Attached files
file | filename |
---|---|
EXCEL - IDEA: XBRL DOCUMENT - INVESCO DB SILVER FUND | Financial_Report.xls |
EX-32.2 - EX-32.2 - INVESCO DB SILVER FUND | d903721dex322.htm |
EX-31.2 - EX-31.2 - INVESCO DB SILVER FUND | d903721dex312.htm |
EX-32.1 - EX-32.1 - INVESCO DB SILVER FUND | d903721dex321.htm |
EX-31.1 - EX-31.1 - INVESCO DB SILVER FUND | d903721dex311.htm |
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 March 31, 2015
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: 001-33234
POWERSHARES DB SILVER FUND
(A Series of PowerShares DB Multi-Sector Commodity Trust)
(Exact name of Registrant as specified in its charter)
Delaware | 87-0778072 | |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) | |
c/o Invesco PowerShares Capital Management LLC 3500 Lacey Road, Suite 700 Downers Grove, Illinois |
60515 | |
(Address of Principal Executive Offices) | (Zip Code) |
Registrants telephone number, including area code: (800) 983-0903
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 | ¨ | |||
Non-Accelerated Filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | x |
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 March 31, 2015: 800,000 Shares.
Table of Contents
POWERSHARES DB SILVER FUND
(A SERIES OF POWERSHARES DB MULTI-SECTOR COMMODITY TRUST)
QUARTER ENDED MARCH 31, 2015
Page | ||||||
PART I. |
1 | |||||
ITEM 1. |
1 | |||||
8 | ||||||
ITEM 2. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
16 | ||||
ITEM 3. |
26 | |||||
ITEM 4. |
28 | |||||
PART II. |
29 | |||||
Item 1. |
29 | |||||
Item 1A. |
29 | |||||
Item 2. |
29 | |||||
Item 3. |
29 | |||||
Item 4. |
29 | |||||
Item 5. |
29 | |||||
Item 6. |
32 | |||||
33 |
i
Table of Contents
ITEM 1. | FINANCIAL STATEMENTS. |
PowerShares DB Silver Fund
Statements of Financial Condition
March 31, 2015 and December 31, 2014
(Unaudited)
March 31, 2015 |
December 31, 2014 |
|||||||
Assets |
||||||||
United States Treasury Obligations, at fair value (cost $20,999,459 and $18,999,376, respectively) |
$ | 20,999,296 | $ | 18,999,665 | ||||
Cash held by commodity broker |
| 2,230,396 | ||||||
Cash held by custodian |
2,490,873 | | ||||||
Net unrealized appreciation (depreciation) on commodity futures contracts |
| (1,108,725 | ) | |||||
|
|
|
|
|||||
Total assets (of which $15,899,840 and $1,951,950, respectively, is restricted for maintenance margin purposes) |
$ | 23,490,169 | $ | 20,121,336 | ||||
|
|
|
|
|||||
Liabilities |
||||||||
Variation margin payablefutures |
$ | 98,560 | $ | | ||||
Payable for securities purchased |
1,999,861 | | ||||||
Management fee payable |
13,315 | 10,606 | ||||||
Brokerage fee payable |
5,359 | 5,385 | ||||||
|
|
|
|
|||||
Total liabilities |
2,117,095 | 15,991 | ||||||
|
|
|
|
|||||
Commitments and Contingencies (Note 9) |
||||||||
Equity |
||||||||
Shareholders equityGeneral Shares |
1,069 | 1,005 | ||||||
Shareholders equityShares |
21,372,005 | 20,104,340 | ||||||
|
|
|
|
|||||
Total shareholders equity |
21,373,074 | 20,105,345 | ||||||
|
|
|
|
|||||
Total liabilities and equity |
$ | 23,490,169 | $ | 20,121,336 | ||||
|
|
|
|
|||||
General Shares outstanding |
40 | 40 | ||||||
Shares outstanding |
800,000 | 800,000 | ||||||
Net asset value per share |
||||||||
General Shares |
$ | 26.72 | $ | 25.13 | ||||
Shares |
$ | 26.72 | $ | 25.13 |
See accompanying Notes to Unaudited Financial Statements which are an integral part of the financial statements.
1
Table of Contents
PowerShares DB Silver Fund
Schedule of Investments
March 31, 2015
(Unaudited)
Description |
Percentage of Shareholders Equity |
Fair Value |
Face Value |
|||||||||
United States Treasury Obligations(a)(b) |
||||||||||||
U.S. Treasury Bills, 0.015% due May 21, 2015 |
79.54 | % | $ | 16,999,524 | $ | 17,000,000 | ||||||
U.S. Treasury Bills, 0.020% due May 28, 2015 |
9.36 | 1,999,912 | $ | 2,000,000 | ||||||||
U.S. Treasury Bills, 0.035% due July 2, 2015 |
9.35 | 1,999,860 | $ | 2,000,000 | ||||||||
|
|
|
|
|||||||||
Total United States Treasury Obligations (cost $20,999,459) |
98.25 | % | $ | 20,999,296 | ||||||||
|
|
|
|
(a) | Security traded on a discount basis. The interest rate shown represents the discount rate at the time of issuance of the security. |
(b) | A portion of United States Treasury Obligations on deposit with the commodity broker are held as margin for open futures contracts. See Note 3 for additional information. |
Description |
Unrealized Appreciation/ (Depreciation) as a Percentage of Shareholders Equity |
Unrealized Appreciation/ (Depreciation)(c) |
Notional Market Value |
|||||||||
Commodity Futures Contracts |
||||||||||||
COMEX Silver (256 contracts, settlement date January 27, 2016 |
0.99 | % | $ | 211,980 | $ | 21,409,280 | ||||||
|
|
|
|
|
|
|||||||
Total Commodity Futures Contracts |
0.99 | % | $ | 211,980 | $ | 21,409,280 | ||||||
|
|
|
|
|
|
(c) | Unrealized appreciation/(depreciation) is presented above, net by contract. |
See accompanying Notes to Unaudited Financial Statements which are an integral part of the financial statements.
2
Table of Contents
PowerShares DB Silver Fund
Schedule of Investments
December 31, 2014
(Unaudited)
Description |
Percentage of Shareholders Equity |
Fair Value |
Face Value |
|||||||||
United States Treasury Obligations(a)(b) |
||||||||||||
U.S. Treasury Bills, 0.025% due February 19, 2015 |
84.55 | % | $ | 16,999,711 | $ | 17,000,000 | ||||||
U.S. Treasury Bills, 0.020% due February 26, 2015 |
9.95 | % | $ | 1,999,954 | $ | 2,000,000 | ||||||
|
|
|
|
|||||||||
Total United States Treasury Obligations (cost $18,999,376) |
94.50 | % | $ | 18,999,665 | ||||||||
|
|
|
|
(a) | Security traded on a discount basis. The interest rate shown represents the discount rate at the time of issuance of the security. |
(b) | A portion of United States Treasury Obligations on deposit with the commodity broker are held as margin for open futures contracts. See Note 3 for additional information. |
Description |
Unrealized Appreciation/ (Depreciation) as a Percentage of Shareholders Equity |
Unrealized Appreciation/ (Depreciation)(c) |
Notional Market Value |
|||||||||
Commodity Futures Contracts |
||||||||||||
COMEX Silver (273 contracts, settlement date January 28,2016) |
(5.51 | )% | $ | (1,108,725 | ) | $ | 21,498,750 | |||||
|
|
|
|
|
|
|||||||
Total Commodity Futures Contracts |
(5.51 | )% | $ | (1,108,725 | ) | $ | 21,498,750 | |||||
|
|
|
|
|
|
(c) | Unrealized appreciation/(depreciation) is presented above, net by contract. |
See accompanying Notes to Unaudited Financial Statements which are an integral part of the financial statements.
3
Table of Contents
PowerShares DB Silver Fund
Statements of Income and Expenses
For the Three Months Ended March 31, 2015 and 2014
(Unaudited)
Three Months Ended | ||||||||
March 31, 2015 |
March 31, 2014 |
|||||||
Income |
||||||||
Interest Income |
$ | 941 | $ | 5,162 | ||||
|
|
|
|
|||||
Expenses |
||||||||
Management Fee |
39,816 | 62,827 | ||||||
Brokerage Commissions and Fees |
24 | 2,351 | ||||||
|
|
|
|
|||||
Total expenses |
39,840 | 65,178 | ||||||
|
|
|
|
|||||
Net investment income (loss) |
(38,899 | ) | (60,016 | ) | ||||
|
|
|
|
|||||
Net Realized and Net Change in Unrealized Gain (Loss) on U.S. Treasury Obligations and Commodity Futures Contracts |
||||||||
Net Realized Gain (Loss) on |
||||||||
Commodity Futures Contracts |
(13,625 | ) | | |||||
|
|
|
|
|||||
Net realized gain (loss) |
(13,625 | ) | | |||||
|
|
|
|
|||||
Net Change in Unrealized Gain (Loss) on |
||||||||
United States Treasury Obligations |
(452 | ) | (1,217 | ) | ||||
Commodity Futures Contracts |
1,320,705 | 583,010 | ||||||
|
|
|
|
|||||
Net change in unrealized gain (loss) |
1,320,253 | 581,793 | ||||||
|
|
|
|
|||||
Net realized and net change in unrealized gain (loss) on United States Treasury Obligations and Commodity Futures Contracts |
1,306,628 | 581,793 | ||||||
|
|
|
|
|||||
Net Income |
$ | 1,267,729 | $ | 521,777 | ||||
|
|
|
|
See accompanying Notes to Unaudited Financial Statements which are an integral part of the financial statements.
