Crypto Hedge Fund Managers Offering CPO for Futures & Swaps Required CFTC Registration
- Asset managers exploring the best way to offer pooled investment vehicles that trade futures, swaps, and other products in digital assets like Bitcoin required to register with the CFTC and comply with certain disclosure
- Crypto hedge fund managers don't need to touch securities for the rules to apply to them
In support of innovation in digital asset products, CFTC's Director of Swap Dealer and Intermediary Oversight Division Joshua B. Sterling published a statement on Feb.10th. The statement reads,
“The Division actively supports the CFTC’s core objective of fostering responsible innovation and enhancing the regulatory experience of market participants.”
Katherine Wu of VC firm Notational Capital says all crypto hedge fund managers, especially those who invest in crypto futures contracts or use leverage or margin needs to take a special look as “you don't need to touch securities for this to apply to you” and “CFTC does have authority over certain leveraged, margined, or financed retail commodity transactions.”
She further reminds of the 2016 incident when CFTC took action against crypto exchange Bifinex and ordered them to pay $75,000 for “offering illegal off-exchange financed retail commodity transactions and failing to register as a futures commission merchant.”
Registration with CFTC and Comply with Disclosures
They can be helpful to commodity pool operators (CPOs) and other asset managers that are exploring the best way to offer pooled investment vehicles that trade futures, swaps, and other products regarding digital assets like Bitcoin (BTC) and stablecoins, said Sterling.
Because those vehicles are considered commodity pools under the Commodity Exchange Act and CFTC regulations, those operators are required to register with the CFTC and comply with certain disclosure, recordkeeping, and reporting requirements as per CFTC’s Part 4 regulations.
Regardless of the asset referenced by a futures contract, swap, or other commodity interest – including Bitcoin and other digital assets, these disclosures are required that are subject to review by NFA, although not for those registered as investment companies under the 1940 Act.
Sterling further clarifies that the operators will have to correctly characterize their pool’s investment strategy, describe “precisely” how the instruments present opportunities for gain or loss.
These pools also have to divulge business background, education experience of its key personnel and material information about its commodity brokers and trading counterparties. Moreover, they will have to disclose expenses related to commodity interest trading and other fees.
Firms that are considering launching a commodity pool have to assess whether it needs to register as a CPO and if they trade a mix of commodity and securities, whether that pool is an “investment company.”
Exceptions are available although that would depend on the composition of a commodity pool’s portfolio, investor base, and the way the pool markets itself.