Key Takeaways
- • The CFTC's Division of Swap Dealer and Intermediary Oversight issued an interpretive letter on December 11, 2017, clarifying that separate compensation for commodity trading advice does not automatically disqualify futures commission merchants (FCMs), swap dealers (SDs), and introducing brokers (IBs) from the "solely incidental" CTA registration exclusion.
- • The EU's MiFID II directive, effective January 3, 2018, requires investment managers to unbundle research payments from execution service payments, prompting the Futures Industry Association (FIA) to seek CFTC guidance on whether this structural change would trigger CTA registration requirements for EU-based intermediaries.
- • The CFTC determined that direct payment for commodity trading advice is merely one factor among many in assessing CTA registration obligations; separate compensation alone is not dispositive, preserving regulatory flexibility for affected intermediaries.
- • This guidance maintains the existing regulatory framework for intermediaries providing incidental trading advice while accommodating the compliance requirements imposed by European regulatory reform.
Summary
On December 11, 2017, the CFTC's Division of Swap Dealer and Intermediary Oversight responded to a request from the Futures Industry Association with an interpretive letter addressing a critical regulatory question facing futures and derivatives intermediaries. The letter clarifies how the EU's imminent MiFID II research compensation requirements interact with U.S. registration obligations for commodity trading advisors.
Under existing CFTC rules, FCMs, SDs, and IBs that provide commodity trading advice must register separately as CTAs unless that advice qualifies as "solely incidental" to their primary business. The "solely incidental" exclusion has historically allowed intermediaries to offer trading guidance without triggering separate CTA registration. However, MiFID II's January 3, 2018, effective date introduces a structural change requiring EU investment managers to separate payments for investment research—including commodity trading advice—from execution service fees.
The FIA's concern was whether this mandatory unbundling would eliminate the ability of affected intermediaries to rely on the "solely incidental" exemption, as the explicit separation of compensation for advisory services might signal that such services are no longer incidental to the firm's core business. In response, the CFTC stated that while direct payment for commodity trading advice represents one relevant factor in determining whether registration is required, receipt of separate compensation is not itself dispositive. This means intermediaries can continue evaluating their CTA registration status based on the full context of their business operations, rather than being forced into registration solely due to payment structure changes mandated by European regulation.
The guidance preserves operational continuity for multinational intermediaries navigating dual regulatory regimes and allows the "solely incidental" framework to accommodate evolving compensation models driven by foreign regulatory requirements. The letter signals that the CFTC views compliance with MiFID II's unbundling requirements as compatible with existing U.S. registration exemptions, provided intermediaries conduct case-by-case assessments of their advisory activities relative to overall business operations.
Under existing CFTC rules, FCMs, SDs, and IBs that provide commodity trading advice must register separately as CTAs unless that advice qualifies as "solely incidental" to their primary business. The "solely incidental" exclusion has historically allowed intermediaries to offer trading guidance without triggering separate CTA registration. However, MiFID II's January 3, 2018, effective date introduces a structural change requiring EU investment managers to separate payments for investment research—including commodity trading advice—from execution service fees.
The FIA's concern was whether this mandatory unbundling would eliminate the ability of affected intermediaries to rely on the "solely incidental" exemption, as the explicit separation of compensation for advisory services might signal that such services are no longer incidental to the firm's core business. In response, the CFTC stated that while direct payment for commodity trading advice represents one relevant factor in determining whether registration is required, receipt of separate compensation is not itself dispositive. This means intermediaries can continue evaluating their CTA registration status based on the full context of their business operations, rather than being forced into registration solely due to payment structure changes mandated by European regulation.
The guidance preserves operational continuity for multinational intermediaries navigating dual regulatory regimes and allows the "solely incidental" framework to accommodate evolving compensation models driven by foreign regulatory requirements. The letter signals that the CFTC views compliance with MiFID II's unbundling requirements as compatible with existing U.S. registration exemptions, provided intermediaries conduct case-by-case assessments of their advisory activities relative to overall business operations.
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