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

DERIVATIVES 101

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

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

Common Types of Fraud

• Ponzi schemes

• Internet stock tips

• Seasonal trading in oil and gas

• Affinity fraud

DUE DILIGENCE

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?

DISPUTE RESOLUTION

If a Dispute Arises

• Civil Suit

• CFTC Reparations

• NFA Arbitration/Mediation

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

NFA DISCIPLINARY ACTIONS

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

ADDITIONAL INVESTOR RESOURCES

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

Investor Education & Resources

48

FuturesFundamentals.org

Investor.gov

QUESTIONS?

Contact NFA

Christie Hillsman | Communications Manager

312-781-1497 or chillsman@nfa.futures.org