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Retail Trades In Currencies Face Card Ban (Wall Street Journal)

Posted by Joseph Trevisani on Feb 12, 2013 6:29:00 PM

Small investors in the currency market may soon find their credit cards denied.

Industry overseers, concerned that retail investors are racking up credit-card debt to bet on currencies, are considering a ban on using the plastic to pay for trades.

The National Futures Association, the self-regulating group for the U.S. futures industry, in a Jan. 18 letter to members, said it is concerned retail customers "are using credit cards as a source for borrowing funds to invest." The association's compliance and risk committee will discuss the proposal Wednesday, a spokesman said.

While estimates vary on the exact amount of business that would be affected by the ban, some industry experts believe it could lead some companies to close their U.S. retail operations completely. At a minimum, retail foreign-exchange trading platforms are likely to see millions of dollars less in deposits flowing to customer accounts in the U.S.

Retail investors are behind about $380 billion a day in foreign-exchange trading volumes, nearly 10% of the total worldwide, according to Aite Group, a consultant.

One investor is Carl Young, a wireless-communications salesman in Knoxville, Tenn. Mr. Young recently used a credit card to fund his accounts with FXDD and Gain Capital Holdings Inc.'s GCAP +0.71% Forex.com, when he was expecting a big paycheck from his work.

He said he would probably trade less if he couldn't use credit cards.

"If I know I have [money] coming to me next month, guaranteed, I want to use it now," Mr. Young said. He said he made profits from the trades he completed before receiving his paycheck, then paid off the credit card in full. "It's a convenience."

One executive with a retail foreign-exchange brokerage estimated a ban, which would also cover online-payment services like PayPal, could affect 60% of transactions it processed in the U.S. It could accelerate consolidation among retail brokers, several of which have already closed their U.S. operations amid stricter regulations and declining volumes.

A ban would also apply to commodity-futures accounts, the NFA said.

Transactions using credit cards are less common in the commodities market, where more money is generally required to open an account, traders and brokers said.

Several companies that operate retail currency-trading platforms said a credit-card ban would be the latest in a series of rulings by the NFA and government regulators that have made it more difficult to operate in the U.S., including lower caps on customer leverage and an increase in the amount of capital brokerages must hold in reserve.

Regulators in the past have been worried about excessive risk taking by customers, which has led to some of the previous rule changes. Investors are able to start foreign-exchange accounts with $100 or less, typically a manageable amount for a credit card. But losses can accumulate quickly in the often-volatile currency market.

"We know of no other industry that has banned retail clients from using credit cards to purchase goods or services," said Michael Borland, chief compliance officer at Oanda Corp., a Canadian company that is one of the biggest retail brokers in the U.S.

An NFA representative declined to comment.

U.S. retail trading volumes have leveled off since 2010, following years of rapid growth, according to Aite estimates. Shares of Gain Capital, a retail broker, are down nearly 50% since they started trading two years ago.

In December, GFT, at the time one of the five biggest retail brokers in the U.S. based on customer deposits, shut its operations in the U.S., selling its remaining accounts to Gain Capital. Others could follow, said Javier Paz, a senior analyst with Aite.

If the NFA moves ahead with its credit-card ban, the Commodity Futures Trading Commission, the government regulator for the currency market, is almost certain to do the same, Mr. Paz said. Such restrictions would force retail foreign-exchange trading customers to find alternate ways to fund accounts, such as wire transfers or sending in checks to brokers.

A spokesman for the CFTC declined to comment.

On a global scale, U.S. retail foreign-exchange trading often accounts for only a small portion of a company's business.

At Gain Capital, less than 10% of total global deposits came from U.S. customers using credit cards. Gain doesn't break out the percentage of its U.S.-only businesses funded by credit cards.

Mr. Young, the retail investor, said he didn't want the NFA telling him how to spend his money or to punish him for others' mistakes.

"I'm not going to trade money I don't have," Mr. Young said.

 

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