What Is a Commodity Trading Advisor (CTA)?
A commodity trading advisor (CTA) is an individual or firm that provides personalized advice regarding the buying and selling of futures contracts, options on futures, and retail off-exchange forex contracts or swaps.
Advisors who give such advice are required to be registered as a CTA by the National Futures Association (NFA), the self-regulatory organization for the derivatives industry.
Key Takeaways
- A commodity trading advisor (CTA) is a person or entity registered to provide advice regarding commodities trading.
- Advisors must meet specific proficiency requirements to be registered as a CTA.
- CTA registration requires CTAs to advise on all forms of commodity investments.
- With some exceptions, CTA registration is required by the National Futures Association (NFA).
- The NFA was created by the Commodity Futures Trading Commission (CFTC) to register CTAs and ensure compliance with CFTC regulations and NFA rules.
Understanding a Commodity Trading Advisor (CTA)
In 1922, the Grain Futures Act was passed, regulating futures trading. It was later replaced by the Commodity Exchange Act of 1936, which further regulated commodities and futures trading and required certain trading to be done on exchanges.
The Commodity Futures Trading Commission Act of 1974 was enacted to amend the Commodity Exchange Act. It created the Commodity Futures Trading Commission (CFTC) and marked the first use of the term commodity trading advisor (CTA).
Investing in commodities often involves the use of significant leverage and, therefore, requires a higher level of expertise to trade properly to avoid the potential for large losses. The CFTC has gradually expanded the requirements for CTA registration over time. It established the NFA to handle CTA registration and ensure that registered members complied with CFTC regulations and NFA rules.
A CTA is a financial advisor who provides advice specifically related to commodities trading. To obtain the CTA registration, applicants must meet certain proficiency requirements, including passing the Series 3 National Commodity Futures Exam. Certain criteria, if met, can exempt advisors from CTA registration.
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.
Exemptions From Registration
Registration as a CTA by the National Futures Association is required for individuals or firms that provide advice on commodities trading unless one of the following criteria is met:
- Advice is given to 15 people or less over the previous 12 months and the individual or firm does not 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 provided is not based on knowledge of, or targeted directly to, a customer’s trading interests or trading account.
Requirements
Generally, CTA registration is required for principals of a firm as well as all employees who take orders from or give advice to the public. CTAs are required to provide advice regarding all forms of commodity investments, including futures contracts, forwards, options, and swaps.
CTA Fund
A CTA fund is a hedge fund that uses a managed futures strategy. It invests in futures contracts and uses a variety of trading strategies. These may include systematic trading and trend following. However, fund managers can actively manage investments using discretionary strategies, as well. CTA funds offering a managed futures strategy must be registered with the CFTC and NFA.
What's a Commodity Trading Advisor?
A commodity trading advisor, or CTA, is a person 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.
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 in the future. 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. As part of its goal to protect the interests of the investing public, it also monitors the actions of CTAs to ensure that they follow its rules.
