It’s been a long time coming, and now it’s finally here: New legislation passed in 2014 will regulate the Israeli FX market for the first time in 2015. This will represent an enormous shift for the burgeoning, previously unsupervised market. Some 8-10 large trading firms operate in Israel, catering for Israeli clients, with an estimated dozens more working below the radar.
In order to provide full details with regard to the newly established rulings, LeapRate spoke to Advocate and Notary Tal Itzhak Ron of Tal Ron, Drihem & Co. Law Firm, a leading lawyer in the financial technologies, hi-tech and gaming industries, in order to fully detail the topic of what brokers should look out for in the new regulations.
Mr. Ron provided a full and concise insight, which he covers full details of here:
The new requirements in Israel’s “Securities Regulations (Trading Platforms & Personal Accounts), 5775 – 2014,” leave absolutely no room for doubt: Israel means business when it comes to regulating the Forex industry. These new regulations are meant to protect brokers and customers alike, and while the laundry list of demands may seem daunting, it is our hope that these regulations can serve to give a “fresh start” to the industry in a jurisdiction that has been plagued with a certain “wild west” mentality since its humble beginnings over a decade ago.
The new Israel Securities Authority license will be granted initially only to brokers who are able to produce a wealth of reports to the agency regarding risks, contingencies, budgeting for said risks and starting capital. The license will also categorize brokers wishing to apply based on their initial capital.
The minimum requirement to apply for a license will be 800,000 NIS – or about 200,000 USD – and will grant the broker only a limited license, subject to heavy oversight by the Securities Authority; with 1.5 million NIS (~380,000 USD) brokers will be allowed to acquire a full license, but subject to the requirement that they employ the services of liquidity providers to protect the broker from market risks.
Finally, only a starting capital of 4 million NIS (~1 million USD) will entitle the broker to the highest degree of license. Note that these amounts must be maintained in reserves in order to ensure the broker’s continued eligibility for the license; eligibility checks and re-categorization will be repeated annually. These are in addition to the actual license fees which must be paid: 25,000 NIS for a restricted license, and 50,000NIS for an unrestricted license. Companies will also be required to be insured at all times, and to maintain budgets of up to 10% to account for market risks and other risks.
Far more pressing for retail brokers, however, are the new transparency requirements and regulations regarding investors. For example, spreads will be limited on the basis of each trader’s individual means, which will need to be investigated by the broker. This includes determining the age of the trader, among other factors. New traders will be required to provide certain securities as well, before they can begin trading, and will need to receive a signed contract with the broker BEFORE depositing funds. Investor funds must be kept in their own separate account at all times, from which trade values can be added or subtracted – not deposited directly into the broker’s account, as has become the routine. Requested withdrawals must be executed immediately.
Any brokers who have been trading with their clients on a B-Book basis will find it particularly difficult to continue doing so, with a multitude of new rules aimed at this practice. Traders must be informed in the event of conflict of interest with the broker, such as when the broker stands to profit from their loss, and generally informed of the likelihood of conflict of interest arising and of what steps the broker is taking to mitigate these circumstances. Brokers must report each transaction that takes place to the trader – which B-Book brokers’ may find problematic, considering that the only deals that can be recorded are with the broker.
The new regulations also provide a basic framework for investment management that had been previously lacking – such as informing brokers what documentation must be saved and what must be destroyed, i.e., which records must be kept. Some of these must be kept for periods of up to 7 years.
Included as well are new reports that must be filed consistently, both with the traders and with the Securities Authority. These are required on a bi-weekly, monthly, quarterly, annual and bi-annual basis, as well as with the occurrence of any significant events in the trader’s account.
New rules regarding advertisement will naturally be included, and any sort of advice or recommendations regarding a specific commodity offered to the traders is prohibited.
Finally, it should be noted that not ALL of the above stated regulations need necessarily apply to all traders. For example, certain clients – such as financial institutions – will be allowed to contractually waive their rights as guaranteed under this agreement.
What does it all add up to? The answer is: a fairer playing field for traders, and a more professional code of conduct for brokers. Though these new regulations create a high bar for entering the market, they also ensure the viability and stability of Forex brokers in the long run. Our estimation is that the larger brokers in Israel (both of Israeli origin, and Israeli activities of major brands) will soon get regulated, and some of the smaller retail brokers will attempt to carry on business as usual, at their own peril. We already received many enquiries on the subject from industry players and started the process with those who don’t want to miss the train.
There are still certain elements that remain unclear in accordance with the legislation, such as: do these regulations apply equally to Binary Options brokers? Do they apply to brokers whose traders reside exclusively outside the territory of the State of Israel? These issues may not find their final resolution until case law addresses these issues. What this means for brokers is that while they do still have some lee-way to continue operations in these grey areas, it is more important than ever to find the right legal counsel in order to avoid straying outside the lines of the new regulations.
Photograph: Advocate and Notary Tal Itzhak Ron of Tal Ron, Drihem & Co. Law Firm