This article was written by David Woliner, Head of Financial Regulation at Ben Basat, Porat & Co Law Firm. Prior to that, David was a regulatory attorney with the Israeli Securities Authority for 5 years, where he was part of the team responsible for drafting and implementing Israel’s trading platforms regulation.
New Israeli regulations pertaining to activities of trading platforms trading to their own account came into effect on May 26, 2015. These regulations directly affect the activity of forex, binary options and other trading platforms, Israeli and foreign, which target Israeli clients.
The enactment of the regulations follows the adoption of Amendment 42 to the Israeli Securities Law, which was legislated as part of an attempt to regulate the activities of companies managing trading platforms and subordinates trading platforms’ activities to strict oversight by the Israel Securities Authority (ISA).
Companies wishing to continue conducting operations in Israel must have applied for a license from the ISA by May 26, 2015. A total of 21 companies have done so, allowing them to continue conducting operations in Israel until a decision on their license application is made by the ISA.
Companies which conducted operations in Israel prior to May 26, 2015, and failed to submit an application to the ISA by this date while maintaining their operations in Israel, should take into
account they may be exposed to criminal and administrative proceedings, as they may be considered to be operating a trading platform in Israel without a license from the ISA.
The regulations subject trading platforms to extensive restrictions, including rigorous licensing requirements by the ISA, rules defining permitted leverage for types of financial instruments, duties regarding management of conflicts of interest, a prohibition on the provision of investment advice and portfolio management services to clients, duties regarding the handling of clients’ funds, the duty to determine the suitability of clients to trading activities and associated risks, rules regarding advertising, extensive reporting duties to clients and the ISA, minimal equity requirements and duties regarding risk management as to the platform’s activities.
The permitted leverage ratio for clients of the trading platform is as follows and depends on the traded financial instrument: high risk financial instruments have a permitted leverage ratio of up to 20:1 of the trade’s value; medium risk financial instruments have a permitted leverage ratio of up to 40:1 of the trade’s value; and low risk financial instruments have a permitted leverage ratio of up to 100:1 of the trade’s value.
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The regulations impose several duties on the trading platform as to the handling of clients’ funds and assets, the main duty being to hold clients’ funds and assets of each client separately from its assets and funds. These duties also include opening a trust account where clients’ funds will be deposited. The said trust account is to be opened with either a bank or financial institution following the conduction of a risk assessment of the chosen bank or financial institution.
The regulations require the trading platform to undertake a process of determining the suitability of clients to the trading activities and associated risks. This process must be documented and should include questionnaires and other examination forms that enable the trading platform to evaluate the client’s understanding of the risks involved in the platform’s activities.
The regulations require the trading platform to submit monthly, quarterly and annual reports, composed of periodic reports, activity reports, profitable and non-profitable clients reports, credit risks reports and market risks reports to the ISA. Trading platforms are also required to submit immediate reports to the ISA following the occurrence of material corporate events which are detailed in the regulations.
The trading platforms are required to provide clients with transaction approvals, which include information regarding transactions executed and the accumulated balance of the specific financial instrument following the execution of the transaction, on a bi-weekly and monthly basis.
The regulations also require trading platforms to allocate sufficient funds to support market risks, credit risks and operating risks, as well as to develop and use techniques to manage risks.
Parties acting in the Israeli market or targeting Israeli clients without an appropriate license may be exposed to criminal and administrative proceedings (including possible sanctions of imprisonment and fines).
To sum up, Israel’s trading platform regulation appears to be based on EU financial regulation principles although one should pay attention to the fact that, being a regulation specifically tailored to regulate the activities of trading platforms trading to their own account (unlike EU regulation which tends to be more of a ‘one size fits all’ regulation), some principles of the Israeli regulation were taken from regulations specifically tailored for trading platforms activities, primarily US regulation (the main example being leverage ratio limitations).
Therefore, it is the view of many members of the industry that the Israeli regulation is relatively harsh and uncompetitive. Given the fact that no licenses were issued by the ISA to any of the applicants, as we are currently still within the licensing period, and actual supervision by the ISA is yet to begin, the view of the industry remains to be confirmed.