Regulations (CEA, CFTC, NFA, AML)
The futures industry is governed by federal law and self-regulation. This chapter covers the Commodity Exchange Act, the CFTC as the federal regulator, the NFA as the industry self-regulatory organization, registration categories, position limits, required disclosures, and anti-money-laundering duties.
The CEA and the CFTC
The Commodity Exchange Act (CEA) is the federal statute governing futures and options on futures. The Commodity Futures Trading Commission (CFTC) is the independent federal agency that administers the CEA, oversees the markets, and prevents fraud and manipulation. The CFTC approves exchanges and registers intermediaries, and it delegates day-to-day member oversight to a registered futures association.
The NFA and Registration Categories
The National Futures Association (NFA) is the industrywide self-regulatory organization for the U.S. derivatives industry. Firms and individuals who deal with the public must register with the CFTC and become NFA members. Key categories include the Futures Commission Merchant (FCM), which carries customer accounts and holds funds; the Introducing Broker (IB), which solicits business but does not hold funds; the Commodity Pool Operator (CPO); the Commodity Trading Advisor (CTA); and the Associated Person (AP), an individual soliciting orders or supervising those who do.
Position Limits and Required Disclosures
To curb excessive speculation and manipulation, the CFTC and exchanges set speculative position limits capping the number of contracts a speculator may hold; bona fide hedgers may apply for exemptions. Before opening an account, a customer must receive the standardized risk disclosure statement describing the risk of loss in futures trading. CPOs and CTAs must deliver a disclosure document to prospective clients, and all promotional material must be truthful and not misleading.
Customer Funds and Anti-Money-Laundering
FCMs must keep customer funds segregated from firm funds so that customer money is protected and not used to finance the firm's business. Under the Bank Secrecy Act and USA PATRIOT Act, firms must maintain an anti-money-laundering (AML) program with a customer identification program, ongoing monitoring, and the filing of Suspicious Activity Reports (SARs) and Currency Transaction Reports for qualifying transactions. Firms must also supervise employees and keep required books and records.