The National Futures Association (NFA) announced yesterday that its Board has approved the prohibition on the use of credit cards to fund retail Forex and futures accounts. The sanction is subject to approval by the Commodity Futures Trading Commission (CFTC) but no amendments to the rulings are expected.
It's been over a year since the NFA began its enquiry into credit card deposits at retail Forex firms. As far back as January, 2013, the expected prohibition was viewed by U.S. Forex brokers with great trepidation, many fearing large losses in their deposits. Most of these firms keep large amounts of credit card deposits on hand, some as high as 35%. The smaller firms were especially concerned by the anticipated ban.
Since that time, however, there has been a consolidation in the number of U.S. retail firms with Alpari, ILQ and FXDD closing their doors and transferring their accounts to other locations outside the U.S. thus reducing competition amongst the smaller brokerage houses. The few remaining retail firms left in the U.S., OANDA, FXCM and GAIN Capital ,continue to do business across the Atlantic but their business there comprises only a fraction of their overall volumes.
NFA's Ban
The NFA's proposed rule prohibits the use of credit cards to fund both futures and retail Forex accounts. However, during its investigation into more than 15,000 retail Forex account, the NFA concluded that futures commission merchants had never permitted this practice in any event.
The NFA also determined in its investigation that a majority of the retail Forex accounts were opened by small clients and were funded by borrowed funds or credit cards. Interestingly, most of these accounts were unprofitable.
According to NFA President and CEO Dan Roth, "Since our inception, NFA has been committed to protecting investors. 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."
There seems to be a light at the end of the tunnel, however. In lieu of credit card deposits, ACH-based bank to bank fund transfer systems have started to emerge in earnest. Knox Payments and Dwolla, for example are two such companies that permit U.S. investors to transfer funds for a minimal cost of under $1.00. Since these transfers are not credit based, the NFA can look upon them as a low cost type of deposit and not take issue with them.