NFA President Thomas W. Sexton III described the self-regulatory organization's ("SRO") approach to derivatives industry regulation.

In a speech at the Association for Financial Markets in Europe Annual Compliance and Legal Conference, Mr. Sexton reviewed the history of the NFA and its successful approach to self-regulation. Mr. Sexton highlighted "effective government oversight" that was not "oppressive," mandatory membership, and the commitment of industry leaders to the ideal of self-regulation.

Mr. Sexton described how the NFA "evolved" to meet new regulatory challenges. He offered two examples. First, the NFA was "aggressive" in its enforcement activity in response to the prevalence of fraud in the largely unregulated retail forex market that developed in the nineties. Second, the NFA established a swap dealer regulatory oversight program following the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Mr. Sexton stated that the NFA's international coordination efforts allow it to perform examinations of non-U.S. swap dealers and strengthen global regulators' efforts to deal with market crises.

Mr. Sexton also noted current regulatory challenges including:

  • a lack of regulatory authority over spot market virtual currency products, such as verifying Members' ownership and control; and

  • cybersecurity risks, such as ensuring the secureness of NFA technology systems and protecting NFA Member data.


Bob Zwirb

Mr. Sexton's remarks overall reflect a welcome reasonable and pragmatic approach to regulation. For example, he mentions that while NFA "works closely" with the CFTC enforcement division, it does so in a way that does "not duplicate enforcement actions so that we can properly allocate our regulatory resources." That is an admirable goal that is not always observed elsewhere in the regulatory sphere. The CFTC's parallel enforcement actions with the Department of Justice, for example, have recently been criticized by members of the industry bar on resource allocation grounds.

Mr. Sexton also states in reference to NFA's overseer (the CFTC) that "government oversight should not be oppressive. If the oversight agency dictates in detail how the SRO should perform its activities, it negates many of the advantages of self-regulation." The same can be said for self-regulation. If too prescriptive, it, too, can become overbearing. A case in point, is retail FX. While that is an area that historically has been the locus of outright fraud, which has kept enforcement personnel rightfully busy, one can argue that the regulatory response has been so stringent as to virtually wipe it out as a sector, with only three such firms currently registered with NFA, a near all-time low. See "US Regulators Victorious: Forex Dealers Data Hits All Time Lows." Regulators, after all, need regulatees. If a decision is made to prohibit certain financial activities, such as retail FX, that arguably should be a legislative decision, rather than a prohibition created through regulatory burden.

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