Exclusive: FXCM Speaks Out On Potentially Damaging Effects Of Israel's Proposed Regulatory Reform

Following an exclusive revelation by Forex Magnates that Israel's ISA plans to impose extremely strict capital adequacy, leverage and client

On the subject of Forex Magnates’ exclusive revelation today surrounding Israel’s financial markets regulator the Israel Security Authority (ISA)’s plans to implement extremely strict new regulatory conditions to which all FX firms marketing to a domestic client base must adhere, the future of the industry within Israel hangs in the balance.

Israel’s highly developed and very large FX industry mostly serves an international audience, however for those companies with a client base and retail FX offices within the country, the landscape of the entire industry is set to change if the Knesset Finance Committee accepts the regulator’s proposals.

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Forex Magnates obtained an exclusive dossier on the entirety of the proposed new rulings, and invited senior management of FX firms in Israel to provide perspective from the inside on the potential effects.

Alarming Potential Effects

Tal Zohar, CEO of FXCM Israel attended the government meeting last week with the ISA, whereby the proposed rules were discussed at length.

2012-02-14 17.44.26
Tal Zohar,
CEO, FXCM Israel

Mr. Zohar has a particularly detailed knowledge of the regulatory structure in Israel, as aside from his position at FXCM, he is the Chairman of the Trading Arena Association, which consults with the ISA on all regulatory matters for the Israeli market.

New Rules Potentially Stifling

“Initially, the new rulings were brought into place to create confidence but actually the new proposed regulation puts so many restrictions not only on the brokers but also on the clients, making it unattractive for them to use Israeli companies” warned Mr. Zohar.

“We think most clients will therefore waive their right to protection and will go for foreign companies, which is quite possible” he explained. “If a regulated broker abroad in England or North America takes an Israeli client, the company breaks Israeli law but the client does not break the law at all, therefore an Israeli client can quite legitimately use a foreign broker, as long as the broker is willing to receive the client.”

FXCM In Negotiations With Officials

“We at FXCM here in Israel consider the market to be competitive enough already, especially with the Tel Aviv stock exchange having halved its volume due to extremely strict regulation.”

“We want to provide protection to the client base but we also want to be able to provide attractive trading conditions to the client in order to be able to keep the client base in Israel and serve the economy of the country, keep the business in Israel and continue to provide more employment within Israel.”

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Mr. Zohar put this to the regulators in last week’s meeting, and explained to Forex Magnates that “it seems that the ISA understands our point, however due to the negative ambience created in the retail FX market in general Israel, the authorities are trapped in the concept of making strict rules.”

Either Leverage or Capital Adequacy – Why Both?

Mr. Zohar made the point that it is a very self-defeating proposal to restrict leverage to very low levels as well as demand high capital requirements. It is his opinion that the client can be served well by either having high leverage and high capital requirements, thus allowing the client to have favorable trading terms whilst reducing exposure, or to have low leverage and low capital requirements for the same reason.

“If, for example, the FCA in the UK is asking for high capital requirements to reduce exposure but allow high leverage, this is sensible. Most regulators around the world, when designing how to mitigate client exposure, saw it as give and take” explained Mr. Zohar.

“Here in Israel they took examples from the local Israeli market and from other regulators, and from their own way of thinking, which has resulted in such a strict environment where there is no give and take at all”.

“A Very Expensive Business”

“To sum it all up, we are mostly worried about two things” continued Mr. Zohar:

“Firstly, due to the current leverage limitations, we worry that even if we have the ISA license we will not be able to be competitive enough, and therefore clients will not choose us, even if we have very good quality regulation and the client cannot possibly risk his investment, as we simply will not be allowed to offer good enough trading conditions, therefore driving Israeli business abroad”.

“Secondly, the mininum capital requirement is $1.2 million to legally operate an FX brokerage in Israel. This doesn’t seem a lot, but overall the number of clients throughout the entire country is less than 5,000 and yet the capital requirements are the same as that of the UK. This is potentially a very expensive business”.

“The problem with this is that it will make venture capital investors look away. Why would an investor fund an FX brokerage in Israel, if for the same outlay they can go to another jurisdiction, and attract thousands more clients and offer them better conditions?”

Mr. Zohar summed up by explaining that “the actual real cost is much higher than $1.2 million. If you look at the capital requirements plus the cost of administering such a detailed set of regulatory procedures, its closer to $2.5 million just to meet requirements.”

“As I mentioned before, it has to be give and take, and friendly to the brokers as well as the clients. If the regulators want to be so over protective with the terms, don’t ask for such high capital requirements. If they want to make high capital requirements mandatory, then they should let terms be more favorable otherwise it will be very destructive to the industry .”

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