Tag Archives: forex registration

CTA and CPO Registration and Compliance Guide

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Practical guidance for CTA and CPO firms

Commodity Trading Advisors (CTAs) and Commodity Pool Operators (CPOs) have been contacting me with greater regularity and we have decided to provide those firms with more detailed information on their registration and compliance requirements. Over the course of the next few weeks we will be continually updating this page with more legal and business guidance for CTAs and CPOs. Specifically, we will be providing information on the following topics:

CTA and CPO Registration – this article discusses the how-to’s of registration with the CFTC. The article details the general requirements for firms, principals, and associated persons. Included in this discussion is information on CTA/CPO exam requirements and an overview of the registration process through the NFA’s electronic registration system.

CTA and CPO Registration Exemptions – while the Commodities Exchange Act will generally require CTA and CPO firms to register with the CFTC, there are some important exemptions from the registration provisions. Review this article to see if your firm might be able to claim an exemption from the registration provisions.

CTA and CPO Compliance Overview – CTAs and CPOs are subject to a number of laws, regulations and rules. Not only must CTAs and CPOs follow CFTC laws and regulations, but as Members of the NFA, these groups must also follow all of the rules developed by the NFA. We will be discussing compliance best practices, major examination issues, major deadlines and the CTA/CPO compliance manual. Being prepared for an NFA examination is of great importance.

Recent NFA Actions against CTA and CPO Managers – the NFA and the CFTC have been quite active lately. In this article we will be discussing some of the most recent actions against NFA member firms. This article will also provide common-sense advice on what managers can do the protect themselves from examination deficiencies.

Important NFA Rules for CTA and CPO Firms – there are a number of rules which the NFA has regarding the conduct of CTAs and CPOs. In general CTAs and CPOs must hold themselves out with the utmost professionalism. This article will detail this and other important NFA rules.

CTA and CPO advertising – there are a number of important rules regarding advertising for CTAs and CPOs. CPOs, especially, must be careful about advertising because of the restrictions under Rule 506 of Regulation D, an exemption that many CPOs utilize in offering their fund interests. Websites will be touched upon in this post and will also be discussed in greater depth in a subsequent posting.

CTA and CPO websites – many CTA firms utilize the internet to advertise their services. CPO firms will also sometimes have a (minimal) internet presence. This article will detail the considerations that both CTA and CPO firms face when creating and maintaining an internet presence and how to deal with internet based inquiries from potential investors.

NFA Exam Requirements for CTAs and CPOs – individuals of NFA member firms will generally need to have a Series 3 exam license and potentially a Series 30 exam. Some individuals may need to have a Series 31 exam license and, potentially in the future, forex CTAs and CPOs will need to have a Series 34 exam license. This article will discuss these exams and the process an individual will go through in order to register to take the exams.

CTA Expo Blog – the unofficial blog of the CTA Expo most recently held in October of 2009.  Information for CTA managers on business, legal and compliance issues.  Included is a directory of CTA firms and service providers.

Forex CTAs and CPOs – the regulatory light has been focused on retail spot forex managers recently. Read this article to get up to speed on recent CFTC and NFA pronouncements regarding this area of the industry. We will also provide information on Forex IBs and Forex FCMs.

In addition to the above topics we are hoping to add others over time. We welcome all feedback and encourage you to leave comments below. We will also attempt to answer CTA and CPO frequently asked questions.

If you are a manager or firm that needs to register as a CTA or CPO, or if you are contemplating registration, please contact Bart Mallon, Esq. of Cole-Frieman & Mallon LLP at 415-868-5345.

NFA Discusses Recent Forex Regulations

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Answers Regarding Prohibition of Hedging Spot Forex Transactions

(www.hedgefundlawblog.com)  The NFA has certainly taken a lot of heat over its controversial rule to ban the practice of “hedging” in a single spot forex account.  Many retail investors have already begun establishing brokerage accounts offshore in order to utilize this trading strategy.  I recently talked with a compliance person at the NFA and they said that they are aware that US persons are going to offshore forex brokers in order to utilize this trading strategy.  We will see if in the future the NFA relents on this issue, but for now the NFA has provided guidance on some of the more technical aspects of the new Compliance Rule 2-43.

The NFA guidance is reprinted in full below and can also be found here.

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NFA Compliance Rule 2-43 Q & A

NFA has received a number of inquiries regarding the application of new NFA Compliance Rule 2-43. This Q & A answers the most common questions.

CR 2-43(a), Price Adjustments[1]

Q. Section (a)(1)(i) of the rule provides an exception from the prohibition on price adjustments where the adjustment is favorable to the customer and is done as part of the settlement of a customer complaint. Does that mean a Forex Dealer Member (“FDM”) can’t make a favorable adjustment if the customer does not complain?

