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FXCM's Tal Zohar Portends FX Broker Exodus after Israel’s New Edict

by Avi Mizrahi
  • Tal Zohar, Chairman of Israel’s Trading Arena Association, a lobby group representing the financial trading industry, spoke with Forex Magnates about the new Israeli regulations and their ramifications on the industry.
FXCM's Tal Zohar Portends FX Broker Exodus after Israel’s New Edict
Photo: Bloomberg
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Tal Zohar, Chairman of Israel’s Trading Arena Association, a lobby group representing the financial trading industry, spoke with Forex Magnates about the new Israeli regulations and their ramifications on the industry.

In the beginning of the month the Finance Committee of the Knesset, the Israeli parliament, approved new regulations on financial margin trading brokers in the country, limiting Leverage and requiring brokers to acquire a licence and more. To get a sense of where the industry is headed, Forex Magnates sat down to talk with Tal Zohar, CEO of FXCM Israel and the Chairman of the Trading Arena Association in Israel, the lobby group representing FX and CFD brokers.

A Storm Gathers

We last talked with Mr. Zohar in May, when the industry was bracing for very tough regulations following the proposals brought up before the committee. A maximum leverage of only 25:1 on major pairs and as low as 10:1 and 5:1 on commodities such as oil and metals was feared. Since then a number of discussions took place in the parliament where the industry brought up its case and tried to influence the final decision.

The main improvement in the regulation which the industry was able to secure is, according to Mr. Zohar, that margin FX and CFD gold-based trading is now considered only low-risk in accordance with the law and can be offered at 100:1 leverage. In addition to that, stock Market Indices of seventeen developed economies, as well as Government Bonds of Israel, U.S and countries with AA rating are considered medium-risk and CFDs based on them can carry maximum leverage of 40:1. All other trading instruments will automatically be considered high-risk and can only offer leverage of 20:1.

New Minimum Capital Requirements

The second major factor that will influence the industry that came out of the regulations is the new minimum capital requirements. Mr. Zohar’s analysis shows that, despite the fact that the official minimum capital requirements were lowered in the final regulations to only $1.2 million to a market making broker and $500,000 for an ECN, as the formula calculation is based on trading volume, even a small or medium size broker can easily be required to deposit two to three times the minimum figures. The Israeli Trading Arena Association estimated that there are only around 5000 active traders in the country so this kind of capital is substantial for the local market.

One issue that the industry was not able to resolve well with the regulator is marketing and advertising, according to Mr. Zohar. Brokers will have to display the new risk warning in-full included in every possible instance of marketing. This means that Facebook, Google and other online banner ads are completely impossible to use as the risk warning by itself is over fifty words and the text is limited. Additionally, every communication with a client, including the first time he is contacted must start with the broker notifying him that there is a conflict of interests and the broker profits from his losses, this is a very aggressive risk warning policy.

Insurance costs will also hurt the industry profits harder now, according to Mr. Zohar. The regulations will also demand from the brokers to issue many reports, and every interaction with a client will require some form of interaction with the regulator, raising the costs of compliance. Monthly reports, quarterly reports, yearly reports, immediate reports and even yearly legal opinions on any body they work with, including their computer and IT service providers will all drive up brokers’ expenses.

New Enforcement Force to Sharpen Teeth?

Mr. Zohar explained that the Israel Securities Authority (ISA), the body that the brokers have now been brought under its control by the regulations, has a very powerful enforcement force. In addition to its supervisors, the ISA also has an investigations department with the ability to impose fines in millions of shekels on brokers and act on the criminal level against the people that it supervises, meaning personal fines or jail time is a possibility of ISA investigations. It is not permitted to insure against these fines and the owners of the firms might bear personal responsibility in some cases, as firms are also not allowed to purchase insurance against ISA fines. Mr. Zohar added that the ISA has a negative perception of Forex companies and dedicated more people to enforcing the regulations than the number of firms who are expected to apply for the license – this is why he expects vigorous enforcement actions that will require additional resources from brokers.

Boaz Toporovsky, Member of Knesset and Chairman of the Securities Subcommittee of the Israeli Parliament, who has been leading the legislative process told Forex Magnates following the final approval: “It is clear to me that the regulations will cause some trading arenas to cease their business in Israel, some to merge and some to apply for a license according to the law. It makes sense that there will be a fewer number of arenas that can overcome all the control hurdles, but at the end of the day – our goal is one – to protect the citizens and ensure fair trade. In my opinion, the number of traders will grow and they will turn the market much more active and vibrant, as they will be assured their money is under the supervision of the ISA. When a citizen will feel safe and understand that the arenas are are under the watchful eyes of the ISA they will understand it can be a safe and legitimate investment.”

We asked Mr. Zohar to comment on the Knesset Member words and he said that he agrees that FX firms will leave the Israeli market: “There are not many companies active and I expect that many of those will exit the market because of the much reduced ROI and the risk of criminal prosecution against the owners.” Its important to remember, he added, that as the new regulations do not ban Israeli citizens from trading with foreign brokers and apply only to Israel-based brokers. Therefore it can lead to a flight of traders from local brokers to international competitors, which will reduce revenues even more, together with a significant increase on the expenses side due to the high ISA regulatory requirements. Both income and expenses sides are leading to high uncertainty and questionable ROI.

