In 1991, the CFTC issued an Advisory describing several methods that CPOs and CTAs could use to account for additions and withdrawals when computing their rate-of-return (ROR). One of the methods authorized by the Advisory was the "only accounts traded" (OAT) method. Under this method, CTAs could exclude accounts that were opened or closed intramonth as long as certain conditions were met. NFA's audits indicate that the OAT method has been used in a reasonable manner, and we have not found any instances where its use produced misleading performance results.
On March 13, 2003, the Commission issued proposed rules relating to CTA performance reporting. In that release, the Commission proposed adopting an appendix to the Part 4 rules to codify methods that can be used to account for additions and withdrawals. The Commission's proposal did not include the OAT method, however. According to the release, "The Commission is not proposing to include the Only Accounts Traded Method as an option CTAs may choose prospectively due to concerns that it allows for accounts to be excluded entirely from the rate of return computation."
Several commenters asked the Commission to retain the OAT method, but Appendix B in the final rules does not include it. Appendix B does provide that a CPO or CTA may "present to the Commission proposals regarding any alternative method of addressing the effect of additions and withdrawals on the rate of return computation, including documentation supporting the rationale for use of that alternative method," but this language suggests that each CTA must file an individual request based on its particular circumstances.
The informal subgroup that helped NFA develop its notional funding proposal was concerned about eliminating the OAT method as a generally accepted option. NFA believes that CTAs should be able to use the OAT method without having to file individual requests and proposes an amendment to the interpretive notice on performance reporting and disclosure. The members of the subgroup reviewed the amendment, and we have incorporated their comments.
NFA amended the interpretive notice on performance reporting and disclosure by adding a section on additions and withdrawals. This amendment generally allows CTAs to adjust for additions and withdrawals by temporarily excluding accounts from the ROR calculation if those accounts were opened or closed during the reporting period, had no open positions or activity because the account has not yet been approved for trading or the client intended to - and did - close the account shortly after the reporting period ended, or had net additions and withdrawals in excess of 10% of the account's beginning net nominal account value for the period. The amendment also makes it clear that Members are not required to use this method but can use any method authorized by the CFTC, including the methods described in Appendix B to Part 4.
Substantively, NFA's proposal is very similar to the CFTC's 1991 advisory. In order to address the CFTC's concerns, however, NFA took several requirements that were implied in the 1991 advisory and made them explicit. In particular, the proposed language includes a footnote with additional examples of when accounts must be included in the ROR calculation, clarifies that the method may not be used if it produces results that are materially different from the results of the methods contained in Appendix B or excludes a significant percentage of the accounts in the trading program, and specifically requires CTAs using this method to provide footnote disclosure regarding any unusual change in the number or size of additions, withdrawals, accounts opened, or accounts closed.
NFA respectfully requests that the Commission review and approve the proposed amendments to the Interpretive Notice to NFA Compliance Rule 2-34 Regarding Reporting and Disclosures. NFA intends to make the amendments effective on May 1, 2004, to correspond with the effective date of Compliance Rule 2-34 and the Interpretive Notice, if the Commission approves the amendments prior to that date.