CTA/CPO capital requirement proposal would lead to exodus from industry

March 8, 2014 06:59 AM

 The National Futures Association’s (NFA) proposed rule changes regarding capital requirements for commodity trading advisors (CTAs)/commodity pool operators (CPOs) are unnecessary particularly regarding CTAs who do not hold, touch or have access to client funds other than to trade them on managed accounts.  

The NFA should look into alternative measures that do not punish or levy heavy burdens on small businesses in the CTA field.  

An adverse effect of over-regulation will be that CTAs will look for alternative structures that will allow them to continue to conduct business.  These include newsletters, subscription services and a multitude of options such as office relocation out of the country for bigger offices and private investment clubs for those that do not wish to be a part of the NFA.  

Private and public bonds, loans, private swaps, subscriptions, and other interpersonal arrangements will become the norm if the NFA decides to punish entrepreneurial CTAs and CPOs with more fees, oversight and capital requirements.  

The NFA should:

1.   Consider stricter punishment for bad actors and higher fines and fees for misconduct.  This would generate more fees for the NFA and would serve as a deterrent to bad behavior.  

2.   Look to lower costs and barriers to entry so that fees could be made up in volume while strongly prosecuting and penalizing all bad actors.  

3.   Keep in mind that many traders will be looking to register under alternative associations even if it means having to transition to equities or mutual funds.  This will cause an exodus of talent, brokers and advisors that will decrease the amount of fees the NFA will generate to replenish its budget. 

4.   Discover ways to increase transparency so that the futures field can expand, not contract.  One simple, cost-effective way is to demand that clearinghouse documents be mailed monthly to clients and investors so that they can compare and contrast their CPO documents and updates with clearinghouse statements. 

Contraction in this business will only hurt small businessmen and women along with the institutions that oversee us.  


About the Author
Wolfrank Guzman, is a Futures Trader and founder of AG WOLF CAPITAL in Monmouth Junction, NJ.  After a few years as a Junior Broker at an Equities Brokerage he decided to transition into the lower margin, highly liquid and expanding Futures field.