Over the past few years Israel’s financial markets regulator, the Israeli Securities Authority (ISA) has sought to bring Forex & CFD trading under it’s remit. There has been long running speculation that such regulation would eventful come into force seeing the provision of FX/CFD services to Israeli residents being tightly regulated. According to industry source Forex Magnates, the new legislation regulating the provision of FX and CFD services is expected to come into force at some point in the next three months or so.
The regulations proposed by the ISA’s Securities Subcommittee, are relatively tough and some are concerned that certain aspects of the new regulation may negatively affect the business of brokerages with a significant client base in the country. The most important aspects of the proposed FX & CFD regulation are as follows:
- Licensing – Brokerages wanting to operate in Israel will be required to apply for a ISA licence.
- Reporting – Additionally, brokerages will be required to file reports with the ISA, in order insure the protection of client funds.
- Leverage – The proposed limitations placed on leverage are probably the most controversial aspect of the new regulatory proposals. Leverage will be limited to a maximum of 100:1. Even tougher leverage restrictions will be placed on instruments that are deemed to of medium and high risk. Leverage for instruments deemed to be high risk will be set at a maximum of 20:1, while leverage on medium risk instruments will be limited to 40:1. This raises the question of whether Israeli brokerages will be able to remain competitive with foreign rivals who are able to offer significantly more leverage to clients.
- Conflict of Interest Reporting – Brokerages will be required to explain their counter-parties and any potential conflicts of interest to their clients. Something which is required in Europe under the Markets in Financial Instruments Directive. But additionally, brokerages will not be able to provide any advice to clients on any product available at the brokerage.
- Client Fund Segregation – Client funds must be held in third party trust accounts, and be safely segregated from a brokerages operating funds. This is something that provides traders with valuable protection and prevents brokerages misappropriating client funds. It is also something that is required by the vast majority of financial services regulators.
- Client Reports – Brokerages will be required to provide clients with bi-weekly and monthly reports outlining all their activity with the brokerage, including deposits, trades, commissions, charges and interest.
- Client Adequacy Verification – Brokers will be required to make sure that their clients is eligible and fully understands the financial mechanism/instrument they are using. They will also be required to identify that the individual is not a minor and is sufficiently competent to trade the financial markets.
The proposed regulations introduce many important protections and brings Israeli regulation somewhat into line with the regulation elsewhere in the world. The strict limitations on the maximum leverage which can be offered to clients is something which is likely going to worry some brokerages, with many retail clients being keen to take advantage of significant sums of leverage. The new proposed regulations will also be of concern to regulated firms in other jurisdictions, who will be required to gain an ISA licence if they want to solicit clients based in Israel.
There is scope for some adjustments with the above proposals still requiring the approval of the ISA’s full committee, but it seems likely that FX & CFD trading regulation will be introduced in Israel in the coming months.