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What Is an Eligible Contract Participant?

Investment managers, brokers, and advisers can determine whether a client is an eligible contract participant under regulatory standards.
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  • Written By: Mary McMahon
  • Edited By: Shereen Skola
  • Last Modified Date: 04 December 2014
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An eligible contract participant is an entity entitled to exemptions to certain financial regulations. This usually means an organization or structured investment pool like a pension plan, although individuals with a higher net worth may qualify as well. These exemptions allow eligible contract participants to be involved in trades and other financial activities not normally permitted by financial regulations due to concerns about risk. High risk activities are barred for members of the general public out of concern for their safety as investors and market participants.

Regulations clearly specify which entities are entitled to this special treatment under the law. This can vary by nation, but often includes insurance companies, large funds, banks, and companies with substantial assets. Entities already subject to government regulation, like pension funds, also qualify, because their activities are monitored by regulators for signs of illegal or dangerous activity and it may not be necessary to restrict their level of market participation. Very wealthy people can also potentially qualify, depending on regional regulations.

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Investment managers, brokers, and advisers can determine whether a client is an eligible contract participant under regulatory standards. If the client meets the criteria, more financial tools are available for the client’s use, allowing for a diversity of investment activities. These can include complex, high-risk opportunities like block trades. Members of the public are specifically barred due to concerns about liquidity and safety; the assumption with an eligible contract participant is that the entity knows the risk and is comfortable managing the associated concerns.

Regulators monitor trading and investment activity, including trades undertaken by eligible contract participants. If they find that an entity doesn’t actually qualify for this status, fines and other penalties may be exacted. These are designed to encourage false claims as well as to regulate brokers and others who may be involved in determining whether clients qualify. If they falsify documentation or do not understand the regulations, this could put their clients at risk.

In the realm of international trading, this can become a complex subject. An entity may qualify as an eligible contract participant in one nation and not another, which requires going through the investigation process again to work in foreign markets. Advisers and brokers may be able to offer assistance to entities that want to be involved on international markets. This can include developing documentation to submit to an overseas agent, researching qualifications, and helping companies determine what they might need to do to be considered an eligible contract participant.

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