CPO/CTA - FAQs
Registered CPOs and CTAs are subject to substantive regulation under the Commodity Exchange Act and the CFTC Rules. Registered CPOs and CTAs are also required to be members of the National Futures Association (NFA), a self-regulatory organization for the futures and derivatives industry, and therefore they are also subject to NFA rules. You must register as a CPO if you are a manager that is soliciting funds and advising for a commodity pool. Moreover, if you are a manager that advises on separately managed accounts investing in commodities, you must register as a CTA. While some exemptions may exist, please reach out to a Waystone representative to find out if an exemption may apply to your firm.
The Commodity Exchange Act defines a CPO as any person:
- Engaged in a business that is:
- of the nature of a commodity pool, investment trust, syndicate, or similar form of enterprise;
- who solicits, accepts, or receives from others, funds, securities, or property, either directly or through capital contributions;
- the sale of stock or other forms of securities, or otherwise, for the purpose of trading in commodity interests, or
- Who is registered with the CFTC as a commodity pool operator.
The Commodity Exchange Act defines a CTA as any person who:
- For compensation or profit, engages in the business of advising others, either directly or through publications, writings, or electronic media, as to the value of or the advisability of trading in commodity interests;
- For compensation or profit, and as part of a regular business, issues or promulgates analyses or reports concerning any of the activities referred to in the first prong;
- Is registered with the CFTC as a CTA; or
- The CFTC, by rule or regulation, may include if the CFTC determines that the rule or regulation will effectuate the purposes of the Commodity Exchange Act.
Commodity interests generally include the following categories of transactions and instruments:
- Futures contracts and options on futures contracts;
- Retail foreign currency and commodity transactions described in Section 2(c)(2)(C)(i) or (D)(i) of the Commodity Exchange Act;
- Commodity options authorized under Section 4c of the Commodity Exchange Act; and
- Leverage transactions authorized under Section 19 of the Commodity Exchange Act.
Under the Commodity Exchange Act, a CPO/CTA is (unless an exemption exists) required to register with the Commodity Futures Trading Commission (CFTC). CPO and CTA Registrations are managed by the National Futures Association (NFA) designated by the CFTC.
To register, a CPO or CTA must complete and file Form 7-R with the NFA together with a nonrefundable registration fee of $200. Form 7-R requires basic information about the registering CPO or CTA, such as its contact information, place and form of organization, location of business records, disciplinary information, branch offices, and other related information. In addition, the CPO or CTA must file Form 8-R with the NFA for each individual principal and associated person of the CPO or CTA, along with a fingerprint card and a nonrefundable registration fee of $85 for each such principal or associated person.
The annual registration fee is $750 for an NFA membership. After the payment is submitted, the NFA will review the application, with registration completed within about 3-5 weeks. Please reach out to a Waystone representative for further assistance on registration renewal.
The process for registering with the CFTC/NFA can vary. The turnaround time will depend on a number of factors, including a firm’s business complexity and the accuracy and completeness of the information submitted.
CFTC Rule 4.7 provides an exemption from a number of the requirements applicable to registered CPOs and CTAs. This partial exemptive relief is only available to (a) registered CPOs that offer or sell participations in a pool solely to investors that are “qualified eligible persons” in an offering that is exempt from registration under the Securities Act pursuant to Section 4(2) or Regulation S2 and (b) registered CTAs whose clients are “qualified eligible persons.”
A common exemption from registration as a CPO is CFTC Rule 4.13(a)(3). CFTC Rule 4.13(a)(3) exempts from registration operators of privately offered commodity pools that limit their trading in commodity interest positions so that either (i) no more than 5% of the liquidation value of the commodity pool’s portfolio is used as a margin to establish such positions, or (ii) the aggregate net notional value of the commodity pool’s trading in such positions does not exceed 100% of the pool’s liquidation value.
The term “notional value” is calculated by multiplying the number of contracts by the size of the contract, in contract units (taking into account any multiplier specified in the contract), by the current market price per unit. For options on futures, multiply the number of contracts by the size of the contract, adjusted by its delta, in contract units (again taking into account any multiplier specified in the contract), by the strike price per unit.
A firm may net futures contracts with the same underlying commodity across designated contract markets and foreign boards of trade; and swaps cleared on the same derivatives clearing organization where appropriate.
Common exemptions from registration are CFTC Rule 4.14(a)(8) and 4.14(a)(10). CFTC Rule 4.14(a)(8) permits limited commodity interest trading advice to be provided to certain entities by an investment adviser that is registered with the SEC or that is otherwise exempt from registration or excluded from the definition of “investment adviser” under the Advisers Act, and that does not otherwise hold itself out as a CTA. Such advice must be “solely incidental” to the securities advice provided by the investment adviser.
Under CFTC Rule 4.14(a)(10), advisors that have given commodity trading advice to at most 15 persons during the previous 12 months and do not hold themselves out generally to the public as CTAs are exempt from CTA registration.
During a reporting period (individual calendar quarter), a registered CPO that has at least one Pool must submit a Form CPO-PQR. This regulatory filing is due 15 days after the last day of the reporting period under CFTC Regulation 4.27.
NFA members must complete an Annual Questionnaire. The Questionnaire provides data for the NFA’s risk monitoring systems. The data provided also affords the NFA information on members’ activities and operations. In most instances, this will be an initial resource utilized by NFA staff when engaging with a member’s account.