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NFA Registration for Spot Forex, Futures,
Futures Options & Commodities
Spot Forex, Futures, Options on Futures & Commodities Any U.S. investment manager trading in commodities, futures, options on futures and/or forex interests clients must register as a commodity pool operator (CPO) and/or a commodity trading adviser (CTA) and become a member of the National Futures Association (NFA). The same is true of any non U.S. investment manager with U.S. customers. However, powerful exemptions from NFA registration exist. Click Here For List of NFA Exemptions If you can’t take advantage of an exemption from NFA registration you must join the NFA. If you are thinking about starting a commodity, forex and/or futures fund and/or managed account business, you will find our Hedge Fund Checklist helpful. Any material person (i.e., anyone dealing with customers or customer money, etc.) of a CPO or CTA business must pass the FINRA Series 3 Exam (and the Series 34 Exam if spot forex is traded) and become an associated person (AP) of the CTA or CPO. Read our Leading Article published in Currency Trader and Contact Us for a Consultation
NFA Registration is required unless a CPO qualifies for one of the exemptions from registration outlined in CFTC Regulations 4.5 or 4.13.
Closely Held Pool Exemption Rule 4.13(a)(1) The Single Pool Exemption is available to a CPO who operates only one pool at a time and does not receive any direct or indirect compensation other than reimbursement of expenses. No one involved in the Pool can advertise the Pool or systematically solicit investors. You can set up a pool to develop a track record and it can be used in conjunction with incubator hedge funds. You can't receive any direct or indirect compensation other than reimbursement of expenses.
Small Pool Exemption Rule 4.13(a)(2) The Small Pool Exemption is available to a CPO receiving capital contributions of less than $400,000 if the Pool doesn't have more than 15 investors. The CPO and its principals and certain relatives of the principals are not counted toward the 15 investor limit. Moreover, their contributions do not count toward the $400,000 limit. One of our planning strategies is to set up an exempt pool as a stepping stone to an NFA approved pool to avoid time delays. Contact Us for a Free Consult
Minimal Commodities Interests Rule 4.13(a)(3) The most common exemption from NFA registration is Rule 4.13(a)(3), also known as the de minimus exemption. Funds that invest in a limited amount of forex, futures and/or commodity interests can obtain an exemption under Rule 4.13(a)(3). To use the de minimus exemption, a fund sponsor must file a Notice of Claim for Exemption with the NFA and an affidavit confirming that the commodities interest fall within the exempt threshold must be filed yearly thereafter. The advertising and solicitation offering available under the JOBS Act and Rule 506(c) did not apply initially to a fund engaged in forex, futures and/or commodity trading. However, in 2014, the CFTC issued an exemptive order to fix this issue and permits general solicitation for Commodity Pool Operators (CPOs) relying on the de minimus exemption. Each investor in a fund relying on Rule 4.13(a)(3) must be at least an accredited investor.
Non U.S. Managers An exemption from CPO registration under CFTC Regulation 3.10(c)(3) is available if a manager is advising a non-U.S. fund of which: (1) all investors are located outside of the U.S.; (2) no solicitations are directed into the U.S. and (3) all commodity interest transactions are submitted for clearing through a registered futures commission merchant (except with respect to swaps not subject to clearing).
