Exclusive: Israeli Watchdog to Ban Volatile Exotic Pairs and Indices CFDs

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.

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 Liquidity The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent Read this Term 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.

Targeting the industry

An important player within the Israeli Forex Forex Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Read this Term 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.”