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EX-32.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 906 - Invesco DB G10 Currency Harvest Fundd230637dex322.htm
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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number:                    001-33020

 

 

POWERSHARES DB G10 CURRENCY HARVEST FUND

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   16-6562496

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

c/o DB Commodity Services LLC

60 Wall Street

New York, New York

  10005
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s telephone number, including area code: (212) 250-5883

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, an Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  þ    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer   ¨    Accelerated Filer   x
Non-Accelerated Filer   ¨ (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange

Act).    Yes  ¨    No  þ

Indicate the number of outstanding Shares as of September 30, 2011: 13,000,000 Shares.

 

 

 


Table of Contents

POWERSHARES DB G10 CURRENCY HARVEST FUND

QUARTER ENDED SEPTEMBER 30, 2011

TABLE OF CONTENTS

 

 

 

           Page  

PART I.

  

FINANCIAL INFORMATION

     1   

ITEM 1.

  

FINANCIAL STATEMENTS

     1   
  

Notes to Unaudited Financial Statements

     10   

ITEM 2.

  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     18   

ITEM 3.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     31   

ITEM 4.

  

CONTROLS AND PROCEDURES

     33   

PART II.

  

OTHER INFORMATION

     34   

Item 1.

  

Legal Proceedings

     34   

Item 1A.

  

Risk Factors

     34   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     34   

Item 3.

  

Defaults Upon Senior Securities

     35   

Item 4.

  

Reserved

     35   

Item 5.

  

Other Information

     35   

Item 6.

  

Exhibits

     35   

SIGNATURES

     36   

EXHIBIT INDEX

     E-1   

Exhibit 31.1

  

Certification required under Exchange Act Rules 13a–14 and 15d–14

     E-2   

Exhibit 31.2

  

Certification required under Exchange Act Rules 13a–14 and 15d–14

     E-3   

Exhibit 32.1

  

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

     E-4   

Exhibit 32.2

  

Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

     E-5   

Exhibit 101

  

Interactive data file pursuant to Rule 405 of Regulation S-T: (i) the Statements of Financial Condition - September 30, 2011 (unaudited) and December 31, 2010, (ii) the Unaudited Schedule of Investments - September 30, 2011, (iii) the Schedule of Investments - December 31, 2010, (iv) the Unaudited Statements of Income and Expenses - Three Months Ended September 30, 2011 and 2010 and Nine Months Ended September 30, 2011 and 2010, (v) the Unaudited Statements of Changes in Shareholders’ Equity - Three Months Ended September 30, 2011, (vi) the Unaudited Statements of Changes in Shareholders’ Equity - Three Months Ended September 30, 2010, (vii) the Unaudited Statements of Changes in Shareholders’ Equity - Nine Months Ended September 30, 2011, (viii) the Unaudited Statements of Changes in Shareholders’ Equity - Nine Months Ended September 30, 2010, (ix) the Unaudited Statements of Cash Flows - Nine Months Ended September 30, 2011 and 2010, and (x) Notes to Unaudited Financial Statements, tagged as blocks of text.

  

 

i


Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

PowerShares DB G10 Currency Harvest Fund

Statements of Financial Condition

September 30, 2011 (unaudited) and December 31, 2010

 

     September 30,
2011
    December 31,
2010
 

Assets

    

Equity in broker trading accounts:

    

United States Treasury Obligations, at fair value (cost $275,995,960 and $324,961,328 respectively)

   $ 275,997,523      $ 324,974,002   

Cash held by broker

     37,569,291        27,374,569   

Net unrealized appreciation (depreciation) on futures contracts

     (14,797,115     4,025,150   
  

 

 

   

 

 

 

Deposits with broker

     298,769,699        356,373,721   
  

 

 

   

 

 

 

Total assets

   $ 298,769,699      $ 356,373,721   
  

 

 

   

 

 

 

Liabilities

    

Management fee payable

   $ 202,211      $ 227,193   

Brokerage fee payable

     2,698        9,271   
  

 

 

   

 

 

 

Total liabilities

     204,909        236,464   
  

 

 

   

 

 

 

Commitments and Contingencies (Note 9)

    
    

Equity

    

Shareholders’ equity

    

General shares:

    

Paid in capital—40 shares issued and outstanding as of September 30, 2011 and December 31, 2010, respectively

     1,000        1,000   

Accumulated earnings (deficit)

     (81     (50
  

 

 

   

 

 

 

Total General shares

     919        950   
  

 

 

   

 

 

 
    

Shares:

    

Paid in capital—13,000,000 and 15,000,000 redeemable Shares issued and outstanding as of September 30, 2011 and December 31, 2010, respectively

     401,242,778        445,836,638   

Accumulated earnings (deficit)

     (102,678,907     (89,700,331
  

 

 

   

 

 

 

Total Shares

     298,563,871        356,136,307   
  

 

 

   

 

 

 
    

Total shareholders’ equity

     298,564,790        356,137,257   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 298,769,699      $ 356,373,721   
  

 

 

   

 

 

 

Net asset value per share

    

General shares

   $ 22.98      $ 23.75   

Shares

   $ 22.97      $ 23.74   

See accompanying notes to unaudited financial statements.

 

1


Table of Contents

PowerShares DB G10 Currency Harvest Fund

Unaudited Schedule of Investments

September 30, 2011

 

Description

   Percentage of
Net Assets
    Fair
Value
     Face
Value
 

United States Treasury Obligations

       

U.S. Treasury Bills, 0.02% due October 6, 2011

     9.71   $ 28,999,971       $ 29,000,000   

U.S. Treasury Bills, 0.025% due October 13, 2011

     3.01        8,999,973         9,000,000   

U.S. Treasury Bills, 0.015% due October 20, 2011

     52.25        155,999,064         156,000,000   

U.S. Treasury Bills, 0.055% due October 27, 2011

     3.01        8,999,928         9,000,000   

U.S. Treasury Bills, 0.045% due November 10, 2011

     4.69        13,999,860         14,000,000   

U.S. Treasury Bills, 0.035% due November 17, 2011

     5.36        15,999,792         16,000,000   

U.S. Treasury Bills, 0.015% due November 25, 2011

     1.01        2,999,946         3,000,000   

U.S. Treasury Bills, 0.015% due December 1, 2011

     4.69        13,999,776         14,000,000   

U.S. Treasury Bills, 0.03% due December 8, 2011

     1.01        2,999,949         3,000,000   

U.S. Treasury Bills, 0.01% due December 15, 2011

     0.67        1,999,950         2,000,000   

U.S. Treasury Bills, 0.01% due December 22, 2011

     2.34        6,999,804         7,000,000   

U.S. Treasury Bills, 0.02% due December 29, 2011

     4.69        13,999,510         14,000,000   
  

 

 

   

 

 

    

Total United States Treasury Obligations (cost $275,995,960)

     92.44   $ 275,997,523      
  

 

 

   

 

 

    

A portion of the above United States Treasury Obligations are held as initial margin against open futures contracts, as described in Note 4(e).

 

Description

   Percentage of
Net Assets
    Fair
Value
 

Unrealized Appreciation/(Depreciation) on Futures Contracts

    

102.9 million Australian Dollars vs. USD 100.0 million for settlement December 19, 2011

     (2.17 )%    $ (6,480,270

8,100.0 million Japanese Yen vs. USD 105.1 million for settlement December 19, 2011*

     0.15        461,375   

128.0 million New Zealand Dollars vs. USD 97.8 million for settlement December 19, 2011

     (2.66     (7,940,570

592.0 million Norwegian Krone vs. USD 100.8 million for settlement December 19, 2011

     (1.59     (4,744,700

92.3 million Swiss Francs vs. USD 101.6 million for settlement December 19, 2011*

     1.31        3,907,050   
  

 

 

   

 

 

 

Net Unrealized Depreciation on Futures Contracts

     (4.96 )%    $ (14,797,115
  

 

 

   

 

 

 

 

* Positions represent futures contracts sold.

Net unrealized depreciation is comprised of unrealized losses of $19,165,540 and unrealized gains of $4,368,425.

See accompanying notes to unaudited financial statements.

 

2


Table of Contents

PowerShares DB G10 Currency Harvest Fund

Schedule of Investments

December 31, 2010

 

Description

   Percentage of
Net Assets
    Fair
Value
     Face
Value
 

United States Treasury Obligations

       

U.S. Treasury Bills, 0.08% due January 6, 2011

     12.92   $ 45,999,908       $ 46,000,000   

U.S. Treasury Bills, 0.085% due January 13, 2011

     6.18        21,999,802         22,000,000   

U.S. Treasury Bills, 0.07% due January 20, 2011

     43.80        155,996,880         156,000,000   

U.S. Treasury Bills, 0.065% due January 27, 2011

     2.25        7,999,704         8,000,000   

U.S. Treasury Bills, 0.125% due February 10, 2011

     1.40        4,999,515         5,000,000   

U.S. Treasury Bills, 0.13% due February 17, 2011

     0.56        1,999,724         2,000,000   

U.S. Treasury Bills, 0.12% due February 24, 2011

     0.84        2,999,514         3,000,000   

U.S. Treasury Bills, 0.145% due March 10, 2011

     2.25        7,998,240         8,000,000   

U.S. Treasury Bills, 0.14% due March 17, 2011

     0.84        2,999,331         3,000,000   

U.S. Treasury Bills, 0.13% due March 24, 2011

     19.09        67,982,592         68,000,000   

U.S. Treasury Bills, 0.18% due March 31, 2011

     1.12        3,998,792         4,000,000   
  

 

 

   

 

 

    

Total United States Treasury Obligations (cost $324,961,328)

     91.25   $ 324,974,002      
  

 

 

   

 

 

    

A portion of the above United States Treasury Obligations are held as initial margin against open futures contracts, as described in Note 4(e).

 

Description

   Percentage of
Net Assets
    Fair
Value
 

Unrealized Appreciation/(Depreciation) on Future Contracts

    

120.7 million Australian Dollars vs. USD 122.3 million for settlement March 14, 2011

     1.40   $ 4,979,990   

9,850.0 million Japanese Yen vs. USD 121.6 million for settlement March 14, 2011*

     (1.06     (3,771,525

710.0 million Norwegian Krone vs. USD 121.6 million for settlement March 14, 2011

     1.03        3,688,100   

158.5 million New Zealand Dollars vs. USD 122.9 million for settlement March 14, 2011

     1.48        5,263,110   

115.3 million Swiss Francs vs. USD 123.8 million for settlement March 14, 2011*

     (1.72     (6,134,525
  

 

 

   

 

 

 

Net Unrealized Appreciation on Futures Contracts

     1.13   $ 4,025,150   
  

 

 

   

 

 

 

 

Net unrealized appreciation is comprised of unrealized gains of $13,931,200 and unrealized losses of $9,906,050.

 

* Positions represent futures contracts sold.

See accompanying notes to unaudited financial statements.

 

3


Table of Contents

PowerShares DB G10 Currency Harvest Fund

Unaudited Statements of Income and Expenses

For the Three Months Ended September 30, 2011 and 2010 and Nine Months Ended September 30, 2011 and 2010

 

    Three Months Ended     Nine Months Ended  
    September 30,
2011
    September 30,
2010
    September 30,
2011
    September 30,
2010
 

Income

       

Interest Income

  $ 20,961      $ 125,577      $ 191,259      $ 309,706   
 

 

 

   

 

 

   

 

 

   

 

 

 

Expenses

       

Management Fee

    674,235        685,155        2,017,073        2,202,524   

Brokerage Commissions and Fees

    41,938        47,812        113,649        146,202   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Expenses

    716,173        732,967        2,130,722        2,348,726   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income (loss)

    (695,212     (607,390     (1,939,463     (2,039,020
 

 

 

   

 

 

   

 

 

   

 

 

 

Net Realized and Net Change in Unrealized Gain (Loss) on United States Treasury Obligations Futures and Foreign Currency Translation

       

Net Realized Gain (Loss) on

       

United States Treasury Obligations

    1,930        184        3,963        471   

Futures

    (6,868,808     270,098        7,790,269        (11,089,090
 

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gain (loss)

    (6,866,878     270,282        7,794,232        (11,088,619
 

 

 

   

 

 

   

 

 

   

 

 

 

Net Change in Unrealized Gain (Loss) on

       

United States Treasury Obligations

    (6,669     14,679        (11,111     (2,723

Futures

    (19,168,380     20,918,226        (18,822,265     4,628,975   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized gain (loss)

    (19,175,049     20,932,905        (18,833,376     4,626,252   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and net change in unrealized gain (loss) on United States Treasury Obligations, Futures and Foreign Currency Translation

    (26,041,927     21,203,187        (11,039,144     (6,462,367
 

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (Loss)

  $ (26,737,139   $ 20,595,797      $ (12,978,607   $ (8,501,387
 

 

 

   

 

 

   

 

 

   

 

 

 

Less: net (income) loss attributed to the non-controlling interest in subsidiary-related party

    —          (51     —          12   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (Loss) Attributable to PowerShares DB G10 Currency Harvest Fund

  $ (26,737,139   $ 20,595,746      $ (12,978,607   $ (8,501,375
 

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited financial statements.

