Since 2009, Israeli law has regulated the operation of online trading platforms for the operator’s own account, defined as “a computerised system through which a person buys from his clients financial instruments for his own account or sells financial instruments from his own account to his clients in an organised, frequent and systematic manner, other than a system in which all the bought or sold financial instruments are financial instruments, the conditions of which are determined by direct negotiations between the parties to the transaction”.
Pursuant to section 44M of the Securities Law, 1968, the operation of a trading platform is subject to the holding of a platform licence, the granting of which is subject to the meeting of a number of criteria, and which is also subject to continuing compliance requirements. There are limited exceptions to the licensing requirement.
One of the duties imposed on a licensed operator, in light of the risks involved in trading platform activities, which often involve complex financial instruments, is to ensure that a prospective client is one for whom online trading platform activity would be appropriate.
This comprises a number of stages – providing the client with questionnaires and carrying out checks, determining if it would be appropriate, in light of the information obtained, to enable the client to trade on the platform, providing a written warning to a client which is not found to be an appropriate candidate for trading, and, if the client nevertheless insists, to consider in light of the circumstances whether they should be permitted to do so.
The purpose of the assessment process is to protect clients against situations in which they may be unable to make informed investment decisions due to an inability to evaluate the risks involve in their online trading activity.
In light of its experience in this regard, the ISA has now published a legal staff position paper as to how the assessment process should be carried out. The paper examines each of the stages of the process in turn, details what they should include, and provides certain practical examples as to incorrect steps which should be avoided.
For example, with regard to the questions to be asked to the potential client, the paper provides that such questions must be drafted so as to enable a direct and objective assessment of the client’s understanding of the relevant risks. As an example of a question concerning leveraged products, the client could be provided with data concerning a product and asked to reach conclusions concerning the consequences of base rate changes.
Examples of types of questions which would be considered insufficient in this regard would be those which enabled the potential client to self-assess, or to answer yes/no as to whether a specific risk was understood, without such understanding being tested.
The paper also included a reminder of the need, as per regulations, to document each stage of the assessment process.
The full paper (in Hebrew) can be found here.