The National Futures Association (NFA) plays a crucial role in regulating the U.S. derivatives industry. As the self-regulatory organization for the futures, options, and swaps markets, the NFA oversees market integrity and protects investors. This comprehensive guide covers everything you need to know about this important organization.

Introduction to the NFA

The National Futures Association is a not-for-profit organization authorized by Congress in 1974 to regulate the U.S. derivatives markets. Headquartered in Chicago, the NFA membership includes industry professionals like commodity trading advisors, commodity pool operators, futures commission merchants, introducing brokers, swap dealers, and more.

The mission of the NFA is to safeguard market integrity, fight fraud, and protect investors. The organization works to ensure ethical business practices and professionalism in the futures and swaps markets.

Key Functions and Responsibilities

The NFA fulfills its mission through various functions and regulatory responsibilities:

Registration

The NFA processes registration applications and performs background checks for firms and professionals seeking to enter the industry. Registration ensures market participants meet qualification standards.

Rule Enforcement

All NFA members must adhere to rules and bylaws that uphold ethical standards. The NFA investigates complaints and enforces rules through audits, disciplinary actions, and fines.

Financial Audits

Routine financial audits of member firms help identify potential risks and issues. Audits ensure sufficient capitalization, proper use of customer funds, and good recordkeeping.

Arbitration

As an alternative to court, the NFA offers an arbitration program to resolve futures-related disputes between customers and NFA members or between two members.

Testing and Licensing

The NFA develops licensing exams and annually tests registrants on regulatory and ethics standards needed to operate in the industry.

Compliance and Risk Monitoring

The NFA screens daily electronic trading activity for risk, performs compliance audits, and monitors advertising and sales solicitation materials.

Education and Outreach

Through its website, newsletters, workshops, and webinars, the NFA provides education to members on regulations and best practices. It also educates the public on smart investing.

NFA Membership

NFA membership is mandatory for all U.S. firms and professionals conducting futures, forex, and swaps business with the public. Some of the main membership categories include:

  • Futures Commission Merchants (FCMs) – Firms that solicit or accept orders, funds, or customer property to buy/sell futures or options and accept money in connection with such transactions.
  • Commodity Pool Operators (CPOs) – Firms or individuals engaged in a business that operates or solicits funds, securities, or property for a commodity pool.
  • Commodity Trading Advisors (CTAs) – Those who provide advice on commodity trading, publish analysis or reports on commodities, or manage accounts for clients.
  • Introducing Brokers (IBs) – Firms or individuals that solicit and introduce customers to an FCM in return for commission on resulting transactions.
  • Swap Dealers (SDs) – Engage in swaps dealing activity above the de minimis threshold must register as an NFA Swap Dealer Member.

NFA Registration Requirements

To become NFA members, firms and individuals must meet registration standards that include:

  • Proficiency Requirements – Demonstrate understanding of laws, ethics, trading, and more through testing.
  • Disclosure Documents – FCMs, IBs, CPOs, and CTAs must file audited financial statements and other documents.
  • Minimum Financial Requirements – Meet specific standards for minimum capital, net worth, and early warning levels.
  • Registration Fees – Pay applicable fees for firm and individual registration.
  • Ongoing Annual Requirements – Submit audited financial statements, pay membership dues, meet capital requirements, and more.

NFA Bylaws, Compliance Rules, and Code of Ethics

All NFA members must comply with NFA Bylaws, Compliance Rules, and Code of Ethics that include:

NFA Bylaws

These govern the NFA organizational structure, membership process, Board of Directors, and more.

Compliance Rules

All members must follow rules of fair practice that relate to sales solicitations, trade practices, antitrust restrictions, reporting requirements, and more.

Code of Ethics

The Code establishes standards of integrity, conflicts of interest, gifts, and other ethical matters.

Key rules include prohibition of fraud, adherence to high standards of commercial honor, knowing customer circumstances to recommend suitable transactions, fair dealing with customers, and more.

Disciplinary Actions and Sanctions

To enforce its rules, the NFA can take disciplinary actions against members that engage in prohibited activities like fraud, manipulation, or inadequate supervision. Possible sanctions include:

  • Fines up to $250,000 per violation
  • Suspension or permanent bar from NFA membership
  • Order to cease and desist prohibited conduct
  • Restriction on futures activities
  • Remediation or education requirements
  • Termination of NFA membership

Serious cases may be referred to the Commodity Futures Trading Commission (CFTC) for civil or criminal prosecution.

