Written by: Mark E. Ruddy, Esq.
Jessica I. Brown, CAMS
Commodity Trading Advisors (“CTAs”) Third-Party Record Keeping Relief
CTAs now have the ability to request relief from certain Commodity Futures Trading Commission (“CFTC”) Regulation 4.33 and 4.7(c)(2) record-keeping requirements. CFTC Exemptive Letter No 17-24 provided CTAs relief from the requirement that books and records must be kept at the registrant’s main office. Letter 17-24, issued by the Division of Swap Dealers and Intermediary Oversight (“DSIO”), allows CTAs to submit a request for relief so that the firm may use a third-party record keeper to comply with Regulations 4.33 and 4.7(c)(2). The request for relief is not self-executing and must be submitted to the National Futures Association (“NFA”) and CFTC through the NFA’s exemption system.
The NFA issued Notice to Members I-17-11, which provides detailed instructions for submitting the request for relief as per CFTC Letter No 17-24.
CTA and Commodity Pool Operator (“CPO”) Financial Ratio Reporting
The second quarter CTA and CPO reports are due in August. The CTA quarterly report (“Form PR”) is due August 14th and the CPO quarterly report (“Form PQR”) is due August 29th.
The NFA has updated both reports to include financial reporting ratios. The ratios are required so that the NFA can monitor the financial stability of its Member firms. The ratios will be reviewed in conjunction with all other data collected relating to the firm and its operations — there is no mandated minimum that a CPO or CTA Member must meet. Rather, the NFA will review the ratio for trends over time. The NFA published Notice to Members I-17-12 regarding the implementation of financial ratio reporting requirements.
The following is a description of the two (2) required ratios:
- Current Assets/Current Liabilities (CA/CL) Ratio — This ratio divides a firm's current assets by its current liabilities, providing a measure of a firm's liquidity. This ratio is based on a firm's current asset and current liability balances at the reporting quarter end.
- Current Assets: Cash or any asset that can be readily converted to cash within one year. Current assets for a CPO or CTA may include, but are not limited to: cash, marketable securities, short-term investments, accounts receivable, or the general partners’ investment in its pool.
- Current Liabilities: Obligations that are reasonably expected to be paid within one year. Current liabilities include, but are not limited to: accounts payable, accrued expenses, payroll liabilities, income tax liabilities, and interest payable. A firm's long-term financial obligations that are not due within the present accounting year are considered a noncurrent liability and should not be included in this ratio.
- Total Revenue/Total Expenses (TR/TE) Ratio — This ratio divides a firm's total revenue by its total expenses, measuring a firm's operating margin. Although a firm will report this ratio each quarter, the ratio must reflect the total revenue earned and total expenses incurred during the prior twelve (12) months.
- Total Revenue: Gross income earned by a firm from its normal business activities before any expenses have been deducted. Income may be received as cash or a cash equivalent and is typically generated by a CPO or CTA through management and/or incentive fees.
- Total Expenses: Costs incurred in a firm's efforts to generate revenue, representing the cost of doing business. Expenses may include, but are not limited to: wages and salaries, rent, utilities, depreciation, and bad debts.
For firms that are dually registered as a CPO and CTA, and file both the PQR and PR, the ratios will be carried over between the forms and can be amended on either filing.
NFA Members are required to maintain financial records supporting the calculations of the ratios as per the NFA’s record keeping requirements.
The NFA issued Notice to Members I-16-31 and a related Interpretive Notice entitled NFA Compliance Rule 2-46: Reporting Financial Information on NFA Forms PQR and PR, in December 2016. Both of the December publications explain the amendment to Compliance Rule 2-46 and the NFA’s goal for the reporting requirements. The financial reporting requirement is effective as of the quarter ending June 30, 2017.
Swap Valuation Dispute Filing Requirements
The NFA’s Interpretive Notice to NFA Compliance Rule 2-49 (“Interpretive Notice”) has been approved by the CFTC and will be effective as of January 2, 2018. The Interpretive Notice expands the information the swap dealers (“SDs”) will be required to include when submitting notice of valuation dispute. Information collected by the NFA from dispute filings has proven beneficial insomuch that it allows the NFA to more effectively monitor and develop risk profiles for Member firms. As a result, the NFA issued the Interpretive Notice to standardize the information SDs will be required to report when filing a notice of swap valuation dispute. Swap valuation dispute information will be filed by completing an NFA form via WinJammer.
The Interpretive Notice and the recently published Notice to Members I-17-03 provide further clarification regarding swap valuation and reportable disputes.
For further information about any of the topics covered, please feel free to contact Ruddy Gregory, PLLC (www.ruddylaw.com) or 202-797-0762.
