When does a hedge fund need to deal with the CFTC?
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When it trades commodity interests. An option on the S&P 500 index is a security, regulated by the SEC; an option on S&P 500 futures is a commodity interest, regulated by the CFTC. Limited trading can stay exempt under CFTC Rule 4.13(a)(3): roughly, margin at most 5% of the fund or net notional at most 100%. The exemption must be reaffirmed with the NFA within 60 days after each year end, or it is withdrawn.
Everything here is for educational purposes only and is not legal, tax or investment advice, or an offer to buy or sell any security. Laws and thresholds change and depend on your facts, so talk to a qualified attorney before acting.
Key facts
- Options on indexes are securities; futures and options on futures are commodity interests.
- Rule 4.13(a)(3) exempts operators of funds with limited commodity trading.
- Limits: initial margin and premiums at most 5% of liquidation value, or net notional at most 100%.
- Reaffirm the exemption with the NFA within 60 days after each calendar year end.
Transcript
Operator: Same index. Two trades. Two different regulators.
Founder: Same index!
Operator: Different instrument. An option on the S&P 500 is a security.
Operator: An option on S&P 500 futures is a commodity interest. That's the CFTC.
Founder: So I register with the CFTC too?
Operator: Not if it stays small. An exemption called 4.13(a)(3) covers limited trading.
Operator: Roughly: margin at most 5% of the fund, or notional at most 100%.
Operator: And reaffirm it with the NFA every year, within 60 days after year end.
Founder: And if I forget?
Operator: The exemption is withdrawn.
Founder: So which trade was the SEC's?