government bill - memorandum of securities law - isa and ministry of finance

d

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.

Memorandum of Securities Law – Translated and Provided by ISA for publishing on AtoZForex.com

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 matters which may affect them

http://www.isa.gov.il

http://atozforex.com/

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 t o S e c t i o n 44M

1. Securities Law 5728-‐1968 (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) 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) 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).

Amendment t o S e c t i o n 44O

2. 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 S c h e d u l e Four B

4. 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 to Schedule Seven

5. 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:

.1The 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.

.2The 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:

.1the company’s strategic decision making;

.2the 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:

.1A 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.

.2A 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.


