Registration categories: FCM, IB, CTA, CPO, AP, floor broker

The Commodity Exchange Act requires many firms and individuals in the futures business to register with the CFTC, and the CFTC has delegated that registration work to NFA (Lesson 10). Each category matches a job.

The categories at a glance

FCM: the firm that holds the money

NFA defines an FCM as an entity that solicits or accepts orders for futures, options on futures, retail off-exchange forex, or swaps, and accepts money or other assets from customers to support those orders. That second part is the key: the FCM is the firm that holds customer funds. All registered FCMs must be NFA Members.

IB: the firm that brings in customers

An IB also solicits or accepts orders, but it does not accept money or other assets from customers to support them. The IB introduces the customer, and an FCM holds the funds. All registered IBs must be NFA Members.

IBs come in two kinds:

• Guaranteed IB. It has a guarantee agreement with an FCM, under which the FCM is jointly and severally liable for all of the IB’s obligations under the Commodity Exchange Act. Because of that guarantee, the IB does not have to raise its own capital to meet minimum financial requirements (CFTC glossary).
• Independent IB. No guarantee, so it must raise its own capital to meet minimum financial requirements.

CPO and CTA: pools and advice

A commodity pool is an enterprise in which funds from a number of people are combined to trade futures and related products (NFA). The CPO operates the pool and solicits money for it. All registered CPOs must be NFA Members. A CPO either makes the pool’s trading decisions itself or hires a CTA to do so (CFTC glossary).

A CTA is an individual or organization that, for compensation or profit, advises others, directly or indirectly, on the value of or the advisability of trading futures and related products. Registered CTAs that manage or exercise discretion over customer accounts, or give advice tailored to particular clients, must be NFA Members.

Both categories have exemptions (NFA points CPOs to CFTC Regulations 4.5 and 4.13; one CTA route covers advising 15 or fewer persons in the past 12 months without generally holding itself out to the public as a CTA).

AP: the individual who deals with customers

An AP is an individual who solicits orders, customers, or customer funds, or supervises people who do, on behalf of an FCM, RFED, IB, CTA, or CPO (NFA). The CFTC glossary excludes purely clerical work.

Two rules from 17 CFR 3.12 shape the AP category:

• Sponsorship. A person may not act as an AP of a firm unless registered as an AP of that sponsoring firm, or exempt under 3.12(h) (3.12(a)). The sponsor completes Form 8-R for the individual (NFA).
• Duration. The registration lasts until each sponsor’s registration ends or the AP’s association with each sponsor ends (3.12(b)).

Floor brokers and floor traders

Both have exchange trading privileges and buy or sell futures, options on futures, or swaps on a contract market. A floor broker is an individual; a floor trader can be an individual or a firm (NFA registers a non-natural person floor trader on Form 7-R). The difference is whose account:

• Floor broker: trades for any other person (NFA), classically executing customer orders in a pit or ring (CFTC glossary).
• Floor trader: trades for the trader’s own account (NFA). The CFTC glossary links this to the local, who trades for his own account and provides liquidity.

One registration does not cover another

Under 17 CFR 3.4, registration in one capacity does not include registration in any other capacity, unless the Act or a CFTC rule, regulation, or order provides otherwise. A firm that wants to act as both an IB and a CTA needs both registrations.

Proficiency: where the Series 3 fits

NFA’s proficiency requirements apply to each individual applying as an FCM, RFED, IB, CPO, or CTA, or as an AP of those firms. In most cases that means passing the Series 3. A person who already passed it does not need to pass it again if he or she passed it within two years of the date the application is filed, or passed it earlier and since then has not had a continuous registration gap of more than two years (as an AP or FB, or as an FCM, IB, CPO, or CTA that is an NFA Member).

A worked example (made-up scenario)

Maria (a made-up person) works for Example Introducing LLC, a made-up guaranteed IB. She calls prospects and takes their orders.

• Maria solicits orders for the IB, so she must be registered as an AP of that IB.
• The IB does not accept customer money to support orders, so customers’ funds are held by an FCM. Because the IB is guaranteed, that FCM is also jointly and severally liable for the IB’s obligations.
• If Maria later moves to a CTA, her AP registration with the IB ends when that association ends, and she needs a new AP registration sponsored by the CTA.

Key ideas

• FCM accepts customer money; IB solicits or accepts orders but does not accept customer money to support them.
• A guaranteed IB relies on an FCM’s guarantee instead of its own capital; an independent IB raises its own.
• CPO runs a pool and solicits funds for it; CTA gives trading advice for compensation or profit.
• An AP is an individual who solicits for, or supervises solicitation for, a sponsoring firm, and must be registered as an AP of that sponsor.
• Floor broker trades for others; floor trader trades for its own account.
• Registration in one capacity does not cover another, and the Series 3 is the usual proficiency test for APs and individual registrants.