Safeguarding the Integrity of the Derivatives Markets

Transcription

1 Regulation. Redefined. Protecting & Educating Investors Safeguarding the Integrity of the Derivatives Markets Fighting Fraud and Abuse

2 Introduction National Futures Association (NFA) is the self-regulatory organization for the U.S. derivatives industry, including on-exchange traded futures, retail off-exchange foreign currency (forex) and OTC derivatives (swaps). NFA has developed and enforced rules, provided programs and offered services that safeguard market integrity, protect investors and help our Members meet their regulatory responsibilities and has done so for more than 30 years. Investor confidence is crucial to the success of the derivatives markets, and the best way to gain investor confidence is to demand the highest levels of integrity of all market participants and intermediaries. Membership in NFA is mandatory, assuring that everyone conducting business with the public on the U.S. futures exchanges and in the retail forex marketplace must adhere to the same high standards of professional conduct. NFA membership also is mandatory for swap dealers and major swap participants. NFA s membership currently numbers more than 4,100 firms and over 57,000 associates. NFA is a non-profit, independent regulatory organization. We do not operate any markets. We are not a trade association. We operate at no cost to the taxpayer. We are financed primarily from membership dues and from assessment fees.

3 NFA s role in the U.S. derivatives industry In 1974 Congress established the Commodity Futures Trading Commission (CFTC), a federal regulatory agency with jurisdiction over futures trading. The same legislation authorized the creation of registered futures associations, giving the futures industry the opportunity to create a nationwide, self-regulatory organization. NFA began operations in Congress passed legislation in 2000 and 2008 requiring firms acting as counterparties to retail forex transactions, as well as forex pool operators, trading advisors and introducing brokers to register with the CFTC and become Members of NFA. Similarly, in 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which gave the CFTC rulemaking authority and oversight over swaps, swap dealers and major swap participants. Subsequently, the CFTC passed regulations requiring swap dealers and major swap participants to register with the CFTC and become Members of NFA.

4 How NFA fights fraud and abuse Rigorous registration screening. NFA thoroughly screens all firms and individuals wishing to register with the CFTC and become Members of NFA. Applicants must meet stringent fitness requirements and must provide fingerprint cards for FBI background checks. In addition, individual registrants must pass comprehensive proficiency testing requirements. NFA has the authority to deny, revoke, suspend, restrict or condition any firm s or individual s registration. Strong enforcement authority. NFA has the authority to take disciplinary actions against any firm or individual who violates its rules. These actions range from Warning Letters for minor rule infractions to formal Complaints in cases where rule violations warrant prosecution. Penalties resulting from Complaints include expulsion, suspension for a fixed period, prohibition from future association with any NFA Member, censure, reprimand and a fine of up to $250,000 per violation. NFA often collaborates with the CFTC, the FBI and other law enforcement agencies to ensure full, comprehensive prosecutions. Comprehensive compliance rules. NFA has adopted a comprehensive set of rules covering the business conduct of its Members, including sales practices, recordkeeping, reporting, risk disclosure, discretionary trading, disclosure of fees and minimum capital requirements. Just as importantly, NFA performs regular examinations of its Members to monitor compliance with those rules. NFA has developed a sophisticated risk assessment system to identify high-risk firms quickly and take immediate action. NFA also conducts financial surveillance to enforce compliance with NFA s financial requirements, including daily electronic confirmation of customer segregated funds held at banks and other depositories. Trade practice and market surveillance. NFA provides a variety of regulatory services and programs to electronic trading platforms to ensure the fair treatment of customers and to maintain orderly markets.

5 Customer protection initiatives Since 2011, NFA has worked closely with the CFTC and other self-regulatory organizations (SROs) to adopt a number of initiatives to further safeguard customer funds. NFA, in conjunction with the CME Group and other SROs, developed and implemented a system in 2013 that requires all depositories holding customer segregated funds on behalf of a Futures Commission Merchant (FCM) to directly report balances daily to SROs. The SROs then perform an automated comparison to the daily reports filed by the FCMs to identify any suspicious discrepancies. In addition, all FCMs are now required to provide regulators with immediate notification if they draw down their excess segregated funds (funds deposited by the firm into customer segregated accounts to guard against customer defaults) by 25 percent in any given day. Such withdrawals must be approved by the CEO, CFO or a financial principal of the firm, and the principal must certify that the firm remains in compliance with segregation requirements. All FCMs also must regularly file certain basic financial information about the firm with NFA. This information is posted and accessible to the public free of charge on NFA s website. The information includes each FCM s capital requirement, excess capital, segregated funds requirement, excess segregated funds and how the firm invests customer segregated funds. This public display of FCM financial information on NFA s website provides investors with another tool to help them conduct due diligence before choosing an FCM.

6 Dispute resolution NFA began an arbitration program in 1983, providing a convenient, inexpensive and prompt method for investors to resolve futures-related disputes. Since that time, NFA arbitration has become the primary venue for dispute resolution for retail futures and forex customers. In October 2001, NFA became the first regulatory organization in the financial services industry to accept arbitration claims online. Since then, NFA has enhanced its website so that customers are now able to file their initial arbitration or mediation claims online. Within minutes, NFA sends a reply stating that the claim has been received and, as the case progresses, claimants and respondents can check the status of the case online. NFA also offers a mediation alternative during the arbitration process in cases where the total amount of the arbitration claim is $150,000 or less. Mediation is a settlement process where the parties work together with a mediator to find a mutually agreeable solution. Settling a dispute through mediation can save the parties time and money.

7 Resources for investors Investor protection begins with investor education. From its inception, NFA has provided investors with the tools they need to make informed financial decisions. NFA has developed several publications that discuss a variety of financerelated topics. All of the publications are available on NFA s website and through NFA s Information Center. One of the most important resources NFA offers investors is the Background Affiliation Status Information Center (BASIC), a free service that can be accessed through NFA s website. BASIC contains registration information concerning all current and former CFTC registrants. BASIC also provides information concerning disciplinary actions taken by NFA, the CFTC and all U.S. futures exchanges. In addition, BASIC contains financial information on all FCMs, including each firm s net capital and the amount of funds held in customer segregated and secured accounts. NFA also publishes a quarterly investor newsletter, distributed electronically to more than 4,000 subscribers, and periodically attends investororiented tradeshows.

8 Information Center World Wide Web CHicago headquarters 300 South Riverside Plaza Suite 1800 Chicago, IL new york One New York Plaza Suite 4300 New York, NY National Futures Association