Israel FX regulation update: Leverate General Counsel Steven Kruger explains

The long and relatively complex set of government-level consultations which are currently taking place at the State of Israel’s Knesset Finance Committee which center on setting in place a full set of regulations for retail FX firms continues as FX software provider Leverate has pointed out some specific matters this week.

Currently, the regulatory structure which had initially been scheduled to be implemented in October 2013, has been sent back to the Knesset Finance Committee for clarification of the language, and therefore is at best many month away from being implemented.

Furthermore, it remains unclear whether certain criteria within the regulatory proposals, for example leverage limitations, will affect brokers who provide services to non-Israeli traders, or only to those who take Israeli traders.

Whilst this matter is critical for many companies, it has attracted the attention of Israeli retail FX software company Leverate’s General Counsel Steven Kruger, who has reported on its status by providing further clarity via Leverate’s blog.

LeapRate spoke to Mr. Kruger today in order to gain further understanding of the current situation and Mr. Kruger’s perspective as a commercial lawyer who specializes in FX.

“On August 3, 2014, the Finance Committee of the Knesset passed the Regulations (the “Regulations”) that were to govern Amendment 42 of the Securities Law, 1968. Although the legislation had been promulgated a while back the Regulations have been the main source of contention over last couple of years and the source of much speculation” explained Mr. Kruger.

He continued “It that stage there was lots of frantic activity by FX providers to get clarification as to how they would conduct the business in light of the new regulations, however the regulations have been sent back to the Finance Committee for clarification of the language and so we are back to square one in terms of the time periods.”

“Once the Regulations have been passed onto the finance minister and signed they will enter into force six months after their publication in the Official Gazette. Accordingly the implementation of the Regulations are once again pretty far off.”

He concluded by explaining that his publication provides a high level overview of the regulations that will be in effect with respect to the Regulations. “I can’t see the substance of the Regulations changing, however I am not able to advise you at the moment to advise as to whether the regulations will affect Israel-based brokers who would take only non-Israeli clients.” confirmed Mr. Kruger.

Mr. Kruger’s concise information is as follows:

The Israeli Securities Authority (ISA) was established in 1968 to look out for the interests of investing public. Assuming responsibility for oversight of FX and CFD services provided to Israeli residents has been one of their aims, and legislation regulating the provision of FX and CFD services is expected to come into force shortly. These regulations, which were proposed by the ISA’s Securities Subcommittee, subject brokers to a new set of stringent guidelines, which has caused some concern regarding the possible negative impact for brokers with a significant number of Israeli clients. The most important aspects of the proposed FX & CFD regulations are as follows:

1. Licensing – Brokerages wishing to operate in Israel will be required to apply for a license through the ISA.

2. Reporting – Licensed brokerages will be required to file reports with the ISA, in order ensure the protection of client funds.

3. Leverage – The proposed limitations placed on leverage are probably the most controversial aspect of the new regulations. Leverage on most instruments will be limited to a maximum of 100:1. 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 calls into doubt whether Israeli brokerages would stay competitive with foreign rivals able to offer traders significantly higher leverage.

4. Conflict of Interest Reporting – Brokerages will be asked to explain their counter-parties and any potential conflicts of interest to their clients, which is something already required in Europe under the Markets in Financial Instruments Directive. Additionally, brokerages will not be able to provide any advice to clients about products they sell.

5. Client Fund Segregation – Client funds must be held in third party trust accounts, safely segregated from brokerage operating funds. This provides traders with valuable protection and prevents unscrupulous brokers from misappropriating client funds. This is already something required by the vast majority of financial services regulators.

6. Client Reports – Brokerages will be required to provide clients with bi-weekly and monthly reports outlining all account activity, including deposits, trades, commissions, charges and interest.

7. Client Suitability Verification – Under the new guidelines, brokers will be required to make sure their clients fully understand the risks involved in currency trading, identify that individuals have reached the age of majority, and confirm that they are sufficiently competent to trade the financial markets.

These proposed changes introduce many important protections and bring Israel’s regulatory environment more in line with the rules in place elsewhere in the world. However, the strict limitations on maximum leverage are likely to worry some Israeli brokerages, as many retail clients wish to take advantage of significant sums of leverage. The directives will also be of concern to firms regulated in other jurisdictions who want to solicit clients based in Israel , as they will now be required to gain an ISA license. While there is a possibility for some adjustments to the above proposals prior to being ratified by the ISA’s full committee, it seems likely that FX & CFD trading regulation will be introduced in Israel in the coming months.

To read the full blog from Leverate, click here.

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