The present crisis in the capital market began in early 1994 and manifested itself not only in the stock market but also in the bond market and, especially, in a major savings mechanism in Israel: the provident funds.

The longest-lasting uptrend in the history of the Israeli capital market began in 1989. It followed a slump that began in late 1983 and signaled the return of the Israeli economy to a trajectory of growth. The growth that has characterized the economy since 1989 reflects the structural changes that the economy experienced after the 1985 Stabilization Plan, the effects of mass immigration, and international developments, i.e., the disintegration of the Eastern Bloc and peace arrangements in the Middle East.

The longer the "bull market" lasted, the more negative features it acquired. Instances of grave criminality surfaced, and these, along with uncontrolled provision of credit for acquisition of securities and mutual funds, created an acute crisis of confidence that has beset the market to the present day.

Even the robust level of capital raising in the bull market (about NIS 20 billion in the peak years), rapidly climbing stock prices, and vigorous trading volumes were unable to conceal a series of defects and structural problems in the Israeli capital market:

• Absence of long-term institutional investors -- Pension funds and life-insurance companies, the mainstays of healthy capital markets worldwide, do not participate in the market in Israel. This anomaly is the outcome of arrangements that provyde these0players wyth subsidizud, ~ontrqdab|e government bonds. This modus operandi deprive the market of long-term sources that should be made available for business-sector investments and housing loans.
• A high level of centralization -- Although the "bull market" caused more players to become active in the capital market, the financial sector is still highly centralized. The bulk of market activity is controlled by the banks and their affiliated provident and mutual funds. This dominance creates potential conflicts of interests and aggravates market fluctuability.
• Discrimination in taxation of investors and savings instruments -- The discriminatory array of tax provisions warps investors' judgment. Essentially identical financial instruments are taxed differently (for example, bonds are taxed on the interest, while corresponding savings schemes are exempt) and different tax rules apply to different investors (resulting in the well known distinction between "gross" and "net" investors).
• Under-regulation of financial players -- The absence of regulatory legislation in the fields of investment consulting and portfolio management, and the lack of norms in consulting, abetted serious occurrences in the past few years that undermined the public's confidence in the agencies that operate in the capital market. Continued vigorous enforcement by the Securities Authority, along with legislation regulating the activities of consultants, portfolio managers, and institutional investors, has created a crucial basis for the restoration of trust.
• Relative paucity of equities -- A privatization process featuring the issue of shares in Israeli "blue chips" could have met the surging demand on the capital market. This process was carried out in part only, and the upturn in demand on the stock market was not met by any increase in supply, let alone of shares in State-owned enterprises.

These structural problems were aggravated by the familiar and natural tendency of capital markets to behave cyclically. After the bull market of 1989-1993, the aforementioned structural problems exacerbated the downturn that was due. Indeed, the trend on the stock market has reversed direction since early 1994, as abruptly falling share prices paralyzed trading on the secondary market. This trend is also attributable to high real interest rates, falling business-sector profitability, and an initiative, not carried out, to tax capital gains on the stock exchange.

Therefore, the current crisis in the capital market, which has lasted for more than two years, is unusual in that its roots are neither random nor transitory. The crisis originates in a series of problems that should be treated from the ground up. Only thus may the major issues in long-term private savings -- a field that is currently experiencing a transformation, be addressed.

The contraction of trading volumes on the secondary market has been detrimental to investors' liquidity and has paralyzed activity in the equity market as well. The economic-growth process that Israel has been experiencing, with its strong emphasis on technology, has been funded by issues on American stock exchanges, to which scores of Israeli companies (and Israeli investors) have turned. Israel has risen to second place among foreign countries, surpassed only by Canada, in the number of companies listed for trading in the bourses of New York, and the Tel Aviv Stock Exchange has lost the results of the Israeli growth that would have represented its most promising supply potential for the next few years.

The provident funds have reported negative yields in the past two years because the prices of the shares and bonds that they hold have been falling. Thus, billions of liquid sheqels began to move out of this long-term mechanism, with its fluctuating yields, to shorter-term horizons that offer fixed yields, such as bank deposits and savings plans. This wave-like transition, which gathered momentum because of sharp changes in interest rates and a turnabout in the yield trend, convulsed the capital market even as the Committee went about its work.

