The following translation is intended solely for the convenience of the reader. This translation has no legal status and although
every effort has been made to ensure its accuracy, the ISA does not assume any responsibility whatsoever as to its accuracy and is not
bound by its contents. Only the original Hebrew text is binding and reader is advised to consult the authoritative Hebrew text in all
mattersdwhich may affect them .
Memorandum of Law
Amendment No. XXXX to the Securities Law 5777-2017
A. Name of the proposed law
Memorandum of Securities Law (Amendment No. XXXX)(….) 5777-2017
B. Aim of and need for the proposed law
Chapter SEVEN “C” of the Securities Law 5728-1968 (hereinafter, “the Securities Law”
or “the Law”) concerns the regulation of "trading platforms to their own account"
(hereinafter, “Trading Platforms” or “Platforms”). A Trading Platform is defined in
Section 44L of the Law as a computerized system through which a person trades in a
financial instrument with his clients for his own account, and also a computerized system
that enables clients to trade through such a system.
Sections 44M and 44O prohibit persons from managing a trading platform without a
license or from offering to trade on a trading platform that is managed by someone who
has no license or by someone who is not exempt from the requirement to obtain a license.
The Law and the Regulations promulgated under it determine the qualifications for a
trading platform license, and the obligations imposed on whoever receives a said license.
A large part of the provisions are designed to address the conflict of interest that is an
inherent element of trading platforms’ operations, as they trade with their clients. For
example, the provisions prohibit platforms from granting credit to clients, provisions that
define the permitted level of leverage, provisions concerning conflicts of interests and
adapting platform activities to clients, provisions concerning platforms’ marketing and
advertising, reporting requirements to the Israel Securities Authority (hereinafter, “the
ISA”) and the public, the information that platforms must inform their clients, and
provisions on how to handle clients’ funds, provisions concerning recording of trades,
retention of documents, and other related issues.
Like all other activities regulated by the Securities Law, the comprehensive regulation and
oversight of trading platforms’ operations is designed to protect the investors in Israel, and
therefore the territorial application of the prohibitions prescribed in the Law concerning
management of platforms without a license, or offering to trade on platforms operated by
someone who does not have a license, refers to trading platforms that operate vis a vis
clients in Israel. Consequently, trading platforms are subject to a licensing requirement if
they offer access to clients in Israel, whether they operate from Israel or outside Israel.
The foundation of this principle is that just as the Securities Law in Israel protects the
investors in Israel and applies to trading platforms that offer trading activities to this
public, other countries also take action to protect the investors in their country and oversee
trading platforms that operate vis a vis those public, whether they operate in or outside that
country.
This situation allows trading platforms located in Israel to offer overseas clients to trade
in various financial instruments without being subject to ISA regulation or supervision as
long as they deny access to clients in Israel. For example, the ISA decision of March 2016
— which states that trading platform licenses will not be issued to companies that offer
trading in binary options to their clients — is relevant only to trading platforms that offer
access to the public in Israel, and does not apply to Israeli trading platforms that deny
access to clients in Israel while offering exclusively to clients outside Israel to trade on
their platforms, and therefore the licensing requirement does not apply to them.
Consequently, the ISA and other enforcement agencies in Israel have begun to receive
complaints concerning heavy losses of clients in other countries resulting from the trading
activities on Israeli based trading platforms that operate without being subject to regulation
or oversight. In some cases, it appeared that the trading activities offered on those trading
platforms serve to camouflage criminal activities such as activities that constitute fraud
and deception. This phenomenon has gained momentum and its current proportions are
causing negative publicity that reverberates around the world, which causes significant
damage to Israel’s image in general, and to the Israeli capital market in particular.
In order to assist foreign Securities Agencies that encounter activities of Israeli based
trading platforms, the ISA takes regular action to assist in conducting judicial inquiries
and transfer information, based on the powers granted to it by law.
Nonetheless, in view of the grave damage to Israel’s image, as stated above, and due to
the growing prevalence of this phenomenon, an amendment to the law on this matter is
advised, extending the ISA’s enforcement powers also to trading platforms that operate in
Israel yet offer trading activities to clients outside Israel.
