) is USfinancial regulatoryterm for an individual or organization who is retained by a fund or individual client to provide advice and services related to trading infutures contracts, commodityoptionsand/orswaps.They are responsible for the trading withinmanaged futures accounts. The definition of CTA may also apply to investment advisors forhedge fundsand private funds includingmutual fundsandexchange-traded fundsin certain cases.CTAs are generally regulated by the United States federal government through registration with theCommodity Futures Trading Commission(CFTC) and membership of theNational Futures Association(NFA).

A CTA generally acts as anasset manager, following a set of investment strategies utilizingfutures contractsandoptionson futures contracts on a wide variety of physical goods such as agricultural products, forest products, metals, and energy, plusderivative contractson financial instruments such as indices, bonds, and currencies.5The trading programs employed by CTAs can be characterized by their market strategy, whethertrend followingormarket neutral, and the market segment, such as financial, agricultural or currency.5

There are three major styles of investment employed by CTAs:technical, fundamental, and quantitative. Technical traders invest after analysing chart patterns. They often employ partially automated systems, such ascomputer softwareprograms, to followprice trends, performtechnical analysis, and execute trades. Successfultrend following, or using technical analysis techniques to capture swings in markets may drive a CTAs performance and activity to a large degree. In 2010, Dr. Galen Burghardt, adjunct professor at the University of ChicagosBooth School of Business, found a correlation of 0.97 between a subset of trend following CTAs and a broader CTA index from the period 2000-2009, indicating that speculative technical trend following had been dominant within the CTA community.6Fundamental traders attempt toforecastprices by analyzingsupply and demandfactors, amongst other market information, in their attempt to realize profits. Other non-trend following CTAs includeshort-term tradersspread tradingand individual market specialists.7Fundamental CTAs typically invest based on analysis of the core markets they are trading, by analysing weather patterns, farm yields, understanding oil drilling volumes etc. Quantitative CTAs do statistical orquantitative analysison market price patterns and try to make predictions based on such research. Many Quantitative CTAs have backgrounds insciencemathematicsstatisticsandengineering.citation needed

A CTA is often compensated through management fees calculated as an annual percentage of equity in the fund and incentive fees calculated as a percentage of new trading profits. Usually no incentive fees are charged if the CTA does not generate a profit exceeding ahurdle rateor high-water mark.89

In the United States, trading of futures contracts for agricultural commodities dates back to at least the 1850s.10The first Federal regulation aimed at futures trading was proposed in the early 1920s, leading to the passage of theGrain Futures Actin 1922. In 1936, this law was replaced by an amended version named theCommodity Exchange Act.1011The commodity trading advisor was first recognized in legislation in 1974, when theCommodity Futures Trading Commission(CFTC) was established under the Commodity Futures Trading Commission Act.1112The name CTA was adopted since the advisors originally operated predominantly within the commodities markets. Later, trading expanded significantly following the introduction of derivatives on other products including financial instruments.511

In July 2010, the definition of commodity trading advisor under theCommodity Exchange Actwas expanded by theDodd-Frank Wall Street Reform and Consumer Protection Actto include persons who provide advice on swap transactions. Prior to this, swaps were not included in the CTA definition.1314

In 1979, the CFTC adopted the first comprehensive regulation for commodity trading advisors, which was later strengthened by additional rules in 1983 and 1995. The additional rules in 1983 increased the CFTCs oversight of such advisors and authorized theNational Futures Association(NFA) to carry out processing of registration for entities including CTAs.1516Those adopted in 1995 aimed to increase disclosure by CTAs leading to increased knowledge and understanding for investors.17

Under theCommodity Exchange Act, CTAs must register with and conform to the regulations of the CFTC, including providing records and reports, unless they meet the Commissions criteria for exemption.118Registered CTAs must also become members of the NFA if they manage funds or provide advice to members of the public.19

Under the Commodity Exchange Act qualifying individuals may be exempted from CTA registration with the CFTC, including if their primary business is not as a CTA, they are registered with theSecurities and Exchange Commissionas an investment advisor, and if they have not provided trading advice to more than 15 persons. If an individual is exempt from registration, they must still file with the NFA.20A CTA is exempt from registration with the NFA if they have provided commodity trading advice to fewer than 15 people and do not generally use the title commodity trading advisor, or if they provide advice only through publications, a computerized system or seminars.19

Nonetheless, exempt CTAs are still regulated in some form. They are still subject to CTFC rules concerning market manipulation as well as the anti-fraud provisions of the CEA. They additionally need to file a public notice disclosing their existence and exempt status. They must provide an offering memorandum to their investors, as well as a quarterly account statement and an annual report. In addition, exempt CTAs are subject to special call provision, where they are, amongst other things, required to file special reports to the CFTC. These reports are used for market surveillance as well as for investigations or litigation cases.21

On January 26, 2011, following the 2010 enactment of theDodd-Frank Wall Street Reform and Consumer Protection Act, the CFTC made additions and amendments to the regulation of CTAs, including two new forms of data collection. The CFTC also increased disclosure requirements and amended the registration criteria.18Due to these changes, advisors managing funds that useswapsor other commodity interests may be defined as CTAs, subject to registration with the CFTC.3TheUnited States Chamber of Commerceand theInvestment Company Institutefiled a lawsuit against the CFTC, aiming to overturn this change to rules that would require the operators of mutual funds investing in commodities to be registered, but the lawsuit was unsuccessful and the rule change was upheld.22

If a commodity trading advisor engages in significant advisory activities regarding securities, it could be required to register under the Investment Advisers Act of 1940 (Advisers Act). However, most commodity trading advisors are able to rely on an exemption from registration set forth in Section 203(b)(6) of the Advisers Act. This exemption is available to registered commodity trading advisors whose business does not consist primarily of acting as an investment adviser.23

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Capital asset pricing modelalphabetasecurity characteristic line)

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