A. It depends on the circumstances. The intent of this provision is to ensure that FDMs can settle customer complaints before or after they end up in arbitration. It was not meant to prohibit FDMs from adjusting prices on customer orders that were adversely affected by a glitch in the FDM’s platform. A firm may not, however, adjust prices on customer orders that benefited from the error (except as provided in section (a)(1)(ii)). Furthermore, an FDM may not cherry-pick which accounts to adjust.

Q. An FDM operates several trading platforms. Two provide exclusively straight-through processing, but one does not. Can the FDM make section (a)(1)(ii) adjustments for trades placed on the two platforms that provide straight-through processing?

A. No. The Board intended to limit the relief to those firms that exclusively operate a straight-through processing business model, and the submission letter to the CFTC uses this language when explaining the rule’s intent. NFA recognizes, however, that the use of the word “platform” in the rule itself may be confusing, and we intend to ask the Board to eliminate that word at its August meeting.

Q. For price adjustments made under section (a)(1)(ii), the rule requires written notification to customers within fifteen minutes. If the liquidity provider informs an FDM of the price change twenty minutes after the orders are executed, can the FDM still make the adjustment?

A. No. The rule provides that customers must be notified within fifteen minutes after their orders are executed, and it was written that way intentionally. Since a customer’s subsequent trading decisions may be based on the customer’s belief that a particular trade was executed at a particular price, the rule provides a narrow window for price adjustments.

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[1] For purposes of this discussion, the term “adjustment” also refers to cancellations.

CR 2-43(b), Offsetting Transactions

Q. CR 2-43(b) states that an FDM cannot carry offsetting positions. If a customer with a long position executes a sell order or a customer with a short position executes a buy order, does the FDM have to close the position immediately or can it wait until the end of the day?

A. The FDM may wait until the end of the day to offset the positions, but it must do so before applying roll fees.

Q. The rule provides that positions must be offset on a first-in-first-out (FIFO) basis. If the customer places a stop order on a newer likesize position and the stop is hit, may the FDM offset the executed stop against that position?

A. No. The only exception to the FIFO rule is where a customer directs the FDM to offset a same-size transaction, but even then the offset must be applied to the oldest transaction of that size.
Related Issues

Related Issues

Q. One of an FDM’s platforms is offered exclusively to eligible contract participants (ECPs). Does Rule 2-43 apply to transactions on that platform?

A. No. Rule 2-43 does not apply to transactions with ECPs.

Q. May an FDM transfer foreign customers to a foreign entity that allows customers to carry offsetting positions in a single account?

A. Yes. If done as a bulk transfer, however, the Interpretive Notice to NFA Compliance Rule 2-40 (located at ¶ 9058 of the NFA Manual) requires that the foreign entity must be an authorized counterparty under section 2(c) of the Commodity Exchange Act (CEA).

Q. May an FDM transfer U.S. customers to a foreign entity that allows customers to carry offsetting positions in a single account?

A. Only if the transactions are not off-exchange futures contracts or options. The legal status of “spot” OTC transactions that are continually rolled over and almost always closed through offset rather than delivery is currently unsettled. Therefore, if an FDM chooses to transfer U.S. customers to a foreign entity so they can continue “hedging,” it does so at its own risk. In any event, a bulk transfer can only be made to a counterparty authorized under the CEA.

Q. If the transactions are not futures or options, does that mean none of NFA’s rules apply?

A. Most of NFA’s forex rules do not depend on how the off-exchange transactions are classified. This includes Compliance Rule 2-36(b)(1), which prohibits deceptive behavior, and Compliance Rule 2-36(c), which requires FDMs to observe high standards of commercial honor and just and equitable principles of trade. An FDM that misrepresents the characteristics of “hedging” transactions (e.g., by touting their “benefits”) or NFA’s purpose in banning them or that implies that transferring U.S. customers offshore will make the transactions legal violates those sections of CR 2-36. Furthermore, NFA Compliance Rule 2-39 applies these same requirements to solicitors and account managers.

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Please feel free to contact us if you are interested in starting a forex hedge fund or a forex managed account.  Other related forex law and regulation articles include:

Offshore Forex Brokers Race To Fill “Hedging” Gap

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NFA Compliance Rule 2-43 Outlaws Forex “Hedging” For NFA Registered Forex Dealers

(www.hedgefundlawblog.com) The new forex regulations have affected the industry in a number of ways.  Rule 2-43 especially has been a source of ire for some forex managers who have utilized a “hedging strategy” as part of their investment program.  In the forex hedging strategy a trader will have both a long and a short position in a single currency pair.  While these positions are essentially offsetting, some trend following forex traders will hold such positions in order to profit once a trend has been detected.  This strategy was effectively eliminated by the passage of Rule 2-43 for managers trading with forex firms which are registered with the CFTC and NFA Member firms.

This rule provides an opening for offshore forex dealers (who are not NFA Members) to offer this strategy to forex traders.  What you are likely to see, then, is an exodus of trading capital to those brokers which allow hedging strategies (see the two press releases below).  I can think of no clearer example of how regulation is actually forcing capital to go overseas where forex brokers may face lower levels of regulation.  This in turn may actually make forex traders more susceptible to fraudulent practices at the brokerage level (when they trade in countries with less regulation).  Interestingly enough, this movement of money to offshore forex dealers was predicted by the US forex dealers when the rule was announced.

