The State of Israel’s Knesset Finance Committee has reviewed proposed draconian and revolutionary proposals put forward by the nation’s regulatory authority the Israel Securities Authority (ISA), which has been revealed to Forex Magnates in the form of an exclusive official dossier.
The document details the proposals for limiting the amount of leverage which a company will be allowed to offer its traders as follows:
The collateral required to perform a client transaction is graded according to risk, and firms must not deviate from these parameters:
1) 20% of the par value of the transaction for transactions on financial instruments which pose high risk;
2) 10% of the par value of the transaction for transactions on financial instruments which pose moderate risk
3) 4% of the par value of the transaction for transactions on financial instrument which pose low risk
If these new proposals are implemented, dealers and risk managers must not allow customers to open a new transaction if the collateral provided is less than the total collateral required for all transactions that are open on a customer account plus the transaction amount of the position which a client requests to open.
Trader Exodus Imminent?
The Finance Committee is scheduled to discuss this matter again in a further meeting at the end of July but the assumption according to Forex Magnates sources is that the industry will do everything it can to attempt to postpone the discussion until after the Finance Committee returns from its summer vacation, so realistically the proposals could be implemented toward the end of 2013.
As a country with a very secure economy and investor protection high on the agenda, Israel’s government takes a serious approach toward conduct within the financial services industry and is very much concerned with the financial stability of the country’s population, and as part of the new rulings, FX companies will be required to publish their annual reports and management structure as public information.
Despite a large proportion of FX companies, both brokers and technology providers alike, being based in Israel, the vast majority of such firms develop their products for overseas markets, and in the case of Israel’s FX brokerages, a large proportion of business is conducted overseas, backed by the regulator of the specific territory in which the firms’ target market exists.
Regardless of this, there is a domestic market, most of which is tightly controlled and bank related, but for those retail FX market participants which do maintain an Israeli client base, the exclusive dossier provided to Forex Magnates serves to indicate a series of events which will potentially change the domestic market beyond recognition.
Customer Protection at All Costs
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The security of client funds whilst in the custody of brokers is a matter which has received a lot of attention around the world recently, especially in the aftermath of the demise of some firms such as MF Global and PFG in North America last year, and various misappropriations having taken place elsewhere.
The State of Israel’s authorities view this matter with utmost stringency and the document defines the proposed rulings set in place to which firms must adhere.
As far as this is concerned, the regulator will use systems to ensure correct maintenance of client funds and assets including accounting and computer systems. The rulings will describe How such operational procedures should be set in place to maintain adequate funds and client assets in order that companies can meet obligations as requested by law.
Subsequent to a first time deposit by a client, the broker to which the client deposits funds must estimate the risks relating to the client, which among other factors will require brokers to take into account the financial situation of the client, credit rating, reputation and experience in financial markets, and keep documented records of such information.
Financial Advice or Execution Only?
A point of interest within the proposed rulings is that the Israel Securities Authority makes a distinction that FX brokers seeking to market to an Israeli audience must set in place procedures by which to ascertain the suitability of such products to its clients, and ensure that they are not mis-sold in such a way that the potential client cannot afford the risk associated with FX trading.
This is relatively unusual as most regulators consider FX to be “execution-only” business in which it is often considered by regulators that the client chose by own accord to use a leveraged product to trade the markets without any actual financial advice having taken place. In this case, Israel’s approach moves further toward that used by other regulators when monitoring financial advisers which have to take precautions to ensure that a particular investment product is suitable for a particular client, and be able to prove that sufficient questions were asked and information provided as to the risks associated with it, plus ensuring that the client is able to afford any loss that may be sustained.
Israel an Economic Powerhouse…….
Much of the economic stability that Israel currently enjoys can be attributed to the financial astuteness and actions of the Governor of the Bank of Israel, Professor Stanley Fischer, who steered the country away from the global financial crisis, which was barely noticeable in Israel. Today, the small but highly sophisticated nation benefits from having one of the safest financial markets economies in the world.
In line with the conservative fiscal policies implemented during Professor Fischer’s tenure, the ISA seeks to further safeguard stability and investor well-being by considering an increase in capital adequacy requirements for FX firms, the full extent of which has not yet been agreed by the Knesset Finance Committee.
Alienation of Client Base?
Israel is well known as an innovator and global leader in all aspects of the FX industry from software & technology right the way through to risk management, sales strategies and social trading, however its disproportionately large and thriving retail FX industry is largely not subject to a domestic client base.
Will these strict measures be welcome, and engender further trust among Israeli clients, bolstering the domestic retail business, or will they serve to alienate Israeli FX firms which are already well established abroad and cause them to concentrate on marketing to overseas clients and eschew the domestic market completely?
Forex Magnates invites comment and discussion on this matter and how its potential effect is perceived by those operating within the country.