Next Man Up: Tom Sexton Takes The Reins At National Futures Association With An Eye On Technology and Swaps Regulation

Jim Kharouf

Jim Kharouf


For the markets and market regulators, the industry is all about technology. Tom Sexton, who was named president and CEO of the National Futures Association (NFA) last week , said the organization is focused on upgrading its systems to keep up with the changing market landscape.

Sexton, who has been at the NFA since 1991 and will take over for current CEO Dan Roth in March, spoke with John Lothian News about his new role and what’s next for the organization.

“Some of our technology is old and some of our systems are 10-plus years or older,” Sexton said.

Among the areas that will receive attention include the NFA member registration system and FACTS system, which provides analytics on members. Sexton said NFA is also investing in its risk monitoring systems in both swaps and futures compliance.

“We have to try to determine which firms pose the most risk here and then go out and examine those firms, and keep on eye on those firms,” Sexton said. “Our risk systems here are key to doing that.”

Sexton added that the NFA has turned to text analytics software to help auditors comb through more than 5,000 reports submitted each year by commodity pool operators. Now with its text analytics tools, it can look at the reports and flag potential problems more efficiently.

“Our staff used to have to go through every one of those reports, and the footnotes, and see if anything was flagged by the outside CPAs as far as risk we should be apprised of,” Sexton said. “We will continue to use technology in the future in similar type ways to become more efficient but not sacrifice the importance of customer protection.”

The NFA is also concerned about cybersecurity, not only of its own records, but of its member firms as well. Sexton said the NFA, like many public agencies, is often the target of hackers.  The NFA has a 10-person team devoted solely to the NFA’s security.  In addition, it has put together guidelines for firms regarding security.

“We’re taking a much more proactive stance on those particular systems and measures we can put in place,” he said.

Bouncing Back

The NFA came under intense scrutiny in the aftermath of the 2011 MF Global meltdown and Peregrine Financial Group fraud case, which ended in the NFA shutting down the firm in 2012 after discovering [[Russell R. Wasendorf, Sr.]] falsified banking records to the regulator. It was revealed he stole more than $200 million in customer funds over a 20 year period. Wasendorf was sentenced in January 2013 to 50 years in jail, although most of the missing funds have not been recovered.

That case followed the 2011 MF Global bankruptcy, where customer segregated funds, once thought untouchable by FCM executives, were breached, leaving a shortfall of more than $1.2 billion. Most of that amount was eventually recovered in the bankruptcy proceedings, but both cases left the futures industry shaken and damaged in terms of customer confidence in the brokerage space.

The NFA, CFTC and exchanges subsequently changed processes and customer seg fund structures to address those problems. Today, every FCM’s customer seg funds are reported to the NFA from two separate sources. Banks, which hold the actual customer money for the FCMs, report to the NFA, and separately, the FCMs report seg fund totals to confirm those numbers.

The NFA also changed its auditing procedures in the aftermath and implemented an annual certified fraud training class for all auditors. Also, NFA regularly brings in an outside examination expert to review its compliance program for FCMs to update them on auditing issues and internal controls. There are also restrictions on withdrawals of customer seg funds greater than 25 percent at FCMs, and now require special approvals and notifications to regulators.

“I certainly hope, in light of the steps that we took, that public confidence has increased significantly,” Sexton said. “The most dramatic step of all was the verification of seg funds that us, and the CME put in place, after those two instances.”

Swap Meet  

Among several initiatives that the NFA has been working on in conjunction with the Commodity Futures Trading Commission, swap participant regulation is one of the more critical sectors. Sexton said the NFA has basically built its swaps regulation group from scratch three years ago, starting with examinations of swap dealers. It also has looked at swap dealer risk management programs and their trade practices.

The organization has been looking at initial margin requirements and moving into the next approval stage, which is focused on capital requirements.  Finally, the NFA is developing a risk system for swap dealers to monitor that going forward.

Sexton said “NFA is significantly different from when I joined 25 years ago.” The regulatory agency has grown dramatically in terms of size, from 250 to about 500 people today, and scope. Today, the NFA oversees its futures members, retail forex as well as more than 100 swaps participants.”

The NFA will have its work cut out for it as it moves forward with swaps regulation and other issues in t

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