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.
- 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 derivates 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.
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.
NFA Member Firms
CFTC regulations also require, with few exceptions, that CFTC registered firms be NFA Members. All futures professionals required to register must undergo a background investigation before they may register.
Futures professionals are broken down into the following categories.
- 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.
In addition, the following non-U.S. firms and individuals must also register:
- Exempt non-U.S. firm: A non-U.S. firm that transacts business directly with U.S. customers solely in futures contracts and options traded on non-U.S. exchanges.
- Associated person (AP): A person who solicits customers, orders, or funds on behalf of a CPO, CTA, FCM, IB, or RFED.
- Floor broker: An individual who purchases or sells derivates for any other person.
- Floor trader: A person who purchases or sells derivatives for their own account.
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.
Example of NFA Regulation
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.