National Futures Association – Definition

Cite this article as:"National Futures Association – Definition," in The Business Professor, updated December 14, 2018, last accessed September 26, 2020, https://thebusinessprofessor.com/lesson/national-futures-association-defined/.

Back to: INVESTMENTS TRADING & FINANCIAL MARKETS

National Futures Association Definition

The National Futures Association (NFA) is a self-regulatory organization for the futures and derivatives market in the United States. The NFA is a registered futures association designated by the Commodities Futures Trade Commission. The organization promotes the integrity of the derivatives market, protects the interest of the investors and makes sure that its members are adhering to the regulations.

The membership dues, fees, and assessments paid by the members and other users are used for funding the operations of the organization. All the firms, intermediaries and associates engaged in futures market business in the U.S. are required to take the NFA membership.

A Little More on What is the National Futures Association

The National Futures Association was established in 1982. The NFA is responsible for registration, compliance, and arbitration in the derivatives market. The organization aims at restricting fraud and abuse in the derivatives market. They implement rigorous registration requirements, strict compliance rules, real-time market surveillance, and strong enforcement authority in order to prevent fraud and abuse.

According to the Commodity Futures Trading Commission (CFTC) regulation, all the CFTC registered firms need to be a member of the NFA. Although, there some exceptions to this rule. During the registration, a thorough background check is done by the NFA. The futures professionals are categorized into the following divisions.

  • Commodity Pool Operators (CPO)
  • Commodity Trading Advisors (CTA)
  • Futures Commission Merchants (FCM)
  • Introducing Brokers (IB)
  • Forex Dealer Members
  • Swap Dealers

Apart from the categories mentioned above the following non-U.S. firms and individuals must register themselves.

Retail Foreign Exchange Dealer (RFED): According to the NFA, a REED is “an organization that acts, or offers to act, as a counterparty to an off-exchange non-U.S. currency transaction with a person who is not an eligible contract participant and the transaction is either a futures contract, an option on a futures contract or an option contract (except options traded on a securities exchange); or offered or entered into, on a leveraged or margined basis, or financed by the offeror, counterparty or person acting in concert with the offeror or counterparty on a similar basis.

Exempt Non-U.S. Firm: A non-U.S. firm that conducts business directly with the U.S. customers solely in future contracts and options traded on non-U.S. exchanges. There are some exemptions for certain Non-U.S. firms from the requirement of CFTC registration.

Floor Broker: The NFA defines a floor broker as, “an individual who purchases or sells any futures contracts, options on futures or swaps on any contract market for any other person”.

Floor Trader: According to the NFA, “a floor trader (FT) is a person who purchases or sells any futures contracts, options on futures or swaps on any contract market for such person’s own account.”

References for the National Futures Association

Academic Research on National Futures Association

Trading volume and transaction costs in futures markets, Wang, G. H., Yau, J., & Baptiste, T. (1997). Journal of Futures Markets: Futures, Options, and Other Derivative Products, 17(7), 757-780. This study examines the relations between trading volume, bid-ask spread and price volatility on four financial and mental futures. Test of specifications, Hausman’s (1978), confirms bid-ask, trading volume and price volatility re determined jointly. The bid-ask spread, price volatility, parameters and elasticities of the trading volume are estimated in a three-equation structural model by use of the generalized method of moments (GMM) procedure. The results show that there was a positive relationship between trading volume and bid-ask spread after controlling for other factors. Results also show that price volatility has a positive relationship with the bid-ask spread.

Futures in Australian education—tacit, token and taken for granted, Gough, N. (1990). Futures, 22(3), 298-310. This paper views ways in which conceptualization of the future in the language of Australian education can be analyzed. Selected samples from an analysis, policy documents, and other text, as it suggests that futures in Australian education discourse are often conceived with relation to (1) tacit inferences; (2) token invocations or; (3) assumptions taken for granted. Future conceptualization in some ways may be disempowering and allows education in Australia to be vulnerable to forces of economic and technological determination.

Regulatory structure in futures markets: Jurisdictional competition between the SEC, the CFTC, and other agencies, Kane, E. J. (1984). Journal of Futures Markets, 4(3), 367-384. Competition among alternative regulatory bodies is what this paper studies. It authenticates innovative financial contracts. This rivalry, in the United States, embraces only the Securities, Commodity Futures Trading Commission, and Exchange Commission although state and federal deposit-institution govern different private regulatory cooperatives. Coming from a political view, different regulators create ways of formally providing ongoing protection for the interest of various political constituencies. Although, from an economic point of vies, overlaps created by competition in regulatory responsibility creates an evolutionary mechanism for conforming to regulatory structures to technological and regulation created innovation.

The clearing association in futures markets: guarantor and regulator, Edwards, F. R. (1983). Journal of Futures Markets, 3(4), 369-392.

Commodity futures markets: a survey, Carter, C. A. (1999). Australian Journal of Agricultural and Resource Economics, 43(2), 209-247. This article shows the major additions in the literature about commodity futures markets. It is arguably noted that there has been the primary focus by modern studies on technical questions, with less economic content. There need to be more research in-line with understanding fundamental economic issues as to the reason why few farmers hedge. Government farm program affects commodity futures and the impact of market commodity pools. The paper does not explain the significance of inverted markets in oilseeds and grains, and also price volatility that cannot be explained like orange juice and hogs.

Customer protection in futures and securities markets, Fischel, D. R., & Grossman, S. J. (1984). Journal of Futures Markets, 4(3), 273-295.

Diversification benefits of managed futures, Schneeweis, T., & Gupta, R. (2006).

International Regulatory Responses to Derivative Crises: The Role of the US Commodity Futures Trading Commission, Born, B. (2000). Nw. J. Int’l L. & Bus., 21, 607. Based on research, over the period of the last decade, as derivative markets such as the counter (“OTC”) market, there have been an increasingly global nature of the U.S. Commodity Futures Trading Commission (“CFTC”) – the federal regulatory agency which oversees commodity option trading and the future, which has played a participating position in enhancing international regulatory cooperation. The present technology that allows instant communication and electronic trading have made a revolution in financial markets. This results in instituting around the clock and global trading and markets users that are globally active, also, including an increased rate of market innovation and market intermediaries.

Regulatory structure in futures markets: jurisdictional competition among the SEC, the CFTC, and other agencies, Kane, E. J. (1984). The study of competition among alternative governing bodies for authority beyond innovative financial contract is a study explained in this paper. This rivalry, in the United States, embraces only the Securities, Commodity Futures Trading Commission, and Exchange Commission although state and federal deposit-institution govern different private regulatory cooperatives. Coming from a political view, different regulators create ways of formally providing ongoing protection for the interest of various political constituencies. Although, from an economic point of vies, overlaps created by competition in regulatory responsibility creates an evolutionary mechanism for conforming to regulatory structures to technological and regulation created innovation.

Futures markets in transition: The uneasy balance between government and self‐regulation, Edwards, F. R. (1983). Journal of Futures Markets, 3(2), 191-206.

Demutualization and corporate governance of stock exchanges, Aggarwal, R. (2002). Journal of applied corporate finance, 15(1), 105-113. There is demutualization for security exchanges all over the world from non-profit mutual organizations to profit based and corporations owned by investors. There have been several exchanges leading publicly traded companies to be listed on the exchange itself. The sudden changes in the form of the organization of the exchanges show major changes in the business place caused by serious global competition and progress in technology. Some traditional means of income like membership fees, listing fees, the sale of information, data market and information services are no more important. The most important source of income will be a transaction fee, and exchanges that deal with liquidity will increase.

Was this article helpful?