Financial industry watchdog NFA (National Futures Association) proposed a ban on using credit cards to fund U.S. forex accounts, citing the need to protect investors against using borrowed money as trading capital.
“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 President and CEO Dan Roth. “Allowing customers to fund accounts with credit cards encourages them to trade with borrowed money.”
I gotta say, the man’s got a solid point. As we constantly emphasize in our School of Pipsology, you shouldn’t be trading money you can’t afford to lose. It’s not that we’re assuming that you’ll wind up wiping out your entire trading capital at some point, but it wouldn’t hurt to be extra cautious of the risks involved in forex.
Take note that this proposed rule was decided upon by the NFA after more than a year’s worth of extensive account reviews, leading officials to conclude that majority of retail forex and futures accounts funded through credit cards or borrowed funds turned out to be unprofitable. Aside from that, the NFA plans to protect consumers against potential credit card fraud or identity theft tactics employed by individuals with gambling tendencies in an effort to win big in the financial markets.
While the regulation is still up for approval by the CFTC, many traders are already looking at a number of alternatives for funding accounts in a more convenient manner. Bank-to-bank transfers conducted by ACH (automated clearing house) institutions, such as Knox Payments and Dwolla, has emerged as a viable option. Those who own U.S. checking accounts can use these to open forex trading accounts in less than 48 hours.
Despite the availability of alternatives, brokers could see a significant decline in the number of accounts opened when this ruling is passed. Ever since the idea of banning credit card deposits was brought up last year, a number of retail forex brokers have already exited the U.S. market and moved their operations offshore. From the brokers’ perspective, this might not be too good for business, as the industry has already seen a slowdown in trading volumes and revenue for the past few months.
For retail traders though, it’s still business as usual… unless you were planning on opening a live account with a credit card. As my buddy Big Pippin puts it, “Don’t be writin’ checks y’all can’t cash!”