Israel’s Switch from Telbor to SHIR: Preparing for a Seamless Switch Q&A
The upcoming transition from Israel’s Tel Aviv Inter-bank Offered Rate (Telbor) to its new risk-free rate, the Shekel Overnight Interest Rate (SHIR), is imminent. Early preparation and adoption can help market participants fare better through this transition.
Tradeweb has significant experience in helping clients with regulatory reform and transitions to risk-free rates. Over the years Tradeweb has helped its clients navigate MiFID II, LIBOR and more recently the Mexican F-TIIE. Here, we discuss the upcoming transition to SHIR, its key facets and the timelines with two ILS market experts from the Bank of Israel (BOI) and Morgan Stanley.
Q: What is SHIR and why is the Bank of Israel transitioning from Telbor to SHIR?
Tsila Billet Blank, Bank of Israel: SHIR stands for Shekel Overnight Interest Rate. The BOI started publishing SHIR in June 2022 after the Telbor committee's decision to replace the Telbor with an overnight risk-free rate. The decision to transition is in line with decisions reached in major countries to switch IBOR interest rates to risk-free overnight interest rates. The BOI declared that the use of the Telbor interest rate is only appropriate for sophisticated investors due to the complexity of the Telbor market, and therefore the current use of the Telbor is limited to derivative trades only.
Over the last few years and after the LIBOR scandals, the FSB and IOSCO’s publications, it seemed that the derivative market would shift to risk-free rates. As the local Israeli market lacks a developed repo market, and the interbank loan and deposit activity is not material enough, it was not possible to establish the SHIR on those markets. Therefore, it was decided that the SHIR will be equal to the BOI's rate, determined by the BOI's Monetary Committee eight times per year.
Ivan Kononov, Morgan Stanley: Essentially, due to the transition, the product is a policy rate swap – also known as a key rate swap – rather than an Overnight Index Swap (OIS) linked to a tradable money market rate. On one hand, it gives clients the opportunity to very clearly express views on the path of the BOI's rate, but on the flip side, if there is a material dislocation between the BOI's rate and the cash market, this is the risk to be mindful of and that can materialise for a number of reasons.
Q: How ready are sell-side and buy-side participants, and what is the state of liquidity in the market?
Ivan Kononov, Morgan Stanley: We are now quite far in the transition process and the market has been receiving extensive guidance about the transition from both the BOI and LCH. Our understanding is that the local community is largely prepared to trade SHIR, whereas on the international bank side, the state of readiness is dispersed. At Morgan Stanley, we are currently fully prepared to trade SHIR.
From a buy-side perspective, the level of client awareness about the transition is high. And the activity is likely to pick up after the LCH conversion in May. And that is also reflected in the market liquidity. There are a few trades taking place every day but mostly concentrated at the front end of the curve, whereas the activity in the centre and the long end is likely to pick up after the conversion takes place.
Q: What are the timelines?
Tsila Billet Blank, Bank of Israel: In April 2024, we announced the cessation of Telbor publication and that all tenors of Telbor will permanently cease following final publication on 30th June 2025.
The fact that the Telbor transition to SHIR is happening after the transition from the LIBOR to risk-free rates is helpful, since most market players are familiar with the very similar process. Also, it's important to note that the Telbor highly correlated to the BOI rate since it is solely used for derivatives that are mostly traded under ISDA agreements and therefore the credit risk component is marginal. This explains why the fallback spreads fixed on April 2024 – date of cessation announcement, were so marginal.
Telbor is solely used for derivative trades, so the transition is rather straightforward, especially since we tailored the process using the same methodology used in the LIBOR transition. Centrally cleared trades will be transitioned by LCH in May, and bilateral trades are being transitioned by the parties themselves. We switch fully to SHIR on 1st July 2025.
Matthew Scaddan, Tradeweb: To elaborate on LCH and their timeline, while LCH has been live for clearing SHIR since October 2023, it’s now working towards converting all the existing Telbor swaps across to the new SHIR index on the weekend of 17th May 2025. After this date, LCH won’t register any further Telbor trades, and this is important for buy-side participants to take note of. From a platform perspective, Tradeweb is ready for the new index with our SHIR NPV and RFQ tools.
Q: What is the methodology for the transition?
Tsila Billet Blank, Bank of Israel: The spread adjustment methodology used for SHIR was based on the same methodology used for other IBOR rates. The spread adjustment is the median, over a period of five years, of the gaps between the Telbor rate and the SHIR compounded in arrears. This spread adjustment is calculated for each tenor that is published for Telbor: overnight, one, three, six, nine and 12 months.
The spread adjustment was calculated by Bloomberg, which was chosen by ISDA to serve as the fallback adjustment vendor. It was updated daily and fixed conclusively on 16th April 2024, which was the date we announced the cessation of Telbor on 1st July 2025.
Q: What are some key factors when it comes to risk management for SHIR?
Ivan Kononov, Morgan Stanley: When we speak about risk management, we really talk about management of legacy positions. There are two factors that contributed to this process being smooth. First, the quite extensive guidance and concrete timelines provided by the BOI and LCH, particularly around the May conversion event for the cleared swaps. Second, the fact that the fallback mechanism is in line with the ISDA definitions, which is particularly important for a subset of non-cleared bilateral swaps, which are not going to be eligible for LCH conversion events.
Q: What are the key messages around the transition?
Ivan Kononov, Morgan Stanley: The transition is imminent, which means that the market should be ready to manage the legacy positions. The market liquidity is going to shift increasingly towards SHIR, especially after the conversion event with LCH.
From a trading perspective, SHIR allows one to express views on the path of the BOI's policy rate in a way that is devoid of any basis effects that are inherent to other LIBOR-style products.
The transition also serves as a good example of a smooth and well-communicated transition, which is important in a world where countries generally tend to move away from LIBOR-style benchmarks to OIS.
Morgan Stanley remains committed to Israel’s rates market, and we are currently fully set up to trade SHIR. A couple of years ago, Morgan Stanley was the first bank to execute a Telbor IRS trade on Tradeweb and we have also recently supported the execution of the first SHIR trade on Tradeweb.
Tsila Billet Blank, Bank of Israel: In this last stage market players will get used to trading more and more SHIR derivatives – we’ve seen liquidity build up over the last few months. They also need to transition all their open trades in Telbor to SHIR. The next few weeks are crucial for completing the transition of the Telbor trades to SHIR, and building up the liquidity in the SHIR market to finalise this transition smoothly.
Matthew Scaddan, Tradeweb: From a Tradeweb perspective, we’d encourage clients to test early. Ensuring your downstream systems can handle the new benchmark before the conversion is important.
Reach out to your top liquidity providers to discuss options with them. Many, like Morgan Stanley, are already providing indicative levels for SHIR.
And finally, the timeline isn't changing, so it's imperative you have a plan in place for the conversion. You can choose to convert existing cleared swaps at LCH, or you can switch out your existing cleared Telbor positions into the new SHIR using Tradeweb’s list tool.
Visit our SHIR Resource Centre for more information.