The Committee's work has been accompanied by many great expectations. Many individuals have offered the Committee their views on how to resolve the current capital-market crisis quickly. Although the Committee obviously believes it important to remedy the market's current ailments, its main task, as set forth in its letter of appointment, is to create a path of recuperation in the medium and long terms -- one from which the short-term therapy, too, will be derived. Thus, the Committee ruled out any solution that promised nothing but short-term efficacy at the expense of the long term, viewing such nostrums as misapplications of good intentions that would cause more harm than any possible good.

The letter of appointment gave the Committee very broad latitude in prescribing corrective and remedial actions, but this latitude was eroded by circumstances and constraints that took shape over the years, foremost:

• Pension savings: Until 1986, the government issued nontradable bonds at higher-than-market interest for all forms of long-term institutional savings. Moreover, under the accounting principles in effect then, savers' yields were shown at their adjusted value and in disregard of fluctuations in market yields. These arrangements remain in effect, to various degrees, in pension funds and life insurance.
  The Israeli capital market, like every advanced capital market in the world, is not an island. Pension savings were redirected from the tradable capital market in order to finance the accrued government deficit, thus depriving the capital market of a crucially needed inflow of sources for business-sector and mortgage activities. Furthermore, now that a multiannual downward path for the budget deficit has been stipulated, the government may at some future time not need all the sources that it has customarily raised thus far by means of these earmarked bonds. In any event, the Committee considers it essential, in order to create a healthy basis for the capital market and to realize the economy's future growth and prosperity potential, to redirect pension savings to the capital market.
  It is universally agreed that comprehensive regulation of pension-savings investment avenues should also address itself to changes in existing pension arrangements, with respect to both budgetary pensions and the "old" pension funds -- the actuarial deficits of which prompted the government resolution of March 29, 1995. However, after it explored the issues pertaining to this matter, believed that the arrangements and government decisions on this subject rule out modifications of the sort warranted by the interests of the capital market itself. Consequently, the proposed changes in this regard apply to new pension funds only.
  As for the old pension funds, to which the changes proposed in this Report do not apply, care should be taken to reduce operating expenses in order to minimize the cost of the arrangement to the state budget.
• Cross-purposes in the management of provident funds-- About half of the NIS 84 billion accrued in these funds is believed to be liquid. This composition of savers -- some interested in solid long-term yields, others interested in high short-term yields -- creates a structural contradiction in the management of the funds' portfolios. Because of this diametrical contrast, the funds are unable to function as important long-term institutional players in the capital market.
• Discriminatory taxation -- The Committee found inconsistent arrangements in the taxation of savings, i.e., different taxation of similar instruments and lack of clear-cut policies and priorities. These inconsistencies, caused by developments years in the making, warp the considerations of savers and investors.
  It is essential to fashion and stabilize the tax system on an equal, non-discriminatory footing, thus creating an effective set of incentives that will encourage saving in accordance with a hierarchy of needs, i.e., saving for retirement, saving for the long term (exceeding ten years), and saving in the medium and short terms. With this in mind, the Committee proposes that savings for retirement be given explicit preference and encouraged as broadly and meaningfully as possible.
  The Committee believes that savings not meant for retirement should be given different tax treatment. However, the Committee acknowledges the importance of long-term savings -- even if it is not necessarily meant for retirement -- because such savings contribute to stability and create of sources for investment. Therefore, some preference should be given to long-term saving (ten years and longer) over short-term saving. To express the importance of private saving and spare it from harm, the Committee recommends that it be taxed at low rates and as simply and uniformly as possible.
  The Committee was careful to limit the incidence of the new tax provisions with respect to existing savings in order to ensure that the provisions of the Protection of Public Investments Law, 5744-1984, be upheld with room to spare.
  In view of the foregoing, the Committee likened its work to a march down a narrow path, in which the possibilities of changing course are limited. Healing and restructuring processes, by their very nature, are measured over long time horizons, and any attempt to rush them along may do more harm than good. Within its tight time constraint, the Committee examined a series of levels of action that would be of great importance for the capital market. In this Report, the Committee wishes to sketch the contours of the requisite future actions -- some in detailed recommendations and others in prescriptions for more protracted examinations that will be needed in the next few months.
  The Committee proposes that the issue of greatest importance for the capital market -- its level of centralization and ways to confront it -- be subjected to painstakingly examination by a separate forum to be created soon. An interim measure that may reduce this centralization is the introduction of personal provident-fund programs for retirement age (modelled after the American IRA). These programs are proposed in the chapter on savings policy.
  The Committee held many lengthy deliberations, in plenum and in subcommittees. The members of the Committee thank the scores of citizens and capital-market players who made the effort to present the Committee with position papers that provided a wide range of observations and insights on the condition of the market and the factors that brought it about. The Committee invited some of them to appear before it.

