Aggregated News From Investment Management Regulators

Tel Aviv District Court upholds ISA’s position that Fairtrade’s operations constitute an unauthorized Exchange, and are therefore illegal


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March 5, 2017 / 8 Adar, 5777

Last Thursday, on March 2, 2017, the Honorable Judge Ruth Ronen of the Tel Aviv-Yaffo District Court (Economics Department) rendered a decision, upholding the ISA’s position and dismissing the appeal filed by G.G. Fairtrade Ltd. The court accepted all the ISA’s arguments and did not intervene in the ISA’s determination that Fairtrade is operating an unauthorized Exchange.

For the past several months, Fairtrade has been operating a trading platform for binary options, which allows its clients to purchase and sell binary options among themselves. After reviewing Fairtrade’s operations, the ISA determined that Fairtrade is effectively operating an unauthorized Exchange, and ordered Fairtrade to suspend its illegal operations.

On January 11, 2017, the company appealed to the court against the ISA’s order to halt its operations. The company was issued an injunction that suspended the validity of the ISA’s decision until the court ruled on the appeal.

In its response to the appeal, the ISA argued that the system that Fairtrade is operating has the essential features of an Exchange. The ISA also clarified the problematic aspects of trading in binary options, and noted that the ISA does not permit licensed trading platforms to trade in binary options because, among other reasons, this financial instrument is essentially similar to gambling. The ISA also argued that it is very doubtful whether Fairtrade’s platform resolves all the concerns that led to the ISA to prohibit trading platforms from offering binary option trading.

The dispute between the ISA and Fairtrade focused on the interpretation of the term “securities,” which is included in the definition of the term “Exchange” in the law. On this point, the court confirmed the ISA’s position and clarified that in view of the aim of the law, the definition includes derivative financial instruments, which include binary options and financial instruments that are based on underlying assets that are not traded on the Tel-Aviv Stock Exchange. The court accepted the ISA’s position that Fairtrade is operating an unauthorized Exchange, and furthermore dismissed Fairtrade’s claims of selective enforcement and abuse of the right to a hearing.

On this point, Judge Ronen determined that the interpretation of the relevant definition of the term “securities” in the law “should take into account the fact that trading in derivatives in general, and specifically in binary options, may subject traders to risks of which they are not necessarily aware of. Such trading raises concerns regarding the security of traders’ funds, rules of fair trading, complete information that is equally available to all investors, the pricing of the traded instruments, and other elements. To mitigate these risks, regulatory supervision of such trading is required…” With respect to the ISA’s authority, the Court held that “in view of the interpretation of the Securities Law as determined in this ruling, the appellant’s unauthorized operations in managing an Exchange are illegal operations. Therefore, the ISA is authorized to take action to shut down these operations, which are in violation of the law.”

It should be stressed that the order that the ISA issued to Fairtrade is part of the ISA’s actions to eradicate the offering of trading in binary options. One year ago, the ISA prohibited trading platforms from offering binary options to Israeli clients. ISA Chair, Prof. Shmuel Hausner, recently approached the Attorney General and the Minister of Justice, requesting an extension of the ISA’s powers to take action against platforms that offer binary options to clients outside Israel, and a proposed amendment to the Securities Law on this topic was published two weeks ago.

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