5 Things to Remember About the NFA Credit Card Funding Ban

In an earlier edition of Espipionage, I’ve discussed how financial industry watchdog NFA (National Futures Association) planned to implement a ban on credit card funding for U.S. forex accounts. This proposal was recently given the green light by the CFTC (Commodity Futures Trading Commission) and the reforms will come into play early next year.

1. Regulation will take effect by January 31, 2015.

According to the press release from CFTC, the ban on credit card funding for U.S. high-risk derivative transactions will take effect in January 31, 2015. This would apply to both new and existing customers, prohibiting them from funding their futures or forex accounts using credit cards.

2. Credit card ban will affect U.S. brokers.

nfa credit card funding banBear in mind that this rule requires compliance from U.S. regulated brokers or NFA members, majority of which spans retail accounts from FXCM, OANDA, and Gain Capital’s Forex.com.

In other words, offshore forex brokers are not covered by the regulation and may still be able to accept credit card funding. If you’re looking into this alternative to open or fund an account using a credit card, just remember that U.S. financial authorities are discouraging the use of borrowed funds to trade because of the volatile nature of the markets.

3. Electronic payment methods linked to credit cards are also banned.

The funding ban also covers electronic payment methods that are linked to credit cards. This includes PayPal, Skrill, and ChinaPay among many others. According to the NFA, this move would limit potentially fraudulent activity and would encourage traders to stick to using funds they already have.

4. Debit card funding will still be accepted.

With that, traditional bank transfer methods and debit card transactions are still considered acceptable methods to open or fund an account. “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,” explained NFA CEO Dan Roth.

U.S. check payments and fund transfers conducted through an automated clearing house are still viable options, although some brokers are already anticipating a decline in new clients due to this regulation.

5. NFA is just trying to protect investors.

Roth also added that allowing credit card funding would lead traders to risk borrowed money, something that goes against the NFA’s mission to look after investors. According to the NFA, members and their associates should observe high standards of commercial honor and just and equitable principles of trade in the conduct of their forex business.

In accepting credit cards as payment methods from their retail clients, brokers might wind up breaching these compliance rules, as an extensive study of 15,000 retail forex accounts revealed that majority of those funded through credit card transactions turned out to be unprofitable.

“Over the last decade, NFA has made significant strides in its regulation of the retail forex markets,” added Mr. Roth. “This ban is just another very important step to fulfill our mission to protect customers.”

What’s your take on this new ruling? Don’t be shy to share your thoughts and experiences in our comments section below!

  • ForExchange

    Hi Ninja,

    it is a very nice writing. Really great. I think the reason seems to be logical for the ban but I think it might only end up hurting US brokers. As you described, there are offshore possibilities so of someone wants to trade with a credit card, most likely they will find a way for it.

    What I do not really understand is the third point you mentioned. Can you please explain it? Because if I have a Skrill or Paypal account, it can be credited with wire transfer, debit card etc. So it does not have to do something with Credit Card. Money on those accounts does not mean it is borrowed money.

    Thanks,
    FE

    • Thanks for checking out my blog and your positive feedback, I really appreciate it. I’m also looking more into the regulation affecting PayPal accounts since I have a bunch of friends who use that to fund their balance using debit accounts or wire transfer too, I’ll keep ya posted!

  • Jeremy W

    They are trying to protect consumers who know nothing about risk management yet are using credit cards for leverage. It is not perfect but the intention behind the move should be lauded. However, they must take care not to alienate the rest of the traders and make life difficult for everyone else.

    • Charles Walker

      Who would want to fund a FX account with borrowed money anyway? That’s insane. This only makes life a little more difficult for amateurs temporarily, but better in the future by not letting them blow out their account and owe their bank money. As much as I support the idea of discouraging funding with credit cards, I think it would have been more appropriate to set deposit limitations along with a big disclaimer educating the trader of the risks.

      • Yeah that’s a good compromise, I think. Thanks for checking out my blog and for sharing your thoughts!

    • That’s very true! Maybe a stricter system for doing background checks on traders who need to use credit cards? Thanks for sharing your thoughts.

  • Fxfreeme

    I’m so tired of Big Brother trying to protect me from myself. If I want to blow my credit lines playing forex, what business is it of the NFA?

    • They’re just watching out for investors who would like to protect their hard-earned cash!

      • Chris Johnson

        Ummm no. They are not trying to protect us. Not in the least bit. Because if they did, they would insure our deposits just like they do futures accounts. All they offer us is “segregated” accounts which means absolutely nothing when it comes to bankruptcy.

        • Fair point. Insurance would be a good idea.

        • john awe

          Good point. They also took away hedging which was a risk management tool so the NFA and the CFTC do not have the retail investor’s best interests at heart.

  • I think their intentions are fine but they could wind up alienating those who just use credit cards for convenience. In any case, let’s see how it affects accounts. Thanks for sharing your thoughts.

  • Yipes, I guess that really happens, huh? Maybe they’ll be stepping up their game when it comes to regulating this? Then again I imagine a lot of traders won’t be happy about it.

    • john awe

      Then they will get sued.

  • john awe

    More reason to ignore the US regulators and take your account overseas. Do not let big brother control your life. Either that or fight back and sue the government for Constitutional violations against American liberties or lack thereof.