The CFTC regulates all the futures, foreign currency (“forex”), and swap markets, including options and other derivatives related to the foregoing. If you plan to trade futures, forex, swaps, or related instruments in a hedge fund, you may have to register the fund’s management company with the CFTC as a commodity pool operator (CPO) and, if you plan to give advice to individual accounts outside of the fund, then you may also have to register as a commodity trading advisor (CTA). There are, however, several exemptions that hedge fund managers use to avoid CFTC registration.
The most common exemption from CPO registration, known as the “de minimis” exemption, requires that you not market your hedge fund as a vehicle to access futures, forex, and swap markets, you limit participation to “accredited investors” and “qualified eligible persons,” as those terms are defined in the applicable regulations, and, either:
(i) the aggregate initial margin and premiums used to establish positions in futures/forex/swaps does not exceed 5% of the liquidation value of the fund’s portfolio; or
(ii) the aggregate net notional value of such positions does not exceed 100% of the liquidation value of the fund’s portfolio.
There are certain other exemptions that may also be applicable depending on your circumstances. You should consult with a licensed attorney with experience in fund formation matters to determine whether you will be able to operate under an exemption.