Post on 08-Jul-2020
Avoiding Fraud is Your Best Money StrategyAAI I Ph oe n ix Ch apte r Me et in g | Ch r i st ie H i l l s man
April 13, 2019
Agenda
• NFA Overview
• Derivatives 101
• Warning Signs of Possible Fraud
• Performing Due Diligence
• Dispute Resolution
• NFA Regulatory Actions
• NFA Investor Resources
NFA Overview
• Self-regulatory organization for the U.S. derivatives industry, including on-exchange traded futures, retail off-exchange foreign currency (forex), and OTC derivatives (swaps)
• Formally designated as a “registered futures association” by the CFTC
• Overseen by the CFTC
• Mandatory membership
• Not-for-profit; not a trade or lobbying association
NFA Overview (cont.)
• Safeguard market integrity
• Ensure NFA Members understand their regulatory responsibilities
• Protect market participants
NFA Overview (cont.)
• Core functions:• Registration & Membership
• Screen firms and individuals to ensure knowledge and fitness standards are met
NFA Overview (cont.)
• Core functions (cont.):• Compliance & Enforcement
• Adopt comprehensive rules• Conduct examinations, analyze financial
information, investigate complaints, and take disciplinary action when appropriate
NFA Overview (cont.)
• Core functions (cont.):• Dispute Resolution
• Offer arbitration and mediation alternatives to customers and Members
NFA Overview (cont.)
• Core functions (cont.):• Education
• Help investors better understand risks and the importance of due diligence
What is a Futures Contract?
•Legally-binding agreements to buy or sell an asset at a fixed time in the future
•Standardized terms: quality, quantity, and delivery time and place
•Dependent variable: price
What is a Futures Contract (cont.)?
•Transacted on a regulated futures exchange
•Clearing: central counterparty (CCP) to every trade
•Risk management (hedging) or speculation
•Volatility
•Leveraged•Large contract value can be controlled by a small amount of capital
Leverage and Margin
One corn futures contract = $3.50/bushel
Contract size = 5,000 bushels
5,000 x $3.50 = $17,500
Initial margin = $900
Move of $0.50 = $2,500
Example 1
Buy one contract with price at $3.50/bushel
Contract gains $0.07
$0.07 x 5,000= $350 credit
Account value increases to $1,250
39 percent profit on original margin deposit
Example 2
Buy one contract with price at $3.50/bushel
Contract loses $0.07
$0.07 x 5,000= $350 loss
Account value decreases to $550 (below the maintenance margin of $750)
39 percent loss on original margin deposit and must deposit $350 to bring account to initial
margin level or liquidate position
Retail Off-Exchange Forex
•Trading foreign currency•Transacted off exchange
•Exchange-traded currency products are available
•Dealer is counterparty•High leverage•No clearing•Volatility•Primarily speculators hoping to profit from
changes in currency exchange rates
Commonly-Traded Currencies
•EUR – Euros
•USD – United States dollar
•CAD – Canadian dollar
•GBP – British pound
•JPY – Japanese yen
•AUD – Australian dollar
•CHF – Swiss franc
Trading Retail Off-Exchange Forex
•Forex transactions are quoted in pairs: you are buying one currency while selling another.
•The first currency is the base currency and the second currency is the quote currency.
•The price, or rate, that is quoted is the amount of the second currency required to purchase one unit of the first currency.
Trading Retail Off-Exchange Forex (cont.)
For example, a EUR/USD spread of 1.1812/1.1819 means:
•You can sell one Euro for $1.1812•You can buy one Euro for $1.1819
Deciding Whether to Participate in the Derivatives or Retail Off-Exchange Forex Markets
•Assess your financial situation
•Assess your tolerance for risk
•Conduct due diligence
Methods of Participating in the Derivatives Markets
• Trade your own account
•Use a commodity trading advisor (CTA) to manage your account
•Participate in a commodity pool
•Use an introducing broker (IB)
Warning Signs of Fraud
• Offers sound too good to be true
• Swindler wants to be your friend
• High-pressure sales tactics
• Request for financial information
• Promises of free items
• Investments that are "without risk"
Common Types of Fraud
• Ponzi schemes
• Internet stock tips
• Seasonal trading in oil and gas
• Affinity fraud
Questions to Ask before Opening an Account
• What is your NFA ID number (firm and individual)?
• How long has your company been in business?
• Where exactly will my money be held? And what type of regular account statements do you provide?
• How much of my money will go to commissions, management fees, etc.?
• How can I liquidate if and when I decide I want my money?
Benefits of NFA Arbitration
• No attorney necessary
• Do not need to allege a specific rule violation
• Industry or non-industry arbitrators
• Timely
• Less expensive than civil litigation
Disciplinary Actions
• Warning Letters
• Complaints• Issued by NFA’s Business Conduct
Committee
• Decisions
• Member or Associate Responsibility Action
Coordination with Other Enforcement Authorities
• U.S. Attorney’s Office
• FBI
• U.S. Postal Inspector’s Office
• CFTC
• State Securities Commissioners
Case Study
• May 4, 2017: NFA permanently barred Patel Futures LLC (IB, Houston, Texas) and AP and principal Pratik Patel from NFA membership• Made false claims about the certainty of large
profits• Misappropriated customer funds• Used these funds to pay for a Corvette and new
house for his parents• Defrauded customers by providing them with false
reports concerning the value of their funds• Permanently barred from NFA membership
Investor Education & Resources
Investor Publications:Scams and Swindles
Opportunity and Risk
47
https://www.nfa.futures.org/investors/investor-resources/index.html
Online Learning Programs:• An Online Learning Guide to Trading Futures
• Forex Online Learning Program
NFA’s Investor Newsletter:Subscribe: www.nfa.futures.org/subscribe/subscribe.asp
Contact NFA
Christie Hillsman | Communications Manager
312-781-1497 or chillsman@nfa.futures.org