National Futures Association (NFA) Definition

What is the National Futures Association (NFA)?

The National Futures Association (NFA) is an independent self-regulatory organization for the United States. futures contracts and derivatives markets. Designated by the Commodity Futures Trading Commission (CFTC) as a registered futures association, the NFA has a mandate to uphold the integrity of the derivatives markets, protect investors and ensure that members meet their regulatory obligations.

Key points to remember

  • The National Futures Association (NFA) is an independent self-regulatory organization for the US futures and derivatives markets.
  • Companies and individuals working in the futures and derivatives industry pay dues and must comply with the rules imposed by the NFA.
  • Failure to follow NFA rules may result in fines or revocation of NFA membership.
  • The NFA operates at no cost to the taxpayer and is primarily funded by membership dues, fees and dues paid by members and other users of the derivatives markets.
  • The tasks and functions of the NFA include registration, compliance and arbitration.

Understanding the National Futures Association (NFA)

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

NFA membership assures the investing public that all firms, intermediaries and associates who do business with them in the US futures markets must adhere to the same high standards of professional conduct. Companies working in the industry have to pay dues to the NFA, which is how the NFA gets its money.

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

In addition to regulating the US futures market, the duties and functions of the NFA include registration, compliance and arbitration. He fights 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 main responsibilities of the NFA are:

Registration and Membership: Firms that engage in derivatives trading must register with the CFTC and most must also register with the NFA. The CFTC has given the NFA registration responsibilities.

Rulemaking: This involves deciding what the industry’s best practices are, and then imposing those practices on the entire industry.

Application and registration measures: When the rules are broken, the NFA takes disciplinary action against members.

Member Training and Resources: The NFA provides educational resources to its members so they can understand the rules and regulations and how to follow them.

Arbitration: Any dispute related to futures or forex can be resolved through the NFA’s arbitration program.

Investor protection: The NFA provides investors with resources before making any investment decision.

Awareness programs: The NFA offers a variety of training programs to entities upon request.

Market regulation: Designated Contractors (DCMs) and Swap Execution Facilities (SEFs) may obtain regulatory services from the NFA.

Member companies

All prospective professionals required to register must undergo a background investigation before they can register.

As of June 30, 2022, the NFA has 3,107 members. The membership categories are as follows:

  • Product Pool Operators (CPOs): Persons or organizations that operate and solicit funds for a commodity pool.
  • Commodity Trading Advisors (CTA): Persons or organizations that advise clients on derivatives trading.
  • Futures Commission Merchants (FCM): An entity that accepts or solicits transactions.
  • Introducing Brokers (IB): People or organizations that connect clients with a broker.
  • Retail Currency Broker (RFED): A counterparty to transactions in currencies other than the United States.
  • Exchange dealers: Those who create a market and trade in swaps as their business.
  • Exchanges: A market where financial instruments are bought and sold.
  • Associates: Anyone who “solicites orders, customers or customer funds (or 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).’
  • Main participants in the exchange: A person 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 capital markets.”

The NFA, as a self-regulatory body, has the authority to research and implement what it considers to be best practices for the industry. The NFA creates rules for its members to follow and has the power to impose fines or revoke membership (which could shut down a business) of its members. It offers an arbitration process to help customers and businesses resolve disputes or find a solution to allegations of wrongdoing.

Membership fees

The NFA has many dues and fees and they vary by type of member. For example, membership dues for a Tier 1 exchange broker are $1.3 million, while for a Tier 2 exchange broker, the dues are $325,000. For an introducing broker, the dues are $750 and for an introducing broker swap 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 broker it is $20 million.

If payment is late, a $25 fee applies. If dues are not paid within 30 days of the date they are due, membership is terminated.

Concrete example

In 2019, based on complaints filed in 2018, East West Global LLC and two people from the company were fined, and one of the people had his NFA membership revoked for five years.

The company and the two individuals have been accused of using flawed promotional materials, flawed sales practices, and failing to uphold high standards of business honor, among several other charges.

One of the individuals was ordered jointly, with the company, and severally pay a fine of $75,000. The company was also ordered to resolve the issues raised in the complaint.

The other person, following a settlement offer, agreed not to apply for membership (or associate membership) in the NFA for five years. After five years, if he reapply for membership, he will immediately be fined $90,000.

Who does the NFA regulate?

The NFA regulates all qualified brokers, futures dealers, commodity pool operators, swap brokers, exchanges, commodity trading advisers, and retail forex traders who trade in the futures markets.

How many members are there in the NFA?

As of June 30, 2022, the NFA has 3,107 members.

Who must register with the NFA?

All qualified entities trading in the futures exchanges must register with the NFA. These include a variety of entities, such as brokers, futures merchants, commodity pool operators, swap brokers, exchanges, and commodity trading advisers.

How do you become a member of the NFA?

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

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