Key Features of the Series 3 Exam

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The Series 3 Exam for commodity futures brokers is divided into two parts – futures trading theory and market regulations. Each part must be passed with a score of at least 70 percent. You will have 2 hours and 30 minutes to complete the exam. There are 120 multiple choice and true/false questions. Most people take at least 2 hours to take the exam, and some do not finish in time, so make sure you monitor time carefully when sitting for the Series 3 exam. The test is administered by the National Futures Association (NFA).

Areas Covered on Series 3 Exam

Part 1: Basics of the Futures Markets

The first part of the Series 3 exam covers the basics of the futures markets. You’ll need to understand futures contracts, hedging, speculating, futures terminology, futures options, margin requirements, types of orders, basic fundamental analysis, basic technical analysis, and spread trading. The exam will test your understanding of theory and ability to calculate the results of a trade from a profit and loss and margin perspective.

Most people have a hard time with hedging and options. Futures options are a problem for people who never traded them before. Stock options are very similar to futures options, so if you understand put and call options, you should be able to translate that knowledge to commodities futures.

Part 2: Market Regulations

The second part of the Series 3 exam consists of market regulations. The NFA likes to get tricky in this section. The underlying goal of the regulatory questions is to test the ability to act in a proper and ethical manner when it comes to clients. If you remember that tidbit, it should help a lot with this section. Many of the regulatory questions are open to interpretation and could go either way, so make sure you understand the material beforehand and thoroughly read and understand the questions before answering.

There are some rules, regulations, and numbers that you will need to memorize for this part of the exam. Don’t take them lightly, because they don’t make this section of the exam easy for you. Be aware that the regulatory environment is always changing and the NFA will test on the latest rules. 

Studying for the Series 3 Exam

It doesn’t take a genius to pass the series 3 exam, but you do have to study for it. The test can be very difficult for someone with limited trading knowledge or experience in the futures markets. Those who do have experience trading commodity futures also need to be well prepared, as they will likely see information that is always subject to change, especially when it comes to the market regulations section.

I believe that it is absolutely necessary to study with a Series 3-course manual with practice exams to prepare properly for the exam. Prep classes are also available in most major cities around the U.S. and the world before you take the exam. I never took prep classes for any of my securities exams, but for some people they can be extremely helpful and the difference between passing and failing. Once you are scoring at least 80 – 85 percent on your practice tests consistently, you should be able to pass the final Series 3 exam.

Effects of Dodd-Frank

In the aftermath of the global financial crisis of 2008 and passage of the Dodd-Frank legislation several years later, regulation has become stricter in all markets, including commodities. The Series 3 exam reflects the changes in the laws. The CFTC has instituted many new rules and legislation over recent years. Regulation has become an iterative process, with changes in standards and laws; the exam is constantly evolving to make sure that professionals in the commodities business are knowledgeable about and in compliance at all times. The exam is given at a testing center and is available by appointment all over the United States and at locations around the world, generally in major cities.

While the first part of the exam tests for industry knowledge from a practical perspective, the regulatory questions have become an area of focus for the National Futures Association, which administers the exam. Additionally, all those who pass the exam are required to participate in continuing education which is available online.

As the exam is a two-part affair, studying for the exam should be approached in the same fashion. First, it is important to understand the ins and outs of the commodities futures and options business. Second, it is important to comprehend fully the regulations covering all professionals within the business. Make sure that you purchase a current course as rules change often. There are study guides available on the internet for self-preparation for the exam. For those more comfortable in a classroom setting, several companies offer prep courses that you can attend in person. The Series-3 exam is not difficult for those who study but taking it without any preparation is a recipe for failure.