Israel finally passes forex legislation

Granted it has taken Israeli authorities more than 1.5 years since the first legislation offer but this has finally happened.

Granted it has taken Israeli authorities more than 1.5 years since the first legislation offer but this has finally happened.

According to Israeli newspaper Calcalist the new legislation by the ISA (Israeli Securities Authority)  imposes several drastic changes on this otherwise unregulated and sprawling industry. There are literally dozens of forex brokers operating out of Israel, most of them displaying Cyprus or other foreign phone numbers in order not to being identified as such by the large Muslim forex trading audience. All of these brokers are expected to be affected by the new rules.

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The new rules include the following amongst other things:

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  1. Leverage reduction from the typical 1:200 or even 1:500 to only 1:25. Similar to Japan and US.
  2. Requirement to deposit customer funds in segregated accounts either in an Israeli or in a G7 bank. This would stop brokers from accepting funds into bank accounts in God knows where and which cannot be reached even if there’s a lawsuit.
  3. Requirement to cease giving investment advice to traders. This is one of the worst features of this markets where brokers, who have huge interest to see traders lose their money (all of these brokers are hardcore market makers), are actually giving investment advice to their clients. Surprisingly this investment advice tends to cause people lose money.
  4. Monitoring of advertisements which will not me misleading and will include a risk warning from now on. There are advertisements by some brokers promising x100 and x1000 return on investments. Naive investors still fall for that.

As much as I’m not a big fan of regulatory framework worldwide, in this region this move makes a lot of sense as these brokers were never regulated and pretty much did what they wanted with their clients.

These steps are very welcomed and it’s a great beginning. However I would expect ISA to later require minimal capital adequacy and establish a Ombudsman compensation service just like FSA requires in order to actually make this regulation effective and prevent brokers from going bust or running away with clients money.

It is also interesting how would the ISA identify brokers falling under its jurisdiction – completely operating out of Israel? Just sales office or just dealing desk? Management in Israel? Shareholders in Israel? It’s a big question as no doubt most of brokers will now want to find ways to avoid these regulations.

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