You may want to refer to the following Glossary of terms when visiting the Broker and Client areas of this website.

1256 Contract This refers to Sec. 1256 of the U.S. Internal Revenue Code which regulates the taxation of regulated futures contracts, foreign currency contracts, non-equity options and dealer equity options. A regulated futures contract is a 1256 contract if it is traded on or subject to the rules of a national securities exchange registered with the Securities and Exchange Commission, or a domestic board of trade designated as a contract market by the Commodity Futures Trading Commission or any other market designated by the Secretary of the Treasury, or which is marked-to-market to determine the amount of margin which must be deposited or may be withdrawn. Marked-to-market means a contract is carried in an account at the price it is originally bought/sold at and is valued every day at the closing price published by the exchange or contract market where it is traded increasing or decreasing the unrealized profit/loss on the open position on a daily basis.

Account Balance The cash balance in an account.

Accredited Investor SEC Rule 501 of Regulation D defines “accredited investors” as:
1. a bank, insurance company, registered investment company, business development company or small business investment company;
2. an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
3. a charitable organization, corporation, or partnership with assets exceeding $5 million;
4. a director, executive officer, or general partner of the company selling the securities;
5. a business in which all the equity owners are accredited investors;
6. a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase;
7. a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
8. a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated makes.

Actual Funding Level When an investor and CTA enter into a notional funding agreement the amount of capital deposited in the investors’ account is referred to as the actual funding level.

Associated Persons (APS) APs are individuals employed to solicit orders, customers or customer funds by FCMs, IBs, CTAs and CPOs.

Background Affiliation Information Center (BASIC) Is a webpage maintained by the NFA which can be used to check the registration status of APs, FCMs, IBs, CTAs and CPOs. BASIC contains CFTC registration listings, NFA membership information and futures related regulatory and non-regulatory actions contributed by NFA, the CFTC and U.S. futures exchanges. You can access BASIC at http://www.nfa.futures.org/basicnet/welcome.aspx

Break Even Analysis A break even analysis shows the fees and expenses investors incur on an initial investment in a pool or fund and the amount the pool or fund must earn for the investor to break even after one year.

Capital Capital refers to the amount deposited in a trading account or invested in a managed account, commodity pool, futures fund or other alternative investment.

Capital Account Investments in commodity pools, futures funds and other pooled alternative investments can be valued as capital accounts or based on the net asset value of the fund or as units. When investments are designated as capital accounts a capital account is established for each investor and the investor’s initial capital contribution is deposited in the account. Some CPOs deduct sales commissions, organizational and offering expenses from the investor’s initial capital contribution before establishing the capital account. The balance in the investor’s capital account is adjusted every month thereafter to reflect any changes in value of the pool or fund. (See Net Asset Value below).

Clearing Broker The clearing broker is the FCM where a customer or CPO opens managed accounts that will be traded by CTAs on behalf of the customer, commodity pool or fund. The CTAs enter trades through the clearing broker, or independent “executing brokers”, these orders are filled in the “pits” or through electronic facilities provided by various exchanges, reported to the CTAs and cleared by the FCM.

Circuit Breaker Describes a system of trading halts and price limits on equities and derivatives markets designed to provide a cooling-off period during large, intraday market declines.

Commodity Futures Trading Commission (CFTC) The CFTC is an independent regulatory agency established by Congress in 1974 that is responsible for regulating futures and options trading on U.S. futures markets pursuant to the Commodity Exchange Act.

Commodity Pool An enterprise in which funds contributed by a number of investors are combined for the purpose of trading futures interests. Commodity pools are usually sold as private placements exempt from registration under the Securities Act of 1933 and qualification under state “blue sky” laws.

Commodity Pool Operator (CPO). An individual or organization which operates or solicits funds for a commodity pool or futures fund and uses the capital raised to trade futures interests.

Commodity Trading Advisor (CTA). Someone who directly or indirectly gives advice to others about buying or selling futures interests for compensation or profit.