From NFA Release on Compliance Rule 2-43

Although many of the FDMs admit that customers receive no financial benefit by carrying opposite positions, some FDMs believe that if they do not offer the strategy they will lose business to domestic and foreign firms that do.

While some traders may move money to offshore forex dealers, these traders should, however, beware that by trading forex with a non-NFA member firm, they may become subject to state level regulation (and accordingly CFTC registration).  As this is a developing and complex area of law, I always advise forex managers to discuss their business operations with an experienced forex attorney.

Please contact us if you have a question on this issue or if you would like to start a forex hedge fund.  If you would like more information, please see our articles on starting a hedge fund.

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InvestTechFX To Continue Forex HEDGING For Traders After NFA Ruling

InvestTechFX released today that the 1 PIP Forex Corporation will continue to allow all types of hedging after the NFA (National Futures Association) ruling against hedging goes into effect on May 15, 2009. As InvestTechFX is not an NFA regulated broker, it is not obligated to adhere to the NFA’s anti-hedging policies. www.investtechfx.com

Toronto, Canada (PRWEB) April 24, 2009 — InvestTechFX the leading 1 PIP Forex Corp commented on the NFA’s new anti-hedging law (NFA Compliance Rule 2-43 regarding Forex orders) currently scheduled to take effect on May 15th, 2009, and released that the No Dealing Desk Forex broker and Software Solutions Corp will be immune to the new law. InvestTechFX’s industry expert noted that the NFA’s move is not entirely unexpected; the spirit of the new regulation is to protect traders from wasteful over-hedging, but the practical implications of the new regulations will likely be counter-productive. Traders who rely on hedging in their strategies will simply take their business to brokers outside the influence of the NFA, such as InvestTechFX. Ironically, the NFA may put US Forex brokers at a disadvantage by barring them from providing the hedging options that their international competitors will not hesitate to offer.

InvestTechFX the leading 1 PIP Forex Corp welcoming hedging explained that “hedging” generally refers to the practice of taking opposite positions against a previous open position in order to reduce risk. In a broader sense, hedged trading means investing to limit exposure and reduce risk. There are several methods of hedging Forex positions, particularly opening short and long positions within the same currency pair at the same time. This type of hedging will be much more difficult after May 15th, 2009, as the new regulations will put strict limits on such strategies. Positions opened prior to May 15th will not be penalized under the new rule, but all positions opened after the initiation date will be effected. Traders who want to continue hedging while staying with an NFA-regulated broker may now have to open separate accounts for their long positions and short positions; something not all traders can afford to do.

InvestTechFX the leading 1 PIP Forex Corp. welcoming hedging strategies noted that new restrictions on hedging are not the only new regulations set forth in the NFA’s new ruling. After May 15th, 2009, all NFA brokers will have to notify traders in writing prior to adjusting or manipulating trades, with the exception of instances in which the adjustment is favorable to a trader or at a trader’s request. Furthermore, the written notification of intent to adjust must take place within 15 minutes or less of the time of execution. This new regulation (Rule 2-43a) will not be going into effect until June 12th, 2009. In regard to customer orders adjusted because of changes in the price structure of a liquidity provider, written notification must be given to customers prior any initial trading (price increases on the account of transaction clearing must be stated before trading takes place, not after or during trading). InvestTechFX’s analyst explained that these new regulations are likely an attempt to increase cost transparency and reduce the hidden fees that many brokers, particularly market makers, rely upon to limit customer profits. Since market makers must always provide the counterparty for a trade (always buy from a seller and sell to a buyer), there is a strong ulterior motive to undercut customer profits, as customer profits always come at the market maker’s expense.

InvestTechFX the leading 1 PIP Forex Corp. welcoming hedging’s analyst elaborated on the threat of expanding regulation in the Forex market, and the unforeseen consequences that well-meaning regulation agencies can impose upon the market. Forex trading is a fast-growing, highly competitive industry, and because of its inherently global nature, traders are not limited to the Forex providers in their own countries. While many would likely work with a local broker, traders can relatively easily move their business abroad if regulation in their own regions becomes more of a burden than a protection. Government guidelines regarding trading clear policies and risk disclosure can serve to keep the industry legitimate and transparent, but regulating hedging in this way borders on telling traders what strategies they can and can’t use. There is ongoing debate over who the NFA is “protecting” with the new policies, as many of the larger regulatory bodies have a reputation for acting out of the long-term interests of companies instead of retail traders. InvestTechFX’s representative explained that the company could not decisively endorse or condemn the use of mirror position hedging, but did state that the position of InvestTechFX is that the decisions regarding trading strategies should be left to the traders, not the regulators.

