Series 3 — National Commodity Futures Exam — All Questions
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Which entity is the federal agency that administers the Commodity Exchange Act and oversees the U.S. futures markets?
- a.The Securities and Exchange Commission (SEC)
- b.The Commodity Futures Trading Commission (CFTC)✓
- c.The National Futures Association (NFA)
- d.The Federal Reserve Board
The CFTC is the independent federal regulator that administers the Commodity Exchange Act and polices the futures markets for fraud and manipulation. The SEC regulates securities, and the NFA is the industry self-regulatory organization.
The National Futures Association (NFA) is best described as:
- a.The industrywide self-regulatory organization for the U.S. derivatives industry✓
- b.A federal government agency created by Congress
- c.A clearinghouse that guarantees every futures trade
- d.A commodity exchange where contracts are listed
The NFA is the self-regulatory organization (SRO) whose members include FCMs, IBs, CPOs, CTAs, and their associated persons. It is not a government agency, a clearinghouse, or an exchange.
A firm that solicits and accepts customer orders and holds customer funds must register as a:
- a.Commodity Trading Advisor (CTA)
- b.Introducing Broker (IB)
- c.Futures Commission Merchant (FCM)✓
- d.Commodity Pool Operator (CPO)
An FCM carries customer accounts and holds customer money. An IB solicits business but does not hold funds, a CTA gives advice, and a CPO operates a pooled investment vehicle.
Speculative position limits set by the CFTC and exchanges are designed primarily to:
- a.Guarantee profits for bona fide hedgers
- b.Prevent excessive speculation and market manipulation✓
- c.Force all speculators to take physical delivery
- d.Eliminate basis risk for hedgers
Position limits cap the number of contracts a speculator may hold to curb excessive speculation and manipulation. Bona fide hedgers can apply for exemptions from these limits because they are offsetting real commercial risk.
Before a non-institutional customer may begin trading futures, the firm must ensure the customer has received:
- a.The standardized risk disclosure statement describing the risk of loss✓
- b.A guarantee that losses will not exceed the initial margin
- c.A prospectus filed with the SEC
- d.Written approval from the CFTC for that customer
Firms must deliver the standardized risk disclosure document, which explains that futures trading carries a substantial risk of loss, before opening the account. There is no guarantee against loss and no SEC prospectus for futures.
Under anti-money-laundering rules, a futures firm that detects a transaction with no apparent lawful purpose is generally required to file a:
- a.Form 8-K with the SEC
- b.Risk disclosure statement
- c.Registration statement with the NFA
- d.Suspicious Activity Report (SAR)✓
Under the Bank Secrecy Act and USA PATRIOT Act, firms must maintain an AML program and file Suspicious Activity Reports (SARs) for qualifying suspicious transactions, along with a customer identification program and ongoing monitoring.