Non-U.S. Pools – CFTC Advisory 18-96 Rgistered U.S. CPOs are provided relief from certain disclosure requirements for their offshore funds that have only non-U.S. investors. The fund must also: (1) not hold meetings or conduct administrative activities in the United States; (2) not receive, hold or invest any capital directly or indirectly contributed from sources within the United States; and (3) conduct no U.S. marketing. A hard copy of the exemption under CFTC Advisory 18-96 must be filed with the NFA to be effective. Contact Us For Assistance
NFA Lite Registration Rule 4.7 (QEP) Funds CFTC Regulation 4.12(b) and Regulation 4.7 provide relief for CPOs that offer interests solely to qualified Eligible Participants (QEP). Learn About Qualified Eligible Persons (QEP) QEPs include persons such as certain investment professionals, knowledgeable employees, qualified purchasers as defined under the Investment Company Act of 1940, non-U.S. persons and accredited investors that meet the portfolio requirement. If an offering memorandum is distributed in connection with soliciting prospective participants in a 4.7 fund, it must include a 4.7 disclosure on its cover page, or, if none is provided, immediately above the signature line on the subscription agreement or other document that the prospective participant must execute to become a participant in the fund. The CPO must register with the NFA. The 4.7 exemption is not self-executing and a request for relief must be filed with respect to the fund with NFA. Click Here for Regulation 4.12(b) and Click Here for Regulation 4.7
Annual Renewal FilingsAny person claiming an exemption or exclusion from CPO registration under CFTC Regulation 4.5, 4.13(a)(1), 4.13(a)(2), 4.13(a)(3), 4.13(a)(5) or an exemption from registration under 4.14(a)(8) to annually affirm the applicable notice of exemption or exclusion within 60 days of the calendar year end. Failing to comply with this requirement will be treated as a request to withdraw the exemption. Click Here to Read the 2012 NFA Rule Changes. Contact Us For Help
CTA RegistrationAny person who for compensation or profit advises others as to the value of or the advisability of, among other things, buying or selling futures contracts or options on futures, and certain swaps, is a commodity trading adviser (CTA). CTAs are required to register unless an exemption is available. If a fund trades even one commodity interest, or if it holds itself out as being able to do so, CPO/CTA registration will be required unless an exemption applies. If a fund invests in other funds and the other funds trade or can trade futures, the investing fund will itself be required to have a registered CPO and CTA, unless an exemption can be found.
You have provided advice to 15 or fewer persons during the past 12 months and do not generally hold yourself out to the public (i.e., no advertising) as a CTA or
You are SEC registered and your advice concerning commodity investing is solely incidental to your principal business or
You are providing advice that is not based upon knowledge of or tailored to customer's particular commodity interest account, particular commodity interest trading activity, or other similar types of information, such as, for example
You make recommendations, such as advice to buy or sell specific futures contracts should a particular price level be reached, through newsletters, books and periodicals. The advice includes specific recommendations and the recipients of publications all receive the same advice or
You provide specific advice through e-mails, facsimiles, an Internet web site, telephone calls or face-to-face meetings with customers consisting of instructions to buy or sell a futures contract based on a computerized trading system, which also is available for purchase and use on a personal computer, and the customers all receive the same advice or
You conduct seminars at which you teach attendees how to trade commodity futures contracts aided by a software program that you sell and you invite seminar attendees to participate in a question-and-answer session at which you provide commodity trading advice without asking or receiving information about the personal characteristics of the attendees.
Commodity Trading Adviser Defined (CTA) A CTA is an individual or organization which, for compensation or profit, advises others as to the value of or the advisability of buying or selling futures contracts, options on futures, retail off-exchange forex contracts or swaps. Providing advice includes exercising trading authority over a customer's account as well as giving advice based upon knowledge of or tailored to customer's particular commodity interest account, particular commodity interest trading activity, or other similar types of information.
Disclosure Documents "Disclosure Documents" is the NFA name for offering documents and for managed accounts contracts. Both CTAs and CPOs need to have disclosure documents (offering documents) approved for use with customers by the NFA. Learn More About Offering Documents
CTA With QEP ClientsUnder CFTC Rule 4.7, a CTA which only serves as a CTA with respect to managed accounts whose owners are QEPs is generally exempt from filing (and requiring each investor to acknowledge receipt of) a Disclosure Document with the NFA, although a prescribed legend is required to be furnished to clients, and clients must consent to their accounts being treated exempt accounts.
