Fallout from the NFA’s credit card ban

NFA’s plan to ban credit card or PayPal-type deposits to retail Forex and futures accounts looks likely to go ahead.

Our article posted last week breaking the news that the NFA plans to ban the use of credit cards and “alternative funding mechanisms” such as PayPal to fund retail customer accounts has generated a tremendous amount of chatter and commentary — some even suggest that this will somehow be good for the retail FX industry — as well as questions, such as what the effect of the credit card ban will be.

First we should note, that following discussions with industry insiders and others involved in the situation, it does seem likely that the NFA plans to go through with this new rule. And, that it will indeed be damaging to those engaging in the retail FX business in the U.S.

So who will be hurt the most? Clearly, those with the most to lose are FX brokers with:

  1. a large U.S. retail client base
  2. historically high credit card deposit rates, and
  3. only a U.S. presence but no international regulated subsidiaries.

Comparing the two largest U.S. based firms, FXCM vs. Gain Capital (Forex.com) — Digging through the filings of the two largest U.S.-based retail FX firms, it seems to us that Gain Capital has more to lose than FXCM. Gain Capital stopped providing geographic volume data about a year ago, but based on its most recent numbers and the fact that it recently picked up GFT’s U.S. clients we estimate that Gain Capital (Forex.com) does about 1/3 of its retail volume in the U.S., versus just 11% for FXCM. And Gain reports (in its 2011 10-K) that 37% of its customer deposits were made by credit card, versus less than 20% at FXCM — and just 3% of FXCM’s U.S. client deposits arrived via credit card.

Other firms which might be negatively impacted include those U.S. firms with foreign clients, but which are only licensed / regulated in the U.S., and thus take on all those foreign clients in their U.S. entity — an example might be MB Trading.

More on this story is sure to unfold in the coming weeks, as the NFA plans to discuss this proposed ban in an upcoming mid February meeting of its Compliance and Risk Committee. Stay tuned…

For the text of the full NFA Request-for-Comments letter on the matter click here.

And for those of you who feel compelled to make your feelings on the matter known to members of the NFA’s Compliance and Risk Committee who will be discussing the proposal in their mid-February meeting, the committee members are listed on the NFA’s website.

For more on the global Forex industry see the LeapRate-Dow Jones Forex Industry Report.



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