In the past, Israel was home to dozens of international Forex brokers that were mildly regulated. This all changed around the year 2014 when ISA began actively regulating the industry.
Established in 1968, the national securities regulator of Israel — the ISA (Israel Securities Authority) — ensures efficient and transparent capital market. The agency’s rules are mostly similar to that of the US securities laws and primarily intended to protect the interests of investors.
Responsibilities
- Issues licenses to financial institutions, investment advisors, and portfolio managers.
- Supervises operations of financial institutions, including Forex brokers.
- Reviews quarterly and annual reports filed by financial institutions.
- Oversees operation of the stock exchange.
- Monitors and ensures fair operation of trading platforms.
- Conducts investigations of violation of rules by license holders.
- If a financial institution is found to have violated the law, administrative enforcement proceedings are carried out by the ISA Enforcement Committee, at the behest of the ISA Chair.
- Before 2014, Israel-based Forex brokers carried out business without any kind of supervision. All that changed when legislation for the regulation of Forex brokers was passed on August 3, 2014, and became active in 2015. Only those Forex brokers having a trading platform license are allowed to operate in Israel.
Who should register?
- Forex and stock market brokers (trading platforms)
- Financial institutions providing investment advice
- Investment and portfolio managers
- Mutual funds
- Underwriting companies
- Credit rating companies
The ISA prohibits licensed brokers to offer binary options to domestic traders since 2016 and to foreign traders since 2017.
Registration and compliance requirements
For a limited license, which involves stringent rules and supervision by the authorities, a Forex broker should have a starting capital of about $200,000. A capital of about $380,000 would enable a Forex broker to receive a full market maker license with the condition that the company properly manages its risks.
- A starting capital equivalent of about $1 million would enable a Forex broker to receive the highest degree of license. The Forex broker must maintain the amount as reserves. Annual checks would be conducted and re-categorization would be done if necessary. Additional charges for restricted and unrestricted license would be approximately $7,000 and $14,000 respectively.
- Forex brokers should remain insured at all times. Furthermore, a minimum of 10% of capital should be set aside for managing unexpected risks.
- Forex brokers should also determine the spread based on the profile of a retail trader. Even the age of a retail trader should be taken into account while determining the spread.
- A retail trader should sign a legal agreement with the broker before making a deposit. Client’s deposit should be maintained in a segregated account.
- Under no circumstances, a Forex broker is allowed to withdraw funds from the segregated account and deposit in their business account when a client makes a losing making trade. There should not be any delay in processing withdrawal requests.
- Conflict of interest, if any, should be disclosed in details to a retail trader. Additionally, it is the duty of the Forex broker to explain the measures taken to mitigate risk.
- The ISA has also proposed a list of documents that have to be kept safely for future verification if required. Safekeeping period varies from one document to another. The ISA obliged Forex brokers to safeguard certain documents for up to 7 years. Various reports should be sent regularly to the ISA on a biweekly, monthly, quarterly, annual, and biannual basis. Additionally, any significant event in the trader’s account should be reported immediately.
- Forex brokers should also send detailed biweekly and monthly statements to clients.
- Forex brokers should refrain from providing any kind of investment advice to traders. Forex brokers should comply with American FATCA (Foreign Account Tax Compliance Act) and report US citizens' earnings to the IRS.
- Forex brokers are expected to hold multiple insurance policies to protect the company from clients' lawsuits, employee malpractice, and hacking related incidents.
- Forex bonuses in any form aren't allowed. Along with each advertisement, there should be at least three disclaimers. Furthermore, all ads should be approved by the regulator before becoming available online.
- The ISA also sanctions hard ceiling for trading leverage. Forex brokers are allowed to offer a maximum leverage of 1:100 for low-risk instruments. For medium- and high-risk assets, the maximum leverage that should be allowed is 1:40 and 1:20, respectively.
Powers at the ISA's disposal
- Conduct investigations. In May 2021, the ISA launched a criminal investigation regarding Michael Ben-Ari and EGFE Israel due to numerous breaches of investment and money laundering related laws.
- Issue warnings. In July 2018, the ISA issued warning about TradeStation Securities Inc. and Emerald Base Ltd., algorithmic trading firms, which hadn't been licensed by the Authority while their social media advertisements could cause an impression that they had been licensed or authorized.
- Impose fine. In August 2019, ATrade (Israeli operator of AvaTrade) was fined NIS 576,000 (~$153,000) for failure to comply with regulatory requirements.
- Cancel license.
As of today, only four Forex brokers possess the trading platform license issued by the ISA.
Conclusion
Overall, it is hard to call the ISA's regulatory environment too strict, yet it is clearly designed to isolate the country's market from foreign companies and to provide a high level of protection to retail traders. However, as evidenced by the low number of operating FX brokers, this approach leads to decreased competition.
If you want to share your opinion, observations, conclusions, or to ask a question regarding the Israel Securities Authority (ISA), feel free to start a discussion on our Forex forum.
