Futures are one of the most heavily regulated derivatives markets available. Due to their exchange traded and leveraged nature, along with the development of commodity trading laws in the US, it has been necessary for them to evolve with multiple tiers of regulation.
There are in fact three separate sources of regulation in futures, each of which we’ll discuss below, as well as providing links to useful resources that you can use to check the status of any brokerage firm you are considering opening an account with.
Unlike many other securities, a futures contract trades on one single centralized exchange. Compare this to forex which is traded via an anonymous electronic network of banks and liquidity providers, or shares in a company’s stock which may trade on a dozen or more exchanges including dark pools, and the relative transparency and security of dealing via an futures exchange should become obvious.
Each contract is issued by an exchange so that, for example, the Light Sweet Crude Oil contract (symbol: CL) is issued by the Chicago Mercantile Exchange, along with a set of contract specifications. These specifications regulate every single aspect of how the contract is traded, stipulating all of the following:
- Contract Units
- Grade And Quality
- Price Quotation
- Hours of Trading
- Minimum Price Fluctuation
- Settlement Method and Procedures
- Expiration Date
- Position Limits
- Minimum Block Size
- Price Limits
- Delivery Procedure and Period
Additionally, the exchange also provides identical data feeds to all traders, manages exposure via their clearing house, and is able to halt trading in exceptionally volatile circumstances. Every aspect of a futures contract and how trades are executed and transacted is regulated by the exchange.
Independent Self-Regulatory Body
In order to provide any kind of futures brokerage service or act as an intermediary in the derivatives markets, it is mandatory for a firm to be registered with the NFA (National Futures Association). The NFA is a non-profit regulatory organization and exists to safeguard market integrity and protect investors and traders in futures, as well as similar derivatives such as forward contracts and swaps. As a regulatory body, the NFA develops and enforces rules to ensure that everyone conducting business through a futures exchange adheres to high standards of professional conduct. The organization has a remit to promote fair practice and fight fraud and abuse, implement initiatives for customer protection, and resolve disputes.
For over thirty years the NFA has operated an arbitration service to resolve disputes between parties in the futures markets. This means that traders involved in a dispute with their broker or another exchange member have a route to prompt and inexpensive resolution.
One of the most important free resources that all investors can access via the NFA website is BASIC – the Background Affiliation Status and Information Center. Within this database it is possible for you to check the status of any broker who you may be considering dealing with to ensure they are authorized to provide futures services, as well as viewing any history of disputes, legal action, suspensions or fines. If you need further assistance with your research, this is also available from an information center representative via phone and email.
Tel 1: 312-781-1410
Tel 2: 800-621-3570
Note that if you’re using our page to compare futures brokers, we list the NFA’s ID number for each firm for your convenience when searching the BASIC database.
Federal Regulatory Body
While the NFA is an independent self-regulatory body, there is also a federal regulatory body called the CFTC (Commodity Futures Trading Commission). The CFTC was created in 1974 as an agency of the US government following the Commodities Exchange Act.
The CFTC states its mission as being “to foster open, transparent, competitive, and financially sound markets, to avoid systemic risk, and to protect the market users and their funds, consumers, and the public from fraud, manipulation, and abusive practices related to derivatives and other products.”
In carrying out this mission and to promote market integrity, the Commission polices the derivatives markets for various abuses and works to ensure the protection of customer funds. The CFTC operates a program allowing the public to file a complaint about any futures industry professional or firm, which can be accessed via their file a tip or complaint page.
The mandate of the CFTC was renewed and expanded by Congress’s passing of the Commodity Futures Modernization Act of 2000, which instructed the Securities and Exchange Commission (SEC) and the CFTC to develop a joint regulatory regime for single-stock futures.
Futures – A Highly Regulated Market
With these three tiers of oversight, the level of futures regulation exceeds that found in any other security or derivative market. Combined with the fact that a broker does not act as the direct counter party to any futures transaction you make, thereby removing the conflicts of interest that can occur in other securities, futures are undoubtedly one of the most transparent and secure markets in which to participate. Just be certain to use these regulatory resources above to your full advantage by making sure that any broker firm you deal with is fully authorized and regulated, and has a good track record in terms of compliance.
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