 

4


Table of Contents

PowerShares DB G10 Currency Harvest Fund

Unaudited Statement of Changes in Shareholders’ Equity

For the Three Months Ended September 30, 2011

 

     General Shares     Shares        
     Shares      Paid in
Capital
     Accumulated
Earnings

(Deficit)
    Total
Equity
    Shares     Paid in
Capital
    Accumulated
Earnings

(Deficit)
    Total
Equity
    Total
Shareholders’
Equity
 

Balance at July 1, 2011

     40       $ 1,000       $ (13   $ 987        15,400,000      $ 455,903,986      $ (75,941,836   $ 379,962,150      $ 379,963,137   

Sale of Shares

               2,200,000        53,100,886          53,100,886        53,100,886   

Redemption of Shares

               (4,600,000     (107,762,094       (107,762,094     (107,762,094

Net Income (Loss)

                    

Net investment income (loss)

           (2     (2         (695,210     (695,210     (695,212

Net realized gain (loss) on United States Treasury Obligations and Futures

           (19     (19         (6,866,859     (6,866,859     (6,866,878

Net change in unrealized gain (loss) on United States Treasury Obligations and Futures

           (47     (47         (19,175,002     (19,175,002     (19,175,049
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (Loss)

           (68     (68         (26,737,071     (26,737,071     (26,737,139
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

     40       $ 1,000       $ (81   $ 919        13,000,000      $ 401,242,778      $ (102,678,907   $ 298,563,871      $ 298,564,790   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited financial statements.

 

5


Table of Contents

PowerShares DB G10 Currency Harvest Fund

Unaudited Statement of Changes in Shareholders’ Equity

For the Three Months Ended September 30, 2010

 

    General Shares     Shares                    
    Shares     Paid in
Capital
    Accumulated
Earnings

(Deficit)
    Total
Equity
    Shares     Paid in
Capital
    Accumulated
Earnings

(Deficit)
    Total
Equity
    Total
Shareholders’
Equity
    Non-controlling
Interest
    Total Equity  

Balance at July 1, 2010

    40      $ 1,000      $ (122   $ 878        16,800,000      $ 486,955,054      $ (118,355,438   $ 368,599,616      $ 368,600,494      $ 878      $ 368,601,372   

Sale of Shares

            200,000        4,518,528          4,518,528            4,518,528   

Redemption of Shares

            (1,200,000     (26,801,334       (26,801,334     (26,801,334       (26,801,334

Net Income (Loss)

                     

Net investment income (loss)

        (2     (2         (607,386     (607,386     (607,388     (2     (607,390

Net realized gain (loss) on United States Treasury Obligations and Futures

      1        1        1            270,280        270,280        270,281        1        270,282   

Net change in unrealized gain (loss) on United States Treasury Obligations and Futures

        52        52            20,932,801        20,932,801        20,932,853        52        20,932,905   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (Loss)

        51        51            20,595,695        20,595,695        20,595,746        51        20,595,797   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2010

    40      $ 1,000      $ (71   $ 929        15,800,000      $ 464,672,248      $ (97,759,743   $ 366,912,505      $ 366,913,434      $ 929      $ 366,914,363   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited financial statements.

 

6


Table of Contents

PowerShares DB G10 Currency Harvest Fund

Unaudited Statement of Changes in Shareholders’ Equity

For the Nine Months Ended September 30, 2011

 

     General Shares     Shares        
     Shares      Paid in
Capital
     Accumulated
Earnings
(Deficit)
    Total
Equity
    Shares     Paid in
Capital
    Accumulated
Earnings
(Deficit)
    Total
Equity
    Total
Shareholders’
Equity
 

Balance at January 1, 2011

     40       $ 1,000       $ (50   $ 950        15,000,000      $ 445,836,638      $ (89,700,331   $ 356,136,307      $ 356,137,257   

Sale of Shares

               4,000,000        96,827,246          96,827,246        96,827,246   

Redemption of Shares

               (6,000,000     (141,421,106       (141,421,106     (141,421,106

Net Income (Loss)

                    

Net investment income (loss)

           (7     (7         (1,939,456     (1,939,456     (1,939,463

Net realized gain (loss) on United States Treasury Obligations and Futures

           21        21            7,794,211        7,794,211        7,794,232   

Net change in unrealized gain (loss) on United States Treasury Obligations and Futures

           (45     (45         (18,833,331     (18,833,331     (18,833,376
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (Loss)

           (31     (31         (12,978,576     (12,978,576     (12,978,607
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

     40       $ 1,000       $ (81   $ 919        13,000,000      $ 401,242,778      $ (102,678,907   $ 298,563,871      $ 298,564,790   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited financial statements.

 

7


Table of Contents

PowerShares DB G10 Currency Harvest Fund

Unaudited Statement of Changes in Shareholders’ Equity

For the Nine Months Ended September 30, 2010

 

    General Shares     Shares                    
    Shares     Paid in
Capital
    Accumulated
Earnings
(Deficit)
    Total
Equity
    Shares     Paid in
Capital
    Accumulated
Earnings
(Deficit)
    Total
Equity
    Total
Shareholders’
Equity
    Non-controlling
Interest
    Total
Equity
 

Balance at January 1, 2010

    40      $ 1,000      $ (59   $ 941        18,000,000      $ 512,535,240      $ (89,258,380   $ 423,276,860      $ 423,277,801      $ 941      $ 423,278,742   

Sale of Shares

            1,800,000        42,775,022          42,775,022        42,775,022          42,775,022   

Redemption of Shares

            (4,000,000     (90,638,014       (90,638,014     (90,638,014       (90,638,014

Net Income (Loss)

                     

Net investment income (loss)

        (6     (6         (2,039,008     (2,039,008     (2,039,014     (6     (2,039,020

Net realized gain (loss) on United States Treasury Obligations and Futures

        (26     (26         (11,088,567     (11,088,567     (11,088,593     (26     (11,088,619

Net change in unrealized gain (loss) on United States Treasury Obligations and Futures

        20        20            4,626,212        4,626,212        4,626,232        20        4,626,252   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (Loss)

        (12     (12         (8,501,363     (8,501,363     (8,501,375     (12     (8,501,387
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2010

    40      $ 1,000      $ (71   $ 929        15,800,000      $ 464,672,248      $ (97,759,743   $ 366,912,505      $ 366,913,434      $ 929      $ 366,914,363   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited financial statements.

 

8


Table of Contents

PowerShares DB G10 Currency Harvest Fund

Unaudited Statements of Cash Flows

For the Nine Months Ended September 30, 2011 and 2010

 

     Nine Months Ended  
     September 30,
2011
    September 30,
2010
 

Cash flows from operating activities:

    

Net Income (Loss)

   $ (12,978,607   $ (8,501,387

Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:

    

Cost of securities purchased

     (1,001,837,303     (1,079,658,076

Proceeds from securities sold and matured

     1,050,997,896        1,116,995,176   

Net accretion of discount on United States Treasury Obligations

     (191,262     (309,706

Net realized (gain) loss on United States Treasury Obligations

     (3,963     (471

Net change in unrealized (gain) loss on United States Treasury Obligations and futures

     18,833,376        (4,626,252

Change in operating receivables and liabilities:

    

Management fee payable

     (24,982     (43,357

Brokerage fee payable

     (6,573     4,648   
  

 

 

   

 

 

 

Net cash provided by (used for) operating activities

     54,788,582        23,860,575   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from sale of Shares

     96,827,246        42,775,022   

Redemption of Shares

     (141,421,106     (90,638,014
  

 

 

   

 

 

 

Net cash provided by (used for) financing activities

     (44,593,860     (47,862,992
  

 

 

   

 

 

 

Net change in cash held by broker

     10,194,722        (24,002,417

Cash held by broker at beginning of period

     27,374,569        38,444,399   
  

 

 

   

 

 

 

Cash held by broker at end of period

   $ 37,569,291      $ 14,441,982   
  

 

 

   

 

 

 

See accompanying notes to unaudited financial statements.

 

9


Table of Contents

PowerShares DB G10 Currency Harvest Fund

Notes to Unaudited Financial Statements

September 30, 2011

(1) Organization

PowerShares DB G10 Currency Harvest Fund (the “Fund) was formed as a Delaware statutory trust on April 12, 2006. DB Commodity Services LLC, a Delaware limited liability company (“DBCS” or the “Managing Owner”), seeded the Fund with a capital contribution of $1,000 in exchange for 40 General Shares of the Fund. The fiscal year end of the Fund is December 31st. The term of the Fund is perpetual (unless terminated earlier in certain circumstances) as provided for in the Second Amended and Restated Declaration of Trust and Trust Agreement of the Fund (the “Trust Agreement”).

The Fund was originally formed as a master-feeder structure. Prior to the close of business on December 31, 2010, the master-feeder structure was collapsed. As a result of the collapse of the master-feeder structure, on December 31, 2010, the Managing Owner’s and the Fund’s interests in DB G10 Currency Harvest Master Fund (the “Master Fund”) were redeemed for all assets and liabilities held by the Master Fund. Hereafter, all references to the Fund either represent the structure in place as of December 31, 2010 or the structure in place prior to such date whereby the financial statements reflect the consolidation of the Fund and the Master Fund. The collapse of the master-feeder structure had no impact on a Shareholder’s net asset value or the results of operations for the Fund.

The Fund offers common units of beneficial interest (the “Shares”) only to certain eligible financial institutions (the “Authorized Participants”) in one or more blocks of 200,000 Shares, called a Basket. The proceeds from the offering of Shares are invested in the Fund. The Fund commenced investment operations on September 15, 2006. The Fund commenced trading on the American Stock Exchange (now known as the NYSE Alternext US LLC (the “NYSE Alternext”)) on September 18, 2006 and is now listed on the NYSE Arca, Inc. (the “NYSE Arca”) as of November 25, 2008.

This Report covers the three months ended September 30, 2011 and 2010 (hereinafter referred to as the “Three Months Ended September 30, 2011” and the “Three Months Ended September 30, 2010”, respectively) and the nine months ended September 30, 2011 and 2010 (hereinafter referred to as the “Nine Months Ended September 30, 2011” and the “Nine Months Ended September 30, 2010”, respectively).

(2) Fund Investment Overview

The Fund invests the proceeds from the offering of Shares in exchange-traded currency futures comprising the Deutsche Bank G10 Currency Future Harvest Index—Excess Return™, (the “Index”), with a view to tracking the changes, whether positive or negative, in the level of the Index calculated on an excess return basis, over time, plus the excess, if any, of the Fund’s income from its holdings of United States Treasury Obligations and other high credit quality short-term fixed income securities over the expenses of the Fund. The Fund holds United States Treasury Obligations and other high credit quality short-term fixed income securities for deposit with the Fund’s currency futures broker as margin.

The Index is designed to reflect the performance of certain currencies. The currencies comprising the Index, at any time (each an “Index Currency”, and collectively, the “Index Currencies”), are six of the following Group of Ten currencies: United States Dollars, Euros, Japanese Yen, Canadian Dollars, Swiss Francs, British Pounds, Australian Dollars, New Zealand Dollars, Norwegian Krone and Swedish Krona, or, collectively, the Eligible Index Currencies. At any time, the Index will consist of long futures contracts on the three Eligible Index Currencies associated with the highest interest rates and short futures contracts on the three Eligible Index Currencies associated with the lowest interest rates. The ratio of the notional value of futures contracts in the Index to collateral used to margin those contracts is generally 2:1 when the Index re-balances quarterly. However, if the United States Dollar is one of the Eligible Index Currencies associated with either the three highest or the three lowest interest rates, the Index will not establish a futures position, and the ratio of the notional value of futures contracts to collateral used to margin those contracts will be 1.66:1 when the Index re-balances.

As discussed above, the Fund employs leverage on an approximate 2:1 basis. As of September 30, 2011 and December 31, 2010, the Fund had $298,769,699 (or 100%) and $356,373,721 (or 100%), respectively, of its holdings of cash, United States Treasury Obligations and unrealized appreciation/depreciation of futures contracts on deposit with its Commodity Broker. Of this, $16,256,970 (or 5.44%) and $17,985,982 (or 5.05%), respectively, of the Fund’s holdings of cash and United States Treasury Obligations are required to be deposited as margin in support of the Fund’s futures positions as of September 30, 2011 and December 31, 2010, respectively. For additional information, please see the unaudited Schedule of Investments as of September 30, 2011 and the audited Schedule of Investments as of December 31, 2010 for details of the Fund’s portfolio holdings.

DBCFHX™ and Deutsche Bank Liquid Currency Index™ are trademarks of Deutsche Bank AG London (the “Index Sponsor”). Trademark applications in the United States are pending with respect to both the Fund and the Index. The Fund

 

10


Table of Contents

PowerShares DB G10 Currency Harvest Fund

Notes to Unaudited Financial Statements—(Continued)

September 30, 2011

 

and the Managing Owner have been licensed by the Index Sponsor to use the above noted trademarks. Deutsche Bank AG London is an affiliate of the Fund and the Managing Owner.

(3) Service Providers and Related Party Agreements

The Trustee

Under the Trust Agreement, Wilmington Trust Company, the trustee of the Fund (the “Trustee”), has delegated to the Managing Owner the exclusive management and control of all aspects of the business of the Fund. The Trustee will have no duty or liability to supervise or monitor the performance of the Managing Owner, nor will the Trustee have any liability for the acts or omissions of the Managing Owner.

