Exposure to Foreign Equity Futures and Regulation

This technical report discusses the increasing exposure of Israeli savings to S&P 500 futures contracts and the associated macroeconomic risks. It outlines how this exposure has reached a scale that poses potential stability risks in local capital and foreign exchange markets, particularly highlighted during the market volatility of March 2020 due to the Covid-19 pandemic. The report details the role of institutional investors in managing these savings, which account for a significant portion of the financial wealth in Israel. It explains the dynamics of futures contracts as a method of investment and the implications of high exposure to foreign equities. The report argues for macroprudential regulation to mitigate risks, particularly the requirement for minimum dollar liquidity for institutional investors and mutual funds. It emphasizes the need for regulatory measures to address the externalities of large-scale currency-exposed investments, especially in light of the growing volume of futures contracts held by these financial entities.