NFA proposed amendments to clarify guidance relating to break-even analysis for CPOs, and to provide additional guidance on performance reporting and disclosure requirements for CTAs.

The NFA proposal will amend the (i) " NFA Interpretive Notice Compliance Rule 2-13: Break-Even Analysis" (the "Break-Even Analysis Notice") and (ii) NFA Compliance Rule 2-34, as well as the related Interpretive Notice entitled " NFA Compliance Rule 2-34: Performance Reporting and Disclosures" (the "Performance Reporting and Disclosures Notice").

According to NFA, a "break-even analysis" informs CPOs' participants of how expenses and fees outlined in CPOs' disclosure documents may impact the potential profitability of participants' investments. The amendments to the Break-Even Analysis Notice will:

  • clarify that the only interest eligible for use in offsetting expenses in the break-even analysis is interest earned by a pool's buy-and-hold cash management strategy from specific investments; and
  • mandate that break-even analysis be based on the minimum (i) initial investment amount of a participant and (ii) total subscription amount for a pool to commence trading in order to provide the participant with the most "conservative break-even point." However, if a CPO anticipates a higher amount of total funds raised that will affect the fees and expenses per participant, then the CPO also may provide a break-even analysis using the higher amount of anticipated total funds raised.

The amendments to Compliance Rule 2-34 and the Performance Reporting and Disclosures Notice will, among other things:

  • extend confirmation requirements to accounts that have an amount exceeding that which the CTA is directed to use as the base for trading decisions; and
  • require that written confirmation provided to clients include an explanation of the impact cash additions, cash withdrawals and net performance will have on the nominal account size.

In addition, the Performance Reporting and Disclosures Notice will provide further guidance on existing requirements under Compliance Rule 2-34, such as that monthly performance returns must be summed rather than compounded when calculating rates of return for certain programs (i.e., those where net performance does not affect the nominal account size).

NFA invoked the "ten-day" provision of the CEA, and the proposed changes will go into effect unless the CFTC notifies NFA otherwise. NFA plans to issue a Notice to Members establishing the effective date for the proposal.

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