The Israel Securities Authority (ISA) recently published a proposed amendment to the Israeli Securities Regulations concerning trading platforms’ activity in Israel. The ISA wishes both to decrease the levels of leveraging allowed in terms of trading financial instruments on the platforms and to require trading platforms to make public the rate of losing clients.
The goal of the amendments proposed by the ISA is clear—to adjust the regulation applicable to trading platforms in Israel to global regulatory policy in general, and to European Union member states especially, and to strengthen the protections afforded to clients. However, the ISA is only partly adopting the regulation of EU member states, and in effect is allowing trading platforms to offer their clients only a limited suite of financial instruments relative to those allowed and offered by trading platforms in the EU. The result of such selective adoption may be disastrous and severely harm trading platforms in Israel, to the point of their elimination, while Israeli clients flee to foreign trading platforms.
Tightening regulation over trading platforms is a clear global trend. In March 2018, the European Securities and Markets Authority (ESMA) published a directive limiting the leverage levels of financial instruments offered to retail clients. According to the directive, for financial instruments in which the base asset is primary currencies, the client is required to deposit a guarantee of a mere 3.33% of the total value of the transaction, which reflects leverage of 1:30. Such leverage is the maximum allowed under the directive, with lower leverage levels established for other financial tools. In addition, the ESMA included in the directive the duty to add a warning to clients that includes the rate of losing clients on trading platforms.
This ESMA directive aligns with regulation applicable in other countries, such as the United States and Japan, for limiting the permitted levels of leverage.
In keeping with this trend, the ISA is proposing to lower the leverage levels of financial instruments offered on Israeli trading platforms in the following ways:
- For financial instruments classified as a lower risk level, the base assets of which are currencies or gold, the client will be required to deposit a guarantee that reflects leverage of 1:30 (instead of the current level of 1:100).
- For financial instruments classified as an intermediate risk level, the base assets of which are leading indexes and certain bonds, the client will be required to deposit a guarantee at a rate of at least 5% (instead of the 2.5% currently required), reflecting leverage of 1:20 (instead of the current level of 1:40).
- For financial instruments classified as a high risk level, the base assets of which are not included in the low or intermediate risk levels (such as stocks), the client will be required to deposit a guarantee at a rate of at least 20% (instead of the 5% currently required), reflecting leverage of 1:5 (instead of the current level of 1:20).
In addition, the ISA is proposing to require trading platforms to publish the rate of losing clients (currently, such data is available to the ISA alone) and to include this rate in the list of warnings each platform must publish under the regulations.
The ISA’s desire to strengthen the protection of trading platform clients must be carried out in a proportional and reasonable manner, allowing trading platforms, already under extensive and aggressive regulation, the space to operate as regulated business entities.