C. Highlights of the proposed law
To regulate the operations of trading platforms that operate in Israel and offer trading
activities exclusively to clients outside Israel, it is proposed to amend Sections 44M and
44O of the Law, to determine that trading platforms in Israel may offer trading activities
exclusively to clients outside Israel only if the person or company holds a foreign license
that permits them to operate in the country where the clients are located, and if they do not
offer to trade in binary options or other financial instruments of any type so defined by the
Ministry of Finance, based on the ISA’s recommendations or in consultation with the ISA
and with the approval of the Knesset finance committee. In this manner, trading platforms
that are managed in Israel and operate without a foreign license that meets the requirements
of the Law, will be prohibited from appealing to or trading with clients in countries where
managing a trading platform requires no license, or in countries where the trading platform
does not hold a license as required by local law, and will be prohibited from offering their
clients to trade in binary options or other financial instruments that are so determined by
the Minister of Finance.
It is proposed to extend the prohibition on trading in binary options also to trading
platforms that appeal to clients in Israel. Although, as noted above, this prohibition is
already in effect under the ISA’s decision, but it is also proposed to establish it in the Law.
It is proposed that the criminal and administrative sanctions defined in the Law for trading
platforms that appeal to clients in Israel without being duly licensed or in violation of the
terms of their license, apply also to trading platforms that appeal to clients outside Israel
in violation of the aforesaid provisions of law, and platforms that offer clients to trade on
trading platforms in a manner that is not consistent with the provisions of the Law.
D. Effect on the State budget
The proposed amendments are not expected to have any impact on the State budget.
E. Impact on administrative aspects and manpower
The ISA will require additional manpower — 2 professional full-time positions — to
perform the regulatory and enforcement activities.
F. Effect of the proposed law on existing laws
Sections 44M and 44O and 53 of the Securities Law 5728-1968 shall be amended,
Schedule Four B shall be added, and Schedule Seven to the Law shall be amended.
G. The text of the proposed law is attached.
Government Bill
Memorandum of Securities Law (Amendment No. XXXX)(….) 5777-2017
Amendment
1.
to
Section
44M
Securities Law 5728-19681 (hereinafter, “the Law”), in Section 44M
—
(a)
The following will appear at the end of sub-section (a): “and
he does not offer binary options or other financial instruments
of the type defined by the Minister of Finance, based on the
ISA’s recommendation or in consultation with the ISA, as
approved by the Knesset Finance Committee; For this purpose,
“binary option” is a financial instrument according to item (4)
of the definition of “financial instrument,” the receipts and
payments stemming thereof are a fixed amount or a fixed
proportion of an amount that was agreed upon, and according
to its conditions the holder of the option is entitled to receipts
if a certain event occurs on the expiry date.”
(b)
The following will appear after sub-section (a):
“(a1) No person shall manage a trading platform exclusively
for clients located outside Israel unless he meets the following
conditions:
(1) He holds a foreign license that permits the
management of a trading platform in the country where
the client is located;
(2) He does not offer financial instruments of the type
stated in the final section of sub-section (a).
For the purpose of this sub-section —
“Management of a trading platform” includes each of the
following:
1
Book of Laws 5728, p. 234, 5776, p. 1261,
(1) Making strategic decisions for the company that
manages the trading platform;
(2) Operating the trading platform, including through
computer systems and computer hardware, customer
service or marketing call or online services, directly by
the company that manages the trading platform or
through whoever renders these services on its behalf;
“Foreign license” – each of the following:
(1) A trading platform license duly issued according to
any of the laws listed in the Fourth Addendum B; The
Minister of Finance may, in consultation with the ISA,
add additional laws to the Fourth Addendum B, by
ministerial order;
(2)
Amendment
2.
to
Section
44O
A license that is comparable to a trading platform license,
to the satisfaction of the ISA, and was duly issued
according to a law that sets provisions on matters listed
in Sections 44M(b)(5)(a) and 44CC(2), (3), (4), and (6).
In Section 44O of the Law, the text shall be marked (a) and shall be
followed by:
(b) No person shall offer exclusively to another person outside Israel,
to trade on a trading platform, unless the trading platform meets the
conditions set forth in Section 44M(a1).
Amendment
to Section 53
3.
In Section 53(b) of the Law —
(1) In paragraph (6a), instead of “in violation of the provisions of
section 44M,” the following will appear: “or offer binary options or
other financial instruments of the type defined by the Minister of the
Finance, in violation of the provisions of Section 44M(a), or
managed a trading platform for clients outside Israel in violation of
the provisions of Section 44M(a1)”;
(2) In paragraph (6b) the words “44O(a) or (b)” shall replace the
words “44O”.
Addendum of 4.
Schedule
Four B
The following shall appear after Schedule Four A to the main law:
“Schedule Four B
(Section 44M(a1)
1. National Laws of the European Union countries that implement
Directive 2004/39EC of the European Parliament and of the Council
of April 21, 2004 on markets in financial instruments, or Directive
2014/65/EU of the European Parliament and of the Council of May
15, 2014 on markets in financial instruments, as amended from time
to time, all pursuant to the decision of the competent legislative
bodies of the European Union.
