Introduction To The NFA regulation

nfa logoNFA or National Futures Association is an independent, non-profit, and self-regulatory agency in the US that oversees the services provided by firms in the derivatives market that include ETFs, Forex (Currencies), and OTC derivatives. NFA was conceived in 1982 by the American Congress to ensure fair practices and conduct from organizations dealing with the general public while rendering services related to retail or OTC trading such as Forex and commodities.
The NFA was introduced so that any firm that is willing to provide derivatives related services to the US traders, including swap dealers and signals providers, should be a member of the NFA and be willing to adhere to the strict standards and regulatory guidelines as proposed by the NFA from time to time. Headquartered in Chicago, IL, the main motive behind NFA is to instill investor confidence in the derivatives markets by putting forward stringent guidelines that will not only safeguard investor interests but also act as a platform to resolve issues between a firm and its consumer.

Who Are Affected By NFA Regulation?

Membership in the NFA is required for all forex brokers, signals providers, brokerage firms, swap dealers, and associates who wish to do business on US soil. Only NFA regulated brokers are allowed to offer brokerage services to residents of the US, and failure to adhere to the strict NFA regulations will attract heavy penalties and subsequent legal action.
Being a non-profit agency, NFA is maintained using membership fees and other dues. This ensures that the NFA is not run using tax payers money, and gives more credibility to the organization in favour of the consumer. According to the legislations passed in the 2000 and 2008 by the Congress, it is mandatory for all firms participating in the derivatives markets to be registered with the CFTC and become members of the NFA. Amendments to the regulations in 2010 also saw the inclusion of swap dealers as well, which pretty much covers all aspects or retail trading in the derivatives market.

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Steps Taken By NFA For Protection of Consumer Rights

Although NFA has been at the forefront of regulation since the 80s, NFA has only recently become more involved in the protection of consumer rights by working closely with several regulatory organizations such as the CFTC, CME Group, and other SROs. NFA, along with the CFTC, performed a major overhaul of the regulatory guidelines so as to ensure more rights to the consumer, and prevent any instances firms taking undue advantage of unsuspecting customers.
Since 2011, NFA has been actively participating in regulating the derivatives market by safeguarding client funds against fraud or abuse. NFA requires all of its members to audit their balance sheets and reports on a daily basis to ensure that there are no discrepancies. NFA also requires all compliant members to keep customer funds in safe and secure segregated accounts to ensure that customer funds can be returned to its rightful owner if the parent company is liquidated or facing a lawsuit.

Is NFA Effective On Broker Fraud & Abuse?

The outstanding quality guidelines and regulatory by-laws put forward by the NFA have certainly helped in fighting fraud and abuse effectively. When it comes to overall safety and security of client funds, NFA forex brokers are known to offer better protection when compared to brokers that aren’t properly regulated by any recognized agency. In most cases, NFA regulated brokers are seen helping their clients, rather than working against them to siphon off their money.
NFA works as an arbitrator in most customer disputes by offering an easy channel for customers to make claims or file complaints against any NFA member. Backed up with sufficient proof, all customer complaints are attended to in a professional manner, and since 2011, almost all NFA forex brokers are seen to cooperate with NFA investigations properly to ensure that the integrity of customer’s right is protected.

Advantages & Disadvantages Of NFA Regulation

There are several advantages as well as disadvantages of choosing an NFA regulated forex broker. NFA regulation guarantees the safety of client funds, along with providing a medium for arbitration or consumer dispute resolution. It also ensures that the broker remains honest and refrains from indulging in any fraudulent activities. Choosing an NFA regulated company also ensures that the forex broker has gone through all the screening procedures as stipulated by the NFA. This allows consumers to browse through a company’s financial profile before deciding on whether they want to user their services or not.
On the flipside, the NFA and CFTC are known to interfere with the freedom of traders by imposing trading restrictions in the name of safeguarding consumer interests. Low leverage, no hedging policies, and scalping rules are all deterrent to a trader who wishes to trade the derivatives market the way he deems fit. Therefore, while NFA regulation is a good thing, especially for traders in the US, it should be noted that traders should carefully analyze the trading policies before choosing an NFA regulated forex broker.

How To Find Brokers Regulated By NFA

In most cases, regulated brokers will provide detailed information about the regulation that includes the license number and a link to their registration profile. NFA also provides an online resource where consumers can perform a background check on the concerned broker, and cross-reference information to ensure that the broker is indeed regulated by the NFA. Details of regulation are usually printed at the bottom of a broker’s website, the ‘about us’ page, or in their FAQ page. Always verify the authenticity of the broker’s NFA regulation claims before depositing funds in their account.

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