National Futures Association and its Functions
The history of the National Futures Association (NFA) dates back to the 1970s. More than 45 years ago, the U.S. Congress established the Commodity Futures Trading Commission (CFTC). Interestingly, the same legislation authorized the creation of registered futures associations. As a result, the industry was able to create a self-regulatory organization.
However, the National Futures Association was not created until 1976. Leo Melamed who served as the chairman of the Chicago Mercantile Commission was able to persuade other industry leaders. He persuaded industry leaders that a Title organization would benefit the futures industry as well as the public.
Furthermore, Melamed created an NFA Organizing Committee. He was the chairman of this commission. Interestingly, industry leaders such as David T. Johnston, John J. Conheeney, and others worked with Melamed in this commission.
It is worth noting that Melamed was able to convince Senator Robert Dale to support legislation for the creation of the National Futures Association under Title III – a private sector, self-funding as well as self-regulating organization.
Framework of the NFA
In 1977, CFTC made the decision to endorse NFA. The creation of NFA was a historic moment. Moreover, this decision gave the futures industry a regulatory framework. Thanks to this regulatory framework, its markets managed to continually grow, as well as succeed without the need for a federal transaction tax.
Interestingly, the Organizing Committee came to several important conclusions. Let’s have a look at them. Firstly, it was possible to reduce costs by creating a single organization that would represent all futures industry segments. Secondly, it was not possible to successfully self-regulate unless its membership was mandatory. Let’s have at the third conclusion. According to this conclusion, a private sector self-regulatory organization would serve the futures industry more efficiently and at a lesser cost than would the government.
The Importance of the National Futures Association
As can be seen from the information stated above, the history of the National Futures Association is full of interesting details.
For example, on September 22, 1981, CFTC formally designated NFA as a registered futures association. Interestingly, Robert K. Wilmouth became the first president of the association and Leo Melamed became the first chairman.
In 1982, NFA began its regulatory operations. This is not the end of the story as the U.S. As a reminder, Congress passed legislation in twenty years ago and then in 2008, requiring firms acting as counterparties to retail forex transactions to register with CFTC and to become a member of NFA.
Apart from retail forex transactions, forex pool operators, trading advisors as well as introducing brokers also fall under this category. Ten years ago, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. This act gave the CFTC rulemaking authority as well as oversight over swaps, swap, and major swap participants. The CFTC passed regulations requiring swap dealers and major swap participants to register with the commission as well as to become a member of NFA.
The Role of NFA
According to the Commodity Exchange Act CEA, certain firms and individuals that conduct business in the derivatives industry must register with the CFTC.
Furthermore, regulations also require CFTC firms except for a few exceptions, to be NFA members. People should consider that the commission delegated registration responsibility to the National Futures Association.
Importantly, all futures professionals have to register with the commission. However, they are granted registration only after a comprehensive investigation of their background. Futures professionals have to comply with fitness standards set forth in the CEA.
Let us have a look at the functions of NFA. Apart from registration, the association is involved in rulemaking as well as enforcement and registration actions. Moreover, NFA offers an affordable and efficient arbitration program.
Also, the association provides several opportunities when it comes to education. NFA helps its members to understand their regulatory requirements.
Furthermore, the National Futures Association offers investor protection. Notably, it can provide a variety of resources to help investors perform due diligence before making any investment decisions.
Also, for the association, it is important to train regulators, as well as exchanges and self-regulatory organizations from around the world. Let’s not forget about market regulations. NFA provides regulatory services to designated contract markets and swap execution facilities. Importantly, each of which has self-regulatory responsibilities to monitor trading on its platform.
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