U.S. derivatives regulators are proposing a rule that would ban retail investors from using their credit cards to finance foreign exchange, or futures, trading.
The U.S. National Futures Association (NFA) announced that its board has approved a proposed ban on the use of credit cards to fund retail forex and futures accounts. The proposal is subject to approval by the U.S. Commodity Futures Trading Commission (CFTC).
The NFA says that the proposed prohibition is a direct result of an extensive study of forex dealers’ practices, which looked at more than 15,000 retail forex accounts and found 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.” Futures dealers don’t allow this practice, it notes.
However, according to the proposal, almost 80% of retail forex accounts studied by the NFA were initially funded by a credit cards, an online payment service such as Paypal, or a debit card; and 72% of them were unprofitable in the fourth quarter of 2013. Additionally, about half of those clients report net income of less than $50,000.
“The board concluded that the data was very disturbing from a customer protection perspective because it revealed that lower income individuals predominantly use credit cards or payment facilitator to fund their accounts and the majority of these individuals lost their funds trading forex,” the proposal notes.
“Credit cards, by their very nature, permit easy access to borrowed funds. Given the highly volatile nature of the forex and futures markets, the substantial risk of loss, and the possibility that a total loss may occur in a very short period of time, the board has concluded that members should be prohibited from permitting customers to use credit cards to fund forex or futures accounts,” it says, noting that it will allow retail clients to still use electronic forms of payment, such as debit cards, or Paypal accounts tied to a bank account, that aren’t based on credit.
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“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,” says NFA president and CEO, Dan Roth.
“Over the last decade, NFA has made significant strides in its regulation of the retail forex markets,” adds Roth. “From the increase in capital requirements to mandating content requirements so that all customers could receive comprehensive and accurate account information, this proposal is just another very important step to fulfill our mission to protect customers.”