InvestTechFX the leading 1 PIP Forex Corporation welcoming hedging is a No Dealing Desk Forex Broker and Federal Canadian Corporation. InvestTechFX offers a 1 PIP fixed spread on 6 major currency pairs, along with a comprehensive account groups system, including interest free, scalping, EA, Micro, and VIP accounts. As a No Dealing Desk, InvestTechFX never takes positions against customers, and has no interest or influence over the trades executed by its customers. www.investtechfx.com

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New Forex Trading Rule by NFA About Hedging Positions Will Change the Trading Game

Forex market is getting revised by continuous trade rule changes. In such uncertain times, Forex Profit Farm may be the perfect solution for people looking to succeed in forex trading.

New York, NY (PRWEB) April 30, 2009 — The forex market is booming with addition of new players every minute because of the high and lucrative potential of making money. Such fast growth poses its own challenges, but at the same time also present with the opportunity to redefine the industry by writing new rules or guidelines.

One such rule that NFA came up with recently is regarding Anti-Hedging. This rule is coming into effect starting 15 may 2009. As per this new law, the trader community cannot create hedged trades.

Rahul Gupta, owner of Forex Profit Farm says, “Currently a forex trader can have two opposite directional trades open at the same time on a single currency pair. So say if you are trading EUR/USD currency pair, you can have short as well as a long trade opened at the same time, which is what is called hedging. The traders do that mostly to judge the direction of the market. Though a hedged open long and short trade on a single currency pair will offset the gain of one position against the other, but when the direction of market trend becomes clear, traders close the losing trade and keep the winning one going. It is a cruel way to trade, but it is very common.”

With that now going to be not possible come May 15, 2009, all traders who use such forex trading practices, will now have to come up with different trading strategies. This is a clear concrete step by NFA to make the forex industry more mature and keep the exponential growth under check.

But Rahul says “Traders who are using best forex trading system don’t have to worry about anything at all. A good trading strategy is independent of such techniques and always remain non-effected from changing rules of similar nature. Traders who use sound trading principles, won’t feel the effect of this new rule at all.”

This is very true because National Future Association (NFA) has passed this new rule to make the unfair practices offered by some of the traders as ineffective, but at the same time preserve the interest of the experienced traders who trade forex for a living.

Like any new rule which is introduced by a governing body, this one also has its share of traders opposing it, but most of the experienced traders see it as a positive step towards regulating the forex trading industry. In such time, a sound trading strategy is all that a trader needs to keep making money by selling one currency against other.

About Forex Profit Farm:

Forex Profit farm is one of the Best forex system available which can help traders achieve the financial independence they always wanted. The system not only comes with an accurate trading strategy with clearly defined instructions on when to enter and when to close the trade, but it also covers the important aspect of trade management that will help traders to make maximum profit from their trades. Covered in multiple manuals and videos, Forex Profit Farm is a must-have system for anyone looking to make money by trading forex.

Discussion with CFTC Regarding Forex Registration

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[http://www.hedgefundlawblog.com]

No New Information on Forex Regulations

I have been getting more and more questions regarding forex registration and unfortunately I have not had much to say because there has been little information coming from the CFTC.  The NFA has done a good job of anticipating what those rules will generally look like, but the NFA (like us) must wait for the CFTC to propose (and then adopt) regulations requiring the registration of forex managers.  Accordingly any preliminary guidance from the NFA should be taken as that – preliminary guidance.  The fact that the regulations are coming obviously puts pressure on legal professionals and forex managers alike as we all try to figure out what will need to be done, when and how.

For this reason I have been calling the CFTC to try to figure out when we might hear something.  After calling the CFTC daily for over a week now, today I finally received a call back from a representative of the CFTC’s Division of Clearing and Intermediary Oversight.  Unfortunately, the representative was as tight-lipped about the future regulations as the CFTC has been up to this point.

During the conversation, I asked several questions and did not receive any responses other than what you would expect from a government agency.  The gist of the conversation was that the CFTC is working on the regulations and the reason that it is taking so long is that there are many aspects to the regulations which must be thoroughly reviewed be many different members and parts of the CFTC.   It sounded like the regulations could be quite detailed – the representative stated that it is not just simply these managers with this amount of assets must register, that the regulations will be comprehensive.  Another issue which remains unanswered is whether there will be exemptions from the registration provisions, similar to the current CPO exemptions and CTA exemptions from registration.

So with that being said, there is not much new to report.  Forex managers are still in a bit of a limbo until the CFTC promulgates the proposed regulations.  Until that happens it would be wise for forex managers to consider getting ready for registration by discussing the issue with a forex attorney.  Managers may also decide to move forward and begin taking the Series 3 exam and the Series 34 exam.  Managers (especially forex hedge fund managers) are especially encouraged to talk with their attorney about potential registration requirements under their state commodity codes – I will be posting more on this issue tomorrow.

I know this does not tell you very much, but please feel free to contact me if you have any specific questions or if you would like to find out more about forex CPO, CTA or Introducing Broker registration.

For more articles related to forex law and registration, please visit our forex hedge fund articles page.