The main recommendations follow. (The recommendations are presented by consensus, with the exception of an alternative proposal by Dr. David Klein on middle- and long-term savings policy.)

	Savings Policy
	The Committee recommends that a hierarchy be created in the level of government encouragement of different forms of savings, both in the sense of tax benefits and in earmarked bonds, in accordance with the term and nature of savings: Savings for retirement age -- This form of savings should be given the highest level of tax benefits. Benefits should be awarded at point of contribution (by means of a tax credit and deduction), at point of accrual (by exempting profits from taxation), and at point of withdrawal (by means of a full or partial tax exemption). Encouragement of saving for retirement (comprehensive pension) should include the issue of earmarked bonds for pension funds only, at 70 percent of assets, for contributions from insured wage not exceeding the national average wage. Long-term savings (ten years and longer)-- This form of saving should be given a medium level of tax benefits. No tax benefits of any kind should be offered at point of contribution to a fund or deposit in a savings plan. However, the gains should be tax-exempt at point of accrual and at point of withdrawal. An exception to this rule should be made for savings through a training fund. This form of saving should continue to receive the existing tax benefit at point of contribution and at point of withdrawal. At point of accrual, however, such savings should be given a tax benefit only if meant from the outset for a term of ten years or longer. Middle- and short-term savings -- This form of savings should be given a partial tax benefit at point of withdrawal, in the form of a reduced tax rate. The possibility of standardizing the rates of contribution/deposit in all forms of retirement savings should be considered, and pre-retirement events for which savers may withdraw their funds with or without penalties should be stipulated. A. Saving for Retirement Age General Saving through pension funds, provident funds, and life-insurance plans (comprehensive pension and personal insurance) should be encouraged by tax benefits. These forms of accrual should be for retirement age only. Rules for movement from one form of savings to another should be set forth, but in any case savers should be allowed to move to a pension fund entitled to earmarked bonds only from another pension fund entitled to earmarked bonds on the same terms. In view of the increase in life expectancy and socioeconomic changes occurring in Israel and worldwide, thought should be given, in the near future, to the relevant retirement age for women and men, in order to adjust this age to the future conditions and needs of the Israeli society and economy. Tax Benefits at Point of Contribution The Committee recommends that the employee's maximum contribution for tax-credit purposes be standardized in all forms of savings, and that contributions to savings channels meant for withdrawal at retirement age in pension form, until the saver's death, should be preferred over contributions/deposits in programs that also permit lump-sum withdrawal. The wage ceiling for which contributions to pension funds, benefit funds, and life-insurance plans confer a tax credit of 25 percent or 35 percent should be increased to a monthly sum equal to twice the national average wage (NIS 10,200, in contrast to today's "eligible income," NIS 7,800). This credit may be divided among different forms of retirement savings. The credit should be set at 35 percent in all forms of savings meant for monthly benefits, and at 25 percent for retirement savings plans that permit other forms of withdrawal. The possibilities of switching from monthly-benefit savings to lump-sum withdrawal savings should be limited and preconditioned on payment of tax differentials (penalty), among other things. Employers' contributions for employees, in monthly-benefit savings only, that are not imputed as employees' income at point of contribution, should be limited to a wage up to four times the national average wage. (Currently, there is no limit on employers' contributions of this type to monthly-benefit pension or provident funds.) Employers' contributions for employees in types of savings that permit withdrawal in a form other than monthly benefit, that are not imputed as employees' income at point of contribution, should be limited to a wage up to twice the national average wage. (Today, the limit applies to contribution from wage of up to NIS 7,800 per month.) Other contributions/deposits should be treated as the employee's income at point of contribution/deposit. . Self-employed savers should be entitled to a credit and deduction for contributions to the aforementioned forms of savings, as they are today. An adjustment of the current limits to those proposed for wage-earners' contributions to provident funds should be considered. The possibility of tax benefits on deposits to accounts in relatives' names should be abolished. A team composed of officials from the State Revenue Administration, the Income Tax Commission, and the Capital Market Division of the Finance Ministry should consider the possibility of standardizing the contribution rates in all forms of