This article was written by David Woliner, Head of Financial Regulation at Porat & Co. Law Firm.
On the evening of October 23rd, 2017, amendment 66 to the Israeli Securities Law was passed into law by the Israeli Parliament. All those affected by the law now have approximately 3 months to comply (formally – 3 months starting the day the law is published in the government official publication), which for most of those involved in the binary options industry means closing down their business.
This is far from being a surprise. All industry players who followed regulatory news in Israel over the past year or so have felt the ground shaking beneath their feet. Their fears have now materialized, as this amendment means the de facto shut down of the binary options industry in Israel.
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So, how far reaching is the amendment? It suffices to quote the law itself to understand that it encompasses all core activities linked to binary options. The amendment introduces the term “managing a trading platform” (which offers binary options, that is) as follows:
- Formulating the strategic decisions of the trading platform;
- Operating the trading platform, including through operating the computerized system in which the trading platform operates, pricing of the financial instruments, clearing of financial instruments and clients’ funds, and operating customer or marketing centers, either phone based or internet based, whether directly or through the use of a service provider.
Shut down or relocate
In practice, all of the above means that:
- Shareholders and managers of trading platforms offering binary options to clients based outside of Israel will have to reevaluate their status, which may lead them to either resign from their posts, sell their shares or relocate, amongst other alternatives;
- Brokers and call centers based in Israel will either immediately cease to offer binary options to clients based outside of Israel (they are already forbidden from doing so to Israeli clients), relocate or close down;
- Payments and clearing services providers based in Israel will either cease to provide services to binary options operators, relocate or close down;
- Technology and platform solutions providers will be allowed only to provide research and development services (in other words – to develop the trading software) and to sell trading software as a shelf product. Any service beyond that will be considered as “managing a trading platform”. The application of the amendment on technology and platform solutions providers was the most debated in the parliament, with technology providers warning about the far reaching connotations of the amendment on the wider technology industry. They argued that trading software cannot be viewed and labeled as a shelf product as the most popular model of providing services to trading platforms is called Software as a Service (SaaS), which includes providing ongoing technical support and software updates along with a fee model derived from the trading platform’s activities, mostly the trading platform’s turnover. The regulator countered by stating that providing ongoing support, and especially a fee model derived from the trading platform’s turnover, amounts to the technology provider operating a trading platform.
FX and CFD providers beware
It remains to be seen how the amendment will be enforced, and how much flexibility the Israeli Securities Authority (ISA) will show when industry players, especially technology and platform solutions providers, seek relief or exemption from the ISA by trying to establish that their services do not amount to operating a trading platform but rather are in the permitted realm of software development.
One needs to remember that the ISA’s original amendment proposal was to be applied on the providers of forex and CFDs products. Eventually, the amendment will apply only to binary options, but the amendment grants the finance minister the power to add other financial instruments to the ban, pending approval by the Israeli parliament. FX and CFD providers need to stay alert.