On October 26, 2015, the Israel Securities Authority ("ISA") issued a response to a pre- ruling request regarding a platform for the execution of foreign exchange spot transactions.

The pre-ruling request was made by a company operating in Israel, which operates an internet based electronic system that provides clients with real-time quotes of currency foreign exchange rates, as well as the execution of foreign exchange transactions for settlement in up to two business days (spot transactions). In this regard, the transactions are foreign currency transactions which will be executed within two business days from the date of the order which is through the platform.

The company requested the ISA to confirm that this activity does not require a license to operate a trading platform under section 44 M of the Securities Law, 5728-1968 ("Law"), on the basis that such transactions do not fall within the scope of a "Financial Instrument" under the Law. 

In its response, the ISA stated that these transactions do not fall within the scope of a "Financial Instrument" under the Law and accordingly, do not require a license to operate a trading platform in accordance with Article 44 M of the Law.

The ISA clarified that from the definition in Section 44 L of the Law, it transpires that that the buying and selling of "Financial Instruments" is a critical element of the definition in question, and consequently, if the transaction does not involve a sale or a purchase of "Financial Instruments", then the trading platform through which the transaction is executed, does not require such a license.

According to the ISA, the "Trading Platform to its Own Account" legislation was not meant  to regulate currency exchange services but rather applies to trading in derivatives (for example, with respect to exchange rates). In accordance with this view, the ISA  emphasized that transactions in foreign currencies: (i) that reflect trading in the underlying asset itself, although the underlying asset is not delivered immediately on closing; and (ii) where the purpose is to physically settle the currencies, rather than making a profit from the change in the underlying value of the agreement between the parties, do not fall within the definition of "Financial Instruments" under Section 44 L of the Law.

The ISA's decision has an impact on entities wishing to operate in the foreign exchange market. In this regard, we recommend that the various entities active on this market actively examine the implications arising from this decision. Our firm advises many companies in this area and will be happy to answer any questions which relate to this issue. 

Attached below are links which set out the full preliminary request and the ISA's response (available only in Hebrew):

The request- http://www.isa.gov.il/ExchangeTradingFloors/decisions/Preliminary%20inquiries%20and%2 0related%20stock%20trading%20arenas/Documents/pniya_zirot29102015.pdf

The response- http://www.isa.gov.il/ExchangeTradingFloors/decisions/Preliminary%20inquiries%20and%2 0related%20stock%20trading%20arenas/Documents/tshuva_zirot29102015.pdf