The US National Futures Association (NFA) announced today that its board has approved banning the use of credit cards for funding Forex accounts. The law is pending approval from the CFTC. However, as the NFA is assigned by the CFTC to supervise the futures and Forex industry, once a measure is formalized by the NFA, rarely does the CFTC make many amendments in rulings.
The news follows a greater than yearlong enquiry into credit card deposits that began in January of 2013. At the time, the impending ban was viewed as possibly being a huge blow to US Forex firms, who depending on the firm are estimated to have between 3% to 35% of their deposits in the form of credit cards. Specifically brokers with smaller size deposits were expected to be especially affected by the ban. However, since the rule was first brought up, the US market has consolidated with firms such as Alpari, FXDD and ILQ, exiting the US retail market. At this point, of the pure Forex firms in the US, the only remaining are FXCM, OANDA and GAIN Capital, whose business in the country composes only a fraction of their overall volumes and accounts. The ban is specifically focused on retail Forex firms as they are the only brokers under the NFA’s jurisdiction that offer credit card deposits.
ACH Fund Transfers vs Credit
Another item which may alleviate the blow of credit card deposits has been the rise of ACH- based bank to bank fund transfer systems. Firms such as Dwolla and Knox Payments in the US have emerged to offer domestic users transfer for well under a dollar, providing low cost alternatives for funding accounts. In addition, as they aren’t based on credit, the NFA isn’t likely to view these low cost and efficient deposit types as encouraging customers to trade with borrowed funds.
The issue of trading on credit was specifically mentioned by the NFA when announcing their decision today. Commenting on the subject in their public statement, NFA President and CEO, Dan Roth said, “Forex and futures markets are both high-risk and volatile, and individuals who wish to participate should use only risk capital to fund their accounts. Allowing customers to fund accounts with credit cards encourages them to trade with borrowed money.” The NFA added that the ban was a “direct result of an extensive study by NFA of forex dealer members’ business practices.” Adding that the “NFA looked at more than 15,000 retail forex accounts and noted that an overwhelming amount of these accounts were funded by small retail customers using a credit card or borrowed funds, and a majority of these accounts were unprofitable.”