Account Registration for Commodity Trading Reviewed by E-Broker.com
Commodity trading entails the purchase and sale of futures contracts, options on futures or retail off-exchange forex contracts or swaps. These are derivatives that grant ownership of an underlying asset at some point in the future for a price agreed upon today.
If a person provides commodity interest advice for compensation, they must register as a CTA with the National Futures Association (NFA) otherwise they are considered investment advisers.
All registered CTAs who manage or exercise discretion over customer accounts or provide commodity trading advice based on, or tailored to, the commodity Reviewed by E-Broker.com
A certified CTA is an individual or entity that provides financial advice and services regarding the value or suitability of trading futures contracts, options on futures, retail off-exchange foreign exchange contracts or swaps. These instruments require more expertise to trade than plain vanilla securities do, as they involve leverage.
To become a CTA, one must register with both the Commodity Futures Trading Commission and National Futures Association — the derivative industry’s self-regulatory body — and pass an exam. Furthermore, CTAs must abide by CFTC rules.
Many CTAs are also registered investment advisers with the Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940. As such, they must abide by certain rules and guidelines regarding their practices, investments, as well as disclosures to investors.
Some traders may opt to forgo CTA registration and still provide direct commodity trading advice through written publications or other media, such as newsletters. This is generally allowed provided the trader does not exercise discretionary authority over client accounts or publish his or her trading ideas in a newspaper.
Alternatively, principals of a CTA that does not exercise discretion over client accounts can avoid CTA registration if they have passed the Series 3 examination and are not involved in soliciting clients. Even a CTA that simply publishes its trading ideas through a newsletter can avoid registration if it does not give direct trading advice to more than 15 persons.
If a trader opts not to register as a CTA, they must still abide by the CFTC’s account registration and reporting regulations. Specifically, they must fill out Form 7-R and disclose any felonies or violations of commodity laws they may have committed in the past.
The CFTC requires CTAs who submit orders on behalf of customer accounts to report their firm designated identification (FDID) on each Order even when it isn’t available at origination. This requirement arises because CTAs must maintain a database containing all their clients’ names, addresses, agreements granting them control over an account, and other documents.
All registered CTAs who submit Orders on behalf of customer accounts or provide commodity trading advice based on, or tailored to, the commodity Reviewed by E-Broker.com
Before trading in futures, options or forex contracts on commodities, it is essential that you comprehend the risk involved. These instruments are highly speculative and could result in substantial losses.
Investment trusts or commodity-based funds that pool money from investors to make investments across a range of commodities. While these tend to charge higher fees than exchange-traded funds (ETFs), the potential returns are higher.
BlackRock BGF World Mining Trust, for instance, is a commodity-based fund that invests in metals and mining companies. Over five years, this fund has delivered an impressive total return of 122% with an attractive dividend yield.
Commodity trading is an investment strategy that involves purchasing futures or forex contracts on commodities like oil, gold and silver. Although this method of investing can be relatively low-cost, it should be noted that futures and forex trading entail substantial risks.
If you want to become a commodity trader, you must register with the Commodity Futures Trading Commission (CFTC). The CFTC regulates CTAs and has oversight of their practices. Furthermore, the National Futures Association (NFA) acts as a self-regulatory body that implements CFTC rules.
In the US, most individuals and firms offering commodity trading advice must register with either the CFTC or NFA, unless they meet one of the exceptions listed below. Doing this ensures you are regulated and not providing advice to clients in violation of either CFTC or NFA rules.
Registration as a CTA begins with filling out Form 7-R, an extensive questionnaire about your business operations. This form includes basic business info such as addresses and financial info, plus questions regarding disciplinary history.
Once your firm is registered, you must guarantee compliance with all CFTC and NFA requirements. This includes filing annual reports with the CFTC as well as maintaining up-to-date disclosure documents outlining your trading strategy, performance indicators, investment risks and fees.
