Key Takeaways
- A Commodity Trading Advisor (CTA) offers personalized advice on trading futures, options, and certain forex contracts.
- CTAs must register with the National Futures Association (NFA) to provide advice on commodity investments.
- Applicants for CTA registration need to meet proficiency requirements, including passing the Series 3 exam.
- Exemptions from CTA registration are available if certain criteria are met.
- CTA funds, employing managed futures strategies, must be registered with the CFTC and NFA.
What Is a Commodity Trading Advisor (CTA)?
A commodity trading advisor (CTA) is an individual or firm that provides personalized advice regarding buying and selling futures contracts, options on futures, and retail off-exchange forex contracts or swaps.
Advisors who give such advice must be registered as a CTA by the National Futures Association (NFA), the self-regulatory organization for the derivatives industry.12
How Commodity Trading Advisors Operate in the Market
The Grain Futures Act was passed in 1922, regulating futures trading. It was later replaced by the Commodity Exchange Act of 1936 which further regulated commodities and futures trading and required that certain trading be done on exchanges.3
The Commodity Futures Trading Commission Act of 1974 amended the Commodity Exchange Act, established the Commodity Futures Trading Commission (CFTC), and first used the term "commodity trading advisor" (CTA).4
Investing in commodities often uses significant leverage, requiring more expertise to avoid large losses. The CFTC expanded CTA registration requirements and established the NFA to oversee registration and ensure compliance with its regulations and rules.5
A CTA is a financial advisor for commodities trading. Applicants must meet proficiency requirements, like passing the Series 3 National Commodity Futures Exam, to register. Certain criteria can exempt advisors from CTA registration if they're met.61
Important
The Great Salad Oil Swindle of 1963 led to the bankruptcy of 16 firms, including two Wall Street brokerages and a subsidiary of American Express. It sparked a cry for tighter regulation of the commodity futures markets.3
When Commodity Trading Advisors Are Exempt from Registration
Registration with the National Futures Association is needed to advise on commodities trading, unless one of these criteria is met:1
- Advice was given to 15 people or fewer over the previous 12 months and the individual or firm doesn't hold itself out to the public as a CTA.
- The individual or firm is registered with the CFTC and the advice given concerning commodities investing is incidental to the individual's profession or the firm’s business.
- The advice is not based on or directly targeted at a customer's trading interests or account.
Essential Requirements for CTA Registration
CTA registration is typically required for firm principals and employees who give advice or take orders from the public. CTAs are required to provide advice regarding all forms of commodity investments including futures contracts, forwards, options, and swaps.7
Exploring CTA Funds and Their Investment Strategies
A CTA fund is a hedge fund that uses managed futures strategies, investing in futures contracts with various trading strategies. Strategies may include systematic trading and trend following. Fund managers can also actively manage investments using discretionary strategies.
CTA funds offering a managed futures strategy must be registered with the CFTC and NFA.
What Is a Commodity Trading Advisor?
A commodity trading advisor or CTA is an individual or firm that advises clients in the use of derivatives as investments. CTAs are required to be registered by the National Futures Association, the industry's independent, self-regulatory organization.1
What Are Futures Contracts?
Futures contracts are a type of derivative. They involve a standardized contract to buy or sell a certain security at a specific price and at a specified time. Futures are used by investors to hedge the value of securities they have positions in and to speculate on price movements.
What Is the National Futures Association?
The National Futures Association (NFA) is the derivative industry's sole self-regulatory organization. It was established by the Commodity Futures Trading Commission to conduct the registration of commodity trading advisors. It also monitors the actions of CTAs to ensure that they follow its rules as part of its goal to protect the interests of the investing public.2
The Bottom Line
- A commodity trading advisor (CTA) provides trading advice regarding commodities to the investing public. The National Futures Association (NFA) monitors the actions of CTAs to ensure that they follow its rules and to protect investors. Registration with the NFA is required in most cases.