Temporary Order – Implementation of Disclosure Requirements According to Layer 3 of Basel – Disclosure Regarding Compensation

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02-6524590 :Fax 02-6552475 :Tel 91007 Jerusalem 780 P.O.B

Israel The Supervisor of Banks Policy Department P.O.B. Kislev 3, 5773, Tel Aviv November 26, 2013

Circular No. 2404-06-H To: Banking Institutions and Credit Card Companies

Subject: Temporary Order – Implementation of Disclosure Requirements According to Layer 3 of Basel – Disclosure Regarding Compensation (Instructions for Public Reporting)

Introduction

1. In July 2011, the Basel Committee on Banking Supervision published additional disclosure requirements according to Layer 3 of Basel. These additional disclosure requirements (hereinafter: "the Additional Disclosure Requirements") are intended to support market discipline in the market. They enable market participants to effectively assess the quality of remuneration systems and the manner in which they support the risk strategies and conditions of banking institutions.

2. On November 19, 2013, Circular 2403-06-H was published, which sets rules to ensure that remuneration arrangements in banking institutions are consistent with sound risk management frameworks and the long-term interests of the banking institution.

3. Following consultation with the Committee on Matters Related to Banking in connection with the Institute of Certified Public Accounts in Israel, I hereby update the instructions for public reporting as detailed below.

4. A new Section A694 is added to the aforementioned Circular, containing the requirements for disclosure regarding compensation, as detailed in the Circular.

5. An additional clarification is added to Section 818 of the aforementioned Circular, referring to the new disclosure requirements as detailed in the Circular.

6. The definition of "Senior Officer" is clarified in the Instructions for Public Reporting, page 630-6, as detailed in the Circular.

Explanation:

To incorporate the Additional Disclosure Requirements into the Instructions for Public Reporting:

Additional definitions have been added to clarify the different terms used in the disclosure requirements. These definitions are based primarily on the definitions included in the Guidelines on Remuneration Policies and Practices issued by the Committee of European Banking Supervisors (CEBS) in December 2010. They also include references to definitions set in other parts of our instructions.

It should be noted that, similar to other disclosure requirements under Basel, the disclosure required by this instruction can be included in a separate report on the banking institution's website or by reference to pages 6-9 of the Instructions for Public Reporting (Circular 694A-2).

1. Basel Committee on Banking Supervision, Pillar 3 Disclosure Requirements for Remuneration, July 2011
2. Committee of European Banking Supervisors, Guidelines on Remuneration Policies and Practices, December 2010

2 2

Effective Date

7. This Circular shall take effect from January 1, 2014. There is no need to provide comparative disclosure figures for the year 2014. This is the first time that quantitative data is required as a result of this Circular.

Update of the File

8. Update the pages of the "Instructions for Public Reporting" file as follows:

Page to Insert	Page to Remove
*(2/09) [14] 630-5	(2/09) [14] 630-5
(11/13) [18] 630-6	(6/09) [17] 630-6
(11/13) [4] 694A-3	(8/13) [3] 694A-3-4
*(8/13) [3] 694A-4	------
(11/13) [3] 694A-21	(8/13) [2] 694A-21
(11/13) [1] 694A-21.1- 21.5	------
*(8/13) [1] 694A-22	(8/13) [1] 694A-22
*(9/13) [3] 699-108	(9/13) [3] 699-108
(11/13) [2] 699-109	(10/13) [1] 699-109

• This page was reprinted due to the transition to double-sided printing. The update is identical to the existing text.

With highest respect,

David Zuck Supervisor of Banks

(11/13) [18] Instructions for Public Reporting: Supervisor of Banks Page 630-6 Director's Report Page 630-6.1 – The following:

Under Section 4 of Circular 301A "Remuneration Policy in Banking Institutions" – "Senior Officer" means:

(b) When the Annual General Meeting requires a report on the Auditor's fee, the report shall be given in at least the format of the example in Appendix G to Sections 165 and 167 of the Companies Law.

(c) If there are significant differences between the estimates, assumptions, and other factors, details shall be provided regarding the reasons for the emergence of these differences and the realization of these estimates compared to the three years prior to the reporting date, including an expert opinion on the basis of the valuation, the impact of these differences, and the "expert opinion," "valuation basis," and "report" as defined in Section A4 of Circular 620-4 "Annual Report of a Banking Institution" – Instructions for Public Reporting.

(d) Prior to this section, disclosure shall be given on "Remuneration of Senior Officers" according to the following procedures:

Definitions (1):

Under Section 1 of Circular 1 and this section regarding the Quarterly Report – "Banking Institution" means:

"Internal Control Procedures and Disclosure" means "Significant Internal Control Procedures and Disclosure" as defined in Circular 309 "Remuneration Policy in Banking Institutions" – (Circular 309 – hereinafter) "Internal Control and Disclosure of Financial Reporting".

(11/13) [4] Instructions for Public Reporting: Supervisor of Banks Page 694A-3 Implementation of Disclosure Requirements According to Layer 3 of Basel – Temporary Order

10. Quantitative data related to balance sheet items shall be provided at the end of the reporting period, unless otherwise specified. Quantitative data related to income statement items shall be provided for the reporting period. Quantitative data related to income statement items shall be provided in the quarterly report for the periods specified in the section.

11. Unless otherwise specified, for any quantitative data disclosed as a result of the requirements of this Temporary Order, comparative data for periods corresponding to the previous reporting year shall be presented.

12. The disclosure requirements of this Temporary Order shall apply on a consolidated basis.

Part IV: Layer 3 – Market Discipline: Relevant Sections *

General Considerations .I

Sections A – D are not included.

Materiality .H

817. A banking institution must decide which disclosure requirements are relevant based on the principle of materiality. Full disclosure details shall be provided in all cases, including "details on the composition of regulatory capital" in tables included in the "disclosure on required adjustments between the balance sheet and financial statements" in Appendix 3, and "disclosure on components of regulatory capital" and published financials.

Frequency .V

174, 175

Despite the quantitative disclosure requirements set forth in this Temporary Order on a quarterly basis, there is no obligation to disclose. Provided that the disclosure requirements included in the annual report according to Section 827 apply, a qualitative disclosure on an annual basis summarizing the risk management policies and objectives is sufficient. However, in cases where significant changes occur in the banking institution's risk profile and remuneration policies and reporting systems, the banking institution's management may determine that disclosure on a quarterly basis is necessary. In such cases, as mentioned, the bank must disclose the general nature of these changes and briefly describe how they are expected to affect the bank's capital adequacy and risk profile.

• The numbering of sections in this Temporary Order, including marginal notes, corresponds to the numbering in the Basel III working framework. However, not all sections included in the Basel III working framework are included in this Temporary Order. Sections not included in this Temporary Order are: 174, 175.

(11/13) [3] Instructions for Public Reporting: Supervisor of Banks Page 694A-21 Implementation of Specific Disclosure Requirements According to Layer 3 of Basel – Temporary Order