This month NFA put out a fantastic reminder about common CTA/CPO ratio errors and the obligations facing reporting firms. In particular they have laid out their expectations for CTA and CPO ratio reporting. Please consider the following directly from NFA as a number of CPOs and CTAs have been incorrectly reporting these financial ratios:
1) Ratios must be calculated using the accrual method of accounting
CPOs and CTAs are incorrectly calculating these ratios because they are using cash basis of accounting. Both ratios must be computed using the accrual method of accounting and in accordance with U.S. generally accepted accounting principles or another internationally recognized accounting standard, consistently applied. The accrual method of accounting requires that revenues and expenses be recorded in the period in which they are earned or incurred rather than when they are received or paid.
2) Current asset balances must only include assets owned by the CPO or CTA
CPOs and CTAs are also incorrectly calculating their current asset (CA) balance in the CA over Current Liability (CL) ratio by including customer assets invested in pools or managed accounts. However, the CA balance must be calculated using only the CPO’s or CTA’s own assets. These assets may include the CPO’s or CTA’s interest in a pool or managed account.
3) Current asset balance must only include the CPO’s or CTA’s current assets
CPOs and CTAs often miscalculate the CA balance using total assets or non-current assets. Such a non-current asset might be a receivable that is not due within the next twelve months or a long-term rent-related security deposit. The CA balance must include only current assets. A current asset is this context is an asset that is expected to be converted to cash within the next year (e.g., cash, accounts receivable due within the next twelve months, marketable securities).
4) TR/TE Ratio must be calculated based on the prior twelve months
Although NFA Forms PQR and PR are filed quarterly, the TR/TE ratio should be calculated using revenue earned and expenses incurred during the prior twelve months. For example, a PQR or PR with an as of date of March 30, 2019 should include all revenue earned and expenses incurred from April 1, 2018 through March 30, 2019.
Contact Turnkey for Additional Information
If you have questions please dial (312) 324-0040 or send an email to info@turnkeytradingpartners.com with your inquiry.
