In view of the apparent increase in the number of Commodity Futures Trading Commission (“CFTC”) Form 40 requests received by our fund clients lately, we thought it would be helpful to briefly outline the circumstances that result in the receipt of a Form 40 request, as well as the CFTC reporting and recordkeeping requirements for Form 40.
Form 40 and the CFTC’s Large Trader Reporting Program
Form 40 is part of the CFTC’s Large Trader Reporting Program, which is designed to:
- collect information that enables the CFTC’s surveillance staff to aggregate related accounts, which in turn enables the staff to assess a trader’s potential market impact and compliance with speculative position limits;
- elicit additional information about a firm’s traders and/or about a participant’s trading and delivery activity, including information on persons who control or have a financial interest in the firm’s futures and options accounts; and
- investigate a threat of a market manipulation or other market disorder.1
Part 16 of the CFTC’s rules requires daily reporting by “reporting markets”2 of their clearing members’ positions and trades. Part 17 of the CFTC’s rules requires daily reporting by futures commission merchants (i.e., futures brokers), clearing members and foreign brokers (collectively, “Reporting Firms”) of certain information with respect to those Reporting Firm customers who have “special accounts.” A “special account” is defined as “any commodity futures or option account in which there is a reportable position.”3
If at the daily market close, a Reporting Firm’s customer has a special account, the Reporting Firm must report that customer’s entire position in all futures and options expiration months in that commodity, regardless of size.4
Exchange-Set Position Limits
CFTC Rule 150.5(a) requires each Designated Contract Market (“DCM”) to impose speculative position limits for contracts trading on the DCM (other than certain foreign currency contracts), unless the CFTC has already imposed such limits under Rule 150.2, subject to certain caps, adjustment requirements, hedge exemptions and aggregation requirements set forth in various subsections of Rule 150.5. Whereas Rule 17 (which requires reporting on Form 40) merely requires position and related reporting, exchange rules imposed pursuant to Rule 150.5(a), and related CFTC rules, impose caps on the size of traders’ positions.
Form 40 Reporting Thresholds
CFTC Rule 18.04 requires “[e]very trader who holds or controls a reportable futures and option position” to file a Form 40 with the CFTC with the office and by the deadline specified by the CFTC.5 A “trader” is defined for this purpose in CFTC Rule 15.00(o) as “a person who, for his own account or for an account which he controls, makes transactions in commodity futures or options, or has such transactions made.” In the case of most hedge funds, the reportable trader will be the manager of the fund.
A “reportable position” is defined in Rule 15.00(l)(1) as:
“any open contract position that at the close of the market on any business day equals or exceeds the quantity specified in [CFTC Rule] 15.03 in either:
- Any one future of any commodity on any one reporting market, excluding future contracts against which notices of delivery have been stopped by a trader or issued by the clearing organization of a reporting market; or
- Long or short put or call options that exercise into the same future of any commodity, or long or short put or call options for options on physicals that have identical expirations and exercise into the same physical, on any one reporting market.
The Rule 15.03(b) reporting thresholds range from 25 contracts (for commodities not specified by name in the rule), to 3,000 contracts (for Three-Month Eurodollar Time Deposit Rates), to 125,000 contracts (for Hedge Street6 products). The reporting thresholds cover the following categories:
- Broad-based security indexes;
- Hedge Street products;
- Natural resources;
- Security futures products;
- TRAKRS;7 and
- All other commodities.
Upon crossing a reporting threshold, a manager may receive a letter from the CFTC requesting that it complete a Form 40 and submit the Form by a certain deadline. This is also known as a “special call.”
Responding to a CFTC Special Call for Form 40 Information
The CFTC’s regulations require that, upon receipt of a special call for information from the CFTC, those who own/control or who have owned or controlled a reportable futures or options position in a commodity (“Reporting Traders”) file a Form 40 (Statement of Reporting Trader)8 with the CFTC by the deadline specified in the special call. The CFTC’s regulations also list the thresholds that will trigger a Form 40 special call and impose on entities holding or controlling reportable positions recordkeeping requirements with respect to the reportable positions and other positions (including in over-the-counter and other markets) in the commodity underlying the reportable positions.
Common questions from clients include:
- whether certain trading strategies constitute “speculative activity” or hedging;
- whether the manager must disclose the name of any investor who owns a greater than 10% interest in the fund whose account incurred the special call; and
- whether any other persons “control” the Reporting Trader’s trading.
CFTC Rule 18.05(a) requires traders holding or controlling reportable positions to maintain books and records:
“showing all details concerning all positions and transactions in the commodity:
- On all reporting markets;
- Over the counter and/or pursuant to Sections 2(d), 2(g) or 2(h)(1)–(2) of the Act or Part 359 of this chapter;
- On exempt commercial markets operating pursuant to Sections 2(h)(3)–(5) of the Act;10
- On exempt boards of trade operating pursuant to Section 5d of the Act;11 and
- On foreign boards of trade.”12
Such reporting traders must also keep books and records showing “all positions and transactions in the cash commodity, its products and byproducts, and all commercial activities that the trader hedges in the futures or option contract in which the trader is reportable” and must furnish the CFTC, upon request, “any pertinent information concerning such positions, transactions, or activities in a form acceptable to the Commission.” 13
Once a manager receives a Form 40 from the CFTC, it must complete and return it to the CFTC by the deadline specified by the CFTC in the special call. Managers can avoid having to complete a Form 40 by staying below the reporting thresholds.