NFA / CFTC Compliance Support for Independent Governance Professionals and Emerging CTAs

The managed futures industry makes up a significant component of the global hedge fund industry assets under management, approaching 10% according to the most recent BarclayHedge data.  With a total of US$3,826 billion hedge fund assets under management at the end of 2020, (more than doubling since 2011),  the managed futures industry is worth US$301.5 billion; fluctuating between US$301.5 billion and nearly US$359 billion during the past 10 years¹ .

Within this sphere, there has been a significant increase in the demand for separately managed accounts and managed account platforms, in particular to reduce risks from commingled funds, while gaining greater flexibility and operational efficiency.  As advances in financial technology continue to modernise the investment funds industry, more opportunities are created for a broader scope of investors.

Many hedge funds, including managed accounts, may have a trading strategy to invest in commodity interests (e.g. futures, options, commodities, physicals and swaps) that could cause it to be subject to the rules and regulations of the US Commodity Exchange Act (“CEA”), US Commodity Futures Trading Commission (“CFTC”) and US National Futures Association (“NFA”).  In other scenarios, certain structured credit repackaging note transactions using a special purpose vehicle (“SPV”) may be considered covered funds subject to Volcker Rule requirements and may be considered a commodity pool if the transaction includes one or more swaps.  To this end, many professional independent directors, or the corporate governing body, of the commodity pool are deemed “commodity pool operators” (“CPOs”) of the funds, managed accounts and platforms they govern.

In some cases, independent directors may opt to delegate certain CPO responsibilities to the commodity pool’s investment advisor or other party, subject to certain requirements.  This is particularly common where the CFTC registrant advisor has the capacity to fulfill the ongoing regulatory reporting obligations.

However, a growing number of small to mid-size investment advisors and platform managers are narrowing their scope of services to focus on their core competency of investment management to effectively execute on the trading strategy, drive performance and manage the platform’s day-to-day operations and may need to further delegate this responsibility.  In other instances, institutional investors with their own managed account platforms may need to have a third-party assume the role of CPO to facilitate the execution of their investment strategy whether directly or indirectly.  We believe this will be a sustained trend as investors continue to demand strong returns amid sustained pressure on fees.  With an estimated US$36 trillion to US$68 trillion² of wealth expected to transfer over generations in the coming decades and investors becoming more knowledgeable, tech-savvy and self-reliant, the pressure on investment advisors to focus and deliver strong performance will continue to increase.

As a leading global fiduciary services provider, the Maples Group works with both well-established and emerging investment advisors on many types of investment vehicles including commodity pools, as well as with third-party independent directors to provide assistance with meeting commodity pool compliance requirements.  Many smaller or emerging mangers may be eligible for certain CFTC registration exemptions or relief from registering as a Commodity Trading Advisor (“CTA”), but by implementing the intended trading strategy may be subject to requirements for CFTC registration and CEA compliance.  In this scenario, subject to certain requirements, the appointed advisor may remain an exempt CTA where the governing body of the commodity pool or its delegate is a registered CPO.  In these scenarios, the governing body, through its broader role to the fund, will provide additional value through an enhanced level of governance in respect to the commodity pool.  Where the Maples Group’s independent directors control the governing body, or in collaboration with other individual third-party independent directors, we work closely with the client to establish bespoke NFA / CFTC compliance solutions.

Our specialist independent directors, qualified Series 3 professionals and qualified accountants provide tailored governance solutions to manage and support CFTC registration requirements, regulatory reporting and ongoing compliance for investment vehicles and managed accounts that are subject to relevant CEA rules and regulations where investors are qualified eligible persons.  Where eligibility requirements are satisfied for CFTC registration exemption, our experienced team can also manage the initial and ongoing required exemption and annual affirmation filings with the NFA.

^{1BarclayHedge: https://www.barclayhedge.com/solutions/assets-under-management/}

^{2Euromoney: https://www.euromoney.com/article/b1n0rl4jwqpvx8/generation-next-and-the-great-wealth-transfer}