CFTC Bans Credit Card Use by Retail Foreign Exchange Investors

09/12/2014 05:18 AST

The Commodity Futures Trading Commission has imposed a ban on investors using credit cards to pay for their foreign exchange trades placed with U.S. retail currency brokers, effective Jan. 31, 2015.

By funding a retail account with a credit card and making a losing bet using leverage as high as 50-1, a trader can lose 100 percent of the investment in a matter of days, as Bloomberg Markets magazine reported in its December issue. The investor would pay at least a 3 percent upfront credit card fee for a cash advance, as well as an interest rate as high as 25 percent on the debt.

“The CFTC’s action, which at least partially constrains the misuse of deadly leverage by unknowing, poorly informed retail forex customers, was a long time coming, but it is good that it is now here,” says Michael Greenberger, who was director of the Division of Trading and Markets at the CFTC from 1997 to 1999.

The National Futures Association, an industry self-regulatory group, announced the CFTC’s approval of the ban in a press release on Dec. 4 after receiving word from the CFTC.

“Retail forex customers overwhelmingly fund their trading accounts using a credit card,” the NFA wrote in a June letter to the CFTC seeking the ban. The NFA is empowered by the CFTC to help regulate forex trading.

Net Losses

In the same letter, the NFA said that 72 percent of U.S. over-the-counter forex traders suffered a net loss in the fourth quarter of 2013.

Some forex brokers currently encourage investors to use credit cards. The website of FXCM Inc. (FXCM), the largest publicly traded forex broker in the U.S. suggests the use of credit cards.

“The fastest way to fund your account is with a credit or debit card,” said FXCM’s site. Spokesperson Jaclyn Klein said the company doesn’t expect the ban to have a material negative effect on U.S. revenue. She declined to say what percentage of U.S. customer deposits are billed to credit cards.

Gain Capital Holding Inc., (GCAP) the second largest publicly traded U.S. forex broker said that 59 percent of U.S. customer deposits were funded by credit and debit cards as of Dec. 31, in its 2013 annual report.

Gain cautioned investors that a ban on credit cards could harm its business. “If customers are unable or unwilling to utilize alternate methods of funding their accounts, the resulting reduction in trading volume by our customers could have a material adverse effect on our business,” the company wrote in the March 17 SEC filing.

Bloomberg