On Tuesday, a new regulatory regime for providers of forex and CFD trading in Israel will finally come into effect. This means that already established brokers will now have to operate in accordance with the demands of the Israel Securities Authority (ISA) in order to not be disqualified from receiving a “Trading Arena” license, as referred to by law.
Last week, Finance Magnates took part in a learning day about adjusting to the new regulations at the Tel Aviv Chamber of Commerce organized by the Trading Arenas Association for Israeli brokers. At the event, leading corporate lawyers as well as senior local partners from top international accounting firms and financial insurance experts presented the local brokers with their understanding of the new regulations and the services that they have tailored to comply with the law.
The experts explained all the new requirements of the Israeli Trading Arenas, such as compliance with the local SOX (internal controls and financial reporting) and even the American FATCA (Foreign Account Tax Compliance Act) to prove they don’t have U.S clients who don’t report earnings to the IRS. Firms will also need to have multiple insurance schemes to guard against client lawsuits, cyber attacks, server malfunctions, employee malpractice and other issues, costing millions of shekels a year depending on the size of operations.
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Beyond the costs of capital, manpower and time needed to comply with all the new regulations, brokers were also discouraged by ISA demands limiting their marketing abilities. Not only are the most common bonuses no longer allowed, but firms will need to display three disclaimers on each publication, making online banner ads ineffective as they will be mostly disclaimers. The brokers will also not be able to respond quickly to possible marketing trends as every new ad will need to be pre-approved by the regulator. One local broker complained that the goal of the ISA might not be to regulate the market but rather to completely kill it.
In contrast, the head of the Association, Itzik Noy, was optimistic that the regulations would actually lead to strong growth for the local forex brokers. Noy gave a speech at the start of the event saying that being officially licensed will help fight the demonization of the forex industry by the media, fueled by smears from the banks worried about losing retail traders. In his opinion, brokers will also now be able to expand to the institutional forex market, still dominated by the banks in Israel, once they get the government’s seal of approval. By setting up new legal barriers for entry, the head of the Association assured brokers that fraudsters and small time hustlers would no longer be able to tarnish the industry’s reputation. Noy once again promised that his organization would pursue any introducing broker (IB) or foreign firm attemptimg to target local clients without an Israeli license.
Israeli traders, while they might be a little put off by the lower maximum leverage, can also find brights spots in the new system. An independent arbitration committee headed by a retired judge was set up so that clients could iron out disagreements with a broker without expensive legal battles in the courts. Additionally, the demands for segregated client accounts and multiple types of insurance will safeguard their money in the case of a broker going bankrupt.
As long as the authorities do not clarify in practice how they plan to use their new powers to stir the industry – whether to simply regulate it or to outright stifle it for the benefit of the banks – it’s hard to predict their true intentions. The situation at present is that no brokerage is assured that it will receive a license from the ISA, and some might eventually be forced to withdraw from the market. Furthermore, interesting international players are rumored to be setting their sights on an Israeli license, including Plus500 and LMAX Exchange.