Forex Hedge Fund Articles

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Below are a list of the articles which are devoted to forex hedge funds and the regulations involved in the off-exchange foreign currency markets.  Please contact us if you would like to start a forex hedge fund or if you would like information related to the forex registration requirements.

Forex Overview

Forex Hedge Funds

Forex Registration

Series 34 Exam


Passing the Series 34 Exam

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By Bart Mallon, Esq.
www.series34exam.com

Discussion about How to Take and Pass the Series 34 Exam

On Thursday I took the Series 34 Exam and I passed.  I answered 30 out of 40 questions correctly for a 75% (it takes a 70% score to pass).  This score is not as good as I had hoped for, but it is good for a couple of reasons.  First, it proves that anyone can pass these exams without buying expensive study guides (I created a free Series 34 exam study guide).  Secondly, the exam gave me an opportunity to really see which areas the NFA is going to focus on therefore which areas of the study guide I needed to improve.

Score Breakdown

My scores broke down as follows:

  • Definitions and Terminology   7 of 10 (70%)
  • Forex Trading Calculations   6 of 8 (75%)
  • Risks Associated with Forex Trading   3 of 4 (75%)
  • Forex Market – Concepts, Theories, Economic Factors and Indicators, Participants   6 of 10 (60%)
  • Forex Regulatory Requirements   8 of 8 (100% – did you expect anything else from a forex attorney?)

Total Correct: 30 of 40

Time to complete the exam – approximately 42 minutes

What I exactly did to study for the exam

The way that I studied for the exam is likely to be different than the way that you study for the exam.  The time I spent creating definitions for each test topic can be spent memorizing the concepts and defintions.  As a brief overview, here is how I studied:

1.  Research to create free series 34 study guide.  Initially I researched all of the topics which were listed in the NFA study outline.  This took a good chunk of time as I had to read information from many different forex resources and then synthesize the information into a short description that I could understand and that would hopefully be helpful to forex managers.  Much of this research involved summarizing original NFA sources including NFA rules, interpretive releases and notices to members.  I also read through some of the good forex trading resources and provided links to these resources as appropriate.

2.  Created note cards.  After creating and posting the items on the checklist, I created note cards which were based on the study guide.  After creating the note cards I went through them a few times – I would imagine that it was about 8-10 times all the way through all together.  This is obviously not very much, but by creating the note cards I was able to ingrain the concepts faster.  There were a few concepts which I needed a little extra help with so I would focus on these note cards.

3.  Exam questions.  Two nights before the exam I reviewed the practice questions which I created.  I made a total of 16 fairly tough questions before the exam.  The night before the exam I re-read through all of the exam questions again.

4.  Final review.  On the night right before the exam I did a final real through of the important NFA resources and the forex trading guide.  I also did more drilling with my note cards and reviewed the exam questions a final time.  I also started an overview sheet which I will turn into another quick glance resource for this website.

Why I did not score as high as I would like

I have taken and passed a number of different proficiency exams which are administered by FINRA – the series 3, the series 7, the series 24, the series 63, the series 65, and now the series 34.   For each of these previous exams I prepared much better and accordingly received much higher scores.  Generally my scores were in the high 80% range (I don’t have the print outs anymore).  Here, my scores were not as high and I think it is for a couple of reasons:

1.  I did not do any practice calculations.  There were around five questions which really required the use of a calculator.  These questions included basic and more advanced calculations related to the actual profits and losses on positions.  There was also a question dealing with the price per pip calculation.  I feel that the reason I struggled with this part of the exam is that I did not really do any sort of practice problems on these types of calculations – I simply memorized the example I used in the definition.  I don’t believe that this is good enough if you want to make sure you will pass – because of this, I am going to create more practice questions related to the actual calculations.

Be prepared to use the calculator on the exam.  As an additional tip, do not spend too much time on one single problem – I must have spent a good 10 minutes on one calculation problem and after my calculations, I didn’t even come up with the right answer.  For this question I just had to guess.  There was another calculation problem which I made a more educated guess on as well.

2.  I did not focus really any of my study time on shorting currency pairs.  Because I spent no time even thinking about this, I was a bit unprepared for a couple of problems which discussed this as a possibility.  These questions were generally pretty basic questions and from previous study I was able to answer them correctly (I think).  For these questions I think that the series 3 exam and the series 7 exam helped in terms of general investment management knowledge.

3.  Ambiguously stated regulatory terms.  The exam included at least one question with ambiguously stated regulatory terms.  I believe the question made reference to a Member and Associated Member of some sort of regulated body.  These terms are not precise and do not make sense – there is no such thing as an associated member.  As I have discussed before the NFA is a self regulatory organization (SRO).  Firms must be Members of this SRO and the employees of the firm are termed “Associated Persons” or “Principals.”  I was not sure if this question was making reference to APs of a NFA Member firm.  I cannot remember how this worked out and I may have switched my answer at the very end (something you are not supposed to do).  This is one of the frustrating things about FINRA exams in general – it is not necessarily how much you know, but that you know how to take the exam.  This is more true with regard to the Series 7 and other exams, but it still holds true for this on

4.  Current Account, Capital Account, Balance of Trade and Balance of Payments.  I did not understand these concepts during my studies and still do not understand them.  The one phrase that I remembered is that the BOT is the largest part of BOP….and this was on the exam in some form.  I think there might have been another question on these issues which I likely answered incorrectly.

