the Group, between the Group companies in 2014 was prepared in accordance with the distribution model, which reflects the scope of activities of each company. In order to formulate the distribution model, TASE management received the services of a professional advisor. In formulating the distribution model, an allocation was made of three main parameters: income, expenses and the distribution of economic profits of the Group between the companies. As part of the income allocation, all specific income of the Group companies was identified and assigned, in accordance with the pricelist. In order to determine the ratio of any mixed income, a mapping of exchanges and Clearing Houses around the world was prepared in order to identify the principles that would be used as benchmarks to determine how to allocate any income involved. Based on an analysis of actual trading and clearing revenue, the allocation ratio vis-à-vis trading and clearing between TASE and TASE-CH is 50% trading and 50% clearing. The allocation ratio vis-à-vis trading and clearing between TASE and MAOF-CH is 15% trading and 85% clearing. As part of the expense allocation, all specific expenses of the various departments were identified and assigned. For the allocation of costs and services that were provided centrally by TASE (including salaries) to all Group companies, various principles were considered and determined for the distribution of the said expenses (such as the ratio of income, head counts, the ratio of direct costs). As part of the economic profit distribution process within the Group's companies, consideration was given to the link between Group's companies taking part together in any specific line of business over time that creates a breakeven point between them that would allow all Group's companies to share in all activities as a result of said, as from the standpoint of the market and from the standpoint of TASE's group structure, TASE is at the trading and clearing front in Israel. To this end, management was aided by game theory models in order to validate the selected equilibrium point. The profitability index used as the allocation key, under the profit sharing model is a 10.3% rate of return for TASE-CH and MAOF-CH . This index was found to be appropriate, in part due to capital and other liquidity requirements, that TASE and the Clearing Houses must comply with, similar to requirements applicable to the Israel's banking system. (**) in 2014, includes the participation in tax expense. 85
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS
NOTE 17 - INTERESTED PARTIES AND RELATED PARTIES (CONT.): D.
Additional Information on Transactions with Related Parties and Interested Parties: (1)
TASE Resolutions on Providing a Credit Line to TASE-CH and to MAOF-CH: In 2004, TASE approved the grant of a loan to TASE-CH not to exceed NIS 50 million, in the event that TASE-CH will require said to meet its liabilities. It was also resolved to authorize a Committee of the Board of Directors to determine when the loan will be granted and also the amount of the loan, which may not exceed NIS 50 million. The loan will be made available at the same rate of interest as the Bank of Israel charges the banks, unless otherwise agreed between TASE and TASE-CH. Concurrently, in 2004 TASE-CH authorized its CEO to apply for and obtain a loan from TASE which would not exceed NIS 50 million, as required. Since the approvals that were granted in 2004 and up to the date of approving these financial statements, no loan has been requested or granted. In early 2009, TASE approved the grant of a loan to MAOF-CH not to exceed NIS 50 million, and provided that the total loan to MAOF-CH and to TASE-CH together, as above, will not exceed NIS 50 million, in the event that MAOF-CH will need said in order to meet its liabilities. It was also resolved to the abovementioned authorize Committee of the Board of Directors to determine when the loan will be granted and also the amount of the loan, subject to the above limitations. The loan will be made available at the same rate of interest as the Bank of Israel charges the banks, unless otherwise agreed between TASE and MAOF-CH. Concurrently, in 2009 MAOF-CH authorized its CEO to apply, and obtain a loan from TASE which would not exceed NIS 50 million as required. Since the approvals that were granted in early 2009, and up to the date of approving these financial statements, no such loan has been requested or granted. TASE is under no obligation to grant these loans. If needed, said loans will be granted if approved by the authorized committee's decision, as above.
(2)
For information on indemnification of office holders and exemption from liability granted to office holders, see note 13.
(3)
See note 6 D (4) (c) regarding an agreement with a financial institution.
NOTE 18 - CHARGES: In March 2008, TASE-CH opened a bank account ("account") for the purposes of receiving loans, if and when TASE-CH has an immediate need for cash to ensure continuous clearing in the event of a member default. In April 2008, a first rank fixed charge was registered on the securities now deposited or that will be deposited in said account, or on the proceeds from their sale and/or gains to be deposited in said account. If TASE-CH takes such a loan in the future, it will deposit the collateral in favor of the bank in the account. TASE-CH has not made any use of the account since it was opened, and no assets have been deposited into it.
86
THE TEL-AVIV STOCK EXCHANGE LTD. NOTES TO THE FINANCIAL STATEMENTS NOTE 19 - EVENTS AFTER REPORTING DATE: (1) On February 19, 2015, the Board of Directors of TASE and the Board of Directors of TASE-CH approved a distribution model. Said distribution model was approved by the Board of Directors of MAOF-CH on March 12, 2015. For additional information, see note 17 C (2). (2) On January 1, 2015 TASE’s Board of Directors approved the capital and liquidity adequacy models. The models, that were approved, as noted, by the Risk Management Committee of the Board of Directors of TASE and the Board of Directors of TASE will also be brought for appoval by the Board of Directoirs of MAOF-CH and TASE-CH by the end of the first half of 2015. For further information, see note 6 D (5).
87
Deutsche Telekom AG Financial Statements as of December 31, 1999 !" ==
Deutsche Telekom AG Financial Statements as of December 31, 2000 !" ==
