How the NFA Fights Forex Fraud

The United States has two principal organizations which oversee and regulate the retail forex market.

The first consists of the Commodities Futures Trading Commission or CFTC that is a U.S. government organization. The second is the National Futures Association or NFA that operates as an independent self regulatory agency.

Both organizations help oversee financial markets in the United States, with the primary difference between them being that one (the CFTC) is a government dependency, while the other (the NFA) is an independent entity created by government legislation.

A Short History of the NFA

After the establishment of the CFTC in 1974, along with a necessary amendment to the Commodity Exchange Act of 1936, the path was opened for the creation of an industry wide national self regulating organization in the United States.

Nevertheless, the envisioned self regulatory agency was not created until 1982 when the National Futures Association or NFA was eventually formed. This independent agency has served as a watchdog for the futures industry ever since. The NFA is based in Chicago and operates another office located in New York City.

Current and Future Purposes of the NFA

According to their website, the NFA’s stated purpose is as follows:

“NFA strives every day to safeguard market integrity, protect investors and help our Members meet their regulatory responsibilities.”

With upcoming proposed legislation that will significantly affect the retail forex market operating in the United States, the NFA may soon be required to register a much larger number of individuals and corporations that do business with the forex trading public.

These might include Introducing Brokers or IBs, Commodity Pool Operators or CPOs, Futures Commission Merchants or FCMs and Commodity Trading Advisors or CTAs that operate as or with forex brokers executing trades in the foreign exchange market.

Once the legislation is approved in its final form, these same forex market participants may also be required to register with the CFTC.

NFA Regulation and Compliance

The NFA operates extensive programs to monitor and supervise its members to safeguard the integrity of the financial markets that it oversees. These programs include:

• Arbitration and Mediation Services
• Audits
• Anti Money Laundering Programs
• Enhanced Supervision
• Disclosure documents for CPOs and CTAs
• NFA Investor Alerts
• Ongoing Educational Resources for Members and Investors

The NFA also works closely with the CFTC which has within its jurisdiction the ability to regulate and oversee futures markets and exchanges. The NFA, on the other hand, regulates every individual or firm which conducts futures trading business with the investing public.

Trading in the forex market qualifies as futures trading in the United States mainly because delivery for spot in the forex market usually consists of two business days — in effect acting as a very short futures contract. The NFA works to ensure that the investing public that participates in the forex market is treated fairly and that their funds are safeguarded from fraud and other forms of misappropriation or unfair withholding.

Furthermore, because individual accounts are required to be segregated from the broker’s account, the U.S. based forex broking customer generally can have some security that their funds are not subject to creditor claims against a Futures Commission Merchant or FCM should the broker become insolvent.

Nevertheless, the NFAs website cautions forex traders as follows:

“Even though an FCM is required to segregate customer funds, customers still may not be able to recover the full amount of any funds in their account if the firm becomes insolvent and there are insufficient funds available to cover the obligations to all of its customers. Customer accounts are not insured. Customers should ask their broker about account protection and should be aware of the limitations imposed on the protection of the funds in their futures trading accounts.”

The NFA’s BASIC Database

With the growing popularity of the Internet, the NFA set up online access to its historical registration and records of disciplinary action in 1998. This portal is now called the Background Affiliation Status Information Center or BASIC and provides an important resource for forex traders to look up information on individuals or corporations that they are considering doing business with.

One of the most useful features of the BASIC database is that it lists all members of the NFA doing business with the public. This can offer just about anyone with an interest in the reputation of forex brokers or anyone doing business with the public in the futures industry the valuable opportunity to research the NFA registrant online.

Furthermore, the database contains all registered members of the CFTC, as well as the NFA membership list, and it also includes any regulatory and non regulatory action that may have been taken against any of the members of either organization by the agencies or by any U.S. based futures exchange.

Chris Lee

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