NFA Investigations and Complaints

The NFA enforcement staff investigates complaints, initiates investigations, audits members, and institutes disciplinary actions for rule violations.

Possible triggers for investigations include:

  • Customer complaints received by NFA’s Information Center
  • Media reports
  • Tips or referrals
  • Member self-reporting
  • Irregularities noted during audits/exams
  • Analysis of regulatory filings

Those under investigation can provide a written explanation to defend against allegations during the process. Complaints against members can be submitted online or by contacting the Information Center.

NFA Arbitration Program

As an alternative to court, NFA offers an arbitration program for futures-related disputes between customers and NFA members or between two members.

Key Features

  • Fair, impartial process with no NFA involvement
  • Simplified procedures and rules
  • Faster resolution than lawsuits
  • Lower costs than litigation
  • Industry expertise of arbitrators

Disputes Accepted

  • Between customers and NFA members
  • Between NFA members
  • Related to futures, forex, and swaps activity

Arbitration Process

  • Submission of claim documents and fees
  • Selection of arbitrators
  • Discovery process
  • In-person or telephone hearing
  • Award issued in about 30 days

Either party can dispute the award within 30 days by notifying NFA. The award is otherwise binding on parties.

NFA’s Information Center

NFA’s Information Center provides information and resources for consumers, registrants, and members.

For Consumers

  • Background checks on brokers and advisors
  • Educational resources on futures trading
  • Instructions for submitting a complaint

For Registrants

  • Registration requirements
  • Compliance updates
  • Exam schedule
  • Ethics training opportunities

For Members

  • Explanations of rule changes
  • Access compliance resources
  • Submit a rules inquiry
  • Review upcoming audits

The Information Center can be reached online or by phone and email during business hours. Information is free and positions are unbiased.

NFA’s Board of Directors

The NFA Board of Directors consists of diverse membership interests, including:

  • 2 FCM representatives
  • 2 IB representatives
  • 1 CPO representative
  • 1 CTA representative
  • 4 public representatives

Responsibilities

  • Governance and oversight
  • Rule approval
  • Budget/fees approval
  • Regulatory decisions
  • Policy direction
  • Appointing officers

Day-to-day operations are handled by NFA President Timothy McHenry and his executive team.

NFA Funding

The NFA receives the majority of its funding from membership fees and services.

Sources

  • Registration fees
  • Annual membership dues
  • Assessments based on volume
  • Late filing and registration fines
  • Arbitration fees
  • Proficiency testing fees
  • Background checks

This allows the NFA to operate independently without influence from outside parties. Their 2021 operating expenses totaled $46.5 million.

History and Milestones

The NFA has evolved over the decades to meet the needs of the derivatives industry:

  • 1974 – NFA authorized by Congress to regulate commodities futures markets
  • 1982 – Launched registration, testing, and arbitration functions
  • 1985 – Implementation of NFA’s Compliance Rules and Code of Ethics
  • 1990 – Jurisdiction expanded to include forex markets
  • 2001 – Implementation of online registration and licensing
  • 2011 – Granted regulatory authority over swaps markets
  • 2012 – Phased in swap dealer registration requirements
  • 2022 – Total NFA membership exceeds 4,100 firms and 55,000 associates

Criticisms of the NFA

Despite its oversight, the NFA has come under scrutiny regarding its effectiveness:

  • Failure to detect fraud in high-profile cases like Peregrine Financial Group
  • Potential conflicts of interest from industry self-regulation
  • Complaints about arbitration process fairness
  • Leniency of sanctions compared to CFTC
  • Lack of authority to directly regulate swaps market

However, many argue the NFA still plays a vital role and provides value as a self-regulator.

Conclusion

For over 45 years, the National Futures Association has sought to protect customers and uphold market integrity in the futures, forex, and swaps markets. It plays a critical role as the industry’s self-regulatory body through its regulatory programs, high ethical standards, and dedication to transparency. While the NFA has its limitations, it continues adapting to better oversee today’s complex derivatives landscape.