retirement savings, and of stipulating pre-retirement events that would entitle savers to withdraw their funds, with or without a penalty. The team should present its recommendations within 90 days. Benefits at Point of Accrual The existing situation, under which gains on the investment are tax-exempt for both the fund and the saver, should remain in effect during the term of accrual in each of the aforementioned forms of savings. Earmarked bonds should continue to be issued for pension funds only, for such funds as are operating under the rules set forth, at 70 percent of assets, but only for contributions from wage not exceeding the national average wage (instead of twice the national average wage as at present). According to a computation by the Capital Market Division of the Finance Ministry, this measure alone (under various assumptions) will increase accrual in the tradable capital market by NIS 54 million in 1997, by NIS 3 billion (cumulative) by 2005, and by nearly NIS 10 billion by 2010. The Committee believes that this will give the institutional players in retirement savings greater weight in the capital market and will free up more long-term sources for long-term investments -- generally and in the specific context of housing loans. Tax Benefits at Point of Withdrawal The tax-exemption ceiling for pension should be raised in order to fully exempt benefits at the level of the national average wage -- about NIS 5,100 per month as against NIS 3,800 today (adding the 2.25 credit points to which every Israel resident is entitled, along with the special exemption for the pension). Withdrawals from savings arrangements that confer a 25 percent tax credit on contributions should remain tax-exempt. Withdrawals from savings arrangements that confer a 35 percent tax credit on contributions should, as a rule, be permitted in the form of monthly benefits only. A substantial penalty should be charged for lump-sum withdrawals. Incidence of the Provisions Pension Funds Because the possibility of modifying the terms of the pension arrangement for the old pension funds is limited, the Committee proposes that the increase in tax benefits be applied to the new pension funds only (to the exclusion of the old funds and budgetary pensions). The higher income ceiling on which a tax credit is given for pension-fund contributions should apply only to new contributions to new pension funds (those established on or after January 1, 1995). The higher pension sum exempt from tax should apply only to members of new pension funds (those established on or after January 1, 1995). The wage ceiling for which pension-fund contributions will not be imputed to the employee's income at point of contribution should be applied to all funds from the day on which the Knesset passes the requisite legislation. Provident Funds New Funds New provident funds that confer the aforementioned tax benefits should be administered for retirement age only. Existing Funds Although the future provident-fund mechanism is defined as a savings instrument for retirement age only, the Committee proposes that special arrangements be made for members of existing provident funds, in order to give them a meaningful incentive not to redeem the sums accrued and to continue making contributions in the coming years. These contributions should entitle current members to non-recurrent tax benefits for a limited time (up to three years) and to the current rules of liquidity: Provident funds that began operating by the present date (September 15, 1996) should continue to operate under the current terms for another three years, until December 31, 1999 (hereinafter: the transition period). Members who have not earmarked their funds for retirement age by the end of the transition period should not be entitled to tax benefits for contributions made to existing accounts after the expiration of the transition period. Savings created during the transition period should receive all the tax benefits for which they qualified previously. The point at which such sums may be withdrawn from these accounts should not be changed. Members who earmark their contributions for retirement age only should be entitled to the new benefits from the time at which they give notice to this effect. Life Insurance The rules applying to life insurance should be identical to those applying to pension and provident funds, depending on the type of insurance -- monthly benefit or lump sum -- and assuming that such savers no longer be allowed to switch from savings for monthly pension to savings for lump-sum withdrawal. The terms of existing life-insurance policies should not be modified, but the wage ceiling for which contributions are not imputed to employee's income should also be applied to new contributions under existing policies that are defined as being for monthly benefit. Withdrawals from life-insurance plans before the end of the term of insurance, as a result of an insurance event that creates the entitlement to make such withdrawal, should be tax-exempt. Budgetary Pension The Committee believes that faster action should be taken to have new employees in the Civil Service, and in other public agencies that offer budgetary pensions, join actuarially balanced accrual-type pension funds. This step may provide the capital market with another important