2. The Securities Exchange Act of 1934 or the Commodity Exchange
Act of 1936 as amended from time to time by a resolution of the
competent legislative bodies of the United States of America.
Amendment
5.
to Schedule
Seven
In Part Three to Schedule Seven to the main law —
(1) In item (5), instead of “in violation of the provisions of section
44M”, the following shall appear: “or offered a binary option or
another financial instruments of the type determined by the Minister
of Finance, in violation of the provisions of Section 44M(a) or
managed a trading platform for clients outside Israel in violation of
the provisions of Section 44M(a1).
(2) The following will appear after litem (5):
"(5a) offered a client outside Israel to trade on a trading
platform in violation of the provisions of Section 44O(b)”;
Explanation
General
Chapter Seven C concerning the regulation of the operations of trading platforms to their own
accounts (hereinafter, “Trading Platforms” or “Platforms”) was added to the Securities Law
5728-1968 (hereinafter, “the Securities Law” or “the Law”) as part of Amendment no. 42 to
the Securities Law in 2010. This amendment came into effect on May 26, 2015, when the
Securities Regulations (Trading Platform to its Own Account) 5775-2014 came into effect
(hereinafter, “the Regulations”).
Section 44L of the Law defines platforms as computerized systems through which a person
trades in financial instruments with clients, for his own account, and computerized systems
that enable clients to trade through such systems.
Sections 44M and 44O of the Law prohibit persons from managing a trading platform without
a license or from offering others to trade on a platform that is managed by someone who does
not hold a license or who is not exempt from the licensing requirement.
The Law and the Regulations determine the qualifications for a trading platform license, and
the obligations imposed on anyone who receives a said license. A large part of the provisions
are designed to address the conflict of interest that is an inherent element of trading
platforms’ operations, as they trade with their clients. For example, the Law and the
Regulations contain provisions that prohibit platforms from granting credit to clients,
provisions that define the permitted level of leverage, provisions concerning conflicts of
interests, provisions concerning adapting platform activities to clients, provisions concerning
platforms’ marketing and advertising, provisions in the matter of reporting requirements to
the Israel Securities Authority (hereinafter, “the ISA”) and the public, provisions concerning
the information that platforms must convey to their clients, and provisions on how to handle
clients’ funds, provisions concerning recording of trades, retention of documents, and other
related issues.
Like all other activities regulated by the Securities Law, the comprehensive regulation and
oversight of the operations of trading platforms is designed to protect the investors in Israel,
and therefore the territorial application of the prohibitions prescribed in the Law concerning
management of platforms without a license, or offering to trade on platforms operated by
someone who does not have a license, refers to trading platforms that operate vis a vis clients
in Israel. Consequently, trading platforms are subject to a licensing requirement if they offer
access to clients in Israel, whether they operate from Israel or outside Israel.
The foundation of this principle is that just as the Securities Law in Israel protects the investors
in Israel and applies to trading platforms that offer to trade to this public, other countries also
take action to protect the investors in their country and oversee trading platforms that operate
vis a vis those public, whether they operate in or outside that country.
This situation allows trading platforms located in Israel to offer overseas clients to trade in
various financial instruments without being subject to the ISA’s regulation or supervision as
long as they deny access to clients in Israel. For example, the ISA decision of March 2016 —
which states that trading platform licenses will not be issued to companies that offer trading
in binary options to their clients — is relevant only to trading platforms that offer access to
the public in Israel, and does not apply to Israeli trading platforms that deny access to clients
in Israel and offer exclusively to clients outside Israel to trade on their platforms, and therefore
the licensing requirement does not apply to them.
Consequently, the ISA and other enforcement agencies in Israel have begun to receive
complaints concerning heavy losses of clients from other countries resulting from the trading
activities on Israeli based trading platforms that operate without being subject to regulation or
oversight. In some cases, it appeared that the trading activities offered on those trading
platforms even serve to camouflage criminal activities such as activities that constitute fraud
and deception. This phenomenon has gained momentum and its current proportions are
creating negative publicity that reverberates around the world, which causes significant
damage to Israel’s image in general, and to the Israeli capital market in particular.
In response to the requests of foreign Securities Agencies that encounter activities of Israeli
based trading platforms, and in order to assist them, the ISA regularly takes action to assist in
judicial inquiries and in transferring information, based on the powers granted to it by law.
