National Futures Association (NFA)

What Is the National Futures Association (NFA)?

The National Futures Association (NFA) is an independent self-regulatory organization for the U.S. futures and derivatives markets. Designated by the Commodity Futures Trading Commission (CFTC) as a registered futures association, the NFA's mandate is to safeguard the integrity of the derivatives markets, protect investors, and ensure that members fulfill their regulatory obligations.

Key Takeaways

  • The National Futures Association (NFA) is an independent self-regulatory organization for the U.S. futures and derivatives markets.
  • Firms and individuals working in the futures and derivatives industry pay membership dues and must uphold the rules imposed by the NFA.
  • Failure to comply with the rules of the NFA could mean fines or revocation of NFA membership.
  • The NFA operates at no cost to the taxpayer and is primarily financed by membership dues, fees, and assessments paid by members and other users of the derivatives markets.
  • NFA's duties and functions include registration, compliance, and arbitration.

Understanding the National Futures Association (NFA)

The NFA operates at no cost to the taxpayer and is primarily financed by membership dues, fees, and assessments paid by members and other users of the derivatives markets.

NFA membership provides assurance to the investing public that all firms, intermediaries, and associates who conduct business with them on the U.S. futures exchanges must adhere to the same high standards of professional conduct. The firms working in the industry must pay membership dues to the NFA, which is how the NFA gets its money.

The NFA began operating in 1982, subsequent to the establishment of the Commodity Futures Trading Commission (CFTC) in 1974; this legislation also authorized the creation of registered futures exchanges, thereby facilitating the creation of a national self-regulatory organization.

In addition to regulation of the U.S. futures market, the NFA's duties and functions include registration, compliance, and arbitration. It combats fraud and abuse in the futures markets through a combination of registration requirements, compliance rules, strong enforcement authority, and real-time market surveillance.

Responsibilities of the National Futures Association

The following are the primary responsibilities of the NFA:

Registration and Membership: Firms that conduct derivatives business need to register with the CFTC and most also need to register with the NFA. The CFTC has given the NFA registration responsibilities.

Rulemaking: This involves deciding what are the industry's best practices and then mandating those practices for the whole industry.

Enforcement and Registration Actions: When rules are not obeyed, the NFA takes disciplinary action against members.

Member Education and Resources: The NFA provides educational resources to its members in order that they can understand the rules and regulations and how to abide by them.

Arbitration: Any futures or forex-related disputes can be resolved through the NFA's arbitration program.

Investor Protection: The NFA provides investors with resources before making any investment decisions.

Outreach Programs: The NFA offers a variety of training programs to entities on request.

Market Regulation: Designated contract makers (DCMs) and swap execution facilities (SEFs) can obtain regulatory services from the NFA.

Member Firms

All futures professionals required to register must undergo a background investigation before they may register.

As of Jan. 31, 2022, the NFA has 3,117 members. Member categories are as follows:

  • Commodity Pool Operators (CPO): People or organizations that operate and solicit funds for a commodity pool.
  • Commodity Trading Advisors (CTA): People or organizations that advise clients on derivatives trades.
  • Futures Commission Merchants (FCM): An entity that accepts or solicits trades.
  • Introducing Brokers (IB): People or organizations that connect clients with a broker.
  • Retail Foreign Exchange Dealer (RFED): A counterparty to non-U.S. currency transactions.
  • Swap Dealers: Those who make a market for, and transact in, swaps as their business.
  • Exchanges: A marketplace where financial instruments are bought and sold.
  • Associates: Any individual that "solicits orders, customers or customer funds (or who supervises persons so engaged) on behalf of a futures commission merchant (FCM), retail foreign exchange dealer (RFED), introducing broker (IB), commodity trading advisor (CTA) or commodity pool operator (CPO)."
  • Major Swap Participants: An individual or entity whose outstanding swaps create "substantial counterparty exposure that could have serious adverse effects on the financial stability of the United States banking system or financial markets."

The NFA, as a self-regulatory organization, has the power to search for and implement what it believes are best practices for the industry. The NFA creates rules that its members must follow and has the power to impose fines or revoke the membership (which could shut down a business) of its members. It offers an arbitration process to help customers and businesses settle disputes or come to a resolution on allegations of wrong-doing.

Membership Dues

The NFA has many dues and fees and they vary depending on the type of member. For example, the membership dues for a Tier 1 swap dealer are $1.3 million whereas for a Tier 2 swap dealer the dues are $325,000. For an introducing broker, the dues are $750 and for an introducing broker swaps firm, the dues are $2,500. These are annual dues.

The financial requirement to register with the NFA is an adjusted net capital of $1 million and for a swap dealer it is $20 million.

If payment is late, there is a fee of $25. If dues are not paid within 30 days of the date they are payable, then membership is withdrawn.

Real-World Example

In 2019, based on complaints filed in 2018, East West Global LLC and two individuals at the firm were fined, and one of the individuals had their NFA membership revoked for five years.

The firm and the two individuals were charged for using deficient promotional material, deficient sales practices, and failing to meet the high standards of commercial honor, among several other charges.

One of the individuals was ordered jointly, along with the firm, and severally to pay a $75,000 fine. The firm was also ordered to fix the issues addressed in the complaint.

The other individual, following a settlement offer, agreed not to apply for NFA membership (or associate membership) for five years. After five years, if he reapplies for membership, he will need to immediately pay a $90,000 fine.

Who Does the NFA Regulate?

The NFA regulates all qualified brokers, futures merchants, commodity pool operators, swap dealers, exchanges, commodity trading advisors, and retail foreign exchange dealers that deal in the futures markets.

How Many Members Are in the NFA?

As of Jan. 31, 2022, the NFA has 3,117 members.

Who Needs to Register With the NFA?

All qualified entities that deal in the futures markets need to register with the NFA. These include a variety of entities, such as brokers, futures merchants, commodity pool operators, swap dealers, exchanges, and commodity trading advisors.

How Do You Become a Member of the NFA?

To become a member of the NFA one needs to apply directly with the NFA. This is done through an electronic filing process.

Article Sources
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  1. NFA. "About NFA."

  2. NFA. "Membership and Directories."

  3. NFA. "Associate Person (AP) Registration."

  4. CFTC. "Final Rules Regarding Further Defining 'Swap Dealer,' 'Major Swap Participant,' and 'Eligible Contract Participant,'" Page 3.

  5. NFA. "Membership Dues and Fees."

  6. NFA. "Rulebook Table of Contents. Financial Requirements."

  7. NFA "National Futures Association Regulatory Actions."

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