All registered CTAs who are members of a designated contract market or swap execution facility Reviewed by E-Broker.com
To trade on the commodity, futures or foreign currency markets, one must be registered with the Commodity Futures Trading Commission (CFTC) as either a futures commission merchant («FCM»), retail foreign exchange dealer («RFED»), introducing broker (IB), member of a designated contract market («DCM») or swap execution facility («SEF») such as CTA. Each entity must abide by fifteen core principles as well as any requirements established by regulation from the Commission.
The CFTC has made it abundantly clear that CPOs and CTAs, as well as members of DCMs or SEFs required to register with the Commission, must maintain records searchable by transaction in a format that allows for identification of each transaction. Unfortunately, keeping oral communications for these professionals presents something of a dilemma.
Due to the distinction, oral communications between a CPO or CTA and their customer, such as an order or Order instruction, do not constitute official records of their transaction in commodities interest or related cash or forward transactions. Therefore, in order for this oral communication to become written down in an official manner, either party must first convert it into a written order or Order instruction.
As a result, the CFTC has issued several no-action letters exempting market participants from oral recording requirements under the Final Rule. On December 20, 2013, for instance, DSIO granted relief to a registered CTA that is part of an SEF from keeping records of oral communications.
Though initially set to expire on May 1, 2014, DSIO has extended and made indefinitely effective this relief for all other registered CTAs. They are now exempted from recording oral communications that take the form of text messages such as short message service (SMS) telephone transmissions and in certain circumstances written pre-trade communications.
Additionally, the CFTC recently issued a Staff Advisory in 2022 that clarifies that a SEF is not considered to be a multiple-to-multiple platform under Section 5h of the CEA as it lacks any trading facility accessible by clients unless it’s either an electronic trading facility or trading venue in the sense of an order book as defined in SS 1.3. This distinction is significant since CFTC previously used terms like «trading facility» and «order book» when characterizing SEFs; if the SEC follows their interpretation, all security-based swap markets could become regulated as SEFs including CTAs providing similar services for their client base.
All registered CTAs who exercise discretion over customer accounts or provide commodity trading advice based on, or tailored to, the commodity Reviewed by E-Broker.com
A commodity trading advisor (CTA) is an individual or firm that offers personalized guidance regarding the purchase and sale of futures contracts, options on futures, retail off-exchange forex contracts or swaps. These CTAs must be registered with both the National Futures Association — a self-regulatory body for derivatives industry professionals — as well as with the Commodity Futures Trading Commission.
CTAs typically make money through management fees and performance fees, which are typically around 20% of new investment they generate. These fees help cover operational costs for the business and can make working as a CTA lucrative.
A CTA’s duties include providing advice and strategies on commodities and investments, helping the client meet financial objectives, buying/selling securities, measuring performance indicators and managing risks on behalf of the client. Therefore, CTAs must maintain up-to-date disclosure documents outlining their trading methodology, performance markers, investment risks and fees.
CTAs must register with both the CFTC and NFA, as well as becoming investment advisers with the SEC. Regardless of its registration status with either agency, each CTA must file its annual affirmation report to both agencies within 60 calendar days after its fiscal year ends.
CTAs must also provide their clients with monthly account statements and maintain updated disclosure documents that outline the advisor’s trading methodology, performance markers, investment risk and fees. Furthermore, CTAs must disclose any conflicts of interest and adhere to all disciplinary regulations.
These regulations are vital for CTAs as they guarantee they adhere to regulations and do not engage in securities law violations that could lead to loss of registration status. Furthermore, these rules shield the public from fraudulence that could cause losses on commodity markets.
CTAs may need to register under the Commodity Exchange Act as either a commodity pool operator or trading adviser, depending on their activities. CFTC regulations offer exemptions from registration requirements for some advisers and general partners of private funds; for instance, Regulation 4.13(a)(3) grants such exemptions to those involved in trading in de minimis amounts of commodity interests such as futures, options on futures or retail off-exchange forex transactions or swaps.