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October 04, 2018
Information for CPOs and CTAs—Avoiding financial ratio errors on NFA Forms PQR and PR
NFA Compliance Rule 2-46 and the related Interpretive Notice to NFA Compliance Rule 2-46 require commodity pool operators (CPO) and commodity trading advisors (CTA) to report quarterly two financial ratios regarding a CPO's or CTA's financial condition. As described in the Interpretive Notice, NFA Forms PQR and PR contain data fields for the Current Asset/Current Liability (CA/CL) ratio and Total Revenue/Total Expenses (TR/TE) ratio. A number of CPOs and CTAs are incorrectly reporting these financial ratios.
Ratios must be calculated using the accrual method of accounting
CPOs and CTAs have incorrectly calculated these ratios using a cash basis of accounting. Both ratios must be computed using the accrual method of accounting and in accordance with U.S. generally accepted accounting principles or another internationally recognized accounting standard, consistently applied.
The accrual method of accounting requires that revenues and expenses be recorded in the period in which they are earned or incurred rather than when they are received or paid. For example, a management fee earned in June and received in July should be recorded as revenue for June. Similarly, a bill for services received in June and paid in July should be recorded as an expense for June.
CA balance must only include assets owned by the CPO or CTA
CPOs and CTAs have incorrectly calculated the CA balance in the CA/CL ratio by including client assets invested in pools or managed accounts. However, the CA balance must be calculated using only the CPO's or CTA's own assets. These assets may include the CPO's or CTA's interest in a pool or managed account.
CA balance must only include the CPO's or CTA's current assets
CPOs and CTAs have incorrectly calculated the CA balance using total assets or non-current assets such as a receivable that is not due within the next twelve months or a long-term rent-related security deposit. The CA balance must include only current assets. A current asset is an asset that is expected to be converted to cash within the next year (e.g., cash, accounts receivable due within the next twelve months, marketable securities).
TR/TE Ratio must be calculated based on the prior twelve months
Although NFA Forms PQR and PR are filed quarterly, the TR/TE ratio should be calculated using revenue earned and expenses incurred during the prior twelve months. For example, a PQR or PR with an as of date of March 30, 2019 should include all revenue earned and expenses incurred from April 1, 2018 through March 30, 2019.
Additional guidance on calculating the ratios is available in the Interpretive Notice to NFA Compliance Rule 2-46 and the materials and recordings for NFA's May 2017 Member Workshop.
As a reminder, CPO and CTA Members must maintain all quarterly ratio calculations and any supporting documentation and make them available to NFA during an examination or upon request.
If you have any questions, please contact Christine Roche, Associate Director, Compliance (firstname.lastname@example.org or 312-781-1562) or Mary McHenry, Associate Director, Compliance (email@example.com or 312-781-1420).