Turnkey Trading Partners (“Turnkey”) has been preparing managerial and performance accounting for Commodity Futures Trading Commission (“CFTC”) and National Futures Association (“NFA”) registrants for nearly 15 years.  During this period of time, nearly every type of trading program, company structure, and brokerage deal has been observed.  Something that is common across all types of CFTC and NFA regulated entities is that, very often, business arrangements don’t necessarily conform to regulatory or compliance obligations and best practices.  How does Turnkey become aware of this?  Turnkey’s experienced accounting team often can identify such deficiencies through a firm’s monthly performance or managerial accounting entries. This means that when NFA comes for an examination, their audit teams will find these deficiencies as well.  For this reason, it is critical to ensure that professional and knowledgeable accounting staff are monitoring company bookkeeping.

Failure to Prepare Books and Records in a Timely Fashion

There are many reasons for traders and brokerage firms to reconcile and close their books monthly. Arguably, the most important reason, is that a firm’s books will be looked at extensively during an NFA audit. Also, that CFTC regulations and NFA rules require accurate financial record keeping and call for monthly reports to be available.  Unorganized bookkeeping generally leads to increased scrutiny by an NFA auditor. Book keeping that is done “after the fact,” that is many months in arrears, can also result in mistakes. Similarly, book keeping that is not kept current will often not accurately reflect the details surrounding recorded accounting transactions. After weeks or even months have passed can a firm really remember what every charge on a credit card was for? What every agreement signed and paid for represented? How every deal was arrived at and recorded in the accounting? Ultimately, regulatory examiners have an expectation that firms maintain accurate and timely records related to all transactions big and small. They also require proper supporting documentation and an appropriate description within firm ledgers. Failure to adhere to this expectation can result in fines or other regulatory actions against the company.

Besides the potential for risk, there are benefits to ensuring books are kept up to date at least monthly.  For example, a monthly reconciliation will help to identify unusual transactions caused by accounting, brokerage, or trading errors. Similarly, monthly reconciliations and processes can help reduce the risk of internal fraud or other forms of malfeasance. Beyond this, tracking receivables and expenses monthly will help companies to better manage cash flow and make longer term, realistic projections about business expenses.  Practically speaking, how can a company determine how much capital is actually available to expand the business, pay staff, or determine long term fiscal health without knowing this information? Eyeballing the cash available in a company bank account as a regulated entity just doesn’t, and shouldn’t cut it.

Cash vs Accrual Accounting

While start up registrants may have accounting needs which are relatively simple, as trading and brokerage firms expand, accounting needs become increasingly complex. A typical CTA, CPO, IB, or FCM must consider many variables while compiling its books and records. These include but are not necessarily limited to: reporting an accurate firm net capital position, total revenue, total payables, total receivables, broker payouts, fee splits for trails and or advisory fee payments, and distributions of company equity to firm principals.

All CFTC registrants and NFA members must present their books on a US GAAP Accrual basis. They must also adhere to regulations 1.10, 1.17, 4.22, and/or 4.35 as applicable. Unfortunately, in Turnkey’s experience, as firms grow, they don’t increase their accounting capabilities.  Ultimately as startup firms expand it becomes increasingly difficult to properly report company financial information on a cash basis. Generally speaking, at some point, most successful brokerage and trading operations either have to hire an industry experienced internal accountant or must consider retaining knowledgeable third-party accounting support.

Recording of Liabilities and Receivables

When Turnkey identifies a firm that has not properly invested in its accounting systems, the revelation typically comes after reviewing the recording of liabilities and receivables. Inaccuracies in how accounting is handled in this area almost always lead to three immediate and common outcomes:

  • Customers and/or brokers are not billed or paid appropriately. This costs registrants both time and money. It also can create a nightmare situation during NFA audits if book keeping entries can’t be justified or supported properly.
  • Regulatory filings are inaccurate with respect to net capital presentations, income statements, and proper period recognition. This often results in a painful financial statement amendment process with NFA.
  • A firms overall internal controls are called into question which also shines a spotlight on management supervision of those controls. Ultimately this can lead to adverse certified audit opinions and additional regulatory scrutiny.

To ensure the above situations do not occur as a result, firms need to implement a process for managing accounts payable and accounts receivable. While not particularly challenging to implement, establishing a consistent and reliable process can be difficult for companies whose staff are spread too thin. If the above problems aren’t occurring due to a lack of accounting knowledge, they most likely are occurring due to a lack of resources or commitment relative to the overall accounting process.


Here to Help

Turnkey’s accounting team is ready and willing to help solve any accounting concerns your firm may have.  Our team specializes in bookkeeping and performance reporting for CFTC registered, NFA member firms. We have assisted hundreds of firms across all major CFTC registration categories – CTA, CPO, IB, and FCMs. To learn more about Turnkey’s accounting solutions please feel free to email accounting@turnkeytradingpartners.com or call us at (312) 324-0040.