What Is the National Futures Association (NFA)?
Let me explain what the National Futures Association, or NFA, really is. It's an independent self-regulatory organization for the U.S. futures and derivatives markets. The Commodity Futures Trading Commission (CFTC) designated it as a registered futures association, and its main job is to safeguard the integrity of these markets, protect investors, and make sure members meet their regulatory obligations.
Key Takeaways
You should know that the NFA is an independent self-regulatory organization for the U.S. futures and derivatives markets. Firms and individuals in this industry pay membership dues and must follow NFA rules. If they don't comply, they face fines or revocation of membership. The NFA runs without costing taxpayers anything, funded by dues, fees, and assessments from members and market users. Its duties include registration, compliance, and arbitration.
Understanding the National Futures Association (NFA)
The NFA operates without any taxpayer money, getting its funding from membership dues, fees, and assessments paid by members and other derivatives market users. When you see NFA membership, it assures you that firms, intermediaries, and associates in the U.S. futures exchanges follow high standards of professional conduct. These industry firms pay dues to the NFA, which is how it sustains itself.
The NFA started in 1982, after the CFTC was created in 1974. That legislation allowed for registered futures exchanges and a national self-regulatory organization. Beyond regulating the U.S. futures market, the NFA handles registration, compliance, and arbitration. It fights fraud and abuse through registration requirements, compliance rules, strong enforcement, and real-time market surveillance.
Responsibilities of the National Futures Association
Here are the primary responsibilities you need to know about. Firms conducting derivatives business must register with the CFTC and usually with the NFA too, as the CFTC delegates registration to them. The NFA sets industry best practices and mandates them for everyone. When rules are broken, the NFA enforces disciplinary actions against members.
It provides educational resources so members understand and follow rules and regulations. For disputes in futures or forex, the NFA's arbitration program resolves them. Investors get resources from the NFA to make informed decisions. The NFA also offers outreach and training programs on request, and it provides regulatory services to designated contract markets (DCMs) and swap execution facilities (SEFs).
Member Firms
All futures professionals who need to register go through a background investigation first. As of June 30, 2022, the NFA has 3,107 members in various categories.
Member 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): Entities that accept or solicit trades.
- Introducing Brokers (IB): People or organizations that connect clients with a broker.
- Retail Foreign Exchange Dealer (RFED): Counterparties to non-U.S. currency transactions.
- Swap Dealers: Those who make a market for and transact in swaps as their business.
- Exchanges: Marketplaces where financial instruments are bought and sold.
- Associates: Individuals that solicit orders, customers, or funds on behalf of FCMs, RFEDs, IBs, CTAs, or CPOs.
- Major Swap Participants: Individuals or entities whose swaps create substantial counterparty exposure risking financial stability.
NFA's Authority and Processes
As a self-regulatory organization, the NFA identifies and implements best practices for the industry. It creates rules members must follow and can impose fines or revoke memberships, which could shut down a business. It also offers arbitration to settle disputes or resolve allegations of wrongdoing.
Membership Dues
Dues and fees vary by member type. For instance, Tier 1 swap dealers pay $1.3 million annually, Tier 2 pay $325,000, introducing brokers pay $750, and introducing broker swaps firms pay $2,500. The financial requirement to register is an adjusted net capital of $1 million, or $20 million for swap dealers. Late payments incur a $25 fee, and if dues aren't paid within 30 days, membership is withdrawn.
Real-World Example
In 2019, based on 2018 complaints, East West Global LLC and two individuals were fined, with one having NFA membership revoked for five years. They were charged with deficient promotional material, sales practices, and failing high standards of commercial honor, among other issues. One individual and the firm were ordered to pay $75,000 jointly and severally, and the firm had to fix the issues. The other individual agreed not to apply for membership for five years, then pay $90,000 if reapplying.
Frequently Asked Questions
Who does the NFA regulate? It regulates qualified brokers, futures merchants, commodity pool operators, swap dealers, exchanges, commodity trading advisors, and retail foreign exchange dealers in the futures markets.
How many members are in the NFA? As of June 30, 2022, there are 3,107 members.
Who needs to register with the NFA? All qualified entities dealing in futures markets, including brokers, futures merchants, commodity pool operators, swap dealers, exchanges, and commodity trading advisors.
How do you become a member of the NFA? Apply directly through their electronic filing process.
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