Nonetheless, in view of the grave damage to Israel’s image, as stated above, and due to the
growing prevalence of this phenomenon, an amendment to the law on this matter is proposed,
to extend the ISA’s enforcement powers also to trading platforms that operate in Israel yet
offer trading activities to clients outside Israel.
Section 1 Amendment to Section 44M
Section 44M of the Law provides that no person shall operate a trading platform unless he
holds a platform license and conforms to the conditions of the license.
It is proposed to amend Section 44M to the effect that sub-section (a) prohibits platforms from
offering financial instruments of the binary option type or other financial instruments of any
type so defined by the Minister of Finance, according to the ISA’s recommendation or in
consultation with the ISA, as approved by the Knesset Finance Committee. Although this
prohibition already exists under the ISA decision, but it is proposed to be established in the
Law, without detracting from the ISA’s authority under Section 44M(d) of the Law. On this
matter, it is proposed to define “a binary option” and determine that it is a derivative financial
instrument, in line with item (4) of the definition of a "financial instrument” that appears in
Section 44L of the Law (an agreement or arrangement, the value of which is derived from the
value of the currencies, commodities, interest rates, exchanges rates, indices, or other financial
instruments), the receipts and payments stemming thereof are a fixed amount or a fixed
proportion of an agreed-upon amount, and which entitles the holder of the financial instrument,
according to its terms, to receipts upon the occurrence of a specific event on the expiry date.
A binary option is a financial instrument which belongs typically to the options type. Typical
binary options entitle the holder to receive a pre-determined amount on the expiry date if a
specific event occurs, or entitles him to receive nothing if the said event does not occur —
which is the source of the name of the option (these options are also known as "digital options"
or "all-or-nothing options").
Trading in binary options on trading platforms is characterized by insufficient information,
which impairs an investor’s ability to make an informed decision. In view of this fact and the
similarity between the cash flows of binary options and the results of a coin toss, in March
2016 by the power vested in it in Section 44M(d) of the Law, the ISA decided to prohibit
trading platforms that submitted applications for a license as the law requires, from trading in
binary options. Among its reasons, the ISA noted that the complexity of binary options and
the challenges in pricing them on the one hand, and the absence of a multilateral market that
creates a market price on the other hand, do not allow the ISA to approve trading in binary
options on trading platforms. The ISA also noted in its reasons that due to the features of
binary options and the features of trading platforms, the continued activity on trading
platforms involving binary options could not only harm platform clients, but also damage the
reputation of the entire market.
In this manner, the Law will prohibit trading platforms that operate vis a vis clients in Israel
from offering their clients trades in binary options or other financial instruments of such types
as the Minister of Finance determines, due to their destructive potential. Although, as noted
above, the ISA already decided in March 2016 to prohibit trading platforms that submitted an
application for a trading license as required by the Law, from trading in binary options, by the
power vested in it in Section 44M(d) of the Law, yet it is proposed to establish this prohibition
in the Law itself. It should be stressed that this amendment does not detract from the ISA’s
authority to define the types of financial instruments in which licensed trading platforms may
trade, as stated in that Section.
Since it is impossible to foresee all possible scenarios in advance, and since new types of
financial instruments with similar destructive potential may be offered in the future, it is
proposed to authorize the Minister of Finance to extend the list of financial instruments
prohibited for trades on trading platforms, according to the ISA’s suggestion or in consultation
with the ISA.
Furthermore, it is also proposed to add sub-section (a1) to Section 44M, which will define a
corresponding prohibition on managing Trading Platforms that trade exclusively with clients
outside Israel, unless the following two conditions are obtained:
1. The trading platform holds a foreign license that permits it to manage a trading platform
in the country where the client is located. It should be noted that the proposed prohibition
will also apply to trading platforms operating in a foreign country that has no licensing
requirement for such activities under the law.
2. The trading platform does not offer its clients to trade in financial instruments of the type
noted at the end of sub-section (a), as proposed above.
In view of the features of binary options and trading in binary options, as described above,
they may serve as fertile grounds for activities that are damaging to clients. Therefore it is
proposed to prohibit trading platforms from offering financial instruments of the binary
option type even when they operate exclusively vis a vis overseas clients and are therefore
not subject to a licensing requirement in Israel. It is important to note that other countries
such as Belgium and the United States have applied various restrictions on binary option
trading, and additional countries are considering similar restrictions. Therefore it is
proposed to extend the prohibition of offering clients to trade in binary option or in other
financial instruments as determined by the Minister of Finance, according to the ISA’s
recommendation or in consultation with the ISA, as proposed above, which applies to
trading platforms that offer trading to clients in Israel, also to trading platforms that offer
trading exclusively to clients outside Israel.
