In the coming months, Israeli investors will be able to make speculative investments on the Tel Aviv Stock Exchange under the jurisdiction of the Israel Securities Agency (ISA), according to local news outlet The Marker.
According to the report, customers will be able to bet on CFDs at leverage levels of up to 20:1 and foreign exchange at levels of up to 100:1.
Before February 2018, leveraged trading was not regulated in Israel. According to the report, approximately 10,000 Israelis are active in the CFDs market, with 1.5 billion NIS ($404.5 million) turned over monthly, all without regulatory supervision.
CFD bets on local stocks
The ISA approved CFD trading on the TA-35 stock market index (so-named because it is contains the 35 largest firms in the TA-125 index) back in February. That said, industry sources shared with Finance Magnates that it has taken until now to negotiate the specifics of the regulatory framework. CFDs are bets made on the price movements of assets that can be made without having to hold the asset itself. Israeli investors had to turn to foreign brokers prior to these new regulations coming into force.
Leveraged trading on the stock exchange opens up the derivatives trading market to retail investors. Some industry insiders claim that high leverage will enable the stock exchange to come in line with its counterparts globally and significantly increase its turnover. Since the beginning of 2018, the turnover on the Tel Aviv stock exchange has been on average NIS 800 million per day ($215 million).
Online trading companies in Israel were considered to be competitors to the stock exchange, and so they were consolidated under a new law in 2016. The ISA has all but suspended retail investors from using leveraged bets in any form.
Under the Israeli regulator’s new directive, the exchange will have to cover half of the turnover of a leveraged investment. In addition to this, leveraged trading will only be available on the 35 largest stocks on the exchange, because the authority is worried that smaller shares could be easily manipulated.
Other restrictions have been put in place too – investors will not be able to go into a negative balance, and companies cannot advertise specific profits or offer bonuses.
Broker-dealer draft regulation
In another regulatory development, the ISA has published a draft of regulations for broker-dealers in Israel, according to an official press release.
The ISA states that the aim of the bill is to increase investor protection by reducing the risks involved in investing, thereby increasing public confidence and thus the stability of the market. It will achieve this by bringing all relevant companies under the jurisdiction of the ISA.
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ISA Chairwoman Anat Guetta said: “The bill is intended to provide protection to the investing public through financial intermediaries and to contribute to the design of a fair and competitive market.”
Another benefit of the bill is that it will encourage competition between companies to the benefit of investors.
Most brokerages in Israel are members of the Tel Aviv Stock Exchange and are regulated by that body. Banks that offer these services are additionally regulated by the Bank of Israel.
However, some companies that are operating in the country are unregulated. Their services are not covered by any regulatory framework, a risk which might have prompted the ISA to rethink its approach to the market.
Unregulated firms are not defined as merchants under Israeli securities laws. The new law concerns dealers that trade in securities for customers and themselves, and will not be relevant to entities which are already regulated by other bodies.
A new broker-dealer license
Brokers will be required to comply with corporate governance requirements such as appointing a board of directors, a permit for controlling shareholders, and limits to incentives received from non-customers. There are also new obligations of care towards customers, including rules concerning possible conflicts of interest and freedom of information requirements.
“The regulation of the brokerage field is added to legislative amendments in the merchant arena, dealing with investments in binary options and other activities initiated by the ISA to reduce unregulated activities,” added Guetta.
Aviya Arika, founder of Aviya Law, said that the proposed law will unify rules relating to brokers and dealers, as is the case in the US and the EU. She said that the new law is the equivalent of an American broker-dealer licence.
“The agent, or broker, is the investment body which executes trades for client, while the dealer, i.e. principal, is the investment body executing trades on its own account from its own capital. In Israel, only the latter has been regulated by the Trading Platforms Act, but the prior had remained unregulated.”
Arika explained that the move is logical because most investment firms function as both broker and dealer.
In March, the regulator announced that it was examining the possibility of launching a sandbox for initial coin offerings, assigning a committee of lawyers and consultants to the task. It was decided that the ISA would define ICOs on a case by case basis, and those deemed to be securities would have to abide by the relevant laws.