source of long-term funds. Investment and Reporting Rules The Committee considers it vastly important to stimulate competition in the financial services and reduce the high level of centralization that typifies this sector. As an essential infrastructure for these processes, and to permit more involvement by savers in determining and readily modifying the composition of their investment portfolios, the set of reports given to savers in all kinds of retirement-age savings should be stipulated. Consequently, the Committee proposes the following: Uniform rules should be created in investing the assets of provident funds, insurance companies, and pension funds, that are not covered by earmarked bonds. The investment rules should be based mainly on considerations of stability and should give portfolio managers greater latitude. All players should be allowed to invest a higher proportion of assets in foreign securities: 5 percent, as against 2 percent in provident funds today. This change should be made gradually over three years. Rules allowing retirement investments modelled after the IRA (Individual Retirement Account) should be set forth. The format and dates of reporting to retirement savers should be standardized, to the extent possible, in order to facilitate comparison among the various savings instruments. B. Non-Retirement Savings In this context, the Committee rethat a distinctiobe drawn between long-term savings -- ten years or more (through nonrecurrent or periodic contributions) -- on which the gains should be tax-exempt, and shorter-term savings, on which real interest should be taxable at a low rate. Long-Term Saving (Ten Years or More) The new tax provisions should be personal and should apply to financial assets that need not be recorded in the books of a business. Savings for ten years or more, in any form (approved savings plans, provident funds, training funds, and life insurance), should confer a tax exemption on gains accrued during the savings term and at point of withdrawal. This exemption should apply to nonrecurrent-deposit and periodic-deposit (monthly or other) plans. When the predetermined term of savings has expired, the saver must withdraw the funds or redeposit them in a savings arrangement of his/her choosing, thus avoiding the possibility of a tax exemption on liquid accrual. Advanced-Training Funds The tax rules applying to contributions to training funds should not be changed. Savers should not be allowed to make new contributions to training-fund accounts that are six years old. New contributions should be made to new accounts. Training funds should be taxable, at the saver's personal income-tax rate, for gains accrued on financial assets in new accounts. Accruals in training-fund accounts that were opened a priori for a term of ten years or more should be fully tax-exempt. At the end of this term, the sum accrued should be redeemed; the option of leaving it liquid should not be permitted. Such a fund should be managed separately from the other training funds. Withdrawals from training funds should remain tax-exempt. The new provisions should apply to training-fund accounts opened after the day on which the legislation containing these provisions is passed. The previous provisions should continue to apply to old accounts, but when the savings term reaches six years, new contributions to the account should not be permitted. Medium- and Short-Term Savings (Up to Ten Years) general The new tax provisions should be personal and should apply to financial assets that need not be recorded in the books of a business. The tax rate should be final, and withholding should be compulsory. Indexed Savings All savings instruments that are fully linked to a price index or an exchange rate -- including bonds traded on the stock exchange that were issued pursuant to a prospectus, approved savings plans, and deposits with financial institutions -- should be included in this category. Nominal interest on savings fully linked to the Consumer Price Index or an exchange rate should be taxed at 10 percent. The tax rate interest on new indexed bonds should be lowered from 35 percent to 10 percent. The discount component on bonds, if any, should be taxable as interest paid at point of redemption. Special tax rules should be instituted for accrued interest on bonds that is payable over a term exceeding one year. Any index- or exchange-rate payment exceeding the increase in the index or the exchange rate during the relevant term, as well as any extra discount, should be regarded in this context as interest taxable at point of redemption. Non-Indexed Savings This category should include all savings instruments that are not linked to the Consumer Price Index or an exchange rate, such as approved savings plans, bonds issued pursuant to a prospectus, and deposits with financial institutions (which have been tax-exempt thus far). Nominal interest on non-indexed savings should be taxable at 5 percent. The Minister of Finance should be empowered to modify the tax rate in regulations from time to time in order to align it with the tax rate on interest on indexed instruments. For short-term instruments that do not bear interest, such as Treasury bills, the difference between redemption value and acquisition cost should be treated in the manner of nominal interest. A