Officiating Today’s Game – the NFA and CFTC

You may, on occasion, hear us refer to the NFA or  CFTC in our writing, but aside from a jumble of letters, what are these organizations and what do they do? The answer is simple: they work to ensure legal and ethical standards are upheld across the industry.

In 1974, Congress passed the Commodity Futures Trading Commission Act of 1974, which President Ford signed into law. It had become clear, as trading increased in frequency, that there was a need for legal oversight. The passing of the bill overhauled the Commodity Exchange Act and created the Commodity Futures Trading Commission (CFTC or Commission), an independent agency with far more authority over futures trading than its predecessor, the Commodity Exchange Authority.

The bill also allowed for the development of a self-regulatory body for the industry that would complement the actions of the CFTC. In 1976, a group of industry participants, lead by the then Chairman of the CME Leo Melamed, formed the National Futures Association Organizing Committee. The goal was to reflect a large cross section of business and regional interests, because without full cooperation across the industry, the efforts would not be a success.

The process was a slow one, but in 1982, Robert K. Wilmouth, former president of the Chicago Board of Trade, became the NFA’s first president. The rest, as they say, is history. The NFA became a self-regulating body operating under the authority of the CFTC.

What are the differences? The answer, it turns out, was not exactly easy to track down. Red tape, hesitance to provide direct answers and the complicated legal system being navigated provided a great deal of fog and confusion in our research. After calling representatives from both bodies and a lawyer specializing in futures investing, as well as doing additional research, the short version is this: the CFTC writes the rules and enforces them for non-NFA members, and the NFA enforces the rules for its members unless the infraction is a large one.

Essentially, the NFA has a long list of compliance rules which members must abide by. Included in these rules are all of the CFTC regulations, while others are derived from the industry in order to uphold the highest levels of integrity among members. As the NFA website explains, “With certain exceptions, all persons and organizations that intend to do business as futures professionals must register under the Commodity Exchange Act.” The NFA will then conduct audits of its members and generally monitor their behavior. If they find something out of line, they will issue a reprimand that can range from a letter of warning to expulsion from the organization and hundreds of thousands of dollars in fines.

When does the CFTC step up to the plate? Legally, they could theoretically get involved in any case alleging an infraction of their regulations, but in practice, they usually only get involved in the punitive process if the offender is not an NFA member (meaning the NFA has no jurisdiction), or if the violation was severe. While it is theoretically possible that someone could be punished by the CFTC and NFA, it doesn’t often happen that way.

Why are these bodies important? To protect investors. The goal of these bodies is to ensure that investors are being given accurate, balanced information about their options, and not being defrauded. The NFA, in particular, provides a useful tool to investors (click here), whereby you can enter the name of the broker, firm, or CTA you are dealing with/thinking of investing with; and find out if they are indeed registered, how long they have been registered, where they have been in the past, and any complaints or infractions they have suffered.

We urge you to learn more about these regulatory agencies, especially because their websites provide a wealth of information regarding managed futures, markets and investing. You can find them here:

Commodity Futures Trading Commission (CFTC) Website

National Futures Association (NFA) Website










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DISCLAIMER

Forex trading, commodity trading, managed futures, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors.

The entries on this blog are intended to further subscribers understanding, education, and – at times- enjoyment of the world of alternative investments through managed futures, trading systems, and managed forex, and is not intended as investment advice, or an offer or solicitation for the purchase or sale of any financial instrument. Unless distinctly noted otherwise, the data and graphs included herein are intended to be mere examples and exhibits of the topic discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts. Opinions expressed are that of the author.

*The mention of specific asset class performance (i.e. +3.2%, -4.6%) is based on the noted source index (i.e. Newedge CTA Index, S&P 500 Index, etc.), and investors should take care to understand that any index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship and self reporting biases, and instant history.

The mention of general asset class performance (i.e. managed futures did well, stocks were down, bonds were up) is based on Attain’s direct experience in those asset classes, estimates of performance of dozens of CTAs followed by Attain, and averaging of various indices designed to track said asset classes.

It should be noted that past market performance is not indicative of future market movement.No market data or other information is warranted by Attain Capital Management as to completeness or accuracy, express or implied, and is subject to change without notice.

Managed Futures Disclaimer:

Past Performance is Not Necessarily Indicative of Future Results. The regulations of the CFTC require that prospective clients of a managed futures program (CTA) receive a disclosure document when they are solicited to enter into an agreement whereby the CTA will direct or guide the client’s commodity interest trading and that certain risk factors be highlighted. The disclosure document contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA.