Exclusive: Israeli Watchdog to Ban Volatile Exotic Pairs and Indices CFDs
Head of forex lobby: "Some companies are reconsidering their future presence in the Israeli market."
The Israel Securities Authority (ISA) is placing yet another block in the road for licensed online trading in the country. Finance Magnates has obtained a copy of an official paper sent to brokers by the ISA’s division for regulating the stock market and trading arenas on May 1, showing new limitations on trading instruments.
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The Israeli watchdog intends to ban financial instruments for which brokers do not have the legal rights to display their trademarked commercial names and symbols. Firms will need to display for each instrument exactly which base asset it is following and its official trading name on the stock exchange.
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The ISA also specifically details that a new list of instruments it will not allow offering CFDs on for trading: FTSE/MIB, Hang Seng, IBEX 35 and SPI 200 as well as EUR/CZK, EUR/DKK, EUR/HUF, EUR/TRY, TYR/JPY, USD/CZK, USD/DKK, USD/HUF, USD/TRY, USD/RUB and the USD/ZAR.
The reasons for banning the instruments on this list according to the ISA are lack of liquidity and “too much volatility” – exactly what traders look for. The watchdog also says that it will only approve CFDs of indices from the world’s leading exchanges – “to ensure they are calculated in a professional matter.”
The ISA even goes so far as dictating how the CFDs will be calculated, determining that they must simply be based on the earliest to expire futures contract on the base assets – which could cause a problem with offering non-expiring CFDs based on a weighted average of futures contracts.
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Targeting the industry
An important player within the Israeli forex industry that wished to remain anonymous commented on the ISA letter to Finance Magnates, saying that the same reasoning the local watchdog is using to ban CFDs on some currency pairs – low liquidity – can also be used to ban trading in the stagnant Tel-Aviv stock exchange itself: “The ISA is trying to separate the forex industry from the rest of the financial industry by limiting OTC trading. Year on year we see enormous growth in OTC forex globally, and while EMIR and Dodd-Frank are all about increasing volumes, the ISA is bizarrely going the exact opposite way.”
The second consequence of this move, the source said, is that the ISA is limiting brokers’ freedom of employment: “While people can get access to financial instruments on credit from the banks, which in the past lead some famous businessmen to great losses on forex trades, in our industry we don’t give credit which protects the clients. Unlike with the banks our clients are safe since they cannot lose more money than they deposited. Practically, the ISA dictates to clients how and where to trade while the banks offer no worthy alternative.”
Brokers to leave Israel?
Speaking with Finance Magnates, Mr Tzah Druker, the Head of the Israeli Trading Arena Association, which represents the industry in its dealings with the regulator, had this to say: “The industry’s greatest concern was realized today as the ISA considers implementing severe trading restrictions concerning the offering of standard instruments such as RUB, TRY, ZAR, DKK etc.
While ignoring the questionable professional approach and even potential political mishap of the ISA offending countries such as Turkey, Russia, South Africa, Denmark, Czech Republic and Hungary by questioning the stability, liquidity and risk level of their currencies, limiting the offerings of Israeli companies and forcing those to quote nonstandard assets such as the closest expiring future contract will create an unbalanced and even risky business models for the companies and the customers alike.
Some companies are reconsidering their future presence in the Israeli market, and those few who will choose to continue with the regulatory process will be severely crippled compared to their international counterparts.
When deciding with whom to invest, customers take into account all variables including price, instruments variety, company’s stability, instrument comparability and regulatory status. At the present state the companies are not certain that the existing business model will remain viable with the latest and future ISA circulars and directives.
Israeli customers will be worse off if required or pushed to non-regulated entities due to lack of alternative in the Israeli regulated market. We hope that the ISA will refrain from implementing those and other current and future market barriers.”
Well…one can effectively say online trading is basically banned in the holy land.
Good thing…other countries trading is kicking on well.
Maybe the next target will be to ban all Israeli passport holders from ever trading local or international.
This article doesn´t seem to talk about the Indices pressure on regulators. As I understand companies such as FTSE are pressuring brokers to rename Indices traded from UK100 to FTSE100, which will require brokers to licence the name of the use of FTSE, something that brokers moved away from when index providers started chasing them for fees. If I have understood correctly, it would be interesting to see how index providers have been lobbying the the ISA, and whether they have also been lobbying other jurisdictions. This would no doubt be a costly endeavour for brokers.
Hi Andrew,
The ISA did not share the reasoning behind the move, as explained in this section: “The Israeli watchdog intends to ban financial instruments for which brokers do not have the legal rights to display their trademarked commercial names and symbols. Firms will need to display for each instrument exactly which base asset it is following and its official trading name on the stock exchange.”
However, Finance Magnates did cover this issue in a recent post: http://www.financemagnates.com/institutional-forex/execution/exchanges-clamp-down-as-unlicensed-firms-distribute-their-data-feeds/
Here’s the thing. A CFD is a synthetic, OTC contract. So there is no requirement to use the official name. Because the name UK100 is a name made up by a broker or LP to make up the synthetic contract FTSE100. How can an exchange stop this? As long as they do not mention FTSE100, aren’t they ok? I suppose the Index originator could stipulate that their data cannot be used to create a synthetic contract that is identical to the original feed. But that’s like saying that you cannot make a bet on a horse outside of the racetrack.… Read more »
I believe the current situation is that exchanges need proof that a trader cannot manipulate the synthetic contract to obtain the original price. That’s to say the LP cant simply add 10 and subtract 10 and call it a synthetic price. I believe the synthetic price is marginally different to the original price for that reason. So exchanges (it isnt actually the exchange but rather the index provider, FTSE is different from LSE) are most likely looking for ways to clamp down on this and generate additional revenue, one way is to force people to use the brand FTSE100 or… Read more »
Thanks Dan. I think there might be confusion between licencing of the price feed and also licencing of the use of the brand ‘FTSE100’ as an example. Hence why brokers use UK100. Also are CFD pricing exactly the same as vanilla pricing?
Would someone please clarify this point:
Does the ISA restrict foreign regulated brokers from on-boarding Israelis? (And for simplicity’s sake, let’s say without the firms soliciting the prospective clients.)
I’ve received some conflicting information from foreign FSA regulated brokers, so if you could even give direct to a source of the information that would be great. I wasn’t at all able to find the information readily available (not in english, at least).
So far the ISA did not comment on restricting foreign brokers (regulated or not) from on-boarding Israelis, which is why the Israeli firms fear clients will just move elsewhere.
However, they don’t make their plans public so they might be thinking about it.
Thanks Avi.