Trading platforms are web-based platforms that enable investors to trade in financial assets, such as foreign currency derivatives. As a result of the Internet revolution, these platforms provide an alternative trading system to that provided by banks and financial institutions which are subject to regulation by the Bank of Israel. Most of the trading platforms activity in Israel involves low amounts and is performed through dedicated websites and smart phone applications. Investing in trading platforms involves many risks. Most investors lack the expertise to understand the implication of their investments. Without appropriate guidelines, investors can easily find themselves investing in investments that are very risky and the investors are also exposed to situations of undisclosed conflict of interests with the operating company. Until recently, trading platforms have operated in Israel without any regulation or restriction. According to the Chairman of the Israel Securities Authority (the “ISA”), inspection and licensing measures are essential to ensure fair trading. In August 2014, the Israeli Parliament (the Knesset) approved Securities Regulations intended to ensure the proper regulation of trading platforms. According to the new regulations the supervision of trading platforms will become mandatory following a transition period of six months. Among other things, the Securities Regulations establish licensing requirements for the operation of a trading platform in Israel, define the level of leverage permitted for the different types of financial instruments, provide a mechanism for dealing with conflicts of interest, details the information which the company operating the trading platform is required to provide to its clients and specify the required reporting duties to the ISA. Below are some of the main provisions included in the new Securities Regulations:
- Application for a license – companies managing the trading platform will need to apply to the ISA for a trading license. There must be attached to the application updated financial statements of the applicant company and the application itself should include, among other things, details of inspection measures and risk management measures as currently in effect in the applicant company.
- Limited leverage level – the collateral required to be provided by a client cannot be less than 5% of the face value of a deal in high-risk transactions; 2.5% in medium-risk transactions; and 1% in low-risk transactions.
- Conflicts of interest – each applicant company should prepare a document describing the likelihood of any potential conflicts of interest arising and its policy for dealing with them. The company must inform its clients about any possible or actual conflict of interests. Also, the company cannot advise its client on transactions related to a financial instrument in which the company itself trades.
- Client funds – client funds will be kept separate from the company’s assets in a trust account managed by a bank.
- Reporting to clients – companies will have to submit a comprehensive monthly report that will include, among other things, details of all customers of client operations, transactions, fees, charges, etc.
Trading platforms provide an easily-accessible trading system that facilitates many investors. However, this alternative system comes with many risks to the unsophisticated investors. The new regulations are intended to permit this operation while providing investors with some safeguards. By Amit Steinman and Sapir Harpaz