August 25, 2026
On July 26, 2026, the Israel Securities Authority (ISA) published a staff position focused on one key issue: whether a hybrid bank deposit should be treated as a security when its return is linked to the performance of the bank’s lending activity. The position clarifies the boundary of the term “security” and highlights the characteristics the ISA considers relevant in determining whether a certain financial instrument is defined as a “security”.
The Instrument at Hand
The bank that applied to the ISA plans to offer customers interest on current account balances and deposits with maturities of three months or longer. For both products:
- the principal amount and the minimum interest rate are fully guaranteed;
- in addition to that minimum, customers may receive an extra return. The amount depends on the bank’s income from loans funded by these deposits, and the portion of that income used in the calculation varies by product: 20% for current accounts, 30% for deposits with terms of three to twelve months, and 50% for deposits with terms of one year or longer.
Why the Definition Set Forth in the Securities Law Does Not Resolve the Issue
The relevant definition appears in Section 1 of the Securities Law, 1968, which describes securities as:
- certificates issued in series;
- issued by a corporation;
- granting a right of membership or participation in the corporation, or a claim against it.
A deposit represents a claim against a bank, which is a corporate entity. Accordingly, based on the wording of the Securities Law, this type of arrangement may fall within the definition.
The ISA expressly acknowledges this point: namely, that the wording of the definition is sufficiently broad to encompass bank deposits. Notwithstanding the foregoing, by reason of their essential characteristics, deposits are not ordinarily classified or treated as securities. The receipt of funds on deposit for the purpose of relending such funds in the ordinary course of banking business constitutes a conventional banking activity. Such activity bears little, if any, resemblance to the issuance of securities, whether the matter is considered from the perspective of the customer or that of the bank.
What the ISA Considered
First, the ISA considered which standard features of a security are not present in this product. The product does not provide a right to dividends, a right to participate in the company’s assets upon liquidation, or the ability to trade or transfer the instrument to another holder. Viewed overall, these characteristics make the product more comparable to a bank deposit than to shares or bonds.
Second, the ISA examined the features the product does include. On this point, the ISA clearly differed from the applicant and noted that the issue is not entirely straightforward. The products have a hybrid structure. The guaranteed principal and guaranteed minimum rate are consistent with a bank deposit, while the non-guaranteed additional return reflects an investment element, since that return depends on the issuer’s business performance.
Third, the ISA considered the existence of an alternative regulatory framework. From the start of its operations, the bank is subject to the directives and rules of the Bank of Israel, including requirements relating to disclosure to both the supervisor and the public, as well as oversight of the conduct of its banking activities. Based on this, the ISA concluded that the need for securities regulation in this context is reduced.
The ISA also took into account the transparency of the products, the customer’s ongoing access to the bank’s financial information, and the likelihood that a customer would understand the product as a bank deposit rather than as a security.
After consideration of all the foregoing factors, the ISA staff did not object to the applicant’s position that the products do not constitute securities.
The Advice Law
The Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 1995 (the “Advice Law”) regulates advisory activity relating to “financial assets.” As a general matter, a bank deposit is not included in that category, except in cases where it may be classified as a “structured product.”
The ISA accepts that, based on the wording of the law, the products could fall within that definition, since the return is determined by a formula that is based, among other factors, on changes in the interest rates of loans issued by the bank. Additionally, from a substantive perspective the ISA does not agree with the applicant’s position, noting that applying the Advice Law could serve a useful purpose, particularly when assessing whether the product is suitable for the customer in comparison with alternative investment products.
Even so, the staff did not object not to apply the Advice Law for this instruments. In its view, the customer’s risk is limited to the return above the guaranteed minimum; the product retains the standard characteristics of a deposit; other banking regulations apply, including rules that prohibit misleading customers or placing them under unfair pressure, as well as disclosure requirements applicable to deposits; and there are broader policy considerations that support increased competition in the banking system.
What Keeps the Product Outside the Regulatory Perimeter
The position identifies the key features that support the view that the proposed products fall outside securities regulation of both the Advice Law and the Securities Law:
- The principal is guaranteed without condition
- A minimum interest rate is guaranteed.
- The product does not provide any entitlement to dividends or to a share of assets on liquidation.
- The product is not tradable and there is no secondary market, which further supports this view.
- All components of the formula are publicly available and can be independently monitored.
- No advisory interaction takes place at the time the product is selected.
- The issuer is subject to banking supervision
How We Can Help
We advise banks, financial institutions, and fintech companies on how their products are treated under the Securities Law and the Advice Law. We support clients at every stage—from reviewing a product’s structure while it is still in development and assessing which features may place it outside the relevant regulatory scope, to preparing a pre-ruling request to the ISA and managing the related discussions with ISA staff, and finally to updating documentation and disclosure in line with the outcome.