In the matter of this sub-section, it is proposed to define the terms “trading platform
management” and “foreign license.”
Regarding the term “trading platform management,” it is proposed to determine that any
connection of a platform’s operations to Israel will be considered management of a trading
platform in Israel. For this purpose it is proposed to determine that any of the following
activities constitutes management of a trading platform which requires a license as
described above:
1. the company’s strategic decision making;
2. the trading platform is operated, including by computer equipment, information, and
software, or by online or human service or marketing call centers, directly by the
company that manages the trading platform or any party that renders such services on
its behalf.
In the matter of “foreign license,” it is proposed to define that a foreign license is each of the
following:
1. A trading platform license issued according to the laws listed in Schedule Four B. It is
further proposed to authorize the Minister of Finance, to add additional laws to Schedule
Four B, in consultation with the ISA.
2. A license that is comparable to the trading platform license, as determined by the ISA, and
is issued by a law that defines provisions on the matters listed in Sections 44M(b)(5)(a) of
the Law (Provisions in the matter of equity, liquid assets, and deposits) and Section
44CC(2) of the Law (prevention of conflicts of interest between a company holding a
platform license, its employees, service providers acting on its behalf, its controlling
owner, and its clients), Section 44CC(3) of the Law (handling clients’ funds), Section
44CC)4) of the Law (information that the company must convey to its clients, including
information concerning the trading platform, the financial instruments traded on it and
their prices, and related transactions) and Section 44CC(6) of the Law (the company’s
obligation to examine the activities’ compatibility with the client, including the client’s
comprehension of the risks and chances that his activities on the platform entail).
For Section 2 Amendment to Section 44O
Section 44O provides that no person shall propose to another to trade on a trading platform
unless the company that operates the trading platform has a platform license.
It is proposed to mark this as (a) and add a sub-section (b) that provides that no person shall
propose to another person outside Israel to trade on a trading platform unless he meets the
conditions set forth in Section 44M(a1), as proposed above.
It should also be noted here, in line with the explanation for the amendment to Section 44M,
that the proposed prohibition should apply even if there is no licensing requirement in the
foreign country.
For Sections 3-5 Amendment to Section 53, addition of Schedule Four B to the Law and
amendment to Schedule Seven to the Law
Section 53(b) of the Law defines the criminal offenses that will be subject to a sentence of two
years imprisonment or a fine equal to two and one half times the fine stated in Section 61(a)(4)
of the Penal Law 5737-1977. If the offender is a corporation, said fine is doubled twelve and
one half times. The offenses listed in this Section include the offense of managing a trading
platform without a license or in violation of the terms of the license (paragraph (6a) of the
above Section) and offering others to trade on a trading platform in violation of Section 44O
of the Law (paragraph (6b) of the above Section).
Paragraph 3 proposes to also add to said criminal offenses in Section 3 the prohibitions
proposed in the Memorandum of Law, that is, offering others to trade in binary options or other
financial instruments determined by the Minister of Finance; management of a trading
platform for clients outside Israel in violation of the provisions of Section 44M(a1) of the Law,
in the format proposed in Section 1 of this Law; and offering others to trade on a trading
platform in violation of the provisions of Section 44O(b) of the Law, in the format proposed
in section 2 of this Law. Nothing in the above shall prevent the enforcement of other criminal
offenses committed as part of activities to operate a trading platform.
Paragraph 4 proposes to add Schedule Four B after Schedule Four A to the main Law, which
will list the foreign laws under which a trading platform license may be obtained and be
recognized as a “foreign license” according to the definition proposed in Section 44M(a1) of
the Law, as stated above. In this list of laws it is proposed to state the laws of the members of
the European Union that implement Directive 2004/39EC of the European Parliament and of
the Council of April 21, 2004 on markets in financial instruments, or of Directive 2014/65/EU
of the European Parliament and of the Council of May 15, 2014 on markets in financial
instruments, as amended from time to time, all pursuant to the decision of the competent
legislative bodies of the European Union, and the Securities Exchange Act of 1934 or the
Commodity Exchange Act of 1936 as amended from time to time by the legislative bodies of
the United States of America.
In paragraph 5, it is proposed to add to Part Three of Schedule Seven to the Law, which
provides the list of administrative offenses in respect of which an offender may be subject to
administrative prosecution before the administrative enforcement committee, the
administrative offense of the provisions of Sections 44M (a), 44M(a1) and 44O(b) of the Law,
in the format proposed in Sections 1-2 of this Law.