method for the taxation of Treasury bills at point of sale should be devised on the basis of LIFO or FIFO. Acquisition commissions and other expenses, including interest expense, should be subtracted from the price on the basis of which the tax is computed. Special tax rules should be instituted for accrued interest on bonds that is payable for a term exceeding one year. Assuming that the banks make the appropriate preparations, it is proposed to divide non-indexed savings into two categories according to term: savings of up to three months, for which nominal interest will remain taxable, and savings for more than three months, on which the interest will be taxable at 10 percent, in the manner of indexed savings. In other words, the acquisition cost should be adjusted in accordance with the Consumer Price Index. The real interest rate should be computed by the banks at the time the yield is credited to the saver, and the tax applying to this interest should be deducted at source. Nontradable Bonds To stimulate activity in tradable bonds on the capital market, and to prevent tax avoidance in nontradable bonds, the Committee proposes that lower the tax rate applying to bonds not traded on the stock exchange not be lowered. Accordingly, the Committee proposes that interest on nontradable bonds remain taxable at 35 percent. Foreign Securities The committee believes it important to diversify the investment portfolio of institutional investors, and of the public at large, and to integrate these investors into international capital markets. Therefore, the Committee proposes that the tax rate on foreign securities be reduced from the current level of 35 percent to 25 percent on interest, capital gains, and dividends (as currently defined) and to 20 percent one year later. To express the preference of trade and activity on the domestic capital market, and in consideration of Israel's foreign reserves, the Committee does not propose that the tax rate on foreign securities be aligned with that applying to securities traded in Israel. Mutual Funds Mutual funds should be taxed at the investor's personal income-tax rate and in accordance with the financial instruments they hold, subject to adjustments for exempt entities and business entities. Taxation of Dividends It is a characteristic of the Israeli share market that few companies award dividends as a matter of permanent policy. The Committee believes that the distribution of dividends would stimulate the public's interest in the domestic capital market and strengthen relations between traded companies and non-controlling shareholders. Accordingly, the Committee proposes that the tax rate on dividends distributed by publicly traded firms be reduced from 25 percent to 15 percent. Incidence of the Provisions The new tax provisions should be applied in the following ways: On savings plans -- The new tax provisions should apply to plans begun after September 15, 1996 (hereinafter: the determining day) for a term shorter than ten years. The provisions should not apply to new deposits in plans begun before the determining day. On bonds (including Treasury Bills) -- The provisions should apply to bonds issued after the determining day. On deposits -- The provisions should apply to deposits made after the taxation is set forth in legislation, including deposits rolled over before this time. On foreign securities -- The provisions should apply to sale of securities purchased after the day the tax-rate reduction is set forth in legislation. On dividends -- The provisions should apply to dividends announced after the day the tax-rate reduction is set forth in legislation. On mutual funds -- The provisions should apply in accordance with the tax incidence on each financial instrument held by the fund. On life-insurance policies not meant for retirement age -- The provisions should apply to policies purchased after the day the tax-rate reduction is set forth in legislation.
	Primary and Secondary Markets
	In these regards, the Committee recommends the following: An accounting-standardinstitution should be estain order to unify all existing accounting-standards powers and gather them under one and only one roof. International auditing standards concerning the format and level of auditing of financial statements should be adopted in all matters not regulated by the Bureau of Certified Public Accountants in Israel. The Committee proposes that the Ministers of Finance and Justice, with the consent of the President of the Supreme Court, consider the formation of a court for economic affairs that would specialize in and adjudicate cases involving securities, banking, insurance, and antitrust. The Committee recommends the following additional measures: acceleration of the privatization of State-owned corporations and "arrangement banks," in ways including mass distribution of their shares to the public. swifter progress in passing the new Companies Law, for various purposes including permission for companies to acquire their own shares. encouragement of distribution of dividends, by lowering the tax rate applying to them. (See chapter on savings policy.) action to reduce centralization in the financial-services sector by introducing the personal provident fund (IRA). development of new financial instruments (securities backed by mortgages and other assets, commercial paper, and participation units in limited partnerships). measures to encourage foreign investors to become active in the Israeli capital market. refinement of trade on the Stock Exchange.
