Here we take a closer look at a few of these roles, and what parts of the futures market they manage. Learn about the introducing broker (IB), the associated person (AP), the commodity trading advisor (CTA), and the commodity pool operator (CPO).
Introducing Broker
The introducing broker (IB) is a professional broker that deals in futures, forex, commodity options, and swaps. The IB often has a direct relationship with a client. The IB does not make the trades, but rather delegates the client’s futures orders to a futures commission merchant (FCM), or to a retail foreign exchange dealer for execution, clearing, and settlement. The role of the IB increases efficiency in these types of trades in that it allows the IB to focus on client needs, while the FCM can work on execution, trading, and floor operations.
Futures Commission Merchant and Associated Persons
A futures commission merchant (FCM) or related futures firm employs an associated person (AP) to carry out a client’s orders. APs are involved in a number of duties. They solicit or facilitate a client’s futures orders, maintain discretionary accounts, and take part in the futures markets in other ways as well. Discretionary accounts are those where an AP will have final say over buying and selling futures for a client. These accounts must have written power of attorney to comply with market regulations. Having power of attorney allows them to trade commodities without having to consult with the clients each time. In most cases, all the people who work for FCMs must also register with the NFA as APs.
Commodity Trading Advisor
A commodity trading advisor (CTA) can be a single person or a firm. CTAs provide individualized advice about the buying or selling of futures contracts, options on futures contracts, or certain foreign exchange contracts. While a CTA acts like a financial advisor, the role is unique to trading in products on futures exchanges. As with APs, a CTA often has discretion over the funds that clients deposit. This means they can buy and sell commodities that they manage as they see fit. CTAs must abide by certain rules around how they report their trades, as per the CFTC.
Commodity Pool Operator
Like the CTA, a commodity pool operator (CPO) can also be a single person or a firm. A CPO solicits and receives funds from clients to invest in commodity futures, options on futures, and any vehicles that trade on commodity futures exchanges in aggregate. A CPO puts client funds in a pool and then invests these funds in one central account, thus pooling that capital. While a CTA and CPO have a lot in common, the CFTC has specific rules that set the two apart. In short, a CTA does not hold funds, but only directs them on behalf of clients. A CPO holds funds and invests them.
Regulation of Futures
All of these professionals who work in the futures markets must pass a proficiency test given by the NFA. That exam is the Series 3 exam. Some experts vying for these roles may be exempt from taking the exam, so long as the CFTC approves it. The rules around commodity futures trading and brokering dates back to the 1970s. This is around the time when retail investors became active in futures markets and Congress created the CFTC. Over time, the CFTC has expanded the regulatory requirements for all professionals involved in these markets. The rules that govern futures trading have a number of functions. First, they make sure professionals have the knowledge to do their jobs, and that they are acting in good faith. Second, the rules protect clients. Lastly, they create standards in an attempt to create a level playing field for all who take part in the market. The CFTC has five commissioners that serve staggered five-year terms. They are nominated by the president and confirmed by the Senate. There is a limit that no more than three commissioners from the same political party can serve at the same time.