Correlation. Correlation measures the extent to which the performance of an investment corresponds to contemporaneous performance of another investment. The correlation coefficient, R, can range from -1 t0 1 and is typically used to express the degree of correlation between investments. An R equal to 1 would indicate perfect positive correlation, while an R of -1 would indicate perfect negative correlation. Its square (R-squared) is a measure of the extent to which performance of one investment can be used to explain performance of the other investment.

Customer Segregated Funds Accounts (Seg. Accounts) The CFTC requires FCMs to deposit all money, securities and other property received from customers in special seg. accounts used to hold and separate customers’ assets from assets belonging to the FCM. The CFTC regulations prohibit FCMs from commingling their assets with seg. funds.

Daily Price Limit. The maximum advance or decline, measured from the previous day’s settlement price, permitted for a futures contract in one trading session. See variable limit.

Disclosure Document The document that CTAs and CPOs must provide to prospective investors describing the risks, benefits and costs associated with opening a managed account or investing in a commodity pool or futures fund.

Escrow Account. Escrow accounts are used by CPOs to hold investors’ capital contributions until they can be invested in a commodity pool, futures fund or other type of pooled alternative investment. Escrow accounts are used to hold investors’ funds during an “initial offering period” when the CPO is trying to raise enough capital to break escrow and begin trading. After that escrow accounts are used to hold investors’ capital from the time the CPO accepts their subscriptions to the time the capital in invested.

Escrow Agent. An escrow agent unaffiliated with the CPO usually maintains and administers the escrow account. The CPO may use a bank or FCM to perform this function.

Executing Brokers. Executing brokers are usually members of an exchange or employees of member firms who specialize in filling orders for their customers and other brokerage firms. “Give-up” brokers provide an interface between exchange floors and non-members allowing them to enter orders through service desks located on the floors or in the brokerage firm’s offices. These brokers usually pass orders along to independent floor brokers or brokerage groups who actually fill the orders and report the fills back up the communications chain. The give-up brokers are paid a fee for handling these orders while the floor brokers charge a separate floor brokerage fee. On some exchanges floor brokerage groups combine the give-up and order filling functions performing both services for one “bundled” fee.

Fee Based Financial Planner. Describes a financial planner who is compensated by clients on a fee basis and receives commissions contingent on the purchase or sale of financial products.

Fee Only Financial Planners. Describes a financial planner compensated solely by clients paying fees based on the value of assets under management. Fee only planners and their related parties receive no compensation from the purchase or sale of financial products for their clients.

Fee Payment Authorization. A written authorization signed by a customer allowing a FCM to pay CTA management and incentive fees out of a customer’s account upon receiving a billing statement from the CTA.

Financial Planner. A term used to identify someone who provides financial planning and advice to others. Many financial planners are registered as investment advisers or hold insurance or securities licenses that allow them to buy or sell financial products for their clients. Some financial planners are certified by professional organizations as Certified Financial Planners (CFPs) or Chartered Financial Consultants (CFCs) or Chartered Financial Analysts (CFAs). Other professionals like attorneys, accountants and bank trust officers also perform financial planning services for their clients.

Floor Brokerage. The fees charged by members of a futures market, also known as floor brokers or order fillers, to buy or sell futures or options contracts on the ‘floor” of a futures market.

Form 1099. The IRS requires FCMs to provide Form 1099s reporting interest earned and profits/losses on 1259 Contracts to customers as of the end of every year.

Form K-1. The CPO prepares a K-1 annually for each investor in a commodity pool or futures fund showing the amount invested, realized and unrealized gains and losses, interest income, fund expenses and the amount of income or loss the investor must report to the IRS on his/her tax return.

Form N-2. The form of registration statement used to register an investment company, hedge fund or fund-of-funds with the SEC.

Form S-1. The form of registration statement normally used to register a publicly offered futures fund with the SEC.

