Commodity Pool Operators

3 Things About…

This is an inaugural post in an occasional series that will attempt to distill a select current event to its essence.

Consistent with the (arguably bland yet) very accurate name of our blog, the focus of this series will be on regulatory and transactional issues related to derivatives and repurchase agreements.  Our first topic is..

…The CFTC’s Proposed Amendments to Form CPO-PQR


Continue Reading 3 Things About…The CFTC’s Proposed Amendments to Form CPO-PQR

As we explained in an earlier post, the CFTC has recently amended its Regulation 4.5 to clarify that the commodity pool operator (“CPO”) of a registered investment company is the entity that serves as the registered investment adviser (“RIA”) to that company.

In this post, we will explore practical implications of this recent rule amendment.


Continue Reading Mutual Fund Corner: Practical Implications of the Recent Amendments to CFTC Regulation 4.5

Mutual fund complexes relying on the exemption under Commodity Futures Trading Commission (“CFTC”) Regulation 4.5 from commodity pool operator (CPO) registration have to file:

(1) An initial notice of eligibility to claim that exemption; and

(2) An annual affirmation of continued reliance on the exemption within 60 days of each calendar year end.

In our experience, many mutual fund complexes “update” their Regulation 4.5 eligibility notices during the last two weeks of February.

This blog post is a reminder to clients and friends that the CFTC has recently amended its Regulation 4.5 to clarify that the registered investment adviser (the “RIA”) to a registered investment company is that company’s CPO.  This clarification will be of interest to any mutual fund complex that may have had an entity other than the RIA claim the CPO exemption with respect to the operation of a registered investment company.   


Continue Reading Mutual Fund Corner: A Reminder for Firms Updating CFTC Regulation 4.5 Exemptions – The Fund’s Adviser is Its CPO

On February 10th, the National Futures Association (NFA) published three Notices to Members identifying common deficiencies noted in examinations of commodity pool operators (CPOs), commodity trading advisors (CTAs), futures commission merchants (FCMs), forex dealer members (FDMs), introducing brokers (IBs), and swap dealers (SDs).

This blog post summarizes these notices and the identified deficiencies.

In addition, we have prepared A Summary of Deficiencies Found in NFA Exams February 2020 to supplement the information presented in this blog post.


Continue Reading NFA Announces Common Deficiencies Identified During Examinations of CPOs, CTAs, FCMs, FDMs, IBs and Swap Dealers

The Securities and Exchange Commission (the “SEC”) and the Commodity Futures Trading Commission (the “CFTC”) announced parallel enforcement orders against an investment adviser (the “Adviser”) and its Chief Executive Officer for derivatives-related oversight failures.  The alleged failures related to the Adviser’s management of a registered investment company that invested primarily in options on stock-index futures contracts.  The Adviser was regulated by the SEC and the CFTC as a registered investment adviser and registered commodity pool operator (“CPO”), respectively.

This blog post will summarize these enforcement orders, since we believe that they are relevant to investment advisers subject to joint oversight by the SEC and the CFTC.  As a general matter, we also believe that this matter highlights the importance of disclosure and consistent risk management practices in connection with any advisory client’s derivatives-based investment strategy.


Continue Reading Mutual Fund Corner: SEC and CFTC Charge Investment Adviser and Portfolio Manager for Derivatives-Related Failures

This post is Part 2 of a series of posts that addresses the impact of recent regulatory developments on the use of limited recourse provisions in futures customer agreements entered into between a futures commission merchant (an “FCM”) and an investment manager on behalf of one or more of the manager’s clients.

In this post, we provide an overview of recent regulatory pronouncements from two divisions of the Commodity Futures Trading Commission (the “CFTC”) and the Joint Audit Committee (the“JAC”) of several large futures exchanges and the National Futures Association that prohibit the use of limited recourse provisions in futures customer agreements.
Continue Reading Limited Recourse Provisions in Futures Customer Agreements: Part 2 – I Cannot Guarantee Your Client’s Losses

Historically, many investment managers have negotiated limited recourse provisions into derivatives trading agreements entered into by the managers on behalf of their clients with banks, broker-dealers, and futures commission merchants (FCMs).  In short, these provisions state that only the assets in the specified account under the control of that particular manager can be used to make the other party to the agreement whole for losses and costs that relate to the specified account.

However, recent regulatory pronouncements from two divisions of the Commodity Futures Trading Commission (the “CFTC”) and the Joint Audit Committee (the “JAC”) of several large futures exchanges and the National Futures Association prohibit the use of limited recourse provisions in futures customer agreements.  This blog post is Part 1 of a series of posts that will address the impact of these recent regulatory developments on investment managers.

We start with the basics – investment management relationships and the use of limited recourse provisions in derivatives trading documents.  Additional posts in this series will address the regulatory pronouncements and how those pronouncements may impact relationships that investment managers have with their clients and the FCMs through which the managers are trading on behalf of their clients.
Continue Reading Limited Recourse Provisions in Futures Customer Agreements: Part 1 – I Only Control My AUM

This post is the fourth in a series that outlines key considerations for investment funds and their advisers regarding the application of the U.S. commodity laws to cryptocurrency derivatives.  This post is intended to be a primer on the topic and is not legal advice.  You should consult with your counsel regarding the application of the U.S. Commodity laws to your particular facts and circumstances.

In this Part 4, we discuss the commodity interests that are likely to be of greatest interest to crypto funds and advisers: futures contracts, swaps and retail commodity transactions.

At the outset, a sincere thanks goes out to Conor O’Hanlon and Michael Selig for their invaluable assistance and time spent thinking through many of the issues that are at this heart of this post and, more generally, this series.


Continue Reading Cryptocurrency Derivatives, Funds and Advisers: Key Considerations Under U.S. Commodity Laws (Part 4: About the Interests of Interest)

This post is the third in a series that outlines key considerations for investment funds and their advisers regarding the application of the U.S. commodity laws to cryptocurrency derivatives. This post is intended to be a primer on the topic and is not legal advice. You should consult with your counsel regarding the application of the U.S. commodity laws to your particular facts and circumstances.

In Part 1, we focused on the status of cryptocurrencies as commodities and how that status relates to the jurisdiction of the U.S. Commodity Futures Trading Commission (the “CFTC”). In Part 2, we provided an overview of the regulation of commodities and the commodity markets under the Commodity Exchange Act (the “CEA”), explaining in particular that while the authority to prevent fraud and manipulation may apply to any transaction in interstate commerce that involves a commodity, the CFTC’s “substantive regulation” applies only if a transaction involves a “commodity interest“.

Here, in Part 3, we explain why the concept of a commodity interest can be described as a “linchpin” to the substantive regulation  of CPOs and CTAs.


Continue Reading Cryptocurrency Derivatives, Funds and Advisers: Key Considerations Under U.S. Commodity Laws (Part 3: Why Commodity Interests Are of Interest)

This post is the second in a series that outlines key considerations for investment funds and their advisers regarding the application of the U.S. commodity laws to cryptocurrency derivatives. This posting is intended to be a primer on the topic and is not legal advice. You should consult with your counsel regarding the application of the U.S. commodity laws to your particular facts and circumstances.

In Part 1, we focused on the status of cryptocurrencies as commodities and how that status relates to the jurisdiction of the U.S. Commodity Futures Trading Commission (the “CFTC”). Here, in Part 2, we provide an overview of the regulation of commodities and the commodity markets under the Commodity Exchange Act (the “CEA”).


Continue Reading Cryptocurrency Derivatives, Funds and Advisers: Key Considerations Under U.S. Commodity Laws (Part 2: The Regulation of Commodities – Quite Substantial, Even If Not Substantive)