The Managing Owner

The Managing Owner serves the Fund as commodity pool operator, commodity trading advisor, and managing owner, and is an indirect wholly-owned subsidiary of Deutsche Bank AG. During the Three Months Ended September 30, 2011 and 2010, the Fund incurred Management Fees of $674,235 and $685,155, respectively. Management Fees incurred during the Nine Months Ended September 30, 2011 and 2010 by the Fund were $2,017,073 and $2,202,524, respectively. As of September 30, 2011 and December 31, 2010, Management Fees payable to the Managing Owner were $202,211 and $227,193, respectively.

The Commodity Broker

Deutsche Bank Securities Inc., a Delaware corporation, serves as the Fund’s clearing broker (the “Commodity Broker”). The Commodity Broker is also an indirect wholly-owned subsidiary of Deutsche Bank AG and is an affiliate of the Managing Owner. In its capacity as clearing broker, the Commodity Broker executes and clears each of the Fund’s futures transactions and performs certain administrative and custodial services for the Fund. As custodian of the Fund’s assets, the Commodity Broker is responsible, among other things, for providing periodic accountings of all dealings and actions taken by the Fund during the reporting period, together with an accounting of all securities, cash or other indebtedness or obligations held by it or its nominees for or on behalf of the Fund. During the Three Months Ended September 30, 2011 and 2010, the Fund incurred brokerage fees of $41,938 and $47,812, respectively. Brokerage fees incurred during the Nine Months Ended September 30, 2011 and 2010 by the Fund were $113,649 and $146,202, respectively. As of September 30, 2011 and December 31, 2010, brokerage fees payable were $2,698 and $9,271, respectively.

The Administrator

The Bank of New York Mellon (the “Administrator”) has been appointed by the Managing Owner as the administrator, custodian and transfer agent of the Fund, and has entered into separate administrative, custodian, transfer agency and service agreements (collectively referred to as the “Administration Agreement”).

Pursuant to the Administration Agreement, the Administrator performs or supervises the performance of services necessary for the operation and administration of the Fund (other than making investment decisions), including receiving and processing orders from Authorized Participants to create and redeem Baskets, net asset value calculations, accounting and other fund administrative services. The Administrator retains certain financial books and records, including: Basket creation and redemption books and records, fund accounting records, ledgers with respect to assets, liabilities, capital, income and expenses, the registrar, transfer journals and related details, and trading and related documents received from futures commission merchants.

The Distributor

ALPS Distributors, Inc. (the “Distributor”) provides certain distribution services to the Fund. Pursuant to the Distribution Services Agreement among the Managing Owner in its capacity as managing owner of the Fund, the Fund and the Distributor, the Distributor assists the Managing Owner and the Administrator with certain functions and duties relating to distribution and marketing services to the Fund including reviewing and approving marketing materials.

Invesco PowerShares Capital Management LLC

Under the License Agreement among Invesco PowerShares Capital Management LLC (the “Licensor”), and the Managing Owner in its own capacity and in its capacity as managing owner of the Fund (the Fund and the Managing Owner, collectively, the “Licensees”), the Licensor granted to each Licensee a non-exclusive license to use the “PowerShares®” trademark (the “Trademark”) anywhere in the world, solely in connection with the marketing and promotion of the Fund and to use or refer to the Trademark in connection with the issuance and trading of the Fund as necessary.

 

11


Table of Contents

PowerShares DB G10 Currency Harvest Fund

Notes to Unaudited Financial Statements—(Continued)

September 30, 2011

 

Invesco Aim Distributors, Inc.

Through a marketing agreement between the Managing Owner and Invesco Aim Distributors, Inc. (“Invesco Aim Distributors”), an affiliate of Invesco PowerShares Capital Management LLC (“Invesco PowerShares”), the Managing Owner, on behalf of the Fund, has appointed Invesco Aim Distributors as a marketing agent. Invesco Aim Distributors assists the Managing Owner and the Administrator with certain functions and duties such as providing various educational and marketing activities regarding the Fund, primarily in the secondary trading market, which activities include, but are not limited to, communicating the Fund’s name, characteristics, uses, benefits, and risks, consistent with the prospectus. Invesco Aim Distributors will not open or maintain customer accounts or handle orders for the Fund. Invesco Aim Distributors engages in public seminars, road shows, conferences, media interviews, and distributes sales literature and other communications (including electronic media) regarding the Fund.

(4) Summary of Significant Accounting Policies

(a) Basis of Presentation

The financial statements of the Fund have been prepared using U.S. generally accepted accounting principles and include the financial statements of the Fund and the Master Fund when applicable. As described in note 1, the Fund was originally formed as a master-feeder structure and such structure was collapsed on December 31, 2010. The financial statements reflect consolidation of the Fund and the Master Fund for all periods presented prior to December 31, 2010. Upon the initial offering of the Shares on September 15, 2006, the capital raised by the Fund was used to purchase 100% of the common units of beneficial interest of the Master Fund (the “Master Fund Limited Units”) (excluding common units of beneficial interest of the Master Fund held by the Managing Owner (the “Master Fund General Units”)). The Master Fund Limited Units owned by the Fund provided the Fund and its investors certain controlling rights and abilities over the Master Fund. Consequently, the financial statement balances of the Master Fund were consolidated with the Fund’s financial statement balances for the periods previously described, and all significant inter-company balances and transactions have been eliminated.

(b) Use of Estimates

The preparation of the financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosure of contingent assets and liabilities during the reporting period of the financial statements and accompanying notes. Actual results could differ from those estimates.

(c) Financial Instruments and Fair Value

United States Treasury Obligations and currency futures contracts are recorded in the statements of financial condition on a trade date basis at fair value with changes in fair value recognized in earnings in each period. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price).

Financial Accounting Standards Board (FASB) fair value measurement and disclosure guidance requires a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

Basis of Fair Value Measurement

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2: Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly;

Level 3: Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

 

12


Table of Contents

PowerShares DB G10 Currency Harvest Fund

Notes to Unaudited Financial Statements—(Continued)

September 30, 2011

 

In determining fair value of United States Treasury Obligations and currency futures contracts, the Fund uses unadjusted quoted market prices in active markets. United States Treasury Obligations and currency futures contracts are classified within Level 1 of the fair value hierarchy. The Fund does not adjust the quoted prices for United States Treasury Obligations and currency futures contracts.

(d) Deposits with Broker

The Fund deposits cash and United States Treasury Obligations with its Commodity Broker subject to Commodity Futures Trading Commission (the “CFTC”) regulations and various exchange and broker requirements. The combination of the Fund’s deposits with its Commodity Broker of cash and United States Treasury Obligations and the unrealized profit or loss on open futures contracts (variation margin) represents the Fund’s overall equity in its broker trading account. To meet the Fund’s initial margin requirements, the Fund holds United States Treasury Obligations. The Fund uses its cash held by the Commodity Broker to satisfy variation margin requirements. The Fund earns interest on its cash deposited with the Commodity Broker.

(e) United States Treasury Obligations

The Fund records purchases and sales of United States Treasury Obligations on a trade date basis. These holdings are marked to market based on quoted market closing prices. The Fund holds United States Treasury Obligations for deposit with the Fund’s Commodity Broker to meet margin requirements and for trading purposes. Interest income is recognized on an accrual basis when earned. Premiums and discounts are amortized or accreted over the life of the United States Treasury Obligations. Included in the United States Treasury Obligations as of September 30, 2011 and December 31, 2010 were holdings of $16,256,970 and $17,985,982, respectively, which were restricted and held against initial margin of the open futures contracts.

(f) Cash Held by Broker

The Fund’s arrangement with the Commodity Broker requires the Fund to meet its variation margin requirement related to the price movements, both positive and negative, on futures contracts held by the Fund by keeping cash on deposit with the Commodity Broker. The Fund defines cash and cash equivalents held by the Commodity Broker to be highly liquid investments with original maturities of three months or less, when purchased. As of September 30, 2011, the Fund had $37,569,291 of cash held with the Commodity Broker of which $14,797,115 was on deposit to satisfy the Fund’s negative variation margin on open futures contracts. As of December 31, 2010, the Fund had $27,374,569 of cash held with the Commodity Broker. There were no cash equivalents held by the Fund as of September 30, 2011 and December 31, 2010.

(g) Income Taxes

The Fund is classified as a partnership for U.S. federal income tax purposes. Accordingly, the Fund will not incur U.S. federal income taxes. No provision for federal, state, and local income taxes has been made in the accompanying financial statements, as investors are individually liable for income taxes, if any, on their allocable share of the Fund’s income, gain, loss, deductions and other items.

The major tax jurisdiction for the Fund and the earliest tax year subject to examination: United States, 2008.

(h) Futures Contracts

All currency futures contracts are held and used for trading purposes. The currency futures are recorded on a trade date basis and open contracts are recorded in the statement of financial condition at fair value on the last business day of the period, which represents market value for those currency futures for which market quotes are readily available. However, when market closing prices are not available, the Managing Owner may value an asset of the Fund pursuant to policies the Managing Owner has adopted, which are consistent with normal industry standards. Realized gains (losses) and changes in unrealized appreciation (depreciation) on open positions are determined on a specific identification basis and recognized in the statement of income and expenses in the period in which the contract is closed or the changes occur, respectively. As of September 30, 2011 and December 31, 2010, the futures contracts held by the Fund were in a net unrealized depreciation position of $14,797,115 and a net unrealized appreciation position of $4,025,150, respectively.

(i) Management Fee

The Fund pays the Managing Owner a management fee (the “Management Fee”), monthly in arrears, in an amount equal to 0.75% per annum of the daily net asset value of the Fund. The Management Fee is paid in consideration of the Managing Owner’s currency futures trading advisory services.

 

13


Table of Contents

PowerShares DB G10 Currency Harvest Fund

Notes to Unaudited Financial Statements—(Continued)

September 30, 2011

 

(j) Brokerage Commissions and Fees

The Fund incurs all brokerage commissions, including applicable exchange fees, NFA fees, give-up fees, pit brokerage fees and other transaction related fees and expenses charged in connection with trading activities by the Commodity Broker. These costs are recorded as brokerage commissions and fees in the statement of income and expenses as incurred. The Commodity Broker’s brokerage commissions and trading fees are determined on a contract-by-contract basis. On average, total charges paid to the Commodity Broker were less than $10.00 per round-turn trade for the Three Months Ended September 30, 2011 and 2010 and the Nine Months Ended September 30, 2011 and 2010.

(k) Routine Operational, Administrative and Other Ordinary Expenses

The Managing Owner assumes all routine operational, administrative and other ordinary expenses of the Fund, including, but not limited to, computer services, the fees and expenses of the Trustee, legal and accounting fees and expenses, tax preparation expenses, filing fees and printing, mailing and duplication costs. Accordingly, all such expenses are not reflected in the statement of income and expenses of the Fund.

(l) Organizational and Offering Costs

All organizational and offering expenses of the Fund are incurred and assumed by the Managing Owner. The Fund is not responsible to the Managing Owner for the reimbursement of organizational and offering costs. Expenses incurred in connection with the continuous offering of Shares also will be paid by the Managing Owner.

(m) Non-Recurring and Unusual Fees and Expenses

The Fund pays all fees and expenses which are non-recurring and unusual in nature. Such expenses include legal claims and liabilities, litigation costs or indemnification or other unanticipated expenses. Such fees and expenses, by their nature, are unpredictable in terms of timing and amount. For the Three Months Ended September 30, 2011 and 2010 and the Nine Months Ended September 30, 2011 and 2010, the Fund did not incur such expenses.

(5) Fair Value Measurements

The Fund’s assets and liabilities recorded at fair value have been categorized based upon the fair value hierarchy discussed in Note 4(c).

Assets and Liabilities Measured at Fair Value were as follows:

 

     September 30,
2011
    December 31,
2010
 

United States Treasury Obligations (Level 1)

   $ 275,997,523      $ 324,974,002   

Currency Futures Contracts (Level 1)

   $ (14,797,115   $ 4,025,150   

There were no Level 2 or Level 3 holdings as of September 30, 2011 and December 31, 2010.

(6) Financial Instrument Risk

In the normal course of its business, the Fund is a party to financial instruments with off-balance sheet risk. The term “off-balance sheet risk” refers to an unrecorded potential liability that, even though it does not appear on the balance sheet, may result in a future obligation or loss. The financial instruments used by the Fund are currency futures, whose values are based upon an underlying asset and generally represent future commitments that have a reasonable possibility of being settled in cash or through physical delivery. The financial instruments are traded on an exchange and are standardized contracts.

Market risk is the potential for changes in the value of the financial instruments traded by the Fund due to market changes, including fluctuations in currency prices. In entering into these futures contracts, there exists a market risk that such futures contracts may be significantly influenced by adverse market conditions, resulting in such futures contracts being less valuable. If the markets should move against all of the futures contracts at the same time, the Fund could experience substantial losses.

