Recently, our CEO Rick Lane sat down with NFA President and CEO Tom Sexton at our Tech Tap to learn more about NFA and how the organization deals with a variety of issues we all face. In Keeping Score of Trade Compliance: A Regulator’s Perspective from Tom Sexton, NFA CEO, Part 1, they discussed the history of the organization, its key functions and specific technology initiatives. For part two of their talk, which covers how NFA tries to stay ahead of the technology curve, Tom’s professional background and more, read on.
Rick: Staying on the technology subject for a second and maybe looking more inward—a little bit of background. We, about five or six years ago, decided to make some pretty drastic changes in our technology stack, not the least of which was to start leveraging the cloud extensively in terms of data retention, data warehousing and application delivery. Five years ago, lots of people were telling us we were crazy to do that in this space.
But one of the few exceptions was actually NFA. We had some NFA folks come over probably four and a half years ago, and we gave them a brief tech demo, explained what we were doing. It turned out that many of the problems that we were trying to solve from a big-data perspective and from a cloud security perspective were problems that NFA was thinking through as well.
And it was actually kind of refreshing, frankly, to see a regulator taking technology that seriously and trying to stay ahead of the curve. You guys were even back then facing ridiculously difficult technology problems just keeping up with the amount of data that you had to deal with.
I just have two questions on that, and I know you’re not directly in charge of technology, but to what extent is it on your mind, in terms of keeping NFA relevant and capable of managing an only growing amount data, and overseeing it in a way that allows you guys to continue operating?
Tom: You’re right, we have a vast amount of confidential data, and protecting this data is always on my mind as one of our highest priorities. Cybersecurity is a concern for everyone who collects data. I talked about cybersecurity with respect to Members, but as cyber threats evolve, NFA continues to implement major initiatives to ensure that NFA’s defenses are dynamic, agile and proactive. To safeguard Member information and its systems, NFA deploys defenses and trains staff on the importance of cybersecurity vigilance. Given the general escalation in security threats and the challenges they pose, NFA annually engages an independent third-party examiner to perform an in-depth review of NFA’s security operations and infrastructure. This security assessment evaluates the effectiveness of ongoing security efforts and, most importantly, helps identify areas of improvement. Last year, we also had an independent review focused on our policies and procedures.
Our systems are also very important to maintain, and NFA is committed to modernizing its critical computer applications to ensure greater efficiency and security.
We’ve been updating our online registration system, which firms and individuals use to apply for and maintain CFTC registration and NFA membership. To date, we’ve developed a comprehensive Member Dashboard and rebuilt the individual registration processes. We also have our FACTS system, which is the analytical system NFA uses to monitor regulatory requirements and analyze financial and other data submitted by Members. We’re in the midst of a multi-year rebuild to enhance the system’s depth and quality of analysis. We’re currently in the process of rebuilding our BASIC system to enhance functionality and user experience. BASIC is a robust, searchable database that offers current and historical registration and membership information, information on regulatory actions, financial information for FCMs and more. Lastly, in June 2017, we launched a redesigned website with streamlined content and navigation, improved functionality and a mobile responsive design.
Overall, we’re making a conscious effort to make sure our systems are up to date and usable by Members.
It’s very important for us as regulators to observe and provide guidance where we think it’s critical, but also to let the market and technology evolve. I’ve been NFA’s CEO for over 15 months, and before that I was general counsel of NFA for a long time, so I know it’s important for regulators to let technology evolve.
Rick: Yeah, and it’s good to hear. Regulation for the sake of regulation doesn’t do anyone any good.
Tom: That’s exactly right.
Rick: Moving to some more personal-oriented questions. You’ve had a long and storied career with the NFA. Are there any enforcement experiences or specific cases that stand out?
Tom: NFA’s enforcement philosophy has always been that it’s better to prevent than prosecute. Therefore, Member education is a priority to ensure our Members understand their regulatory obligations. We then put our efforts into monitoring Members’ compliance with our rules.
When I first started at NFA in 1991, I worked on a number of enforcement cases. What strikes me is the evolution of these cases over time. Twenty years ago, 75% or more of NFA’s enforcement docket involved telemarketing, promotional material or other forms of sales practice abuse. Last year, just one of our cases involved those types of violations. Recently, our most significant disciplinary cases have involved various forms of trading abuses.
Our early enforcement efforts regarding forex dealer members, or FDMs, focused on capital deficiencies, books and records violations, conversion of customer funds and sales practice abuses. However, those efforts changed when we started receiving customer complaints regarding FDM trading platforms and pricing issues. After identifying serious issues with FDM pricing practices, we developed the Fortress system, which allows us to conduct daily trading surveillance and identify pricing anomalies on FDM trading platforms.
To better identify trading abuses, we have developed an array of tools that our staff can use to analyze trade data in order to identify potential violations. Today, much more business is done via email, text messages, IMs and conversations on social media websites. The review of electronic communications is becoming much more common and is resource intensive, so we’ve implemented an e-discovery tool to help us quickly and effectively review electronic communications.
Rick: That’s very interesting.
So, of those ongoing challenges—and it sounds like you guys have employed technology to help, if not solve, the monitoring of and then enforcement of these types of issues—are there any issues in particular that keep you up at night?
Tom: I already mentioned this, but like most CEOs, the increased risk associated with cyber threats—and what NFA is doing to protect data and ensure our systems are safe—is constantly on my mind. In addition, as NFA has evolved, we are constantly working to ensure we have the right number of staff with the right skill sets and the right tools to effectively and efficiently fulfill our regulatory responsibilities. We have a talented staff and an engaged Board of Directors that provides us with critical expertise and guidance.
Rick: How large is the staff, roughly?
Tom: We currently have a staff of about 540, with the largest departments being futures and swaps compliance and IT.
Rick: You’ve worn a lot of hats over the years within the NFA. Have you had any particular mentors or role models you’ve looked up to throughout your career?
Tom: It’s difficult to narrow it down since I’ve been fortunate to have contact with so many who have been generous in helping me throughout my career. One of our founding fathers, Leo Melamed, NFA’s Permanent Special Advisor to the Executive Committee and Board of Directors, has been one of my mentors. I’ve also had the privilege of working under two former CEOs, Bob Wilmouth and Dan Roth, and learned a lot from them about the technical aspects of NFA’s work, as well as leadership skills.
Rick: That’s great. If you weren’t leading NFA, what would you be doing?
Tom: NFA’s mission includes customer protection, which certainly has a public service dimension. All of us at NFA are committed to self-regulation and public service in some way. I would expect that if I weren’t in my current role, I’d be doing something in a public service capacity.
Rick: Well, Tom, I really appreciate this. And it certainly was eye-opening for me, and I expect it will be for a lot of our readers. I think we tend to think of the relationship of the trading community and the regulator as maybe a contentious one, but it sounds like NFA strives to create a really collaborative relationship with Members, and that’s really great to hear.
Tom: I’m glad you came away with that because that’s very important to us.
Rick: I appreciate your time, Tom.
I enjoyed the process of getting to know more about Tom and NFA, and gaining a deeper appreciation for their role in our industry. On behalf of all of us at TT, I’d like to thank Tom for taking time to speak with us.