Spot Forex, Futures & Commodities Anyone trading in commodities, futures and/or forex interests for U.S. clients must comply with the Commodities Exchange Act and, unless an exemption is available, become a member of the National Futures Association (NFA). Learn More About Hedge Fund Law A modest level of forex, futures and/or commodity trading results in NFA regulation and oversight. However, powerful exemptions from NFA registration exist. If you can’t take advantage of an exemption from NFA registration (see information below), you must join the NFA and comply with detailed disclosure, record keeping and reporting regulations. Click Here For List of NFA Exemptions 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/CTA business are required to pass the FINRA Series 3 Exam (and the Series 34 Exam if spot forex is traded). Read our Leading Article published in Currency Trader and Contact Us for a Consultation
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
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
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. You can't advertise the pool or solicit investors.
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. There are many exemptions to the $400k and 15 person limit such that the net effect is that you can set up a large pool while relying on this exemption. 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
NFA Registration is required unless a CPO qualifies for one of the exemptions from registration outlined in CFTC Regulations 4.5 or 4.13. The initial membership and annual membership dues for a CPO is $750. The initial membership and annual membership dues for a forex CPO is $2,500. All registered CPOs must be Members of NFA in order to conduct futures business with the public. Examples of entities or individuals that may be exempt include the following:
Those otherwise regulated, such as a bank, insurance company, or a registered Investment Company,
Those who operate one or more small pool(s) that has received less than $400,000 in aggregate capital contributions and that have no more than 15 participants in any one pool, or
Those who operate pools that do not commit more than 10 percent of the fair market value of their assets to establish commodity interest trading positions and they trade commodity interests in a manner solely incidental to their securities trading activities.
De Minimis Pool CFTC 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. An affidavit confirming that the commodities interest fall within the exempt threshold must be filed yearly thereafter. Note that the advertising and solicitation offering available under the JOBS Act and Rule 506(c) did not apply to a fund engaged in forex, futures and/or commodity trading (even if the fund is exempt under the de minimus exemption). However, in 2014, the CFTC issued an exemptive order to fix this issue and it applies only to funds relying on Regulation D Rule 506(c). The order permits general solicitation for Commodity Pool Operators (CPOs) relying on the de minimus exemption. The CFTC exemption is not self-executing and funds must file a claim for exemptive relief.
Exempt Pool Filings Any person claiming one of these exemption must also file a notice of eligibility with the NFA as the exemptions are not self-executing. Contact Us We can prepare and file NFA Exemptions for qualifying CPOs. CFTC Rule 4.13
Exempt Qualified Eligible Participant (QEP) Funds CFTC Regulation 4.12(b) and Regulation 4.7 provide relief from some of the regulatory burdens, including record keeping, disclosure and reporting requirements for CPOs that offer interests solely to qualified Eligible Participants (QEP). The definition of a QEP is defined in Rule 4.7 of the Commodity Exchange Act. Exempted parties must file notification with the NFA. Click Here for Regulation 4.12(b) and Click Here for Regulation 4.7
Renewal FilingsThe NFA exemptions from registration need to renewed annually. The CFTC requires any 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 CTA 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 Registration is required unless:
You have provided advice to 15 or fewer persons during the past 12 months and do not generally hold yourself out to the public as a CTA or
You are in one of a number of businesses or professions listed in the Commodity Exchange Act or are registered in another capacity and your advice is solely incidental to your principal business or profession 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.
All registered CTAs who manage or exercise discretion over customer accounts must be Members of NFA in order to conduct futures business with the public. The initial membership dues for forex CTA is $2,500, plus a firm registration fee of $200 and an individual registration fee $85. The annual membership dues for a forex CTA is $2,500. The annual membership dues for a CTA it is $750, plus a firm registration fee of $200 and an individual registration fee $85. The annual membership dues for a CTA is $750.
(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.
Call Us First We are experts in international hedge funds and tax. Click on any reference below to our leading articles:
Strategic Hedge Fund Planning by Hannah Terhune. Wilmott Magazine Ltd. (Volume 2013, Issue 63, pages 8-11 January 2013).
Trading Foreign Index Contracts? Know the Tax Rules Before You Trade by Hannah M. Terhune and Roger D. Lorence. Stocks, Futures and Options (June 2005).
Follow @HannahTerhune
Read leading, cutting-edge articles on hedge funds and taxes by Hannah Terhune, hedge fund and international tax attorney. Her articles are widely published on the Internet and recommended by TheStreet.com and other respected media.
Capital Management Services Group, Inc. is recognized by discriminating persons as being one of the foremost legal authorities in the hedge fund industry. Ms. Terhune's numerous articles on hedge funds and international tax matters have appeared in publications worldwide. Read Our Leading Media Content and Articles by Hannah Terhune on Hedge Funds and International Tax Planning, Chances are, if you have read anything related to starting a hedge fund, Ms. Terhune wrote it. Read Our Client Comments and Read About Hannah Terhune on LinkedIn. When you engage us you get a unique combination of securities, tax, and business experience. Give us the opportunity to use our knowledge and experience for you. No client is too large or too small for us. We pride ourselves in providing personal attention to each Client. We provide high quality services at competitive rates. But don't take our word for it, give us a call and let us prove what we can do for you.
Personal Consultations Ms. Terhune's hard-earned knowledge and experience can be put to work for you. You can get answers to your specific questions by speaking directly to Hannah Terhune in a consultation. A consultation represents an invaluable opportunity to learn how to achieve more in less time. Ms. Terhune's credentials and experience gives you access to a well-informed lawyer with sound ethical judgment. The availability of such expertise required to recommend the best solutions to you and provide sound ethical advice should never be taken lightly and unsurpassed in the area of hedge fund development. We are confident that when you are finished with your consultation you will be impressed and more informed about your business plans than ever before. Call +1 (307) 213-4732 or Click Here to Request Services.