The timetable to implement the regulations is six months from August 2014.

tal zohar

Tal Zohar, Chairman of Israel’s Trading Arena Association, a lobby group representing the financial trading industry, spoke with Forex Magnates about the new Israeli regulations and their ramifications on the industry.

In the beginning of the month the Finance Committee of the Knesset, the Israeli parliament, approved new regulations on financial margin trading brokers in the country, limiting Leverage and requiring brokers to acquire a licence and more. To get a sense of where the industry is headed, Forex Magnates sat down to talk with Tal Zohar, CEO of FXCM Israel and the Chairman of the Trading Arena Association in Israel, the lobby group representing FX and CFD brokers.

A Storm Gathers

We last talked with Mr. Zohar in May, when the industry was bracing for very tough regulations following the proposals brought up before the committee. A maximum leverage of only 25:1 on major pairs and as low as 10:1 and 5:1 on commodities such as oil and metals was feared. Since then a number of discussions took place in the parliament where the industry brought up its case and tried to influence the final decision.

The main improvement in the regulation which the industry was able to secure is, according to Mr. Zohar, that margin FX and CFD gold-based trading is now considered only low-risk in accordance with the law and can be offered at 100:1 leverage. In addition to that, stock Market Indices of seventeen developed economies, as well as Government Bonds of Israel, U.S and countries with AA rating are considered medium-risk and CFDs based on them can carry maximum leverage of 40:1. All other trading instruments will automatically be considered high-risk and can only offer leverage of 20:1.

New Minimum Capital Requirements

The second major factor that will influence the industry that came out of the regulations is the new minimum capital requirements. Mr. Zohar’s analysis shows that, despite the fact that the official minimum capital requirements were lowered in the final regulations to only $1.2 million to a market making broker and $500,000 for an ECN, as the formula calculation is based on trading volume, even a small or medium size broker can easily be required to deposit two to three times the minimum figures. The Israeli Trading Arena Association estimated that there are only around 5000 active traders in the country so this kind of capital is substantial for the local market.

One issue that the industry was not able to resolve well with the regulator is marketing and advertising, according to Mr. Zohar. Brokers will have to display the new risk warning in-full included in every possible instance of marketing. This means that Facebook, Google and other online banner ads are completely impossible to use as the risk warning by itself is over fifty words and the text is limited. Additionally, every communication with a client, including the first time he is contacted must start with the broker notifying him that there is a conflict of interests and the broker profits from his losses, this is a very aggressive risk warning policy.

Insurance costs will also hurt the industry profits harder now, according to Mr. Zohar. The regulations will also demand from the brokers to issue many reports, and every interaction with a client will require some form of interaction with the regulator, raising the costs of compliance. Monthly reports, quarterly reports, yearly reports, immediate reports and even yearly legal opinions on any body they work with, including their computer and IT service providers will all drive up brokers’ expenses.

New Enforcement Force to Sharpen Teeth?

Mr. Zohar explained that the Israel Securities Authority (ISA), the body that the brokers have now been brought under its control by the regulations, has a very powerful enforcement force. In addition to its supervisors, the ISA also has an investigations department with the ability to impose fines in millions of shekels on brokers and act on the criminal level against the people that it supervises, meaning personal fines or jail time is a possibility of ISA investigations. It is not permitted to insure against these fines and the owners of the firms might bear personal responsibility in some cases, as firms are also not allowed to purchase insurance against ISA fines. Mr. Zohar added that the ISA has a negative perception of Forex companies and dedicated more people to enforcing the regulations than the number of firms who are expected to apply for the license – this is why he expects vigorous enforcement actions that will require additional resources from brokers.

Boaz Toporovsky, Member of Knesset and Chairman of the Securities Subcommittee of the Israeli Parliament, who has been leading the legislative process told Forex Magnates following the final approval: “It is clear to me that the regulations will cause some trading arenas to cease their business in Israel, some to merge and some to apply for a license according to the law. It makes sense that there will be a fewer number of arenas that can overcome all the control hurdles, but at the end of the day – our goal is one – to protect the citizens and ensure fair trade. In my opinion, the number of traders will grow and they will turn the market much more active and vibrant, as they will be assured their money is under the supervision of the ISA. When a citizen will feel safe and understand that the arenas are are under the watchful eyes of the ISA they will understand it can be a safe and legitimate investment.”

We asked Mr. Zohar to comment on the Knesset Member words and he said that he agrees that FX firms will leave the Israeli market: “There are not many companies active and I expect that many of those will exit the market because of the much reduced ROI and the risk of criminal prosecution against the owners.” Its important to remember, he added, that as the new regulations do not ban Israeli citizens from trading with foreign brokers and apply only to Israel-based brokers. Therefore it can lead to a flight of traders from local brokers to international competitors, which will reduce revenues even more, together with a significant increase on the expenses side due to the high ISA regulatory requirements. Both income and expenses sides are leading to high uncertainty and questionable ROI.

The timetable to implement the regulations is six months from August 2014.

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