By: James Mahoney & Justin Meagher
During the 4th Quarter of 2016, the Commodity Futures Trading Commission (CFTC) approved an amendment to the National Futures Association (NFA) Compliance Rule 2-46, which will take effect for the June 30, 2017 filing. The new amendment requires filers to report information on the financial condition of commodity pool operators (CPO) and commodity trading advisors (CTA) as part of the NFA compliance oversight program. It is intended to provide the NFA with an increased ability to monitor a firm’s financial condition and identify firms that may be facing financial hardships. Here a firm refers to the CPO or CTA and their individual pools. Forms PQR and PR will require each CPO and CTA to report financial ratios related to their firm’s financial health.
Required ratios in the amendment to NFA Compliance Rule 2-46:
The two new ratios CPOs and CTAs will need to fill out in the NFA Forms PQR and PR include:
- Current assets/current liabilities – This ratio divides a firm’s current assets by its current liabilities to measure liquidity. It is based on a firm’s current asset and current liability balances at the reporting quarter end.
- Total revenue/total expenses – This ratio divides a firm’s total revenue by its total expenses and represents a firm’s operating margin each quarter. It must include all revenue and expenses from the preceding 12 months.
The amendment does not establish minimum ratios for firms to meet. Instead, it will incorporate the financial information collected on Forms PQR and PR into its oversight program. This will serve to identify trends and observe member firms.
Additionally, the amendment incorporates financial record keeping mandates requiring CPOs and CTAs to demonstrate how ratios reported on Form PQR or PR were calculated as well as retain the financial records supporting these calculations. This may include making available relevant financial records of the holding company.
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