The Commodity Futures Trading Commission (CFTC) approved a proposal for the ban in December of 2014. The banning of credit cards from forex was first suggested by the National Futures Association (NFA), which argued that investing using borrowed funds produces “substantial risk of loss, and the possibility that a total loss may occur in a very short period of time”.
According to BloombergBusiness, the biggest forex brokers encouraged investors to use borrowed funds for trading purposes, claiming that using a credit card was “the fastest way to fund your account”.
Just how many people were funding their deposits with borrowed funds? The second largest forex broken in the country, Gain Capital Holding Inc., reported that 59% of its U.S. customers were funding their deposits with credit cards. In a separate, independent study, the NFA found that, out of 15,000 accounts they studied, a bigger part of all the accounts were funded using credit cards.
Despite a large share of the U.S. forex market being funded by credit cards FXCM, the country’s largest publicly traded forex broker, doesn’t believe it will be a problem for them. Jaclyn Klein, the company’s spokesperson, told Bloomberg that they do not anticipate any substantial impact on their U.S. revenue.
The new policy extends not only to credit cards, but funding methods which make it difficult to distinguish whether a credit card is involved in the transaction – such as certain electronic payments. For example, retail customers will not be able to fund their forex accounts using the popular online payment processor PayPal, as those funds can be filled using credit cards. A big part of the new policy stresses that trading companies must be able to distinguish whether funds are coming from a credit card or other means before accepting them.
As of today, debit cards and electronic transfers which come directly from a savings or checking account are still acceptable. Whether this ban will have a substantial effect in helping customers avoid risky financial behavior is yet to be seen. The general idea behind it, however, is sound. While consumers who invest funds may very well lose 100% of their investment, those using borrowed funds are wagering more than what they put in. By using a credit card, a consumer is also exposing himself to having pay interest on lost investments. It is easy to see that, given the right set of circumstances, an individual using a credit card to invest may find themselves in over their head with debt, just as the NFA argued.