A note about pacing through the exam

One of the nice things about FINRA exams is that they always follow a very similar pattern.  At the beginning of the exam the questions will be easy and you will probably breeze through the first 5-8 questions.  From there the questions will begin to get tougher and somewhere around questions 20-28ish there are likely to questions which seem impossible.  It is at this point when the despair usually begins to kick in – REMEMBER THIS and keep it all in perspective.  You can miss a lot of questions and still pass.  After you make it though the tougher questions, the end is easy and you will likely breeze through the last 10 questions or so.  Like I said this is a common feature of FINRA exams and I have had the same exact feeling in each exam and really believed that I may not pass.

On the day of the exam

I scheduled my exam for 8:00am.  I always try to schedule these exams for the morning for a few reasons, the most important of which is that I just want to get the exam done with.  If I schedule the exam in the afternoon I am going to spend the day being distracted and trying to get extra studying in – this is just me, you should schedule your exam for the time you think you will be able to do your best.

I woke up at 5:40am, took out the dog, took a shower and was at the coffee shop by about 6:10.  I had a coffee and a bagel with cream cheese and then made my way to the bus stop.  I waited for the bus and went through my note cards on the bus ride down to the exam center.  After I got dropped off and walked to my exam center, it was 7:10am and I had a few minutes to kill before I was supposed to be at the center (FINRA recommends being at the testing center a half hour before the time which the exam starts).  I found a nearby bench and continued to go through my flash cards.  At 7:30am I made my way to the exam center and there were 7 people who were there before me.  I waited for the lady to check me in and I was finally seated by about 8:05am. After the exam I was given my print out and was on my way.  I would recommend eating more than I did; usually I am a bit more prepared but it seems to have turned out ok.

How would I study for the exam knowing what I know now.

The most important thing about this exercise of taking the exam is that I can share my experience with you before you take the exam.  Knowing what I know now, I would have modified my studying a little bit.  By far the easiest part of the exam were the regulatory questions – these were very basic and they could have been made harder.  The regulatory questions which I have included in my practice questions are harder (note: the structure of the regulatory questions may change in the future so I have deliberately made tougher questions with regard to the regulations).  As I said before there was a good mix of calculations which were necessary, so I would have focused on this more – during my study time I did not once touch a calculator.  I would have ingrained the American Terms and European Terms into my head from the beginning (this would have made it easier for me to focus on the concept tested instead of trying to first remember the definition).  These two terms user used to describe exchange rate quotes in many different contexts.  Besides these relatively minor modifications, I would have studied in a very similar matter – that is, making note cards, reading, making study guides, focusing on parts I was not quite as  confident about, etc.

For those persons who have not taken a FINRA exam before I highly recommend purchasing a study guide (or more than one study guide) which includes multiple exam prep questions.  Doing a large number of questions will help you when taking the actual exam.  The good thing is that you will generally take the series 3 exam before you take the series 34 exam and the series 3 is much more difficult than the series 34.  If you passed the 3 you will have an understanding of the pace of the exams, the types and styles of questions, and how to deal with more of the pedantic parts of the exam taking process (like showing up before, signing in, etc).

I would imagine that it would take someone 20 to 30 hours to properly prepare for the exam, spread out over a week or two weeks.  If someone is diligent about putting in this study time, there should be no problem passing the exam.  If you have specific questions, I have tried to answer these in other parts of the website.  Also, please feel free to contact me or leave a question below.

Reason for taking the exam – Forex Attorney and Develop Free Study Guide

As you may know I am an attorney with a practice focused on helping hedge fund managers start their hedge funds.   I also have a related compliance business which focuses on helping forex managers and forex introducing brokers register with the NFA (please see my other site devoted to forex registration information).  Through these ventures, I have clients who are involved in the forex area in many different respects and it is likely that these clients (including forex hedge fund managers) will need to take this test sometime in the future.  I believe that as a lawyer I am more effective if I can give my clients actual advice based on personal experience.

I also wanted to develop a free exam prep guide for the community – there is no reason why you should need to spend money on a study guide for this exam.  I am hoping that members of the community will be able to add to the guide over time and we can develop this into a very useful resource.

Conclusion

The Series 34 Exam is a passable exam and I believe I have provided forex managers with a lot of good information on the exam through these posts and through the free study guide.  Please help me to continue to make this resource and website useful for forex managers.

