FOREX Licensing by the NFA (United States)

As anyone considering opening a FOREX account knows, licensing requirements are an important prerequisite. Licensing and regulation are an important prelude to any trading activity, as they ensure the safety of your investments while also safeguarding your funds from being tampered with. These two promises are at the core of what FOREX watchdogs do. In what follows, we will present all the relevant information about the American FOREX regulatory body, the National Futures Association (NFA).

NFA in Brief

The NFA is the self-regulatory organization for the US derivatives industry. This includes on-exchange traded futures, retail off-exchange foreign currency (FOREX) and over-the-counter OTC derivatives (Swaps). The NFA is headquartered in Chicago and maintains an office in New York City. The NFA is a non-profit, independent regulatory organization. The organization does not operate any markets and is not a trade association. The NFA operates at no cost to the taxpayer and is primarily financed by membership dues, fees and assessments paid by members and other participants of the derivatives markets.

Membership in the NFA is mandatory, therefore guaranteeing that everyone conducting business with the public on US futures exchanges and in the retail FOREX marketplace must adhere to the same standards and requirements. NFA membership is also mandatory for swap dealers and major swap participants. The NFA's membership currently numbers approximately 4,000 firms and 55,000 associates.

For FOREX companies specifically, the NFA plays two fundamental roles: to uphold transparency, and to prevent fraud. Given its good reputation, a significant number of FOREX brokers and binary options brokers from all over the world have obtained registration from the NFA.

How to Verify If a Company is Licensed by the NFA?

Each FOREX broker with which you are considering opening an account ought to be licensed by the NFA. Details for this should be easily accessible on FOREX companies’ Websites, with each carrying a register number. In cases where a company claims it is licensed by the NFA, but where you have doubts, you can easily verify this information by visiting the NFA at the following URL: https://www.nfa.futures.org/basicnet/welcome.aspx. If you find results, then the company’s claims for licensing are legitimate. Otherwise, the company in question is not licensed by the NFA and should be avoided at all costs.

Understanding the NFA

As mentioned, NFA membership provides assurance to the investing public that all firms, intermediaries, and associates who conduct business with them on the US futures exchanges must adhere to the same high standards of professional conduct.

The NFA began operating in 1982, following the establishment of the Commodity Futures Trading Commission (CFTC) in 1974. This legislation also authorized the creation of registered futures exchanges, thereby facilitating the creation of a national self-regulatory organization.

In addition to regulation of the US futures market, the NFA's duties and functions include registration, compliance and arbitration. It combats fraud and abuse in the futures markets through a combination of registration requirements, compliance rules, strong enforcement authority and real-time market surveillance.

Member Firms

With very few notable exceptions, CFTC regulations also require CFTC-registered firms to be NFA members, and all futures professionals are required to register and must undergo a background check before they are allowed to become listed

Futures professionals are broken down into the following six categories.

Commodity Pool Operators (CPO): People or organizations that operate and solicit funds for a commodity pool.
Commodity Trading Advisors (CTA): People or organizations that advise clients on derivatives trades.
Futures Commission Merchants (FCM): An entity that accepts or solicits trades.
Introducing Brokers (IB): People or organizations that connect clients with a broker.
Retail Foreign Exchange Dealer (RFED): A counterparty to non-US currency transactions.
Swap Dealers: Makes a market for, and transacts in, swaps as its business.

Additionally, the following non-US firms and individuals must also register:

Exempt Non-US Firm: A non-US firm that transacts business directly with US customers solely in futures contracts and options traded on non-US exchanges.
Associated Person (AP): A person who solicits customers, orders or funds on behalf of a CPO, CTA, FCM, IB, or RFED.
Floor Broker (FB): An individual who purchases or sells derivatives for any other person.
Floor Trader (FT): A person who purchases or sells derivatives for their own account.

NFA Rules and Enforcement

The NFA, as a self-regulatory organization in the US, has the power to search for and implement what it believes are best practices for the industry. In other words, the NFA creates rules that its members must follow.

The NFA has the power to impose fines or revoke the membership (which could shut down a business) of its members. It offers an arbitration process to help customers and businesses settle disputes or come to a resolution on allegations of wrongdoing.

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Conclusion

As would be expected from the world’s largest economy, with some of the most formidable financial markets in the world and arguably the most important currency, the NFA is a very reputable, self-regulatory body that is responsible for the futures industry in the US, including the FOREX market. Its mission is to provide a series of regulatory programs and services to ensure the protection of market participants, and to help its members meet their regulatory responsibilities. The US financial sector watchdog does a great job, making it one of the most sought-after licenses for FOREX activity in the world. Therefore, any FOREX broker boasting an NFA license should be dealt with a great deal of confidence.