"Trading in derivatives in general, and in binary options in particular, is liable to expose traders to risks of which they are not necessarily aware. Such trading arouses concern about the safety of the traders' money, fair trade rules, the availability of full information about the trading rules on an equal basis, and more. In order to reduce these risks, regulation of this trading is necessary. Such regulation is likely to reduce this trading, but such a reduction is less of a problem, given the existing doubt about the social necessity for trading of this type," wrote Tel Aviv District Court (economic section) Judge Ruth Ronen in a judgment outlining the limits for this problematic theater in Israel. She ruled that binary options were "securities" under the Securities Law, and were therefore subject to supervision by the Israel Securities Authority.
The judgment was rendered in the framework of the Securities Authority's campaign designed to eliminate binary options trading by Israeli companies. The Securities Authority banned marketing of binary options to Israelis a year ago, and began to promote legislation banning overseas marketing of such options by Israelis.
The Securities Authority recently distributed for public comment a legislative amendment memorandum designed to prevent Israeli companies from offering binary options trading to customers outside Israel.
The background to the campaign is the large number of cases of fraud committed in the unsupervised binary options trading theater. It emerged that in many cases, the trading offered in the trading arenas was a cover for criminal activity: deception and fraud. This phenomenon has reached proportions that are causing widespread negative publicity around the world, significantly damaging Israel's image in general and the reputation of its capital market in particular. Those operating in the industry quickly acquired the nickname "Wolves of Tel Aviv."
One recent case involved Canadian Fred Turbide of Edmonton, 61, who committed suicide after being fleeced by Israeli binary options company 23Traders and losing his life savings of $152,000, which he had put aside for retirement.
As part of its efforts to combat this problem, the Securities Authority demanded that the Fairtrade company, which had begun binary options trading in recent months, desist from this activity. The Securities Authority ruled that Fair Trade was in effect conducting a securities exchange without a license, and demand that it cease doing so. Fairtrade did not accept this ruling, and petitioned the Tel Aviv District Court against it.
A broker, not a party to a transaction
Fairtrade operated a sharing technological platform accommodating multi-party trading in binary options. Trading took place between offerers and offerees (P2P). The platform was a "market" for bringing the parties to the transaction - offerers (writers of options) and offerees (buyers) - together. Fairtrade is the broker in these transactions. In contrast to other platforms, however, the brokerage is not a party to the transactions taking place through it, does not write options, and does not sell them from its account or buy options for its account. In other words, Fairtrade facilitates trading, but is not a party in it.
The Securities Authority, headed by Prof. Shmuel Hauser, did not accept Fairtrade's position. It alleged that Fairtrade's activity was forbidden, because it was conducted without a securities exchange license. The Securities Authority relied on the provisions of the Securities Law making it illegal to run a securities exchange without a license from the Minister of Finance. According to this view, in early January this year, the Securities Authority ordered Fairtrade to halt its activity within seven days, and published a specific warning on its website, in which it notified the public that it had ordered Fairtrade to stop its activity. In its announcement, the Securities Authority also stated that this activity was risky and unsupervised. The dispute between the parties concerned the question of whether the binary options traded on the platform operated by Fairtrade were "securities" as the term was defined in the Securities Law.
The options are securities
Ronen accepted the Securities Authority's position that binary options were "securities." The judge made it clear that the relevant definition of "security" in the law was very unclear in its language and subject to many interpretations. In view of the purpose of the law, however, the definition also applies to financial derivatives, including binary options and financial instruments, derived from underlying assets not traded on the Tel Aviv Stock Exchange (TASE).
"In the absence of appropriate supervision, investors are liable to find themselves selecting investment methods that are not completely clear to them, and which could cause them possible unwanted losses," the judge wrote.
Published by Globes [online], Israel Business News - www.globes-online.com - on March 6, 2017
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