	Formation of a Secondary Mortgage Market
	In the Committee's opinion, the paucity of sources for mortgages is one of the major structural problems in the capital market. Redirection of additional sources from long-term savings to the capital market would eventually relieve some of this paucity. Furthermore: The Committee recommends that preparations continue for the formation of a secondary mortgage market. Such preparations are currently being made by the Accountant-General of the Finance Ministry, in coordination with the mortgage banks and other capital-market players. The Committee proposes that a team chaired by the Accountant-General, with the participation of representatives of the Finance Ministry and the Bank of Israel, be established to consider within 60 days the actions needed to expedite the formation of a secondary mortgage market, modelled after the American one except for adjustments to the domestic capital market and the infrastructures that have taken shape in Israel. The team's examination should make reference to the necessary extent of government involvement in creating the secondary market, in the senses of legislation, taxation, insurance, and guarantees.
	Coordination and Supervision of the Capital Market
	A team of capital-market regulators -- the Chairman of the Israel Securities Authority, the Commissioner of Capital Market, Insurance, and Savings, and the Commissioner of the Antitrust Authority -- worked out a format for the activation of a coordinating body, which was adopted by the Minister of Finance and the Governor of the Bank of Israel. Several recommendations of this team follow: A committee should be established to coordinate the actions of the capital-market regulators (hereinafter: the coordinating committee). The coordinating committee should be composed of five members: the Chairman of the Securities Authority; the Supervisor of Banks; the Regulator of the Capital Market, Insurance, and Savings; the head of the Antitrust Authority; and a chairperson appointed jointly by the Finance Minister and the Governor of the Bank of Israel. The supervisory powers currently vested in each of these regulatory agencies should remain in effect. The coordinating committee should be empowered by law to make and enforce its decisions in cases where the regulators disagree about the application of powers that are held by two or more regulatory agencies. The committee recommends that the recommendations of this joint team be adopted, and urges the Finance Minister and the Governor of the Bank of Israel to create a team to examine, within 60 days, alternatives to the proposed modus operandi and their significance, and to draft the requisite legislation for the formation of the statutory coordinating committee.
	Division of Capital-Market Activity between the Government and the Bank of Israel
	A subcommittee of our Committee, including officials from the Finance Ministry and the Bank of Israel, reached the conclusion that monetary policy should be implemented not via the primary market (as is done today, through the issue of Treasury bills) but by means of operations on the secondary market (as is conventional in most developed countries). The Committee proposes that the Finance Minister and the Governor of the Bank of Israel establish a joint team to consider, within 45 days, how to divide the capital-market activities of their respective entities in the long term. The team should set forth the changes required in detailed recommendations.
	Structure of the Financial-Services Sector
	Many of the petitions presented to the Committee concerned the highly problematic nature of the financial-services sector, in its current structure, and the dominance of the banks and the institutional investors affiliated with them (provident and mutual funds) in the capital market. In view of its wish to complete its work by its stipulated deadline, the Committee preferred to overlook the broad question of the structure of the financial-services sector within this time frame. The Committee considers this a major issue in the future performance of the capital market. Therefore, it proposes that the Minister of Finance appoint a committee to consider the future structure of the sector and to propose measures that will make the sector less centralized than it is today.
	Legislation and Implementation
	The Committee believes it important to complete the legislation and the regulations needed to apply its recommendations by the beginning of FY 1997. To accomplish this, the Committee proposes that the matter be presented to the government for resolution as expeditiously as possible and, concurrently, to draft the requisite legislation, regulations, and provisions. Consequently, the Committee recommends that the Finance Minister promptly appoint a team of jurists to prepare the legislation and adjust the tax laws pursuant to the decisions that will be made. The Committee also proposes the formation of a steering committee to guide the work of the teams that will deal with various matters and to monitor progress in implementing the decisions.