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How NFA uses the Internet to deliver information, provide Member services and conduct surveillance

There's no denying the Internet has become an integral part of the business world. In a relatively brief period of time organizations have turned to the Internet and the World Wide Web to accomplish a variety of corporate goals, such as marketing their goods and services, increasing operational efficiencies and broadening public relations efforts.

During the past several years, NFA has developed its own Internet strategy-one that focuses on three main components: delivering information, providing Member services and conducting surveillance.

Delivering information

With the introduction of the Background Affiliation Status Information Center (BASIC) in February 1999, NFA became the first organization in the financial services industry to offer background information on the firms and individuals it regulates to anyone with access to the Internet. During its initial phase, BASIC contained the data from NFA's Clearinghouse of Disciplinary Information as well as registration information about firms and individuals currently active in the industry.

"In March of 2000 NFA incorporated a number of enhancements to BASIC," says Laura Oatney, director of Communications and Education. "In addition to disciplinary or regulatory information and current registration information, BASIC now includes historical registration information, data about customer arbitration cases and ethics training data about individuals. NFA also added a tool that allows users to search for background information by the name of a specific commodity pool."

NFA also expanded the amount of information available on its web site (www.nfa.futures.org). For example, all of NFA's public education materials, all of the forms used in the registration process, all seven of NFA's regulatory guides, the Rulebook and all of the materials that support NFA's dispute resolution program are now online.

"The enhancements to BASIC and the new content have significantly boosted traffic to the site," says Oatney. "The number of pages accessed now averages about 166,000 each month, up 60 percent over last year. Visitors download an average of about 3,500 brochures and forms each month. And the system now processes over 20,000 BASIC searches each month, up 70 percent over last year. In fact, since its introduction, the system has processed over 350,000 searches."

Providing Member services

In 1997, NFA began accepting electronic financial statements from its Members. Based on the 1-FR and Focus statements, the system, dubbed iNFAst, was developed to help firms reduce repetitive entry of the same information for their own systems and multiple regulators, reduce data entry errors, and speed up the reporting and analysis process.

With this system, NFA sends Members preformatted workbooks for each financial statement that they are required to submit. Members can enter their 1FR or Focus reports manually or import the information from their own accounting or other regulator's software. The financial information is imported into NFA's database systems and an immediate initial analysis is performed, alerting compliance staff of any serious problems.

Another area in which NFA has used the Internet to improve Member services is the electronic filing of disclosure documents. When NFA assumed the responsibility for the review of Disclosure Documents from the CFTC in November 1997, it created a dedicated e-mail address for submissions. As the Disclosure Document review process can involve several revisions, the speed of e-mail helps keep down the turnaround time and reduces the amount of paper that NFA needs to store.

The most recent system developed at NFA, implemented in early October, is the Daily Segregation Reporting System. NFA recently received approval from the CFTC to include a risk-based minimum capital requirement for FCMs which carry customer accounts. This calculation is based on SPAN margin requirements. This information is submitted daily along with the segregation information currently provided by Member firms.

NFA has already seen several benefits to this system. The data being sent over the web is highly structured, and most data entry errors can be avoided. The system allows instant notification, both to the firm and to NFA, of any serious problems with the segregation numbers. At the time of submission, a management alert is generated automatically, informing analysts and management that there is a potentially serious problem with the firm's finances.

Conducting Internet surveillance

NFA's Compliance Rule 2-29 provides Members with guidance on how and what information they communicate to the investing public. To uphold that rule, NFA monitors print advertisements, radio and television ads. Now, with the increased use of web sites to publicize investment, NFA has added the Internet to its list of communications surveillance areas.

NFA has been monitoring the Internet for several years. However, in 1999 NFA set up a committee comprised of NFA staff to address the issue of monitoring electronic media. After researching surveillance programs at other regulatory organizations, NFA decided that the team currently responsible for the review of promotional material and disclosure documents should also monitor the Internet. The team is comprised of eleven members of the Compliance Department.

NFA staff members conduct Internet searches using phrases such as "futures trading systems" or "heating oil options" in an attempt to review as many sites as possible. The Compliance Department also maintains a database that contains all of the web sites we are aware of that are maintained by NFA Members. We come across these sites through audits, surveillance, and firms often submit web sites for us to review. This database helps NFA to periodically review Members' sites.

NFA also reviews mass e-mail solicitations and password protected web sites. Several members of the Compliance Department have set up anonymous e-mail addresses that would be accepted for mailing lists and protected sites.

One of the ways NFA measures the effectiveness of its Internet surveillance efforts is by studying the number of enforcement actions that result from NFA referrals to the states, the CFTC, the SEC and the NASD. The CFTC has recently taken 16 enforcement actions related to fraudulent web sites. Of those 16 cases, 11 were referred to the Commission by NFA. The cases involved non-registrants and CTAs that were not NFA Members.

Whether posting information on a web site, providing electronic services to Members or conducting surveillance to ensure the integrity of industry professionals, NFA will continue to use the Internet to meet its strategic goals and fulfill its regulatory responsibilities.

NFA is the premier independent provider of efficient and innovative regulatory programs that safeguard the integrity of the derivatives markets.
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