Discussion about Forex Registration and the Series 34 Exam

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Creating Series 34 Exam Prep Materials

One central issue in the investment management industry is increases in regulation of previously unregulated or lightly regulated activities.  The major area which will see direct regulation within the next 12 months is the retail off-exchange foreign currency industry.  As we have discussed, forex managers and those parties which solicit retail forex investors are is expected to have to register with the NFA as forex CPOs, forex CTAs or forex introducing brokers.  As part of this process, individuals subject to registration are going to need to pass the Series 34 exam.  This article will discuss the exam and the new exam prep materials I have been creating to help managers pass the exam.

Overview of the Series 34 Exam

The Series 34 exam is a brand new test created by the NFA at the very end of last year. I have talked with the National Futures Association (which is the self regulatory organization in charge of the forex registration process) and they have told me that individuals can now take the Series 34 exam.  To take this exam individuals are going to need to submit a Form U-10, pay the $70 testing fee and sign up with either Pearson Vue or Prometric to actually take the exam.  The exam is 60 minutes long, has 40 questions and requires 70% correct answers for successful completion.

Series 34 Exam Preparation Materials

There are very few Series 34 materials out there for managers to study from.  I have talked with many different groups and they are planning on potentially releasing a Series 34 exam study guide, but these groups will be waiting until they are able to judge the demand for such a product.  Of course we cannot know the demand for the product until the CFTC proposes its forex registration rules, but it is a safe bet that many forex managers will need to take the exam.  Accordingly, I have started creating a free series 34 exam study guide for the general public.

The free series 34 exam study guide will provide an explanation of all of the major concepts that the NFA has stated will be covered in the exam.  I have provided in depth explanations on the concepts through my own research through many available online resources.  I believe that these materials will be strong, especially with regard to the regulatory requirements for forex managers – I have been reporting on these requirements now for over 6 months and have been able to cull together great resources.

In addition to the free guide, I will also have premium materials available for purchase.  These materials will include an outline, notecards, and practice questions.

  • The series 34 outline will be similar to an outline that you might see prepared for a law school exam – I have taken numerous exams (including many FINRA sponsored exams – Series 3, Series 7, Series 24, Series 63, Series 65) and have found that an outline is a great way to make sure all of the basic concepts are ingrained prior to taking the exam.
  • The series 34 notecards will be an exact replica of the notecards which I will use to study.  You can either print out the notecards and cut them out or you can copy the information onto individual notecards yourself.  I would recommend you write out the information onto individual notecards – in this way you enforce the learning process.  Probably my favorite way of studying is through notecards.  I can take them with me anywhere I am going and then study them when I am in line at a store, on a bus, during a TV commercial, etc.
  • The series 34 practice questions will be similar in style to the questions which you will expect to see on the exam.  I am going to write practice exam questions before I take the exam based on what material I think will be covered in the exam.  I am going to try to write toward areas of expected weakness so I anticipate the questions will be more difficult than those to be seen on the exam.  Additionally, I plan to go back and add more questions after I take the exam to best reflect the nature and difficulty of the questions on the exam.

Information on How to Study for the Series 34 Exam

The ultimate goal of the above exam prep materials is to provide forex managers with the tools they need in order to pass the test on the first try.  It is a waste of time and money to study and then not pass the test on the first time because of lack of preparation or study materials.  If the manager does not pass the exam on the first try, they will need to wait 30 days before they can take it again; if a manager does not pass the exam on the second try, they will need to wait 60 days before they can take it again.

As I have coached managers through the test taking process numerous times before I understand what is needed to pass on the first time – it is simply not enough to only read an exam prep guide.  You must read an exam prep guide and proactively study the concepts which will be tested.  Very smart people have failed the regulatory exams because of not properly studying.   You will need to over-study.

A common joke in the industry is that the perfect score is 70% because it means that you didn’t study too much to pass.  If someone else is paying for you to take the exam, and if you are still considered “on the clock” if you take time off of work to go take the exam, then this thinking may be fine (if you don’t mind taking tests) – however, for busy forex managers your time is too valuable to waste by not passing on the first try.  You should go into the test confident that you will pass and not hoping that you studied “just enough” to pass.

Series 3 Exam – A Pre-Requisite

While anyone can take the Series 34 exam, forex managers will likely need to have passed the Series 3 in addition to the Series 34 exam.  [HFLB Note: the CFTC has not promulgated rules on this issue so this is not a for sure requirement yet.]  I have taken the Series 3 exam and passed and provided more information here (general guidelines on how to study for a FINRA exam can be found here) – please review these articles in addition to the other resources linked on this page.

Timing of Materials Release

I should be able to release the materials later on this week.  I am currently planning to take the exam sometime this week.  I will update this article once the materials have been posted on our other websites.  In the meantime, please feel free to contact us with any questions you might have.

Other related hedge fund law articles:

Forex E-Micro

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New Forex Product Launched by CME

As the CFTC continues to work on promulgating rules which would require forex managers to register (the so called new forex registration rules), the CME has introduced a new forex product called the Forex E-micro which is geared towards the retail forex investor.  It is currently not clear how this new product will fit within the CFTC’s regulatory regime.  We will keep you updated as the CFTC and the NFA provides guidance on this product.