Commodity Pool Operator (CPO) DefinedA CPO is an individual or organization which operates a commodity pool and solicits funds for that commodity pool. A commodity pool is an enterprise in which funds contributed by a number of persons are combined for the purpose of trading futures contracts, options on futures, retail off-exchange forex contracts or swaps, or to invest in another commodity pool.
What is a Commodity Pool? A commodity pool is a hedge fund that invests in forex, futures and/or commodity interests. While they are regulated by the CFTC/NFA, commodity pools are also "covered securities" and subject to standard hedge fund laws. Learn More About Hedge Fund Law
CFTC OversightExamples of products that are subject to CFTC jurisdiction include the following: listed futures products (including security futures products), options on futures, forex (a common abbreviation used for “foreign exchange” (e.g., selling dollars to buy Euros)), credit default swaps (CDS) on a broad security index, commodity swaps, correlation swaps on a broad security index, correlation swaps that are commodity-based, dividend swaps on a broad security index, guarantees of swaps, interest rate swaps, credit default swaps on loans (LCDS) on multiple loans, total return swaps on loan mortgage backed securities (LTRS) on multiple loans, non-deliverable forwards, options on swaps, swaps on an exempt security (other than municipal securities), total return swaps (TRS) on a broad security index, variance swaps on a broad security index, weather, energy or emissions swaps, contracts for difference (CFD) that are not securities based, securities-based swaps (SBS) also based on certain CFTC-regulated rates, indices, currencies, commodities, and listed forex options contracts.
(CTFC) Commodity Futures Trading Commission The Commodity Futures Trading Commission (CFTC) is an independent federal agency created by the Commodity Exchange Act to regulate the commodities futures and commodities options markets in the United States. It also regulates forex. Absent an exemption, a hedge fund that trades commodities derivatives must register with the CFTC.
National Futures AssociationThe National Futures Association (NFA) is a self-regulatory organization established by the Commodities Futures Trading Commission (CFTC) to regulate the managed futures market and ensure compliance with the Commodities Exchange Act. The NFA is responsible for regulating futures markets and overseen by the CFTC.
Taxes on Forex Trading Foreign currency gains and losses (including gains and losses on forward, future and option contracts) are taxed under Section 988. That means that forex trading gains are taxed at the short-term (ordinary) tax rates. There is an exception for what is called a "qualified fund" where an election can be made to treat profits from foreign currency trades under Section 1256 (mark-to-market and a blended rate of 60% long-term gain and 40% short-term gain (regardless of how long a position is held). However, the fund must be meet a statutory definition of "qualified fund" which has its principal business the trading of forward, future and option contracts. There are also other tests to meet the definition of a qualified fund. In a qualified fund currency futures--otherwise known as regulated futures contracts--are taxed under Section 1256. Forward contracts and over-the-counter options in other traded currencies for which there is also trading in regulated futures qualify as Section 1256 contracts (but after 2007, some doubt). Gains in a qualified fund from futures trading are taxed at the 60/40 blended rate. Learn More About Hedge Fund Taxes
Introducing Brokers (IB) Persons who solicit or accept orders for Futures Commission Merchants (FCM) or Retail Foreign Exchange Dealer (RFED) for spot forex must register with the NFA as an Introducing Broker. IBs must either maintain the net capital requirements applicable to futures and commodity options IBs or to enter into guarantee agreements with the FCMs and RFEDs they deal with. An IB can choose (1) to meet the minimum net capital requirements applicable to futures and commodity options IBs, or (2) to enter into a guarantee agreement with an FCM or an RFED. The NFA requires an IB to have a net worth of $45,000. If you cannot meet this capital requirement you can establish a Guaranteed Introducing Broker where the clearing FCM provides the equity. As a guaranteed IB, the IB can only clear through its guaranteeing FCM. As an IB cannot be a party to more than one guarantee agreement at a time, it effectively makes IBs that can't maintain the minimum net capital requirements exclusive sales agents for the FCM.
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