National Futures Association (NFA)
A self-regulatory organization that regulates the U.S. derivatives industry
What is the National Futures Association (NFA)?
The National Futures Association (NFA) is a self-regulatory organization that regulates the U.S. derivatives industry and provides investors with protection by ensuring that member firms employ industry best practices and meet regulatory requirements.
The NFA is an independent, non-profit organization and it is funded by membership and assessment fees from a majority of firms that operate in the derivatives industry. NFA membership is mandatory for a large number of firms in the market, as mandated by the Commodity Exchange Act (CEA) and the Commodity Futures Trading Commission (CFTC).
Summary
- The National Futures Association (NFA) is a self-regulatory organization that works to protect investors and regulate the financial derivatives market in the United States.
- The NFA requires all qualified brokers, futures merchants, commodity pool operators, and advisors to register their business.
- Other responsibilities of the NFA include rulemaking, enforcement, and arbitration in cases of disputes.
History of the National Futures Association
The National Futures Association began operating in 1982 after the derivatives industry was given the opportunity to create a self-regulatory organization that served as a “registered futures association” by the CFTC legislation in 1974.
The NFA is headquartered in Chicago, Illinois in the United States. Since the establishment of the NFA, the U.S. Congress has passed many laws requiring trading advisors, brokers, forex firms, forex operators, and swap dealers to become members of the NFA.
Who Must Register with the NFA
In addition to the types of organizations listed above, individual registrants of the NFA include individual brokers, traders, and any representatives associated with the organizations shown below.
Commodity Pool Operator (CPO)
Commodity pool operators (CPOs) are individuals or organizations that operate and manage commodity pools. Commodity pools are firms that combine the funds received from members with the aim of trading derivatives, such as futures, options, swap contracts, and forex contracts.
Commodity Trading Advisor (CTA)
Commodity trading advisors (CTAs) are similar to CPOs in that they help investors to trade commodities in exchange for compensation or profits. CTAs act as advisors rather than managers and are compensated for the value of their advice in trading derivatives.
Futures Commission Merchant (FCM)
Futures commission merchants (FCMs) are individuals or organizations that exchange assets or money from investors for their services, including the execution of futures contracts, options, forex contracts, or swap deals.
Introducing Broker (IB)
An introducing broker (IB) is an individual or organization that functions as an intermediary in connecting clients to futures commission merchants, who are responsible for the execution of trades and account management.
Introducing brokers are essentially brokerage firms that deal directly with clients and make money primarily through brokerage commissions.
Responsibilities of the NFA
In addition to providing members with educational resources and regulatory information and conducting on-request outreach programs, the NFA is responsible for the following:
1. Registration and Membership
The Commodity Exchange Act (CEA) and the Commodity Futures Trading Commission (CFTC) require registered firms to be NFA members. The NFA is responsible for the membership and registration of members.
2. Rulemaking
The NFA is also responsible for identifying and mandating industry best practices that benefit all the stakeholders that are involved, including member firms and investors.
3. Enforcement
The NFA imposes disciplinary actions against members that violate regulations in the form of assessment fees and other trading restrictions.
One of the recent cases of enforcement was evident in a complaint against Westline Capital Strategies, Inc. (Westline), a firm that was then charged with “failing to uphold just and equitable principles of trade” for overexercising a customer’s funds without discretion, resulting in a $25,000 fine.
4. Market Regulation
The NFA provides regulatory services to designated contract markets (DCMs) and swap execution facilities that oversee and monitor trading on their platforms.
5. Arbitration
In addition to the enforcement of rules, the NFA acts as an arbitrator and works to resolve disputes that are related to derivative trades. The NFA provides arbitration services to member firms, as well as customers of member firms.
6. Investor Protection
The NFA provides investors with a variety of resources that aid investment decisions by allowing them to conduct due diligence and research before investing in any company.
An example is the BASIC tool, a free guide that allows investors to research the background of any company or individual who is a member of the NFA.
Additional Resources
CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:
