National Futures Association submitted two rule submission letters to the CFTC on August 29th, 2019 updating various NFA Rules and Interpretive Notices. Below we will look at some of the key changes and compliance related impacts they will have on various operations.
CTA Performance Accounting and Presentation
While it has always been good practice, NFA’s new amendment will require CTAs that trade accounts using notional funds to ensure trade level updates are confirmed in writing from clients. The proposed amendments now require the confirmation to be provided to all clients, regardless of QEP status, and also include an explanation of how cash additions, cash withdrawals and net performance will affect an accounts nominal trade level size. Additionally, in instances where net performance does not affect nominal account size, CTA performance must now be summed or annualized instead of compounded when calculating the annual return, peak-to-valley draw-down and net lifetime ROR. This obligation could have significant impacts for CTAs who work primarily with Introducing Brokers (“IB”) to gain customer account allocations.
Additionally, use of hypothetical performance now will require the hypothetical performance disclosure outlined in NFA Compliance Rule 2-29 regardless of whether the offering is solely for QEPs. For certain extracted or composite performance, members will be allowed to include either the disclaimer verbatim or create other language that appropriately discusses the performance shown and its limitations. Any member firms utilizing hypothetical performance should carefully review the aforementioned rules and applicable Interpretive Notices to make the necessary adjustments to all used promotional material.
Changes to CPO Fund Break Even Analysis
The main focus of the amendments to the aforementioned Interpretive Notice focus on the presentation of the break-even analysis required within any pool offering memorandum or private placement document. Previously, a CPO was able to use a simple $1,000 per unit pricing to show associated fees and expenses an investor would incur the initial year of an investment. From there, NFA member firms could then outline what return would be required to break-even on a hypothetical investment. The NFA amendments now require firms use the minimum initial investment amount, rather than a $1,000 unit value, be utilized to show break even and rate of return levels. CPOs now must also indicate the minimum total subscriptions that will be required for the pool to commence trading.
Clarification on NFA Jurisdiction
Amendments were made to NFA Compliance Rule 2-36 to clarify the scope of the rules regarding application to specific member registration categories. More specifically NFA further clarified that all commodity interests (Swaps, Forex, Futures, Options, Digital Currency etc.) not just futures, are under its regulatory purview.