Reverse certificates are financial instruments whose performance is opposite to the underlying index. In other words, a decrease in the index – increases the certificate’s value, and vice versa.

Reverse certificates can serve as a substitute for short selling. The price of a reverse certificate is the difference between the exercise price and the index, at that point in time. The terms of the certificates specify that if the index reaches 80% of the exercise price determined in the prospectus, the company will carry out a forced early redemption of the certificate.

A covered warrant is a type of warrant that allows the holder to buy or sell a specific amount of an underlying asset from the issuer at a specific price and time, similar to a long position on an option (call/put).

Investors can use covered warrants to protect their investment against the rise or fall of the underlying asset’s price. The instrument can also serve as an alternative to an investment in the underlying asset.

The issuer, usually a bank or a similar financial institution, holds the short position, while the investor hold the long position.

Under the TASE listing requirements, covered warrants may be issued on international indices (such as the S&P500 index, the Nasdaq-100, the Dow Jones), on commodities and on currencies.

Three kinds of complex certificates are permissible:

1.      A certificate tracking multiple indices
The weight of each index is predetermined in the prospectus and may not be adjusted or changed.

For example, a given certificate could track the TA-100 index (25%)and the linked bonds index (75%).

2.      Certificates tracking formulae based on a given index
In some markets these certificates are called "Accelerated Trackers". For instance, a given certificate might grant double exposure to an index (leverage).

Example: An investor buys a certificate for NIS 100. The issuer borrows another NIS 100 and buys the underlying asset in the value of NIS 200. Upon conversion, the investor is entitled to receive double the index’s return during the relevant period of time minus interest that the issuer paid for the loan.

The exposure to the index is doubled, and the risk is greater than that entailed in a regular index-linked note. If the index rises, the investor wins double returns. But if the market falls, the loss is doubled.

3.     Index-linked notes tracking variable indices 

The prospectus must state up to 10 possible indices. The issuer can change the index that the certificate tracks up to four times a year, with 7 days’ advance notice.

The list of potential indices must be stated in advance in the prospectus. No other indices may be added later on.

During the advance notice term, the issuer shall not charge conversion fees. If a holder wishes to sell the certificate consequent to the change, it can be done at a low cost.

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