Forward Market Value. The value of all interbank foreign currency postions open in an account marked-to-market.

Fully Disclosed. IBs introduce their customers’ accounts to FCMs where the accounts are cleared on a fully disclosed basis by the FCM. This means that the customers receive trading reports and statements prepared by the FCM even though the IB is responsible for soliciting orders from the customers and supervising the trading in their customers’ accounts.
Fund of Funds. A type of alternative investment where the capital raised is invested in a portfolio of hedge funds.

Futures Commission Merchant (FCM). A FCM is a brokerage firm that solicits and accepts orders to buy or sell futures interests, clears customer trades and holds customers’ funds or other property to margin their accounts.

Futures Interests. A term that includes futures contracts, options on futures and foreign exchange.
General Partner. The general partner of a commodity pool or futures fund is responsible for the day-to-day operations of the partnership and assumes unlimited liability for the partnership’s liabilities.

Hedge Fund. A type of alternative investment where the capital raised is invested in managed accounts trading specific strategies for equities, options, fixed income, futures interests or other derivative markets.
Incentive Fee. A monthly or quarterly fee charged by a CTA or CPO on new net profits in an account.
Initial Closing. The initial closing occurs when the CPO of a commodity pool or futures fund raises the minimum amount of capital needed for the pool or fund to begin trading.

Introducing Broker (IB). An IB is a brokerage firm that solicits and accepts orders for futures interests from customers but does not accept money, securities or other property from customers to margin their accounts. Thee IBs customer accounts are cleared by a FCM on a fully disclosed basis.

Investor Service Fees. See Trailer Commissions.
Limited Liability Company (LLC). Describes a form of investment ownership providing limited liability to investors, who are known as members, and flow through treatment of profits and losses. The day-to-day operations of a LLC are the responsibility of the managing Member(s).

Limited Partner. A passive investor in a partnership who has no management responsibility for the day-to-day activities of the partnership.

Limited Trading Authorization. A power of attorney that authorizes a CTA or other third party to trade another person’s account on a discretionary basis.
Long Option Value. The value of all open long option positions in an account marked-to-market.

Managed Account. An arrangement by which investors give a written power of attorney (see Limited Trading Authorization) to someone else, usually an AP or CTA, to buy and sell futures interests for their accounts without their prior approval.

Management Fee. A monthly or quarterly fee charged by a CTA or CPO based on the amount of assets under management regardless of whether the trading done for a customer is profitable.

Margin. A good faith deposit or performance bond deposited by buyers and sellers of futures contracts and sellers of options to ensure performance of the contractual obligations represented by the futures and options contracts in their accounts. Initial margin is the amount that must be deposited when a position is initiated while maintenance margin is additional margin that needs to be deposited when the equity in an account falls below a specific level. Futures margins differ from securities margins since FCMs do not loan money to customers like broker-dealers do.

Member. An owner of a Limited Liability Company.

NASD Broker Check. The website that allows investors to check to see if brokerage firms and RRs are registered with the NASD at www.nasdr.com/2000.asp.

National Futures Association (NFA). The NFA was authorized by Congress in 1974 and designated as a “registered futures association” by the CFTC in 1988. NFA is the self-regulatory organization for U.S. futures industry. All FCMs, IBs, CTAs, CPOs and APs doing business in the U.S. are members of NFA.

National Association of Securities Dealers, Inc (NASD). The NASD was created in 1938 by the Maloney Act Amendments to the Securities Act of 1933. It is the largest self- regulatory organization in the US responsible for regulating the NASDAQ Stock market and the securities industry.

Net Asset Value (NAV). Is a way of valuing investments in commodity pools and futures funds. Ownership is expressed in terms of the number of units owned multiplied by the NAV which is determined by taking all of the assets in a managed account, pool or fund minus liabilities plus or minus the value of open positions marked-to-market divided by the total number of unite outstanding.

