In the world of futures markets, there are many important roles for professionals with expertise in trading, executing, margining, settling, brokering, and even managing client funds that invest in these markets. The Commodity Futures Trading Commission (CFTC) requires registration via the National Futures Association (NFA) for many of these individuals and organizations, such as futures commission merchants (FCMs). These positions facilitate a separation of responsibilities and create efficiency within the industry.
Keep reading to take a closer look at a few of these important roles: the introducing broker (IB), the associated person (AP), the commodity trading advisor (CTA), and the commodity pool operator (CPO).
The IB or introducing broker is a professional broker that deals in futures, forex, commodity options, and swaps. The IB often has a direct relationship with a client. However, the IB delegates the client's futures orders to a futures commission merchant or retail foreign exchange dealer for execution, clearing, and settlement. The role of the IB increases efficiency in that it allows the IB to focus on client needs while the FCM concentrates on execution, trading, and floor operations.
The IB receives a commission for orders directed toward the FCM. An IB can work for one or more FCMs.
Futures Commission Merchant and Associated Persons
A futures commission merchant (FCM) or related futures company employs an associated person (AP) to execute customers' orders. APs are involved in the solicitation or facilitation of transacting client futures orders, the maintenance of discretionary accounts, and participation in the futures markets.
Discretionary accounts are usually those where an AP will have discretion over buying and selling for a client. These accounts must have written power of attorney according to market regulations. That allows them to trade commodities without consulting the clients. In most cases, all employees of FCMs must register with the NFA as APs.
Commodity Trading Advisor
A commodity trading advisor or a CTA can be an individual or a firm. CTAs provide individualized advice regarding the buying or selling of futures contracts, options on futures contracts, or certain foreign exchange contracts. While a CTA acts like a financial advisor, the role is unique to trading in products on futures exchanges. As with APs, a CTA often has discretion over the funds that clients deposit—they can buy and sell commodities under their management as they see fit. CTAs have specific reporting requirements designated by the ultimate regulator, the CFTC.
Commodity Pool Operator
A commodity pool operator is an individual or a firm that solicits and receives funds from clients for investment in commodity futures, options on futures, and any vehicles that trade on commodity futures exchanges in aggregate. A CPO aggregates client funds in a pool and then invests these funds in one central account, thus pooling that capital. While there are many similarities between a CTA and a CPO, the CFTC has specific rules and regulations that distinguish between the two.
Regulation of Futures
All of these professionals, who do business in the futures markets, must pass a proficiency test that the NFA administers. That exam is the Series 3 exam. Under certain circumstances, exemptions are possible so long as the regulatory body, the CFTC, approves that exemption.
The regulatory environment for commodity futures trading and brokering dates back to the 1970s when retail investors became active in futures markets and Congress created the CFTC. The CFTC has gradually expanded the regulatory requirements for all professionals involved in these markets.
Futures markets operate with a high degree of leverage. Therefore, the potential for significant gains has attracted many investors and traders in recent decades. However, when there is a high profit potential, there always exists a potential for significant losses, as well.
The regulatory environment protects not only clients of these professionals but standardizes the rules and regulations in an attempt to create a level playing field for all market participants.
The CFTC has five commissioners that serve staggered five-year terms. The longest-serving commissioner was sworn in on Aug. 15, 2017. Commissioners are nominated by the president and confirmed by the Senate. There is a limit that no more than three commissioners from the same political party can serve at the same time.