Q. So, these are Futures Commission Merchants… but that’s not a particularly enlightening phrase. Who are they and what do they do?
A. They’re essentially the top of the food chain in the futures world, the folks who actually transact on a futures exchange like ICE or CME. These agents are essentially vouching for you with the exchanges; they verify your identity, send over the required margin to place a trade, confirm that you have the funds to back up your trading behavior, and keep you informed of your account balances and needed action.

Q. So MF Global, for example, was an FCM?
A. Right. Unfortunately, not a poster child of responsibility, but right. The big thing that a lot of industry professionals are very upset with about MFGlobal is that the allegation that they broke really the cardinal rule of the whole futures industry, keeping customer funds segregated. In principle, those customer funds cannot be used for anything other than customer trades, and they should have been readily available back to the customers, as happened, for example, in the Refco bankruptcy.

Q. OK, so to be clear, FCMs are different than the CTAs that we’ve talked about before, the folks who run futures trading strategies for individual investors.
A. Right. The CTAs are professional traders, just like professional money managers in stocks and bonds. Usually, individuals have “managed accounts” with CTAs: that is, the money in the account actually belongs to the individual, and the CTA trades it. But to do that, the CTA has to work through an FCM.

Q. So who does the regulating here? The CFTC?
A. The CFTC is to futures like the SEC is to other securities; and the NFA — the National Futures Association– is the industry’s SRO, sort of like FINRA is for broker dealers and registered investment advisors. And you should always go to the NFA website before investing with any CTA or in any CPO.