Credit risk is the possibility that a loss may occur due to the failure of an exchange clearinghouse to perform according to the terms of a futures contract. Credit risk with respect to exchange-traded instruments is reduced to the extent that an exchange or clearing organization acts as a counterparty to the transactions. The Fund’s risk of loss in the event of counterparty default is typically limited to the amounts recognized in the statement of financial condition and not represented by the futures contract or notional amounts of the instruments.

 

14


Table of Contents

PowerShares DB G10 Currency Harvest Fund

Notes to Unaudited Financial Statements—(Continued)

September 30, 2011

 

The Fund has not utilized, nor does it expect to utilize in the future, special purpose entities to facilitate off-balance sheet financing arrangements and has no loan guarantee arrangements or off-balance sheet arrangements of any kind, other than agreements entered into in the normal course of business noted above.

(7) Share Purchases and Redemptions

(a) Purchases

Shares may be purchased from the Fund only by Authorized Participants in one or more blocks of 200,000 Shares, called a Basket. The Fund issues Shares in Baskets only to Authorized Participants continuously as of noon, New York time, on the business day immediately following the date on which a valid order to create a Basket is accepted by the Fund, at the net asset value of 200,000 Shares as of the closing time of the NYSE Arca or the last to close of the exchanges on which the Fund’s assets are traded, whichever is later, on the date that a valid order to create a Basket is accepted by the Fund.

(b) Redemptions

On any business day, an Authorized Participant may place an order with the Managing Owner to redeem one or more Baskets. Redemption orders must be placed by 1:00 p.m. New York time. The day on which the Managing Owner receives a valid redemption order is the redemption order date. Redemption orders are irrevocable. The redemption procedures allow Authorized Participants to redeem Baskets. Individual shareholders may not redeem directly from the Fund.

By placing a redemption order, an Authorized Participant agrees to deliver the Baskets to be redeemed through The Depository Trust Company’s (the “DTC”) book-entry system to the Fund not later than noon, New York time, on the business day immediately following the redemption order date. By placing a redemption order, and prior to receipt of the redemption proceeds, an Authorized Participant’s DTC account is charged the non-refundable transaction fee due for the redemption order.

The redemption proceeds from the Fund consist of the cash redemption amount. The cash redemption amount is equal to the net asset value of the number of Basket(s) requested in the Authorized Participant’s redemption order as of the closing time of the NYSE Arca or the last to close of the exchanges on which the Fund’s assets are traded, whichever is later, on the redemption order date. The Fund will distribute the cash redemption amount at noon, New York time, on the business day immediately following the redemption order date through DTC to the account of the Authorized Participant as recorded on DTC’s book-entry system.

The redemption proceeds due from the Fund are delivered to the Authorized Participant at noon, New York time, on the business day immediately following the redemption order date if, by such time on such business day immediately following the redemption order date, the Fund’s DTC account has been credited with the Baskets to be redeemed. If the Fund’s DTC account has not been credited with all of the Baskets to be redeemed by such time, the redemption proceeds are delivered to the extent of whole Baskets received. Any remainder of the redemption proceeds are delivered on the next business day to the extent of remaining whole Baskets received if the Managing Owner receives the fee applicable to the extension of the redemption distribution date which the Managing Owner may, from time-to-time, determine and the remaining Baskets to be redeemed are credited to the Fund’s DTC account by noon, New York time, on such next business day. Any further outstanding amount of the redemption order will be canceled. The Managing Owner is also authorized to deliver the redemption proceeds notwithstanding that the Baskets to be redeemed are not credited to the Fund’s DTC account by noon, New York time, on the business day immediately following the redemption order date if the Authorized Participant has collateralized its obligation to deliver the Baskets through DTC’s book-entry system on such terms as the Managing Owner may from time-to-time agree upon.

 

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Table of Contents

PowerShares DB G10 Currency Harvest Fund

Notes to Unaudited Financial Statements—(Continued)

September 30, 2011

 

(c) Share Transactions

Summary of Share Transactions for the Three Months Ended September 30, 2011 and 2010

and the Nine Months Ended September 30, 2011 and 2010

 

     Shares
Three Months Ended
    Paid in Capital
Three Months Ended
    Shares
Nine Months Ended
    Paid in Capital
Nine Months Ended
 
     September 30,
2011
    September 30,
2010
    September 30,
2011
    September 30,
2010
    September 30,
2011
    September 30,
2010
    September 30,
2011
    September 30,
2010
 

Shares Sold

     2,200,000        200,000      $ 53,100,886      $ 4,518,528        4,000,000        1,800,000      $ 96,827,246      $ 42,775,022   

Shares Redeemed

     (4,600,000     (1,200,000     (107,762,094     (26,801,334     (6,000,000     (4,000,000     (141,421,106     (90,638,014
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Increase/ (Decrease)

     (2,400,000     (1,000,000   $ (54,661,208   $ (22,282,806     (2,000,000     (2,200,000   $ (44,593,860   $ (47,862,992
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(8) Profit and Loss Allocations and Distributions

Pursuant to the Trust Agreement, income and expenses are allocated pro rata to the Managing Owner as holder of the General Shares and to the Shareholders monthly based on their respective percentage interests as of the close of the last trading day of the preceding month. Any losses allocated to the Managing Owner (as the owner of the General Shares) which are in excess of the Managing Owner’s capital balance are allocated to the Shareholders in accordance with their respective interest in the Fund as a percentage of total shareholders’ equity. Distributions (other than redemption of units) may be made at the sole discretion of the Managing Owner on a pro rata basis in accordance with the respective capital balances of the shareholders.

(9) Commitments and Contingencies

The Managing Owner, either in its own capacity or in its capacity as the Managing Owner and on behalf of the Fund, has entered into various service agreements that contain a variety of representations, or provide indemnification provisions related to certain risks service providers undertake in performing services which are in the best interests of the Fund. As of September 30, 2011, no claims had been received by the Fund and it was therefore not possible to estimate the Fund’s potential future exposure under such indemnification provisions.

(10) Net Asset Value and Financial Highlights

The Fund is presenting the following net asset value and financial highlights related to investment performance for a Share outstanding for the Three Months Ended September 30, 2011 and 2010 and for the Nine Months Ended September 30, 2011 and 2010. The net investment income and total expense ratios are calculated using average net asset value. The net asset value presentation is calculated using daily Shares outstanding. The net investment income and total expense ratios have been annualized. The total return is based on the change in net asset value of the Shares during the period. An individual investor’s return and ratios may vary based on the timing of capital transactions.

Net asset value per Share is the net asset value of the Fund divided by the number of outstanding Shares.

 

     Three Months Ended     Nine Months Ended  
     September 30,
2011
    September 30,
2010
    September 30,
2011
    September 30,
2010
 

Net Asset Value

        

Net asset value per Share, beginning of period

   $ 24.67      $ 21.94      $ 23.74      $ 23.52   

Net realized and change in unrealized gain (loss) on United States Treasury Obligations and Futures

     (1.65     1.32        (0.64     (0.18

Net investment income (loss)

     (0.05     (0.04     (0.13     (0.12
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (1.70     1.28        (0.77     (0.30

Net asset value per Share, end of period

   $ 22.97      $ 23.22      $ 22.97      $ 23.22   
  

 

 

   

 

 

   

 

 

   

 

 

 

Market value per Share, beginning of period

   $ 24.78      $ 21.79      $ 23.74      $ 23.54   
  

 

 

   

 

 

   

 

 

   

 

 

 

Market value per Share, end of period

   $ 22.95      $ 23.24      $ 22.95      $ 23.24   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ratio to average Net Assets*

        

Net investment income (loss)

     (0.78 )%      (0.66 )%      (0.72 )%      (0.69 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

PowerShares DB G10 Currency Harvest Fund

Notes to Unaudited Financial Statements—(Continued)

September 30, 2011

 

     Three Months Ended     Nine Months Ended  
     September 30,
2011
    September 30,
2010
    September 30,
2011
    September 30,
2010
 

Total expenses

     0.80     0.80     0.79     0.80
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Return, at net asset value **

     (6.89 )%      5.83     (3.24 )%      (1.28 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Return, at market value **

     (7.38 )%      6.65     (3.33 )%      (1.27 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

* Percentages are annualized.
** Percentages are not annualized.

(11) Subsequent Events

The Fund evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date the financial statements were issued. This evaluation did not result in any subsequent events that necessitated disclosures and/or adjustments.

 

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Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This information should be read in conjunction with the financial statements and notes included in Item 1 of Part I of this Quarterly Report (the “Report”). The discussion and analysis which follows may contain trend analysis and other forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 which reflect our current views with respect to future events and financial results. Words such as “anticipate,” “expect,” “intend,” “plan,” “believe,” “seek,” “outlook” and “estimate,” as well as similar words and phrases, signify forward-looking statements. PowerShares DB G10 Currency Harvest Fund’s (the “Fund”) forward-looking statements are not guarantees of future results and conditions and important factors, risks and uncertainties may cause our actual results to differ materially from those expressed in our forward-looking statements.

You should not place undue reliance on any forward-looking statements. Except as expressly required by the Federal securities laws, DB Commodity Services LLC, or the Managing Owner, undertakes no obligation to publicly update or revise any forward-looking statements or the risks, uncertainties or other factors described in this Report, as a result of new information, future events or changed circumstances or for any other reason after the date of this Report.

Overview/Introduction

Prior to the close of business on December 31, 2010, the Fund invested substantially all of its assets in the DB G10 Currency Harvest Master Fund (the “Master Fund”). After the determination of the net asset value of the Master Fund on December 31, 2010, the Master Fund transferred and distributed all of its assets and liabilities to the Fund and terminated. Effective January 1, 2011, the reorganized Fund has performed all of the necessary functions in order to continue normal Fund operations. Accordingly, the collapse of the master-feeder structure had no effect on the operations or processes of the Fund. All references to historical results of the Fund include results of the Master Fund where the context requires.

The Fund seeks to track changes, whether positive or negative, in the level of the Deutsche Bank G10 Currency Future Harvest Index–Excess Return™ (the “Index”) over time, plus the excess, if any, of the Fund’s interest income from its holdings of United States Treasury Obligations and other high credit quality short-term fixed income securities over the expenses of the Fund. The Index is designed to reflect the return from investing on a 2:1 leveraged basis in long currency futures positions for certain currencies associated with relatively high yielding interest rates and in short currency futures positions for certain currencies associated with relatively low yielding interest rates.

The Index is designed to exploit the trend that currencies associated with relatively high interest rates, on average, tend to rise in value relative to currencies associated with relatively low interest rates. This trend is consistent with economic theory regarding the correct price of a currency future, known as the Interest Rate Parity formula or the Covered Interest Arbitrage formula, and can be seen in the historical trading patterns of currency futures.

The currencies that are eligible for inclusion in the Index are the currencies of The Group of Ten (the “G10”) countries (the “Eligible Index Currencies”), which include the following currencies:

 

Eligible Index Currency

   Symbol  

United States Dollar

     USD   

Euro

     EUR   

Japanese Yen

     JPY   

Canadian Dollar

     CAD   

Swiss Franc

     CHF   

British Pound

     GBP   

Australian Dollar

     AUD   

New Zealand Dollar

     NZD   

Norwegian Krone

     NOK   

Swedish Krona

     SEK   

The futures contracts referencing each of the Eligible Index Currencies (except USD) in which the Fund invests are currently traded on the Chicago Mercantile Exchange (the “CME”), although currency futures contracts on the Eligible Index Currencies also trade on other exchanges in the United States and the Fund may invest in such contracts.

At any time, the Index is comprised of long futures positions in the three Eligible Index Currencies associated with the highest interest rates and short futures positions in the three Eligible Index Currencies associated with the lowest interest

 

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rates. The Index’s six component currencies from time-to-time, comprised of the three long and three short futures positions (each an “Index Currency”, and collectively, the “Index Currencies”), are used to calculate the value of the Index. The composition of the Index may be adjusted in the event that the Index Sponsor is not able to calculate the closing prices of the Index Currencies.

The following table reflects the Fund and Index weights of each Index Currency as of September 30, 2011:

 

Eligible Index Currency

   Fund Weight (%)     Index Weight (%)  

United States Dollar

     —       —  

Euro

     —          —     

Japanese Yen

     (34.97 %)      (35.00 %) 

Canadian Dollar

     —          —     

Swiss Franc

     (33.92 %)      (33.92 %) 

British Pound

     —          —     

Australian Dollar

     32.88     32.86

New Zealand Dollar

     32.31     32.32

Norwegian Krone

     33.53     33.53

Swedish Krona

     —          —     

 

* The United States Dollar was one of the Eligible Index Currencies (as hereinafter defined) associated with the three lowest interest rates. As a result, the Fund did not establish a futures position, and the ratio of the notional value of futures contracts to collateral used to margin those contracts will be 1.66:1 when the Fund re-balances.

The Fund is an index tracking fund and does not utilize any trading system, whether discretionary, systematic or otherwise. The Index is a mathematical construct that is comprised of the Index Currencies, each of which is assigned an initial weight. As the value of the underlying Index Currencies changes, the relative weights of each of the Index Currencies will vary. The Index will be re-balanced at a pre-determined frequency in order to restore the target weights. As the Fund will invest in futures contracts tied to the underlying Index Currencies (and their corresponding target base weights) with a view to tracking the changes, whether positive or negative, in the changes in the levels of the Index, the Managing Owner serves in an administrative role in order to ensure that the Fund invests in a manner that seeks to track the Index.

As discussed above, the Fund employs leverage on an approximate 2:1 basis. As of September 30, 2011 and December 31, 2010, the Fund had $298,769,699 (or 100%) and $356,373,721 (or 100%), respectively, of its holdings of cash, United States Treasury Obligations and unrealized appreciation/depreciation of futures contracts on deposit with its Commodity Broker. Of this, $16,256,970 (or 5.44%) and $17,985,982 (or 5.05%), respectively, of the Fund’s holdings of cash and United States Treasury Obligations are required to be deposited as margin in support of the Fund’s futures positions as of September 30, 2011 and December 31, 2010, respectively. For additional information, please see the unaudited Schedule of Investments as of September 30, 2011 and the audited Schedule of Investments as of December 31, 2010 for details of the Fund’s portfolio holdings.

The Index Sponsor calculates the Index on both an excess return basis and a total return basis. The excess return basis calculation reflects the change in market value of the applicable underlying currency futures only. The total return basis calculation reflects the sum of the change in market value of the applicable underlying currency futures plus the return on 3-month U.S. Treasury bills. The Fund seeks to track changes, whether positive or negative, in the level of the Index calculated on an excess return basis, over time, plus the excess, if any, of the Fund’s income from its holdings of United States Treasury and other high credit quality short-term fixed income securities over the expenses of the Fund.

The Fund will make distributions at the discretion of the Managing Owner. To the extent that the Fund’s actual and projected interest income from its holdings of United States Treasury securities and other high credit quality short-term fixed income securities exceeds the actual and projected fees and expenses of the Fund, the Managing Owner expects periodically to make distributions of the amount of such excess. The Fund currently does not expect to make distributions with respect to its capital gains. Depending on the Fund’s performance for the taxable year and an investor’s own tax situation for such year, an investor’s income tax liability for the taxable year and allocable share of the Fund’s net ordinary income or loss and capital gain or loss may exceed any distributions an investor may receive with respect to such year.

In order to determine which Eligible Index Currencies to include in the Index from time-to-time, the Index Sponsor will review the composition of the Index on a quarterly basis 5 business days prior to the IMM Date. “IMM Date” means the third Wednesday of March, June, September and December, a traditional settlement date in the International Money Market.

 

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Table of Contents

The Index Sponsor will review the three month Libor rate for each Eligible Index Currency other than the SEK and NOK and will review the three month Stibor rate and the three month Nibor rate for the SEK and NOK, respectively. The Libor, Stibor and Nibor rates for the Eligible Index Currencies, as applicable, mean the London, Stockholm and Norway interbank offered rates for overnight deposits, respectively, each of which is published by Reuters. The Eligible Index Currencies are then ranked according to yield. The three highest yielding and three lowest yielding are selected as Index Currencies for inclusion in calculating the Index. If two Index Currencies have the same yield, then the previous quarter’s ranking will be used. Please see http://dbfunds.db.com/dbv/weights.aspx with respect to the most recently available weighted composition of the Fund and http://dbfunds.db.com/dbv/index.aspx with respect to the composition of the Fund’s index.

The Index is re-weighted quarterly. Upon re-weighting, the high yielding Index Currencies are allocated a base weight of 33 1/3% and the low yielding Index Currencies are allocated a base weight of -33 1/3%. These new weights are applied during the Index re-weighting period, which takes place between the fourth and third Index Business Days prior to the applicable IMM Date (the “Index Re-Weighting Period”).

The CME traded futures contract of each applicable Index Currency that is closest to expiration is used in the Index calculation. The futures contracts on the Index Currencies are rolled during the Index Re-Weighting Period. The new futures contract on an Index Currency that has the next closest expiration date is selected. The calculation of the Index on an excess return basis is the weighted return on the change in price of the futures contracts on the Index Currencies.

A 3-month U.S. Treasury bill return is then calculated and included to calculate the total return index. Please refer to Exhibit B of the Trust Agreement for the mathematical formula of the Index.

The Index has been calculated using historical data since March 12, 1993. The Index is composed of notional amounts of each Index Currency. The notional amounts of the Index Currencies included in the Index are based on the Index Closing Level as of the Index Re-Weighting Period. The Index Closing Level reflects an arithmetic weighted return of the change in the Index Currencies exchange rates against the USD since March 12, 1993. March 1993 was chosen as a starting period because it represents the earliest date on which reliable data for all the Eligible Index Currencies exists. On March 12, 1993, the closing Index level was USD 100. Between March 12, 1993 to September 30, 2011, the Index level as calculated on an excess return basis has ranged from as high as USD 315.27 (July 25, 2007) to as low as USD 94.03 (July 30, 1993). Past Index results are not necessarily indicative of future changes, positive or negative, in the Index.

To track the Index, the Fund generally will establish long futures positions in the three Eligible Index Currencies associated with the highest interest rates and short futures positions in the three Eligible Index Currencies associated with the lowest interest rates and will adjust its holdings quarterly as the Index is adjusted. However, if the United States Dollar (“USD”) is among the Index Currencies from time-to-time, the Fund will not establish a long or short futures position (as the case may be) in USD, because USD is the Fund’s home currency and, as a consequence, the Fund can never enjoy profit or suffer loss from long or short futures positions in USD. When the USD is not associated with the highest or lowest interest rates among the Eligible Index Currencies, the aggregate notional value of the Fund’s futures contracts at the time they are established will be double the value of the Fund’s holdings of United States Treasury and other high credit quality short-term fixed income securities, which means the Fund will have a leverage ratio at such time of 2:1. If the USD is associated with the highest or lowest interest rates among the Eligible Index Currencies, the aggregate notional value of the Fund’s futures contracts at the time they are established will be approximately 1.66 times the value of the Fund’s holdings of United States Treasury and other high credit quality short-term fixed income securities, which means the Fund will have a leverage ratio at such time of approximately 1.66:1. Holding futures positions with a notional amount in excess of the Fund’s net asset value constitutes a form of leverage. The use of leverage will increase the potential for both trading profits and losses, depending on the changes, positive and negative, in the Index. The Fund’s ability to track the Index will not be affected by the presence or absence of the USD among the Index Currencies. Because the notional value of the Fund’s futures positions can rise or fall over time, the leverage ratio could be higher or lower between quarterly adjustments of the Index Currencies.

The use of long and short positions in the construction of the Index causes the Index to rise as a result of any upward price movement of Index Currencies expected to gain relative to the USD and to rise as a result of any downward price movement of Index Currencies expected to lose relative to the USD. The inclusion of both long and short positions is also expected to reduce the country specific foreign exchange risk of the Index (and, therefore, risk in connection with an investment in the Fund) relative to a directional (outright long or short) exposure to any or all of the Index Currencies.

There can be no assurance that the use of both long and short positions will reduce the volatility of the Index during any or all market cycles or performance periods, or that the Fund will achieve its objectives. It is possible that, prior to an Index rebalancing, that Index Currencies expected to lose relative to the USD may rise and/or Index Currencies expected to gain relative to the USD may fall. In such cases, the Fund may experience losses in both its long and short positions at the same time. Such losses will be greater as a result of the Fund’s use of leverage, reflected in its long futures exposure to Index Currencies with a notional value of up to 100% of the Fund’s net asset value and its short futures exposure to Index

 

20


Table of Contents

Currencies with a notional value of up to 100% of the Fund’s net asset value. Under such circumstances, the Fund’s losses would be greater as a result of its leverage than would be the case were it to limit its overall exposure to Index Currencies with a notional value of 100% of the Fund’s net asset value.

As a result of its use of leverage, the Fund will be required to deposit a greater proportion of its net assets as margin, not expected to exceed 10% of net assets. This represents margin deposit requirements approximately twice as great as would be required if the Fund did not use leverage. Similarly, as a result of its use of leverage, the Fund will trade more futures contracts and incur more brokerage commission expense than it would if it did not use leverage. The additional amount of brokerage commission expense generally will be proportional to the Fund’s leverage ratio.

The Fund’s portfolio also will include United States Treasury securities and other high credit quality short-term fixed income securities for deposit with the Fund’s Commodity Broker as margin.

The theoretical or “fair market” price of a currency futures contract is derived from the spot FX rate, interest rates of the two currencies and time to expiry of the currency futures contract and represents an equilibrium relationship among the interest rates, spot markets and futures markets associated with the currencies in question. If an equilibrium relationship does not exist between two currencies, arbitrage opportunities arise and the exploitation of these opportunities by arbitrageurs will tend to drive currency futures prices toward equilibrium. Application of the Interest Rate Parity formula under circumstances in which currencies are not in an equilibrium relationship predicts that if the currency future is based on a rate ranging from a high yielding currency to a low yielding currency, the fair market price of the currency future will be below the spot rate. The longer the time to the expiry of the currency future the greater the amount the fair market price of the currency future will be below the spot rate. If the spot rate stays approximately the same then, as you move closer to the expiry of the currency future, the fair market price will increase. In other words, the currency future rate between a relatively high interest rate currency and low interest rate currency tends to increase over time (assuming spot is relatively stable).

The Index exploits this trend using both long and short futures positions, which is expected to provide more consistent and less volatile returns than could be obtained by taking long positions only or short positions only.

Under the Trust Agreement, Wilmington Trust Company, the Trustee of the Fund, has delegated to the Managing Owner the exclusive management and control of all aspects of the business of the Fund. The Trustee will have no duty or liability to supervise or monitor the performance of the Managing Owner, nor will the Trustee have any liability for the acts or omissions of the Managing Owner.

The Index Sponsor obtains information for inclusion in, or for use in the calculation of, the Index from sources the Index Sponsor considers reliable. None of the Index Sponsor, the Managing Owner, the Fund or any of their respective affiliates accepts responsibility for or guarantees the accuracy and/or completeness of the Index or any data included in the Index.

The Shares are intended to provide investment results that generally correspond to the changes, positive or negative, in the levels of the Index over time. The value of the Shares is expected to fluctuate in relation to changes in the value of the Fund’s portfolio. The market price of the Shares may not be identical to the net asset value per Share, but these two valuations are expected to be very close.

Margin Calls

Like other futures and derivatives traders, the Fund will be subject to margin calls from time-to-time. The term “margin” has a different meaning in the context of futures contracts and other derivatives than it does in the context of securities. In particular, “margin” on a futures position does not constitute a borrowing of money or the collateralization of a loan. The Fund does not borrow money.

To establish a position in an exchange-traded futures contract, the Fund makes a deposit of “initial margin.” The amount of initial margin required to be deposited in order to establish a position in an exchange-traded futures contract varies from instrument to instrument depending, generally, on the historical volatility of the futures contract in question. Determination of the amount of the required initial margin deposit in respect of a particular contract is made by the exchange on which the contract is listed. To establish a long position in an over-the-counter instrument, the counterparty may require an analogous deposit of collateral, depending upon the anticipated volatility of the instrument and the creditworthiness of the person seeking to establish the position. The deposit of initial margin provides assurance to futures commission merchants and clearing brokers involved in the settlement process that sufficient resources are likely to be on deposit to enable a client’s position to be closed by recourse to the initial margin deposit should the client fail to meet a demand for variation margin, even if changes in the value of the contract in question, which are marked to market from day to day, continue to reflect the contract’s historical volatility. Collateral deposited in support of an over-the-counter instrument serves a similar purpose.

 

21


Table of Contents

Once a position has been established on a futures exchange, “variation margin” generally is credited or assessed at least daily to reflect changes in the value of the position. In contrast to “initial margin,” “variation margin” represents a system of marking to market the futures contract’s value. Thus, traders in exchange-traded futures contracts are assessed daily in an amount equal to that day’s accumulated losses in respect of any open position (or are credited daily with accumulated gains in respect of such position). Collateral may move between the parties to an over-the-counter instrument in a similar manner as gains or losses accumulate in the instrument. As with initial margin, variation margin serves to secure the obligations of the investor under the contract and to protect those involved in the settlement process against the possibility that a client will have insufficient resources to meet its contractual obligations. Collateral deposited in support of an over-the-counter instrument serves a similar purpose. Like initial margin (or an equivalent deposit of collateral), variation margin (or an equivalent deposit of collateral) does not constitute a borrowing of money, is not considered to be part of the contract purchase price and is returned upon the contract’s termination unless it is used to cover a loss in the contract position. United States Treasury Obligations are used routinely to collateralize OTC derivative positions, and are deposited routinely as margin to collateralize futures positions. The Fund may liquidate United States Treasury Obligations to meet an initial or variation margin requirement.

Performance Summary

This Report covers the three months ended September 30, 2011 and 2010 (herein referred to as the “Three Months Ended September 30, 2011” and the “Three Months Ended September 30, 2010”, respectively) and the nine months ended September 30, 2011 and 2010 (hereinafter referred to as the “Nine Months Ended September 30, 2011” and the “Nine Months Ended September 30, 2010”, respectively). The Fund commenced trading on the American Stock Exchange (now known as the NYSE Alternext US LLC (the “NYSE Alternext”)) on September 18, 2006, and, as of November 25, 2008, is listed on the NYSE Arca, Inc. (the “NYSE Arca”).