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CME Group to Launch Forex E-Micro Contracts

Smaller contract size and proportionally reduced margins aimed to attract retail participation

CHICAGO, Feb. 18 /PRNewswire-FirstCall/ — CME Group, the world’s largest and most diverse derivatives exchange, today announced that it will launch a series of innovative smaller-sized Foreign Exchange (FX) contracts, called Forex E-Micros, designed to enable retail traders and investors to cost-effectively access the security, transparency and liquidity of CME Group’s FX products. These contracts are listed with, and subject to, the rules and regulations of CME.

“Our new Forex E-micro futures contracts provide the opportunity for a broader universe of customers to mitigate their counterparty risk by trading FX in CME’s $100 billion-a-day global FX liquidity pool,” said Derek Sammann, CME Group Managing Director, Global Head of FX Products. “Active individual traders looking to participate in the global FX market, or small businesses seeking a cost-effective hedging tool for their FX risk, can choose Forex E-micro futures as a versatile and accessible new resource to manage their exposure. And they can do this with the full investor safeguards of operating in CME Group’s regulated environment while benefiting from the transparency and deep liquidity offered by our futures market.”

“With the emergence of FX as a global asset class and the ever-present need to manage FX risk, futures customers will gain access to the global FX markets in a cost-effective, secure manner,” said Christopher Larkin, Vice President, E*TRADE Securities LLC. “We believe that Forex E-micro futures traded at CME provide an ideal introduction to FX and we are pleased to be able to work with CME Group in offering them to our customers.”

“CME Group continues to roll out innovative products for both the institutional and retail futures trader,” said Joseph Cusick, Senior Vice President of Education, OptionsXpress. “We are very excited about offering the new E-Micro FX futures products to our clients.”

“With Forex E-micro futures traded at CME, for the first time we will be able to offer our customers the standards of security and pricing they deserve when entering into a new asset class for the first time,” said Greg Sabatello, President and CEO, Transaction Futures. “Electronically traded and cleared via a central counterparty, these new products ensure on a globally recognized legitimate exchange with transparent fees, which should appeal to spot traders.”

The Forex E-micro contracts will be one-tenth the size of the corresponding CME FX contracts, making them accessible to active individual traders, small Commodity Trading Advisers (CTAs), and Small Medium Enterprises (SMEs). The contracts will be exclusively traded on the CME Globex® electronic trading platform, the world’s largest regulated FX marketplace, which also offers the security of centralized clearing and guaranteed counterparty credit. The new contracts are set to launch in the first quarter of 2009.

The Forex E-Micro contracts will be quoted in interbank or “over the counter” (OTC) terms, making it easy for customers to integrate them into their systems and portfolios. Contracts will be launched in the following six currency pairs: EUR/USD, GBP/USD, AUD/USD, USD/JPY, USD/CHF and USD/CAD.

All Forex E-micro contracts will be cash-settled and EUR/USD, GBP/USD and AUD/USD contracts will be fully fungible with CME Group’s full-sized FX contracts, and margins and exchange fees will be scaled down in proportion with the full-sized versions at roughly one-tenth of the full cost. USD/JPY, USD/CHF and USD/CAD all have a high percentage of margin offset with the larger CME Group FX contracts.

CME Group FX is the largest regulated FX marketplace and one of the top two FX platforms in the world with more than $100 billion in daily liquidity. With the addition of the Forex E-micro contracts, the CME Group FX product suite will consist of 49 futures contracts and 32 options contracts based on 20 currencies.

FINRA to Regulate Member’s Retail Forex Activities

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Comments on Proposed Retail Forex Rules Sought

The Finanacial Industry Regulatory Authority (FINRA) requested comments on a proposed rule to limit the leverage available to retail investors trading in the off-exchange foreign currency (forex) markets.  The proposed rule would be applicable to FINRA member firms and would limit leverage in forex transactions to 1.5 to 1.  The proposed leverage limits are significantly lower than the leverage limits currently offered in the industry (which can reach up to 100 to 1 or higher).  The leverage limitation would not be applicable to eligible contract participants.  The FINRA proposal is the latest step in a series of regulatory tightening measures which have been instituted with the goal of protecting retail investors from the risks of the forex markets (for more information please see New Forex Registration Requirements).  Comments on the proposal are due February 20, 2009.  Continue reading →

CFTC Uses New Enforcement Authority to Police Forex

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Forex Firm Caught Operating a Ponzi Scheme

The CFTC just announced that it charged a group out of Atlanta with operating a Ponzi scheme.  This is the first action the CFTC has brought against a forex firm for fraud.  At the beginning of last year Congress passed the Farm Bill which provided the CFTC with more authority for regulating the off-exchange foreign currency markets (also known as the spot forex markets).  This action indicates that the CFTC is serious about cleaning up the forex markets.  As we’ve detailed before, forex registration will be coming shortly.  Continue reading →