Follow-up to our Exclusive article back in January 2013 on the NFA’s plans…
In a significant regulation note coming out of the USA’s FX industry on the one hand further legitimizes retail Forex as a legit asset class to trade for the retail public in the eyes of regulators; but on the other hand is not so broker friendly, is a new ban on credit card deposits announced today by the National Futures Association (NFA).
Further Reading: US Retail FX client assets drop to multi-year lows
With only big major players operating in the sector, the only thing it will do is further reduce client accounts as ease of deposit has been hindered a bit. Although, I believe this is a good move, there is no need for people to load up accounts on credit cards (especially when inexperienced and testing the trading waters). The new regulation should weed out non-serious traders from compulsively funding an account without further enhancing their knowledge with training and education (a role introducing brokers need to play). However, if you have a USA checking account, depositing into an account takes as little as 24-48 hours still, which is no big deal.
Below you can read the official press release:
Chicago — National Futures Association (NFA) announced that its Board approved a ban on the use of credit cards to fund retail forex and futures accounts. This prohibition is subject to approval by the Commodity Futures Trading Commission. Although NFA’s proposed rule prohibits the use of credit cards to fund both futures and retail forex accounts, NFA determined through its study that futures commission merchants currently don’t permit this practice (except currently for forex).
“Since our inception, NFA has been committed to protecting investors,” says NFA President and CEO Dan Roth. “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.”
This prohibition is a direct result of an extensive study by NFA of forex dealer members’ business practices. NFA looked at more than 15,000 retail forex accounts and noted 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.
“Over the last decade, NFA has made significant strides in its regulation of the retail forex markets,” Roth says. “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.”
This is a huge consumer protection move which protects against stolen identities, stops people with gambling tendencies to get into financial trouble by using borrowed funds that they most likely will lose assuming they blow their account. Regulation is very rock solid in the USA, no one can deny that. However, there could still be some amending to regulations to make it a little more business friendly such as treating IBs in FX as agents of the brokers with whom they introduce for and lowering the capital requirement to maintain IB status or to operate a white label; allowing for funds still be held by the principal broker, and require a custom license for pure FX trading/investing IBs to make it easier for the industry to thrive in the retail segment. A model similar to the way independent stock brokers solicit clients to the larger broker/dealers within the equities market could also work in FX for the USA.