Commodity Pool Operators

Anyone interested in becoming a member of a Commodity Pool is rightfully concerned that his/her investment will be handled wisely and ethically. In order to ensure that these investments are handled in such a manner the United States government has established laws regarding how the funds are handled as well as who can be left in charge of the pools. Following is a brief explanation of Commodity Pool Operators including their duties and registration requirements.

Basic Definition of a Commodity Pool Operator
Commodity Pool Operators are often referred to as CPO’s and they are the persons or limited partnerships in charge of investments made in a commodity pool in terms of futures and/or options positions. In other words, they control the assets within the pool. Most often a CPO will enlist the services of a Commodity Trading Advisor (CTA) to make the actual decisions for the commodity pool, but the final authority always rests with the CPO that is also responsible for soliciting funds to be traded in such securities as Forex and futures contracts. In brief, a commodity pool is a venture in which a number of investors contribute funds to be traded in futures, options or retail Forex contracts and the pool is overseen by a Commodity Pool Operator.

Registration Requirements for Commodity Pool Operators
For the protection of the general public (investors), Commodity Pool Operators must be registered with the United States Commodity Futures Trading Commission (CFTC) and the rules regulating this registration are Rules 4.5 and 4.13. There are other rules that also pertain to the registration of CPO’s which must also be adhered to as set forth by the CFTC. All CPO’s must also be members of the National Futures Association (NFA) in order to conduct futures activities with the general public. Requirements for registration consist of completing Form 7-R online, an application fee that is non-refundable ($200) and CPO Membership Dues ($750). Also, if the Commodity Pool deals with Forex trading then the CPO must make application to become a Forex firm on the above mentioned online Form 7-R.

Certain Entities Exempt from Registration Requirements
There are, however, certain persons and entities that are exempt from the above mentioned registration requirements. These exemptions are outlined in Rules 4.5 and 4.13 but can be summarized as follows:

  • Entities regulated in other ways such as insurance companies, banks and otherwise registered investment companies.
  • Any person or entity that operates small pools receiving less than a total (aggregate) capital contributions less than $400k and said pools have 15 or fewer participants in a single pool.
  • Entities/persons operating pools not committing greater than 10% FMV (fair market value) for the establishment of commodity interest trading positions and all trading is incidental to securities trading.
  • CPO’s whose pools are only open to investors meeting certain sophisticated financial standards and therefore trade futures and options within specific limits. (In other words, only open to persons who meet a certain net worth/financial sophistication.

These exemptions are in place so as to avoid overlap in otherwise regulated areas. The sole purpose of enforcing such stringent regulations is to protect the general public but many professions are already regulated and to require registration as a CPO would be redundant for those otherwise registered/licensed.

Over the years the Federal Government has established rules and regulations to protect investors from ineptitude as well as from the unethical practices of those who would defraud the general public. Commodity Pool Operators are strictly regulated for just these reasons. Before investing in a Commodity Pool, take the time to thoroughly research the CPO’s credentials in order to ascertain that they meet with CTFC and NFA regulations.

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