Let's say for a moment you know a thing or two about trading commodity futures. You've done well trading your own account or have worked in the industry for a couple of years with much success managing proprietary accounts. All in all you know the ins and outs of commodity trading pretty well and routinely seem to know better than the "other guy". In fact, you believe in yourself and your methodologies so much that it becomes apparent you should be sharing your knowledge with the world. So what can you do to leverage your skills and try to make some money for yourself? How can you benefit others with your unique skill set? The answer here is quite simple; you can decide to become a commodity trading advisor ("CTA").
So now that you've decided to become a CTA, how do you get started? The answer to that question can easily be discovered by reading "How to Become A Commodity Trading Advisor" or by visiting www.nfa.futures.org. However, teaching you how to become a CTA is not the point of this article. Today, I'd like to share with you some of the most common mistakes made by people who attempt to start a commodities advisory business.
Over the past four years I have worked with countless CTAs through probably any regulatory or business problem you can imagine. Whether I spent time working with them as a regulatory auditor at the National Futures Association, as an institutional accounts manager, or through my independent consulting firm, I have seen nearly everything the managed futures trading industry has to offer. So rather than lay out the basics of becoming a CTA, I'd like to take a moment to share with you the areas where I feel most people get off track.
Before we get started, I would like to make clear that commodity rules and regulations should be looked at on a case by case basis by a qualified professional. It is important to keep in mind that many times in regulation there is not an all encompassing answer to even the most basic questions. Simply put, the way US commodity laws and rules are structured allows room for one off, sometimes subjective, decisions to be made by NFA or the CFTC. Thus, the following points hold true most of the time, however depending on your specific circumstances, these rules and examples may be applied differently.
Mistake Number One: Not all exemptions apply to standard US based CTAs
In my dealings with private clients, and through my experiences as a regulator, I have been asked with alarming frequency about the CFTC's part four exemptions and how they relate to CTAs (click here for a link to part 4). For a myriad of reasons, people generally seem to want to avoid as much regulation as possible. To an extent this is understandable, especially given the cost and complexity of trying to navigate all of the requirements that come from having any form of oversight. However, it is equally important to recognize that regulation within the market place is not something to be feared. In fact, in many ways regulation is necessary to protect public interest and raise investor confidence; two things that benefit us all. Therefore, it is truly important to understand the exemptions which are available to CTAs and the reasons behind them.
At this time the following exemptions are the only ones which are available to standard, US based, CTA registrants:
Briefly:
1. CFTC Regulation 4.7: Provides relief from certain part 4 requirements to commodity trading advisors that deal with only qualified eligible participants ("QEP"). In this instance a QEP is defined by specific financial requirements spelled out by the CFTC and may include individuals or institutions. To read up on the specifics of QEP eligibility requirements follow the link provided above.
2. CFTC Regulation 4.14: Offers complete relief from registration as a commodity trading advisor. This exemption is used when the activities conducted by a commodities business do not meet the definitional guidelines set forth by the CFTC to be considered a CTA. To find out more about the eligibility requirements for this exemption follow the link above as well.
As I suggested with most regulations, things are generally never cut and dry. That being said, I will add that it is possible to petition the CFTC for a special exemption on a case by case basis. It is however impractical to discuss all of the terms of this process within a brief article such as this. Therefore, for all intents and purposes the provisions of parts 4.7 and 4.14 are all that are available to standard CTAs doing business within the US, and servicing US clients at this time. All other part four exemptions apply to commodity pool operators ("CPO") or combination CTA/CPOs.
The remainder of the article can be found on CNC's Home Page by following the link.
