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Interpretive Notices


(Board of Directors, August 24, 1995; revised July 24, 2000 and February 1, 2020)


NFA Compliance Rule 2-13 requires, in pertinent part, that each Member CPO which delivers a disclosure document under CFTC Regulation 4.21 must include in the disclosure document a break-even analysis which includes a tabular presentation of fees and expenses. The break-even analysis must be presented in the manner prescribed by NFA's Board of Directors. The purpose of this requirement is to ensure not only that participants will be clearly informed as to the nature and amount of fees and expenses that will be incurred, but that participants will also be made aware of the impact of those fees and expenses on the potential profitability of their investments. NFA's Board of Directors has adopted the following guidelines which must be adhered to by NFA Member CPOs when preparing the break-even analysis required by Compliance Rule 2-13:

  • The break-even analysis must include the applicable fees and expenses required to be described in the CPO's disclosure document by CFTC Regulation 4.24(i).
  • The break-even analysis must be based on the minimum initial investment amount for a participant and the minimum total subscription amount required for the pool to commence trading. Additionally, if the CPO anticipates a higher amount of total funds raised that will affect the fees and expenses per participant, then the CPO may also provide a break-even analysis using the higher amount of anticipated total funds raised.
  • If a redemption fee is charged at the end of the first year of investment, it must be clearly shown, considered part of the total cost and reflected in the break-even analysis. Any other redemption fee(s) (e.g., early withdrawal fees) on the redemption of the initial investment must be disclosed in the explanatory notes to the break-even analysis.
  • If the pool incurs fees and expenses in connection with the pool's participation in other investments, such fees or expenses must be clearly shown, considered part of the total cost and reflected in the break-even analysis.
  • Incentive fees must be stated as a percentage of profits, and the method by which profits are calculated must be described.
  • All management, brokerage and other fees must reflect actual experience or contractual charges, if known. If not known, they must be based on good faith estimates.
  • For purposes of the break-even analysis, CPOs may only offset expenses with interest income generated through the pool's investment in high credit quality short-duration1 instruments or deposits associated with the pool's buy-and-hold cash management strategies. Examples of such instruments or investments include, but are not limited to, Treasury Bills, cash on deposit at a bank or in a money market account, funds on deposit with brokerage firms and interest in a money market mutual fund. The estimate of this interest income must include the assumed interest rate, and that rate must reflect current cash market information. If any interest income is to be paid to the pool operator, or to anyone other than the pool participants, that fact and an estimate of the amount must also be clearly disclosed.

The CPO must calculate the additional trading profit necessary to overcome any incentive fees that would be incurred by a participant prior to the participant recovering the amount of their initial investment. This situation will arise whenever the pool expects to incur expenses which would not be deducted from the net performance that is the basis of in the incentive fee calculation. The incentive fee amount can be computed by first summing all of the pool fees, expenses and interest income that will be excluded from the computation of the incentive fee, then dividing that amount by (1- incentive fee rate) and then multiplying this amount by the incentive fee rate. For example, if the incentive fee is 25%, the denominator would be (1- .25) multiplied by the incentive fee rate of 25%.

As discussed above, the break-even presentation should be based on the minimum initial  investment amount and the minimum total subscription amount required for the pool to commence trading. A sample break-even presentation is shown below:

Minimum Initial Investment (1) $100,000
Upfront Syndication and Selling Expense (2) 1,500
Initial Organizational Expenses (3) 200
General Partner's Management Fee (4) 985
Fund Operating Expenses (5) 1,034
Trading Advisor's
Management Fees (6)
Trading Advisor's
Incentive Fees on Trading Profits (7)
The General Partner's Incentive Fees on Trading Profits (8) 0
Brokerage Commissions and Trading Fees (9) 1,724
Less Interest Income (10) (1,231)
Amount of Trading Profits Required for
a Participant's Capital Account
(Redemption Value) at the End of
One Year to Equal Its Initial Investment
Percentage of Minimum Initial Investment 6.42%

Explanatory Notes:

    (1) Investors will initially make an investment of $100,000. The break-even presentation is based on the $100,000 minimum initial investment and the minimum total subscriptions of $5,000,000 for the Fund to commence trading.
    (2) A 1.5% upfront syndication and selling charge will be deducted from each subscription to reimburse the Fund, the General Partner and/or the Clearing Broker for the syndication and selling expenses incurred on behalf of the Fund.
    (3) The initial organizational costs for the Fund are $10,000. Therefore, each participant's allocation of those costs based on a minimum initial investment of $100,000 and minimum total subscriptions of $5,000,000 will be $200.
    (4) The Fund's General Partner will be paid a monthly management fee of 1/12 of 1% of Net Asset Value.
    (5) The Fund's actual accounting, auditing, legal and other operating expenses will be borne by the Fund. These expenses are expected to amount to approximately 1.05% of the Fund's Net Asset Value.
    (6) The Fund's Trading Advisor will be paid a monthly management fee of 1/12 of 2% of Allocated Net Assets, which is anticipated to be 90% of the Net Asset Value.
    (7) The Trading Advisor will receive an incentive fee of 15% of Trading Profits exclusive of interest income. The $439 of incentive fees shown above is equal to 15% of the net of total trading income of $6,424, minus $1,724 of brokerage commissions and trading fees and $1,773 of Trading Advisor management fees.
    (8) In the above example, no incentive fee for the General Partner is included in the calculation. The General Partner charges a 20% quarterly incentive fee based upon New Net High Profits. New Net High Profits is the net of all management fees, brokerage commissions and operating expenses and as such, the General Partner does not receive an incentive fee until the Fund generates trading income sufficient to offset such expenses. Based on the above analysis, the General Partner would need to earn more than $6,424 of gross trading income per unit before it would be entitled to an incentive fee.
    (9) Brokerage commissions (including any spread on forex transactions) and trading fees are estimated at 1.75% of Net Asset Value.
    (10) The Fund will earn interest on margin deposits with its Clearing Broker. Based on a current assumed interest rate of 2%, interest income is estimated at 1.25% of Net Asset Value.

The above break-even analysis is a sample and the fees and expenses included in it may vary from those charged by other commodity pools. The analysis included in an actual disclosure document must include all of the fees and expenses of any type which affect the break-even point of that investment.

1 For the purpose of this Interpretive Notice, short-duration generally means instruments with a term of one year or less.