Commodity Pool Operator (CPO)
What Is a Commodity Pool Operator (CPO)?
A Commodity Pool Operator (CPO) is an individual or business entity that solicits funds and pools these resources together to trade futures contracts and commodity options. CPOs make crucial trade decisions in the futures markets on behalf of their pooled investors.
Commodity Pool Operators also play an essential role in ensuring the day-to-day operations of the pooled investments are conducted with transparency and integrity while meeting compliance requirements.
Due to the importance of a CPO’s role, federal regulations require an individual or business to register with the Commodities Futures Trading Commission (CFTC) via the National Futures Association’s (NFA) before becoming a commodity pooled operator.
CPO Registration Requirements
To register as a CPO, applicants have to accomplish the following requirements:
- Designate a Security Manager to obtain access to the NFA’s Online Registration System (ORS). This person must represent the firm, maintain its account profile, and be responsible for all aspects of the NFA compliance program.
- Complete online Form 7-R and submit it to NFA. The Form 7-R is a one-time submission that will create the firm’s account profile in the ORS and provide secure access credentials to the assigned Security Manager.
- Complete the online NFA membership application. Applicants can do this while creating their account profile in the ORS.
- Pay a non-refundable application fee of $200 to NFA. Applicants can pay the dues by online payment, wire transfer, or check.
- Complete the online Annual Questionnaire and submit it to NFA. This questionnaire allows applicants to provide NFA with updated information about the company and its activities.
- Pay non-refundable CPO membership dues yearly.
Once applicants have completed all the steps and paid the necessary fees, NFA staff will review the submitted documents. They will notify applicants if additional information is needed to complete the CPO registration process.
Exemptions From CPO Registration
There are certain exemptions from the requirement to register as a CPO. These include the following:
CPOs That Operate One Pool at a Time
If a CPO fulfills all of the following conditions – operates only one pool, does not advertise or receive compensation, and is neither directly nor indirectly associated with any person registered with the CFTC – they may be exempted from registration.
Small Pool Exemption
CPOs may be exempt from registration requirements if their pool maintains gross capital contributions of less than $400,000 and no more than 15 participants at any given time.
The pool’s operator, Commodity Trading Advisor, principals, their immediate family members, and relatives sharing the same residence can be excluded from counting towards this number of participants.
Pool With Minimal Commodity Interest Trading
A CPO may be exempted from registration if their pool only does minimal commodity interest trading. There are two means to determine if a pool qualifies for this exemption.
First, a pool’s combined initial margin, premiums, and minimum security deposits must not exceed 5% of its portfolio’s liquidation value. Second, a pool’s combined net notional value of positions must not exceed 100% of its portfolio’s liquidation value.
Pools Already Regulated by Another Regulatory Authority
A CPO may be exempt from registration if its operator is already registered or subject to another regulatory authority. There are several instances where this might be possible. First, the pool’s operator may already be registered under the Investment Advisors Act of 1940.
Second, the pool’s operator is a state-regulated insurance company or a financial institution regulated by the U.S. Lastly, the pool’s operator is a trustee of any named fiduciary or an employer maintaining pension plans covered by ERISA.
Phases of CPO Examinations
To ensure that CPOs comply with NFA Rules and CFTC Regulations, the NFA may conduct periodic examinations. These examinations are divided into three phases: planning, fieldwork, and reporting.
During the planning phase, an NFA staff will review information in the ORS and conduct preliminary research. They will also send the member firm an email announcing the upcoming examination and requesting some initial documents.
The formal announcement—including all requested documents and additional information regarding submission formats—will also appear in Regulatory Filing System (RFS).
The fieldwork phase involves a more in-depth analysis of a member firm’s business practices and procedures, including an onsite visit. This phase includes interviews with key staff, reviewing crucial reports and documentation, and monitoring operations.
The NFA staff will use these activities to evaluate the member firm’s internal controls and procedures for trading activities, customer complaint handling, position monitoring, risk management, disclosure documents, and recordkeeping.
NFA examiners may conduct fieldwork at the Member firm’s offices (in-person) or remotely from the NFA’s office. Depending on the type of test, fieldwork can take anywhere from a day or two to several weeks. After that, NFA staff can return to their offices to do more work.
Upon completion of their examinations, NFA staff will provide member firms with a written report outlining any deficiencies or weaknesses identified during the examination and recommendations for corrective action if necessary.
The NFA has compiled a wide range of tools and forms, many of which are available online, to help Members maintain the required examination records.
CPO vs Commodity Trading Advisor (CTA)
A commodity pool operator and a commodity trading advisor (CTA) offer services related to the same financial market – commodities trading. However, they play fundamentally different roles.
A CPO is an individual or organization that runs a pooled investment vehicle made up of contributions from multiple investors and bets on the direction of futures markets.
On the other hand, a CTA is an industry professional who provides advice and trade recommendations to their clients based on market analysis.
Both CPOs and CTAs must register with the National Futures Association and conform to their codes of conduct to begin operations.
To maximize their investments safely and effectively, participants in the commodities markets need to be aware of these significant distinctions between a CPO and a CTA.
If you are interested in commodities trading, consult a financial advisor who can guide you through the process.
Commodity Pool Operators are individuals or organizations that solicit funds and pool these resources together to trade futures contracts and commodity options. Before legally engaging in these activities, CPOs must register with the CFTC via the NFA.
Several requirements are needed for registration, including the assignment of a security manager, the submission of several forms, and the payment of non-refundable fees.
Most individuals or businesses who operate pools are required to register. However, there are several exemptions, such as pools already regulated by another regulatory authority, CPOs that operate one pool at a time, small pools, and those with minimal commodity interest trading.
The CFTC and the NFA provide strict regulatory guidelines to protect investor rights. To uphold these standards, the NFA may conduct periodic examinations involving three phases: planning, fieldwork, and reporting.
Commodity Pool Operators play a crucial role as custodians of investments. Thus, they are expected to accommodate the NFA’s examinations and adhere to all recommendations for corrective action if necessary.
Commodity Pool Operator (CPO) FAQs
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.