CTAs ponder regulatory future

Regulation of over the counter markets poses one type of challenge to the CTA community, but there are others to consider too.

Commodity trading adviser (CTA) strategies generally use futures to bet on trends in areas such as asset prices, interest rates and FX in order to make money.

Strictly speaking, a CTA in the US is a firm or individual registered with the Commodity Futures Trading Commission (CFTC), who is compensated for giving advice on options, futures and the trading of managed futures accounts.

In Europe, companies such as Dexia are branching out into Ucits versions of CTA strategies – although work-arounds are required for areas such as total return swaps (see box below).

Currently, the sector faces two key challenges. One is regulatory, which can be broken down into the benign and the aggressive, the other is trends, or rather the lack of them, suggests Steeve Brument (pictured), head of systematic funds at Dexia Asset Management.

He is part of a Paris-based team overseeing some €4bn in alternative investments across different strategies, including CTA, where assets roughly doubled in the past year to about €75m.

A more benign type of regulation, from the perspective of a CTA provider or investor, includes some of the regulation proposed by the CFTC. Brument characterises it as addressing a market problem that does not necessarily exist.

Instead, the US regulatory e­nvironment, as far as commodities and over-the-counter trading are concerned, may be driven more by reactions to pricing trends in agriculture or oil – fast-rising oil prices are politically very sensitive in the US.

But Brument argues that the scope of commodity market manipulation has actually been fairly rare over a 30 to 40-year time horizon.

There may have been a few cases of attempts to corner the coffee or silver markets, but others such as oil are deemed simply too big to rig.
This in turn means perceived problems, for which regulatory proposals are put forward (position limits, for example), may not necessarily exist.

Remaining liquid

While CTAs, like other alternative investments, have been criticised for their perceived role in the f­inancial crisis, Brument says they have remained liquid throughout.

Other areas of regulatory zeal may be felt more aggressively by the CTA community, such as proposals to tightly regulate high-frequency trading (HFT).
But as a first response it is vital to note that, although CTAs may rely on algorithms, they are not performing the role of market makers, which Brument sees as analogous to HFT.

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