In 2012 the Israel Securities Authority (ISA) set out to bring FX trading in the country into its domain with new legislation. At the time, there was a string of high profile law suits against brokers and the regulators wanted to seize the opportunity to increase their reach. The ISA demanded urgency from lawmakers, saying: “We are going down this road only now after many families have already lost all they had.”
Israeli financial regulators seek to protect traders, even at the cost of harming local firms. A recent example can be seen in the case of investment houses, whose numbers have dropped dramatically – from over 600 to less than a 100 – in just a few years after the passing of more strict regulations relating to their operation.
Despite the state of urgency and emergency that the ISA tried to convey, lawmakers took their time and the Israeli FX and CFD markets went unregulated for almost two years. Now FX insiders are telling Forex Magnates that the regulation and licensing regime is almost ready and is expected to come to light in the next three months.
The law to grant powers to financial regulators in demand to regulate brokers has already been passed in the form of an amendment at the Knesset (the Israeli parliament) and only the specifics of the regulation need to be ironed out now. Forex Magnates spoke with Tal Zohar, the CEO of FXCM Israel and the Chairman of the Trading Arena Association in Israel, who represents the industry in parliament. Following a discussion held last month in the Knesset subcommittee, Forex Magnates is closely following any developments to find out what lies ahead.
The proposals are not favorable, to say the least, for the local Israeli FX trading industry. 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 is feared. In the U.S., a maximum leverage of 50:1 caused many American traders to drop retail FX trading. A leverage of only half of that is likely to have stronger effects for the excitement of Israeli traders.
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Licensing costs are also expected to be prohibitive with about NIS100,000 ($29k) just for the application and about NIS260,000 ($75.5k ) for the annual license fee. Mandated multiple auditors and various forms of insurance will probably bring the yearly costs to about a million NIS ($290k) or more for an average broker and will only increase as trading volumes rise.
Additionally, massively high capital requirements ($1-10 million) will have the strength to drive all but the biggest players out of the market. Speaking with Forex Magnates, Mr. Zohar expected even the companies that can afford such capital requirements will have to reconsider having an Israeli local branch as their ROI will suffer from the new regulations.
A new mandatory risk warning to any new traders will also be required. One that seems designed to not only warn but to actually discourage trading FX and CFDs. For example, the very first sentence will state that the investor understands that the broker benefits from his losses, and his wins are the broker’s loss. Many other disclosures will also be required, including the number of traders, the percent of profitable traders (US style) and even overall exposures and assets, risk management methods and what counterparties the broker uses to hedge its positions will have to be exposed to the public.
As the new regulations do not ban Israeli citizens from trading with foreign brokers and apply only to Israel-based brokers, they can lead to an exodus of traders from local brokers who will only be able to offer very low leverage when compared to international competitors and would need to raise spreads to cover the expected added costs. An FCA regulated broker for example, offering leverage 10 to 20 times higher and the safety of segregated funds in the UK, might not seem to be unsafe to many Israelis comparing with an Israel-based broker.
It is expected that the new regulations will be approved by the parliamentary committees this summer and will become effective by early 2015. Forex Magnates will continue to follow the situation as it develops and report on any changes.