The Commodity Exchange Act was enacted in 1936 after being passed by the US government. It was used as a replacement for the Grain Futures Act of 1922. The Commodity Exchange Act set up federal regulations on all futures trading and commodities and requires that all of these options be traded as organized exchanges. As a result of this act, the Commodity Futures Trading Commission was created in 1974. In 1982, it created the National Futures Association. Registration under the Commodity Exchange Act has become a mainstay under this law.
The act specifies that the manager of a hedge fund needs to register as a commodity pool operator for registration under the Commodity Exchange Act if any commodity futures, contracts, or options are traded by the fund. They are usually seen being referred to as CPO's. The CPO will be required to keep up with record keeping, reporting and disclosure requirements as dictated by the Commodity Exchange Act, in addition to the regulations that were laid out by the Commodity Futures Trading Commission. Not only is registering a requirement, but the offering document of the hedge fund must also get approval from the National Futures Association before it can even be used.
Registration under the Commodity Exchange Act also says that if a hedge fund has a total initial margin and the option premiums for commodity transactions don't exceed 10 percent of fund's total assets, then it may be able to ask for an exemption request from the numerous regulations it would impose on it otherwise as a CPO. This is also true for when investors of the fund are being limited to only "qualified eligible participants."
When dealing with registration under the Commodity Exchange Act, any person that the hedge fund manager legitimately thinks, at the time, has done certain things, would be considered a "qualified eligible participant." These things include any investor who owns securities from issuers that are not affiliated with these participants and other investments with a total market value of $2 million or more. A "qualified eligible participant" also includes an investor who had put in a deposit with a futures commission merchant. This could be for an account of its own within the preceding six month period prior to the sale and one that had more than $200,000 in initial margin and option premiums for commodity interest transactions. Any person that fits into those categories would be considered a qualified eligible participant.
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