Yesterday’s exclusive announcement by Forex Magnates that The State of Israel’s financial regulatory body, the Israel Securities Authority (ISA) has put forward somewhat controversial plans to implement a very strict regulatory environment has been met with a series of responses from senior industry figures.
The Voice From Within
Oren Eldad, CEO of AvaTrade in Israel is very familiar with the potential new rulings, and began working with the ISA on consultation regarding the implementation since 2008, one year after his appointment as CEO of the firm.
Mr. Eldad explained to Forex Magnates that he is “happy to say that a lot of our remarks have been accepted by the ISA but yet there are some problematic issues which we are still in dialog with them over”.
Oren Eldad,
CEO, AvaTrade Israel
As a contrast to this perspective, another senior executive of a retail broker in Israel who wishes to maintain anonymity sees this as a "death punch to the entire FX industry in Israel."
He detailed his view on the stringency of the regulations and understands it could consign all non-bank FX in Israel to the history books.
Our source explained further that "the way the new proposal has been presented is likely to put an end to the FX business in Israel as it stands. The regulators are going to demand from us huge amounts of capital and Leverage restrictions which is not sustainable as a business model."
"Not only that but it is counterproductive to business and revenue for this country because if we are able to operate here and clear tax profits, and capital gain tax from our clients, then the country benefits."
Client and Company Exodus
This particular executive sees a far more sinister side too, in terms of threat to the domestic market by foreign companies wanting to capitalize on this and take the client bases of Israeli customers as they will be able to offer them good terms under the rules laid out by well respected but foreign regulators.
"There are dozens of companies abroad waiting for this regulation to come into effect, and profit from the outflow of Israeli clients to foreign FX companies in regions such as Cyprus, the UK or America. Although it is perfectly legal for an Israeli citizen to invest in a foreign FX company, it is not legal for those companies to solicit Israeli clients, but they will approach the market one way or another, the authorities wont be able to have any bearing on it if the companies are based abroad."
"The banks will remain in the FX market and have all the business here, but all of the retail customers will go out, as will all of the FX companies. It is impossible for us to stay in this market under the proposed regulatory structure. Nobody can work in the Israeli market under this new regulation as it is impossible" he said. Even the FSA (FCA)'s regulation in the UK is way lighter than the Israeli regulation and therefore is workable."
On the effect of it, this particular executive demonstrated his view that he is witnessing the end of an era for FX in Israel, and that the authorities will go to the extent of applying these regulations, only to have no companies left to regulate: "The authorities will apply the regulation it but they will have nothing to do here, and no-one to regulate as no companies will stay here to be regulated. The entire Israeli market will move to foreign companies, therefore the whole regulation was done for nothing. All that expense, all that bureaucracy and in the end the country will lose because the clients will invest abroad and the FX companies will go, and as a result the government will lose taxation income."
Previous instances of this have been demonstrated in other regions. On October 22, 2008, the US Commodity Futures Trading Commission approved increases to the NFA's capital requirements for Forex Dealer Members. As stated in a notice to members on July 23 the same year, the minimum requirement was gradually increased, beginning at $10 million as of October 31, 2008, $15 million as of January 17, 2009, and $20 million as of May 16, 2009, as well as supervisory rules strengthened. This led to a mass exodus of retail FX firms from the US market, reducing the number of companies from approximately forty, to just nine today.
A significant amount of trading is conducted within the banking system in Israel, but most of that is made up of interbank and corporate transactions. Added to this, the banking system is regulated by the Bank of Israel, and therefore unlikely to be affected by the new OTC rules which are aimed at the retail market.
Israel's market participants involved in the retail FX sector currently consist of a combination of international and domestic brokers, the most prominent of which are AvaTrade, Matach 24, FXCM Israel, GoForex, TradeNet, iForex, and RealForex.
Fears Increase Over High Capital Requirements
Mr. Eldad went on to confirm the main factors of the proposals: “The ISA is going to limit the leverage to between 1:50 and 1:5 depending on the instrument" he said.
“But after we asked them to review this and made our protest known, the ISA added another category called "competent customer" which could have no limitation on leverage subject to some tests to ensure that such customers are knowledgeable and competent traders who know what they are getting into”.
“All the other aspects are well known from other regulatory structures including those of the FSA and MiFID - and we at AvaTrade don't have any problem with it at all” Mr. Eldad stated.
According to Tal Zohar, CEO of FXCM Israel, the capital adequacy requirement is currently $1.2 million, however it is subject to further review. Mr. Zohar explained to Forex Magnates that the true cost of meeting regulatory requirements is closer to $2.5 million once all the other criteria has been taken into account, an amount which Mr. Zohar considers disproportionate to the small number of actual clients within Israel.
Mr. Eldad sympathized with this view: “The minimal capital requirement subject is still in check. The ISA don't understand this well enough and their request is not connected to the reality” he explained.
“We hope that after some negotiation they will understand our side and lower the requirement a bit so that it will be reasonable.”
Despite his hope that the regulators will review the capital adequacy requirements, as an overall view, Mr. Eldad is optimistic as he believes that such rulings will generate further stability. “In general I can tell you that we are welcoming this very important and well needed regulation and we believe this will bring new customers to use our service.”
Land Of Milk And Honey?
The outlines of the new regulations in which draconian leverage restrictions plus high capital adequacy requirements are being discussed at senior government level following proposals put forward to the Knesset Finance Committee by the ISA, and are scheduled for implementation as early as July.
Opinion is such that firms may attempt to prolong this until after the government officials return from summer break in order to provide further time for consulting with the regulator, however that will make only an arbitrary difference as the likelihood is that the Finance Committee may accept the proposals.
The State of Israel has long been concerned with the well-being of its people and when it comes to financial protection, the government and regulatory authorities take a very conservative approach.
Ensuring the continued stability of the country has been a priority for officials, most notably Bank of Israel Governor Professor Stanley Fischer, whose contribution to the nation's economic sustainability and success has been insurmountable, the country having completely avoided the global financial crises that have unfolded over recent years by setting in place a series of very conservative monetary policies which have protected not only the nation but also its people from exposure to financial risk.
Mr. Eldad echoes this line of thinking and opines that such strict rules will serve to "clean the Israeli market from any bad companies that gave this business a bad name here and made investors skeptical”.
It is the intention of Forex Magnates to report on this as it progresses toward implementation.