Performance of the Fund is detailed below in “Results of Operations”. Past performance of the Fund and the exchange traded Shares are not necessarily indicative of future performance.

The Index is intended to reflect the change in market value of its underlying currency futures contracts. The Deutsche Bank G10 Currency Future Harvest Index—Total Return™ (“DBCFH-TR™”), consists of the Index plus 3-month United States Treasury Obligation returns. Because DBCFH-TR™ is an index, it does not reflect (i) actual trading and (ii) any fees or expenses. Past Index results are not necessarily indicative of future changes, positive or negative, in the Index closing levels.

The section “Summary of DBCFH-TR™ and Underlying Index Currency Returns for the Three Months Ended September 30, 2011 and 2010 and the Nine Months Ended September 30, 2011 and 2010” below provides an overview of the changes in the closing levels of the Index by disclosing the change in closing levels of the Index itself and each underlying component Index Currency plus 3-month United States Treasury Obligations returns. Please note that the Fund’s objective is to track the Index (not DBCFH-TR™) and the Fund does not attempt to outperform or underperform the Index.

The following chart highlights the results of the DBCFH-TR™ and Underlying Index Currency Returns for the Three Months Ended September 30, 2011 and 2010 and the Nine Months Ended September 30, 2011 and 2010.

 

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Table of Contents

Summary of the DBCFH-TR™ and Underlying Index Currency

Returns for the Three Months Ended September 30, 2011 and 2010

and the Nine Months Ended September 30, 2011 and 2010

 

Underlying Index
Currency

  AGGREGATE RETURNS FOR INDEX CURRENCIES IN THE
DBCFH-TR™
 
  Long Position1     Short Position1  
  Three Months
Ended
September 30,
2011
    Three Months
Ended
September 30,
2010
    Nine Months
Ended
September 30,
2011
    Nine Months
Ended
September 30,
2010
    Three Months
Ended
September 30,
2011
    Three Months
Ended
September 30,
2010
    Nine Months
Ended
September 30,
2011
    Nine Months
Ended
September 30,
2010
 

Norwegian Krone (NOK)

    (2.50 )%      3.63     0.53     0.09     N/A        N/A        N/A        N/A   

Australian Dollar (AUD)

    (2.87 )%      5.24     (0.57 )%      3.72     N/A        N/A        N/A        N/A   

New Zealand Dollar (NZD)

    (2.33 )%      2.62     0.22     1.14     N/A        N/A        N/A        N/A   

Japanese Yen (JPY)

    N/A        N/A        N/A        N/A        (1.42 )%      (2.10 )%      (1.75 )%      (3.72 )% 

Swiss Franc (CHF)

    N/A        N/A        N/A        N/A        2.46     (3.36 )%      (1.10 )%      (1.95 )% 

 

     DBCFH-TR™ - Index Returns  
     Three Months
Ended
September 30,
2011
    Three Months
Ended
September 30,
2010
    Nine Months
Ended
September 30,
2011
    Nine Months
Ended
September 30,
2010
 

3-MONTH UNITED STATES TREASURY OBLIGATIONS

     0.00     0.04     0.05     0.10

DBCFH-TR™

     (6.67 )%      6.07     (2.62 )%      (0.62 )% 

 

1 

Although the United States Dollar was one of the Eligible Index Currencies associated with the top three highest or bottom three lowest interest rates during the three months ended September 30, 2011, the Index (as per its rules) did not include a long or short USD futures position.

If the Fund’s interest income from its holdings of fixed income securities were to exceed the Fund’s fees and expenses, the aggregate return on an investment in the Fund is expected to outperform the Index and underperform the DBCFH-TR™. The only difference between the Index and the DBCFH-TR™ is that the Index does not include interest income from a hypothetical basket of fixed income securities while the DBCFH-TR™ does include such a component. Thus, the difference between the Index and the DBCFH-TR™ is attributable entirely to the hypothetical interest income from this hypothetical basket of fixed income securities. If the Fund’s interest income from its holdings of fixed income securities exceeds the Fund’s fees and expenses, then the amount of such excess is expected to be distributed periodically. The market price of the Shares is expected to closely track the Index. The aggregate return on an investment in the Fund over any period is the sum of the capital appreciation or depreciation of the Shares over the period, plus the amount of any distributions during the period. Consequently, the Fund’s aggregate return is expected to outperform the Index by the amount of the excess, if any, of its interest income over its fees and expenses but, as a result of the Fund’s fees and expenses, the aggregate return on the Fund is expected to underperform the DBCFH-TR™. If the Fund’s fees and expenses were to exceed the Fund’s interest income from its holdings of fixed income securities, the aggregate return on an investment in the Fund is expected to underperform the Index.

Net Asset Value

Net asset value means the total assets of the Fund, including, but not limited to, all futures, cash and investments less total liabilities of the Fund, each determined on the basis of U.S. generally accepted accounting principles, consistently applied under the accrual method of accounting. In particular, net asset value includes any unrealized appreciation or depreciation on open currency futures contracts, and any other credit or debit accruing to the Fund but unpaid or not received by the Fund. All open currency futures contracts will be calculated at their then current market value, which will be based upon the settlement price for that particular currency futures contract traded on the applicable exchange on the date with respect to which net asset value is being determined; provided, that if a currency futures contract could not be liquidated on such day, due to the operation of daily limits or other rules of the exchange upon which that position is traded or otherwise, the Managing Owner may value such futures contract pursuant to policies the Managing Owner has adopted, which are consistent with normal industry standards. The Managing Owner may in its discretion (and under circumstances, including,

 

23


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but not limited to, periods during which a settlement price of a futures contract is not available due to exchange limit orders or force majeure type events such as systems failure, natural or man-made disaster, act of God, armed conflict, act of terrorism, riot or labor disruption or any similar intervening circumstance) value any asset of the Fund pursuant to such other principles as the Managing Owner deems fair and equitable so long as such principles are consistent with normal industry standards. Interest earned on the Fund’s brokerage account is accrued monthly. The amount of any distribution is a liability of the Fund from the day when the distribution is declared until it is paid.

Critical Accounting Policies

The Fund’s critical accounting policies are as follows:

Preparation of the financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires the application of appropriate accounting rules and guidance, as well as the use of estimates, and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expense and related disclosure of contingent assets and liabilities during the reporting period of the financial statements and accompanying notes. The financial statements of the Fund include the consolidated financial statements of the Fund and Master Fund when applicable. As described above, the Fund was originally formed as a master-feeder structure and such structure was collapsed on December 31, 2010. The financial statements reflect consolidation of the Fund and the Master Fund for all periods prior to December 31, 2010. The Fund’s application of these policies involves judgments and actual results may differ from the estimates used.

The Fund holds a significant portion of its assets in currency futures contracts and United States Treasury Obligations, both of which are recorded on a trade date basis and at fair value in the financial statements, with changes in fair value reported in the statement of income and expenses.

The use of fair value to measure financial instruments, with related unrealized gains or losses recognized in earnings in each period is fundamental to the Fund’s financial statements. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price).

In determining fair value of United States Treasury Obligations and currency futures contracts, the Fund uses unadjusted quoted market prices in active markets. FASB fair value measurement and disclosure guidance requires a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The objective of a fair value measurement is to determine the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The hierarchy gives the highest priority to unadjusted quoted prices for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. See Note 4(c) within the financial statements in Item 1 for further information.

When market closing prices are not available, the Managing Owner may value an asset of the Fund pursuant to policies the Managing Owner has adopted, which are consistent with normal industry standards.

Realized gains (losses) and changes in unrealized gain (loss) on open positions are determined on a specific identification basis and recognized in the statement of income and expenses in the period in which the contract is closed or the changes occur, respectively.

Interest income on United States Treasury Obligations is recognized on an accrual basis when earned. Premiums and discounts are amortized or accreted over the life of the United States Treasury Obligations.

Market Risk

Trading in futures contracts involves the Fund entering into contractual commitments to purchase a particular currency at a specified date and price. The market risk associated with the Fund’s commitments to purchase currencies is limited to the gross or face amount of the contracts held.

The Fund’s exposure to market risk is also influenced by a number of factors including the volatility of interest rates and foreign currency exchange rates, the liquidity of the markets in which the contracts are traded and the relationships among the contracts held. The inherent uncertainty of the Fund’s trading as well as the development of drastic market occurrences could ultimately lead to a loss of all or substantially all of the investors’ capital.

 

24


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Credit Risk

When the Fund enters into futures contracts, the Fund is exposed to credit risk that the counterparty to the contract will not meet its obligations. The counterparty for futures contracts traded on United States exchanges is the clearing house associated with the particular exchange. In general, clearing houses are backed by their corporate members who may be required to share in the financial burden resulting from the nonperformance by one of their members and, as such, should significantly reduce this credit risk. In cases where the clearing house is not backed by the clearing members (i.e., some foreign exchanges), it may be backed by a consortium of banks or other financial institutions. There can be no assurance that any counterparty, clearing member or clearinghouse will meet its obligations to the Fund.

The Commodity Broker, when acting as the Fund’s futures commission merchant in accepting orders for the purchase or sale of domestic futures contracts, is required by CFTC regulations to separately account for and segregate as belonging to the Fund all assets of the Fund relating to domestic futures trading and the Commodity Broker is not allowed to commingle such assets with other assets of the Commodity Broker. In addition, CFTC regulations also require the Commodity Broker to hold in a secure account assets of the Fund related to foreign futures trading.

Liquidity

All of the Fund’s source of capital is derived from the Fund’s offering of Shares to Authorized Participants. The Fund in turn allocates its net assets to currency futures trading. A significant portion of the net asset value is held in United States Treasury Obligations and cash, which are used as margin for the Fund’s trading in currency futures. The percentage that United States Treasury Obligations bear to the total net assets will vary from period to period as the market values of the Fund’s currency futures change. The balance of the net assets is held in the Fund’s trading account. Interest earned on the Fund’s interest-bearing funds is paid to the Fund.

The Fund’s foreign currency futures contracts may be subject to periods of illiquidity because of market conditions, regulatory considerations or for other reasons. For example, commodity exchanges may limit fluctuations in certain futures contract prices during a single day by regulations referred to as “daily limits.” During a single day, no trades may be executed at prices beyond the daily limit. Once the price of a particular futures contract has increased or decreased by an amount equal to the daily limit, positions in the futures contract can neither be taken nor liquidated unless the traders are willing to effect trades at or within the limit. Although the Eligible Index Currencies that the Fund invests in are not currently subject to daily limits, the Eligible Index Currencies could become subject to such limits in the future. Such market conditions could prevent the Fund from promptly liquidating its currency futures positions.

Because the Fund trades futures contracts, its capital is at risk due to changes in the value of futures contracts (market risk) or the inability of counterparties (including exchange clearinghouses) to perform under the terms of the contracts (credit risk).

Authorized Participants may also redeem Baskets of Shares. On any business day, an Authorized Participant may place an order with the Managing Owner to redeem one or more Baskets. Redemption orders must be placed by 1:00 p.m., New York time. The day on which the Managing Owner receives a valid redemption order is the redemption order date. Redemption orders are irrevocable. The redemption procedures allow only Authorized Participants to redeem Baskets. Individual Shareholders may not redeem directly from the Fund. By placing a redemption order, an Authorized Participant agrees to deliver the Baskets to be redeemed through DTC’s book-entry system to the Fund not later than noon, New York time, on the business day immediately following the redemption order date. By placing a redemption order, and prior to receipt of the redemption proceeds, an Authorized Participant’s DTC account is charged the non-refundable transaction fee due for the redemption order.

Cash Flows

The primary cash flow activity of the Fund is to raise capital from Authorized Participants through the issuance of Shares. This cash is used to invest in United States Treasury Obligations and to meet margin requirements as a result of the positions taken in futures contracts to match the fluctuations of the Index the Fund is tracking.

Operating Activities

Net cash flow provided by operating activities was $54.8 million and $23.9 million for the Nine Months Ended September 30, 2011 and 2010, respectively. This amount primarily includes net purchases and sales of United States Treasury Obligations which are held at fair value on the statement of financial condition.

During the Nine Months Ended September 30, 2011, $1,001.8 million was paid to purchase United States Treasury Obligations and $1,051.0 million was received from sales and maturing contracts. During the Nine Months Ended September

 

25


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30, 2010, $1,079.7 million was paid to purchase United States Treasury Obligations and $1,117.0 million was received from sales and maturing contracts. Unrealized appreciation on United States Treasury Obligations and futures decreased by $18.8 million and increased by $4.6 million during the Nine Months Ended September 30, 2011 and 2010, respectively.

Financing Activities

The Fund’s net cash flow provided by and (used for) financing activities was $(44.6) million and $(47.9) million during the Nine Months Ended September 30, 2011 and 2010, respectively. This included $96.8 million and $42.8 million from the sale of Shares to Authorized Participants during the Nine Months Ended September 30, 2011 and 2010, respectively.

Results of Operations

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 AND THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

The Fund was launched on September 15, 2006 at $25.00 per Share. The Shares traded on the NYSE Alternext from September 18, 2006 to November 25, 2008 and have been trading on the NYSE Arca since November 25, 2008.

