Lesson 6: Financial Regulatory Agencies in the United States

One of the first things you learned about the forex market is that it is largely unregulated. Indeed, the forex market's decentralized nature is a major part of what makes it attractive to investors. 

However, this isn't entirely true. While no global authority oversees forex activities, many countries have established financial regulatory authorities with jurisdiction over their territories. 

The United States is among the countries with the most stringent forex regulations. Its chief regulatory agencies, the Commodity Futures Trades Commissions (CFTC) and the National Futures Association (NFA), are known for imposing significantly stricter requirements than other countries. 

In this lesson, you'll learn about these two US forex regulators. 

Lesson Highlights 

• The US has two primary forex trading regulatory authorities, the CFTC and the NFA. 
• The CFTC was founded in 1974 through the Commodity Futures Trading Commission Act of the same year. 
• The CFTC is headed by five commissioners appointed by the US president. 
• The CFTC mainly differs from the SEC in the focus of its responsibilities. 
• All entities must be registered with the NFA before participating in the US futures market. 
• The NFA is a self-sustaining and self-governing organization that operates under the CFTC's supervision. 

Commodity Futures Trades Commissions 

The CFTC, founded in 1974, is one of the oldest forex trading regulators still around today. It was created through the 1974 Commodity Futures Trading Commission Act. 

During the time of its inception, most futures trading revolved in the agriculture industry. The CFTC's role as a futures and options trading regulator gradually became more complex as the financial sector embraced modernity. 

Because futures include currencies, the CFTC also includes forex trading under its purview. 

The agency has five presiding commissioners, all of whom are appointed by the sitting US president, with approval from the US Senate. 

Each commissioner heads a committee focusing on one of five sectors relevant to the CFTC: 

• Agriculture 
• Technology 
• Market risk 
• Global markets 
• Energy and environmental markets 

Besides the commissioners and their committees, 13 other operating divisions and offices comprise the CFTC. Among these 13 are the agency's five primary divisions: 

• Division of Clearing and Risk 
• Market Participants Division 
• Division of Market Oversight 
• Division of Data 
• Division of Enforcement 

The Commission has a headquarters in Washington, DC, and three other offices in Kansas, Chicago, and New York. 

CFTC vs. SEC 

Considering the CFTC's wide scope, you may wonder how it differs from the Securities and Exchange Commission (SEC). 

Both agencies are responsible for overseeing market activities, but their focus makes them distinct. The key differentiation between the two is that the CFTC is primarily concerned with derivatives, while the SEC attends to securities. 

How the CFTC Helps Against Scam Brokers 

All intermediaries are required to register with the CFTC. This includes: 

• Commodity pool operators and advisors 
• Introducing brokers (IBs) 
• Broker-dealers (B-D) 
• Futures commissions merchants 
• Swap dealers 

This allows the agency to effectively "vet" these entities and filter out those that fail to meet their requirements. 

Through this process, the CFTC ensures that traders will have an accessible list of "trustworthy" registered market participants. 

More importantly, the CFTC has regulatory oversight over any entity under its legal jurisdiction. This allows the agency to enforce regulatory actions, fines, and other measures against erring bodies. 

Contacting the CFTC 

If you have any issues you wish to clarify or bring up with the CFTC, you can reach the agency through its website. 

Additionally, you can file your complaints or report any suspicious activities here. 

National Futures Association 

The NFA is a self-sustaining and self-regulatory organization established in 1982 under the CFTC. The association's mission is to oversee activities in the derivatives markets. Its primary task is to ensure the safety of investors and keep its members from evading their legal obligations. 

As a self-sufficient institution, the NFA does not rely on taxpayer money for funding. Instead, it uses the fees, dues, and other member payments to pay for its expenditures. 

The NFA does more than regulate the US futures market. It also ensures that market participants register and comply with the organization's rules and regulations. 

Since no one can participate in the US futures market without being an NFA member, you can be assured that every futures trader and broker you interact with answers to the association. 

How the NFA Helps Against Scam Brokers 

As a delegated market regulator, the NFA has the authority to act as a gatekeeper of the US derivatives market. 

Its rigid registration process screens out prospective market players who fail to meet the association's high standards. This ensures that investors only deal with "clean" brokers. 

The NFA strictly enforces its regulations on registered members. It metes out disciplinary actions (e.g., fines) against any entity under its jurisdiction that breaches its policies.

Contacting the NFA

You can reach the NFA through its website.

Now that you know about the forex market regulators in the US, you can head on to the next lesson and learn about the financial authorities of other countries.