Israel Offers FX Regulation Model

The landscape changed last year for binary options, forex and other trading platforms operating in Israel. The amendment to the Israeli Securities Law paved the way for a set of regulations designed to literally clean up the country’s securities industry that had started to decay because of infiltration by fraudulent brokers targeting unsuspecting retail investors.

Israel’s tough regulations of forex and binary options trades have become a model for several countries trying to protect their citizens from toxic investment products. From Europe to America to Asia, financial regulators can be seen borrowing a leave from Israel’s regulation book.

Weeding out of fraudulent providers is expected to create an environment in which genuine Forex trading providers will thrive.

Areas covered by the regulations

The new Israeli securities regulations have introduced extensive restrictions in the areas such as requirements for operator license. The regulations have also affected the minimum balance that a broker is a requirement to maintain and rules pertaining to advertising of leveraged financial assets.

Client protection

Under the new regulations, brokers are required to first establish the suitability of a client before they allow them to trade. The evaluation process involves determining whether a potential client understands the risks in the trading activities they are aspiring to. A trading platform may block a prospective client who doesn’t meet the requirements as set out by the regulator Israel Securities Authority (ISA).

Permitted leverages

The new ISA regulations affect leverage rates that brokers can offer their clients. The regulator has set specific leverage rates that trading platforms can offer their clients depending on the nature of the financial assets involved. For instance, the leverage ratio of financial assets classified as low risk can go up to 100:1. For medium risk assets, the regulator permits leverage rate of up to 40:1. The leverage ratio for high-risk assets has been capped at 20:1.

Qualification for approval

Firms wanting to continue operating in Israeli’s changed securities market were required to reapply for licenses. ISA said that 21 firms sought licenses under the new regulations but it only recently cleared five firms. The securities trading platforms and brokers that have been cleared by ISA are FXCM Israel, First Index, Plus500, Real Forex and Atrade. These firms can now sell retail leveraged financial products to Israeli clients.

ISA has set different degrees of licenses that trading platforms can apply to hold. For a minimum of $200,000, a firm can get a limited license that subjects to heavy regulatory oversight. A firm that makes a $380,000 deposit can earn itself a full license but will be required to hire the services of liquidity provider so that it can protect itself and the clients from market risks. For a $1 million deposit, a broker gets the highest level of a license under the new ISA regulations.

The minimum balance must be maintained at all times for a provider to be considered eligible to sell leveraged assets for trading to Israeli citizens. Operators are also required to maintain insurance cover as part of hedging against market risks.

Ripple effect

Israel’s stringent retail securities trading regulations have sparked a wave of industry crackdown across the world. Financial regulators in France and Belgium have issued bans on retail trading in forex, binary options and other leveraged financial instruments in their jurisdictions. The Netherlands on its part has banned advertising of what it calls toxic investment products and financial regulators in Germany and Denmark and also rising to protect their citizens against predatory forex and binary options brokers.

The ground is fast shrinking for fraudulent securities brokers around the world as the U.S. and Canada have also stepped up a crackdown on toxic investment products.