The Fund seeks to track changes in the closing levels of the Deutsche Bank G10 Currency Future Harvest Index—Excess Return™ (the “Index”), over time, plus the excess, if any, of the Fund’s interest income from its holdings of United States Treasury Obligations and other high credit quality short-term fixed income securities over the expenses of the Fund. The following graphs illustrate changes in (i) the price of the Shares (as reflected by the graph “DBV”), (ii) the Fund’s NAV (as reflected by the graph “FBVNV”), and (iii) the closing levels of the Index (as reflected by the graph “DBCFHX”). Whenever the interest income earned by the Fund exceeds Fund expenses, the price of the Shares generally has exceeded the levels of the Index primarily because the Share price reflects interest income from the Fund’s collateral holdings whereas the Index does not consider such interest income. There can be no assurances that the price of the Shares will continue to exceed the Index levels.

The Index is a set of rules applied to a body of data and does not represent the results of actual investment or trading. The Index is frictionless, in that it does not take into account fees or expenses associated with investing in the Fund. Also, because it does not represent actual futures positions, the Index is not subject to, and does not take into account the impact of, speculative position limits (if applicable) or certain other similar limitations on the ability of the Fund to trade the Index Currencies. The “TR” version of the Index includes an assumed amount of interest income based on prevailing rates that is adjusted from time to time. The Fund, by contrast, invests actual money and trades actual futures contracts. As a result, the performance of the Fund involves friction, in that fees and expenses impose a drag on performance. The Fund may be subject to speculative position limits (if applicable) and certain other limitations on its ability to trade the Index Currencies, which may compel the Fund to trade futures or other instruments that are not the Index Currencies as proxies for the Index Currencies. The interest rate actually earned by the Fund over any period may differ from the assumed amount of interest income factored into the “TR” version of the Index over the same period. All of these factors can contribute to discrepancies between changes in net asset value per Share and changes in the level of the Index over any period of time. Fees and expenses always will tend to cause changes in the net asset value per Share to underperform changes in the value of the Index over any given period, all other things being equal. Actual interest income could be higher or lower than the assumed interest income factored into the “TR” version of the Index, and therefore could cause changes in the net asset value per Share to outperform or underperform changes in the value of the “TR” version of the Index over any given period, all other things being equal. Similarly, trading futures or other instruments that are not the Index Currencies as proxies for the Index Currencies could cause changes in the net asset value per Share to outperform or underperform changes in the value of the Index over any given period, all other things being equal.

 

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COMPARISON OF DBV, FBVNV AND DBCFHX FOR THE THREE MONTHS ENDED

SEPTEMBER 30, 2011 AND 2010 AND THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

LOGO

NEITHER THE PAST PERFORMANCE OF THE FUND NOR THE PRIOR INDEX LEVELS AND CHANGES, POSITIVE

OR NEGATIVE, SHOULD BE TAKEN AS AN INDICATION OF THE FUND’S FUTURE PERFORMANCE.

LOGO

NEITHER THE PAST PERFORMANCE OF THE FUND NOR THE PRIOR INDEX LEVELS AND CHANGES, POSITIVE

OR NEGATIVE, SHOULD BE TAKEN AS AN INDICATION OF THE FUND’S FUTURE PERFORMANCE.

See Additional Legends below.

 

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LOGO

NEITHER THE PAST PERFORMANCE OF THE FUND NOR THE PRIOR INDEX LEVELS AND CHANGES, POSITIVE

OR NEGATIVE, SHOULD BE TAKEN AS AN INDICATION OF THE FUND’S FUTURE PERFORMANCE.

LOGO

NEITHER THE PAST PERFORMANCE OF THE FUND NOR THE PRIOR INDEX LEVELS AND CHANGES, POSITIVE

OR NEGATIVE, SHOULD BE TAKEN AS AN INDICATION OF THE FUND’S FUTURE PERFORMANCE.

See Additional Legends below.

 

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Additional Legends

Deutsche Bank G10 Currency Future Harvest Index – Excess Return™ is an index and does not reflect (i) actual trading and (ii) any fees or expenses.

WHILE THE FUND’S OBJECTIVE IS NOT TO GENERATE PROFIT THROUGH ACTIVE PORTFOLIO MANAGEMENT, BUT IS TO TRACK THE INDEX, BECAUSE THE INDEX WAS ESTABLISHED IN DECEMBER 2005, CERTAIN INFORMATION RELATING TO THE INDEX CLOSING LEVELS MAY BE CONSIDERED TO BE “HYPOTHETICAL.” HYPOTHETICAL INFORMATION MAY HAVE CERTAIN INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW.

WITH RESPECT TO INDEX DATA, NO REPRESENTATION IS BEING MADE THAT THE INDEX WILL OR IS LIKELY TO ACHIEVE ANNUAL OR CUMULATIVE CLOSING LEVELS CONSISTENT WITH OR SIMILAR TO THOSE SET FORTH HEREIN. SIMILARLY, NO REPRESENTATION IS BEING MADE THAT THE FUND WILL GENERATE PROFITS OR LOSSES SIMILAR TO THE FUND’S PAST PERFORMANCE OR THE HISTORICAL ANNUAL OR CUMULATIVE CHANGES IN THE INDEX CLOSING LEVELS. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY INVESTMENT METHODOLOGIES, WHETHER ACTIVE OR PASSIVE.

WITH RESPECT TO INDEX DATA, ONE OF THE LIMITATIONS OF HYPOTHETICAL INFORMATION IS THAT IT IS GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. TO THE EXTENT THAT INFORMATION PRESENTED HEREIN RELATES TO THE PERIOD MARCH 1993 THROUGH NOVEMBER 2005, THE INDEX CLOSING LEVELS REFLECT THE APPLICATION OF THE INDEX’S METHODOLOGY, AND SELECTION OF INDEX CURRENCIES, IN HINDSIGHT.

NO HYPOTHETICAL RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THERE ARE NUMEROUS FACTORS, INCLUDING THOSE DESCRIBED UNDER ITEM 1A. “RISK FACTORS” SET FORTH IN THE FUND’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2010, RELATED TO THE CURRENCIES MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF THE FUND’S EFFORTS TO TRACK THE INDEX OVER TIME WHICH CANNOT BE, AND HAVE NOT BEEN, ACCOUNTED FOR IN THE PREPARATION OF THE INDEX INFORMATION SET FORTH ON THE FOLLOWING PAGES, ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL PERFORMANCE RESULTS FOR THE FUND. FURTHERMORE, THE INDEX INFORMATION DOES NOT INVOLVE FINANCIAL RISK OR ACCOUNT FOR THE IMPACT OF FEES AND COSTS ASSOCIATED WITH THE FUND.

THE MANAGING OWNER, AN INDIRECT WHOLLY OWNED SUBSIDIARY OF DEUTSCHE BANK AG, COMMENCED OPERATIONS IN JANUARY 2006. AS MANAGING OWNER, THE MANAGING OWNER AND ITS TRADING PRINCIPALS HAVE BEEN MANAGING THE DAY-TO-DAY OPERATIONS FOR THE FUND AND MANAGING FUTURES ACCOUNTS AND RELATED PRODUCTS. BECAUSE THERE ARE LIMITED ACTUAL TRADING RESULTS TO COMPARE TO THE INDEX CLOSING LEVELS SET FORTH HEREIN, PROSPECTIVE INVESTORS SHOULD BE PARTICULARLY WARY OF PLACING UNDUE RELIANCE ON THE ANNUAL OR CUMULATIVE INDEX RESULTS.

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2010

Fund Share Price Performance

For the Three Months Ended September 30, 2011, the NYSE Arca market value of each Share decreased 7.38% from $24.78 per Share to $22.95 per Share. The Share price high and low for the Three Months Ended September 30, 2011 and related change from the Share price on June 30, 2011 was as follows: Shares traded from a high of $24.97 per Share (+0.77%) on July 7, 2011, to a low of $22.24 per Share (-10.25%) on August 10, 2011.

For the Three Months Ended September 30, 2010, the NYSE Arca market value of each Share increased 6.65% from $21.79 per Share to $23.24 per Share. The Share price low and high for the Three Months Ended September 30, 2010 and

 

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related change from the Share price on June 30, 2010 was as follows: Shares traded from a low of $21.77 per Share (-0.09%) on July 1, 2010, to a high of $23.79 per Share (+9.18%) on September 3, 2010.

Fund Share Net Asset Performance

For the Three Months Ended September 30, 2011, the net asset value of each Share decreased 6.89% from $24.67 per Share to $22.97 per Share. For the Three Months Ended September 30, 2011, losses in the long index currency positions in the Australian Dollar, Norwegian Krone and New Zealand Dollar and the short index currency positions in the Japanese Yen were partially offset by gains in the short currency positions in the Swiss Franc contributing to an overall 6.67% decrease in the level of the DBCFH-TR™.

Net loss for the Three Months Ended September 30, 2011, was $26.8 million, resulting from $0.01 million of interest income, net realized loss of $6.9 million, net unrealized losses of $19.2 million, and operating expenses of $0.7 million.

For the Three Months Ended September 30, 2010, the net asset value of each Share increased 5.83% from $21.94 per Share to $23.22 per Share. For the Three Months Ended September 30, 2010, gains in the long index currency positions in the Australian Dollar, Norwegian Krone and New Zealand Dollar were partially offset by losses in the short currency positions in the Japanese Yen and the Swiss Franc contributing to an overall 6.07% increase in the level of the DBCFH-TR™.

Net income for the Three Months Ended September 30, 2010, was $20.6 million, resulting from $0.1 million of interest income, net realized gains of $0.3 million, net unrealized gains of $20.9 million, and operating expenses of $0.7 million.

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2010

Fund Share Price Performance

For the Nine Months Ended September 30, 2011, the NYSE Arca market value of each Share decreased 3.33% from $23.74 per Share to $22.95 per Share. The Share price high and low for the Nine Months Ended September 30, 2011 and related change from the Share price on December 31, 2010 was as follows: Shares traded from a high of $25.14 per Share (+5.90%) on April 27, 2011, to a low of $22.24 per Share (-6.32%) on August 10, 2011.

For the Nine Months Ended September 30, 2010, the NYSE Arca market value of each Share decreased 1.27% from $23.54 per Share to $23.24 per Share. The Share price high and low for the Nine Months Ended September 30, 2010 and related change from the Share price on December 31, 2009 was as follows: Shares traded from a high of $24.32 per Share (+3.31%) on May 3, 2010 to a low of $21.77 per Share (-7.52%) on July 1, 2010.

Fund Share Net Asset Performance

For the Nine Months Ended September 30, 2011, the net asset value of each Share decreased 3.24% from $23.74 per Share to $22.97 per Share. For the Nine Months Ended September 30, 2011, losses in the long index currency positions in the Australian Dollar and the short currency positions in the Japanese Yen and the Swiss Franc were partially offset by gains in the long currency positions in the Norwegian Krone and New Zealand Dollar contributing to an overall 2.62% decrease in the level of the DBCFH-TR™.

Net loss for the Nine Months Ended September 30, 2011, was $13.0 million, resulting from $0.2 million of interest income, net realized gains of $7.8 million, net unrealized losses of $18.9 million, and operating expenses of $2.1 million.

For the Nine Months Ended September 30, 2010, the net asset value of each Share decreased 1.28% from $23.52 per Share to $23.22 per Share. For the Nine Months Ended September 30, 2010, gains in the long positions in the Australian Dollar, the New Zealand Dollar and the Norwegian Krone were offset by losses in the short index currency positions in the Japanese Yen and Swiss Franc, contributing to an overall 0.62% decrease in the level of the DBCFH-TR™.

Net loss for the Nine Months Ended September 30, 2010, was $8.5 million, resulting from $0.3 million of interest income, net realized losses of $11.1 million, net unrealized gains of $4.6 million, and operating expenses of $2.3 million.

Off-Balance Sheet Arrangements and Contractual Obligations

In the normal course of its business, the Fund is a party to financial instruments with off-balance sheet risk. The term “off-balance sheet risk” refers to an unrecorded potential liability that, even though it does not appear on the balance sheet, may result in a future obligation or loss. The financial instruments used by the Fund are currency futures, whose values are based upon an underlying asset and generally represent future commitments which have a reasonable possibility to be settled in cash or through physical delivery. The financial instruments are traded on an exchange and are standardized contracts.

 

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The Fund has not utilized, nor does it expect to utilize in the future, special purpose entities to facilitate off-balance sheet financing arrangements and has no loan guarantee arrangements or off-balance sheet arrangements of any kind, other than agreements entered into in the normal course of business noted above, which may include indemnification provisions related to certain risks service providers undertake in performing services which are in the best interests of the Fund. While the Fund’s exposure under such indemnification provisions cannot be estimated, these general business indemnifications are not expected to have a material impact on the Fund’s financial position.

The Fund’s contractual obligations are with the Managing Owner and the Commodity Broker. Management Fee payments made to the Managing Owner are calculated as a fixed percentage of the Fund’s net asset value. Commission payments to the Commodity Broker are on a contract-by-contract, or round-turn, basis. As such, the Managing Owner cannot anticipate the amount of payments that will be required under these arrangements for future periods as net asset values are not known until a future date. These agreements are effective for one-year terms, renewable automatically for additional one-year terms unless terminated. Additionally, these agreements may be terminated by either party for various reasons.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

INTRODUCTION

The Fund is designed to replicate positions in a currency futures index. The market sensitive instruments held by it are subject to the risk of trading loss. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Fund’s main line of business.