Net Performance. The increase or decrease in NAV of a managed account, commodity pool or futures fund exclusive of additions, withdrawals and redemptions.

New Net Profits. CTAs and CPOs are paid performance fees (also called incentive fees) on new net profits earned by investors. New net profits represent the increase in an investment net of brokerage fees and other expenses from one period to another. Most performance fees are paid quarterly so the fee, if any, would be based on the increase during the quarter. If an investor owns 100 units of a fund valued at $1,250.00 per unit at the beginning of the quarter and the NAV per unit increases to $1,312.50 during the quarter the CTA would earn a performance fee on $6250.00, based on the appreciation in units owned (100 units x $62.50 increase per unit = $6250) If the investor owns a managed account or fund units valued on a capital account basis and the account increases in value from $125,000.00 to $131,250.00 the CTA’s fee would also be based on $6,250.00 in appreciation. If the CTA charges a 20% incentive fee the fee would total $1,250.00 reducing the value of the fund units owned, managed account or capital account to $130,000 after paying the performance fee. The investor would not pay another performance fee until new appreciation increased the value of his/her fund units, managed account or capital account above $130,000.00.

Notional Funding. An arrangement between a CTA and an investor where they agree that the CTA will trade the account “as if” it had more capital in the account than the amount actually deposited. If an investor deposits $100,000 in an account with the understanding that the CTA will trade the account like it had $200,000 in equity, the actual funding level would be $100,000 and the notional funding level would be $200,000.

Organizational & Offering (O&O) Expenses. O&O expenses include all fees and expenses incurred in organizing a pool or fund and selling fund interests to investors.

Open Trade Equity. The value of all open positions in a futures account marked-to-market.

Operating Expenses. Include administrative, legal and accounting fees, costs incurred in preparing and mailing reports to investors, other day-to-day expenses as well as any extraordinary expenses.

Performance Fee. See Incentive Fee.

Realized Profit/Loss. The actual profit or loss made when an open futures interest contract is closed out.

Regulation D (Reg D). Allows a CPO to solicit investments in a commodity pool without registering the pool offering with the SEC.

Sales Agent. A brokerage firm, AP or RR authorized to solicit investments in a commodity pool or futures fund.

Sales Commission (Load). A separate commission sometimes charged when a managed account is opened or an investment is made in a commodity pool or futures fund before any trading occurs.

Securities and Exchange Commission (SEC). The government agency created in 1934 by the Securities Exchange Act of 1934 to administer that act and the Securities Act of 1933.

Sharpe Ratio. The Sharpe ration is a performance measure which indicates the amount of excess return per unit of risk taken. It is calculated as the difference between the annualized return and the risk free rate of return divided by the annualized standard deviation of return. The more positive the Sharpe ratio, the better the risk-adjusted returns.

Short Option Value. The value of all open short option positions in an account marked-to-market.
Standard Deviation. The standard deviation is often used by investors to measure the risk of an investment or portfolio of different investments. Standard deviation calculates the average (mean) return on an investment then measures the variation of the returns around the mean. The basic idea is that the more an investment’s returns vary from the average returns, the more volatile it is.

Total Equity. The sum of the account balance, open trade equity and forward market value in an account.

Trailing Commissions/Investor Service Fees. A commission paid to brokerage firms, APs and RRs as compensation for selling interests in commodity pools and futures funds and providing ongoing services to their investors. These payments can be based on half-turn or round –turn commissions paid by a pool or fund or on a percentage of a pool or funds assets.

Unrealized Profit/Loss The marked-to-market profit or loss on an open futures interest position prior to it being closed out.

Variable Limit. A price system that allows for larger than normal allowable price movements under certain conditions. In periods of extreme volatility some exchanges permit trading at price levels that exceed regular daily price limits.

Wrap Fee. Describes a charge for investment services that bundles or wraps a number of services like advice, research, financial planning, etc. together with a single fee based on the value of assets under management.