Market movements can produce frequent changes in the fair market value of the Fund’s open positions and, consequently, in its earnings and cash flow. The Fund’s market risk is primarily influenced by changes in the price of currencies.

Value at risk (“VaR”), is a measure of the maximum amount which the Fund could reasonably be expected to lose in a given market sector. However, the inherent uncertainty in the markets in which the Fund trades and the recurrence in the markets traded by the Fund of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated VaR or the Fund’s experience to date (i.e., “risk of ruin”). In light of this, as well as the risks and uncertainties intrinsic to all future projections, the inclusion of the quantification included in this section should not be considered to constitute any assurance or representation that the Fund’s losses in any market sector will be limited to VaR or by the Fund’s attempts to manage its market risk.

Standard of Materiality

Materiality as used in this section, “Quantitative and Qualitative Disclosures About Market Risk,” is based on an assessment of reasonably possible market movements and the potential losses caused by such movements, taking into account the leverage, and multiplier features of the Fund’s market sensitive instruments.

QUANTIFYING THE FUND’S TRADING VALUE AT RISK IN DIFFERENT CURRENCY CONTRACTS

Quantitative Forward-Looking Statements

The following quantitative disclosures regarding the Fund’s market risk exposures contain “forward-looking statements” within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). All quantitative disclosures in this section are deemed to be forward-looking statements for purposes of the safe harbor, except for statements of historical fact (such as the dollar amount of maintenance margin required for market risk sensitive instruments held at the end of the reporting period).

VaR is a statistical measure of the value of losses that would not be expected to be exceeded over a given time horizon and at a given probability level arising from movement of underlying risk factors. Loss is measured as a decline in the fair value of the portfolio as a result of changes in any of the material variables by which fair values are determined. VaR is measured over a specified holding period (1 day) and to a specified level of statistical confidence (99th percentile). However, the inherent uncertainty in the markets in which the Fund trades and the recurrence in the markets traded by the Fund of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated VaR or the Fund’s experience to date (i.e., “risk of ruin”). In light of this, as well as the risks and uncertainties intrinsic to all future projections, the inclusion of the quantification included in this section should not be considered to constitute any assurance or representation that the Fund’s losses in any market sector will be limited to VaR or by the Fund’s attempts to manage its market risk.

 

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THE FUND’S TRADING VALUE AT RISK

The Fund calculates VaR using the actual historical market movements of the Fund’s total assets. The following table indicates the trading VaR associated with the Fund’s total assets as of September 30, 2011.

 

Description

   Total Assets      Daily Volatility     VaR* (99
Percentile)
     Number of times
VaR Exceeded
 

PowerShares DB G10 Currency Harvest Fund

   $ 298,769,699         0.82   $ 5,701,008         8   

The following table indicates the trading VaR associated with the Fund’s total assets as of December 31, 2010.

 

Description

   Total Assets      Daily Volatility     VaR* (99
Percentile)
     Number of times
VaR Exceeded
 

PowerShares DB G10 Currency Harvest Fund

   $ 356,373,721         0.82   $ 6,795,465         1   

 

* The VaR represents the one day downside risk, under normal market conditions, with a 99% confidence level. It is calculated using historical market moves of the Fund’s total assets and uses a one year look-back.

NON-TRADING RISK

The Fund has non-trading market risk as a result of investing in short-term United States Treasury Obligations. The market risk represented by these investments is expected to be immaterial.

QUALITATIVE DISCLOSURES REGARDING PRIMARY TRADING RISK EXPOSURES

The following qualitative disclosures regarding the Fund’s market risk exposures—except for those disclosures that are statements of historical fact—constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. The Fund’s primary market risk exposures are subject to numerous uncertainties, contingencies and risks. Government interventions, defaults and expropriations, illiquid markets, the emergence of dominant fundamental factors, political upheavals, changes in historical price relationships, an influx of new market participants, increased regulation and many other factors could result in material losses as well as in material changes to the risk exposures of the Fund. There can be no assurance that the Fund’s current market exposure will not change materially. Investors may lose all or substantially all of their investment in the Fund.

Several factors may affect the price of the Index Currencies, including, but not limited to:

 

   

National debt levels and trade deficits, including changes in balances of payments and trade;

 

   

Domestic and foreign inflation rates and investors’ expectations concerning inflation rates;

 

   

Domestic and foreign interest rates and investors’ expectations concerning interest rates;

 

   

Currency exchange rates;

 

   

Investment and trading activities of mutual funds, hedge funds and currency funds;

 

   

Global or regional political, economic or financial events and situations;

 

   

Supply and demand changes which influence the foreign exchange rates of various currencies;

 

   

Monetary policies of governments (including exchange control programs, restrictions on local exchanges or markets and limitations on foreign investment in a country or on investment by residents of a country in other countries), trade restrictions, currency devaluations and revaluations;

 

   

Governmental intervention in the currency market, directly and by regulation, in order to influence currency prices; and

 

   

Expectations among market participants that a currency’s value soon will change.

QUALITATIVE DISCLOSURES REGARDING NON-TRADING RISK EXPOSURE

General

The Fund is unaware of any (i) anticipated known demands, commitments or capital expenditures; (ii) material trends, favorable or unfavorable, in its capital resources; or (iii) trends or uncertainties that will have a material effect on operations.

 

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QUALITATIVE DISCLOSURES REGARDING MEANS OF MANAGING RISK EXPOSURE

Under ordinary circumstances, the Managing Owner’s discretionary power is limited to determining whether the Fund will make a distribution. Under emergency or extraordinary circumstances, the Managing Owner’s discretionary powers increase, but remain circumscribed. These special circumstances, for example, include the unavailability of the Index or certain natural or man-made disasters. The Managing Owner does not apply risk management techniques. The Fund initiates positions on both the “long” and “short” side of the market and does not employ “stop-loss” techniques.

 

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of the management of the Managing Owner, including Hans Ephraimson, its Chief Executive Officer, and Michael Gilligan, its Principal Financial Officer, the Fund carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this quarterly report, and, based upon that evaluation, Hans Ephraimson, the Chief Executive Officer, and Michael Gilligan, the Principal Financial Officer, of the Managing Owner, concluded that the Fund’s disclosure controls and procedures were effective to ensure that information the Fund is required to disclose in the reports that it files or submits with the Securities and Exchange Commission (the “SEC”) under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and to ensure that information required to be disclosed by the Fund in the reports that it files or submits under the Exchange Act is accumulated and communicated to management of the Managing Owner, including its Chief Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There has been no change in internal control over financial reporting (as defined in the Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the Fund’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Fund’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings.

Not Applicable.

 

Item 1A. Risk Factors.

There are no material changes from risk factors as previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2010, filed February 28, 2011 except for the following:

(29) The Effect Of Market Disruptions and Government Intervention Are Unpredictable And May Have An Adverse Effect On The Value Of Your Shares.

The global financial markets have in the past few years gone through pervasive and fundamental disruptions that have led to extensive and unprecedented governmental intervention. Such intervention has in certain cases been implemented on an “emergency” basis, suddenly and substantially eliminating market participants’ ability to continue to implement certain strategies or manage the risk of their outstanding positions. In addition—as one would expect given the complexities of the financial markets and the limited time frame within which governments have felt compelled to take action—these interventions have typically been unclear in scope and application, resulting in confusion and uncertainty which in itself has been materially detrimental to the efficient functioning of the markets as well as previously successful investment strategies.

The Fund may incur major losses in the event of disrupted markets and other extraordinary events in which historical pricing relationships become materially distorted. The risk of loss from pricing distortions is compounded by the fact that in disrupted markets many positions become illiquid, making it difficult or impossible to close out positions against which the markets are moving. The financing available to market participants from their banks, dealers and other counterparties is typically reduced in disrupted markets. Such a reduction may result in substantial losses to the affected market participants. Market disruptions may from time to time cause dramatic losses, and such events can result in otherwise historically low-risk strategies performing with unprecedented volatility and risk.

(30) Regulatory Changes or Actions, Including the Implementation of the Dodd-Frank Act, May Alter the Operations and Profitability of the Fund.

The regulation of commodity interest transactions in the United States is a rapidly changing area of law and is subject to ongoing modification by governmental and judicial action. Considerable regulatory attention has been focused on non-traditional investment pools that are publicly distributed in the United States. The Dodd-Frank Act seeks to regulate markets, market participants and financial instruments that previously have been unregulated and substantially alters the regulation of many other markets, market participants and financial instruments. Because many provisions of the Dodd-Frank Act require rulemaking by the applicable regulators before becoming fully effective and the Dodd-Frank Act mandates multiple agency reports and studies (which could result in additional legislative or regulatory action), it is difficult to predict the impact of the Dodd-Frank Act on the Fund, the Managing Owner, and the markets in which the Fund may invest, the Net Asset Value of the Fund or the market price of the Shares. The Dodd-Frank Act could result in the Fund’s investment strategy becoming non-viable or non-economic to implement. Therefore, the Dodd-Frank Act and regulations adopted pursuant to the Dodd-Frank Act could have a material adverse impact on the profit potential of the Fund and in turn the value of your Shares.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(a) There have been no unregistered sales of the Fund’s securities. No Fund securities are authorized for issuance by the Fund under equity compensation plans.

(b) Not Applicable.

(c) The following table summarizes the redemptions by Authorized Participants during the Three Months Ended September 30, 2011 and 2010:

 

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Period of Redemption

   Total Number of
Shares Redeemed
     Average Price
Paid per Share
 

Three Months Ended September 30, 2011

     4,600,000       $ 23.43   

Three Months Ended September 30, 2010

     1,200,000       $ 22.33   

 

Item 3. Defaults Upon Senior Securities.

None.

 

Item 4. Reserved.

 

Item 5. Other Information.

None.

 

Item 6. Exhibits.

 

31.1    Certification required under Exchange Act Rules 13a-14 and 15d-14 (filed herewith)
31.2    Certification required under Exchange Act Rules 13a-14 and 15d-14 (filed herewith)
32.1    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
32.2    Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
101    Interactive data file pursuant to Rule 405 of Regulation S-T: (i) the Statements of Financial Condition - September 30, 2011 (unaudited) and December 31, 2010, (ii) the Unaudited Schedule of Investments - September 30, 2011, (iii) the Schedule of Investments - December 31, 2010, (iv) the Unaudited Statements of Income and Expenses - Three Months Ended September 30, 2011 and 2010 and Nine Months Ended September 30, 2011 and 2010, (v) the Unaudited Statements of Changes in Shareholders’ Equity - Three Months Ended September 30, 2011, (vi) the Unaudited Statements of Changes in Shareholders’ Equity - Three Months Ended September 30, 2010, (vii) the Unaudited Statements of Changes in Shareholders’ Equity - Nine Months Ended September 30, 2011, (viii) the Unaudited Statements of Changes in Shareholders’ Equity - Nine Months Ended September 30, 2010, (ix) the Unaudited Statements of Cash Flows - Nine Months Ended September 30, 2011 and 2010, and (x) Notes to Unaudited Financial Statements, tagged as blocks of text.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

PowerShares DB G10 Currency Harvest Fund

By:

 

DB Commodity Services LLC,

its Managing Owner

 

By:   /S/    HANS EPHRAIMSON        
Name: Title:  

Hans Ephraimson

Chief Executive Officer

 

By:   /S/    MICHAEL GILLIGAN        
Name: Title:  

Michael Gilligan

Principal Financial Officer

Dated: November 7, 2011

 

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EXHIBIT INDEX

 

Exhibit
Number

  

Description of Document

   Page
Number
 
31.1    Certification required under Exchange Act Rules 13a-14 and 15d-14 (filed herewith)      E-2   
31.2    Certification required under Exchange Act Rules 13a-14 and 15d-14 (filed herewith)      E-3   
32.1    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)      E-4   
32.2    Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)      E-5   
101      Interactive data file pursuant to Rule 405 of Regulation S-T: (i) the Statements of Financial Condition - September 30, 2011 (unaudited) and December 31, 2010, (ii) the Unaudited Schedule of Investments - September 30, 2011, (iii) the Schedule of Investments - December 31, 2010, (iv) the Unaudited Statements of Income and Expenses - Three Months Ended September 30, 2011 and 2010 and Nine Months Ended September 30, 2011 and 2010, (v) the Unaudited Statements of Changes in Shareholders’ Equity - Three Months Ended September 30, 2011, (vi) the Unaudited Statements of Changes in Shareholders’ Equity - Three Months Ended September 30, 2010, (vii) the Unaudited Statements of Changes in Shareholders’ Equity - Nine Months Ended September 30, 2011, (viii) the Unaudited Statements of Changes in Shareholders’ Equity - Nine Months Ended September 30, 2010, (ix) the Unaudited Statements of Cash Flows - Nine Months Ended September 30, 2011 and 2010, and (x) Notes to Unaudited Financial Statements, tagged as blocks of text.   

 

E-1