4
Table of Contents
PowerShares DB Silver Fund
Statement of Changes in Shareholders Equity
For the Three Months Ended March 31, 2015
(Unaudited)
General Shares | Shares | Total Shareholders |
||||||||||||||||||
Shares | Total Equity | Shares | Total Equity | Equity | ||||||||||||||||
Balance at January 01, 2015 |
40 | $ | 1,005 | 800,000 | $ | 20,104,340 | $ | 20,105,345 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Sale of Shares |
| | | |||||||||||||||||
Redemption of Shares |
| | | |||||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Net Increase (Decrease) due to Share Transactions |
| | | |||||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Net Income (Loss) |
||||||||||||||||||||
Net investment income (loss) |
(1 | ) | (38,898 | ) | (38,899 | ) | ||||||||||||||
Net realized gain (loss) on United States Treasury Obligations and Commodity Futures Contracts |
(2 | ) | (13,623 | ) | (13,625 | ) | ||||||||||||||
Net change in unrealized gain (loss) on United States Treasury Obligations and Commodity futures contracts |
67 | 1,320,186 | 1,320,253 | |||||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Net Income (Loss) |
64 | 1,267,665 | 1,267,729 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net Change in Shareholders Equity |
| 64 | | 1,267,665 | 1,267,729 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at March 31, 2015 |
40 | $ | 1,069 | 800,000 | $ | 21,372,005 | $ | 21,373,074 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Unaudited Financial Statements which are an integral part of the financial statements.
5
Table of Contents
PowerShares DB Silver Fund
Statement of Changes in Shareholders Equity
For the Three Months Ended March 31, 2014
(Unaudited)
General Shares | Shares | Total Shareholders |
||||||||||||||||||
Shares | Total Equity | Shares | Total Equity | Equity | ||||||||||||||||
Balance at January 01, 2014 |
40 | $ | 1,290 | 1,000,000 | $ | 32,217,416 | $ | 32,218,706 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Sale of Shares |
| | | |||||||||||||||||
Redemption of Shares |
| | | |||||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Net Increase (Decrease) due to Share Transactions |
| | | |||||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Net Income (Loss) |
||||||||||||||||||||
Net investment income (loss) |
(2 | ) | (60,014 | ) | (60,016 | ) | ||||||||||||||
Net realized gain (loss) on United States Treasury Obligations and Commodity Futures Contracts |
| | | |||||||||||||||||
Net change in unrealized gain (loss) on United States Treasury Obligations and Commodity futures contracts |
22 | 581,771 | 581,793 | |||||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Net Income (Loss) |
20 | 521,757 | 521,777 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net Change in Shareholders Equity |
| 20 | | 521,757 | 521,777 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at March 31, 2014 |
40 | $ | 1,310 | 1,000,000 | $ | 32,739,173 | $ | 32,740,483 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Unaudited Financial Statements which are an integral part of the financial statements.
6
Table of Contents
PowerShares DB Silver Fund
Statements of Cash Flows
For the Three Months Ended March 31, 2015 and 2014
(Unaudited)
Three Months Ended | ||||||||
March 31, 2015 |
March 31, 2014 |
|||||||
Cash flow from operating activities: |
||||||||
Net Income |
$ | 1,267,729 | $ | 521,777 | ||||
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: |
||||||||
Cost of securities purchased |
(18,999,279 | ) | (30,996,081 | ) | ||||
Proceeds from securities sold and matured |
19,000,000 | 31,000,000 | ||||||
Net accretion of discount on United States Treasury Obligations |
(943 | ) | (5,167 | ) | ||||
Net change in unrealized (gain) loss on United States Treasury Obligations and Commodity futures contracts |
(1,320,253 | ) | (581,793 | ) | ||||
Cash transfer to Commodity Broker to satisfy variation margin requirements (Note 4) |
20,120 | | ||||||
Cash received (paid) to Commodity Broker to satisfy open variation margin, net (Note 4) |
191,860 | | ||||||
Change in operating receivables and liabilities: |
||||||||
Variation margin payable-futures |
98,560 | | ||||||
Management fee payable |
2,709 | 1,166 | ||||||
Brokerage fee payable |
(26 | ) | 2,351 | |||||
|
|
|
|
|||||
Net cash provided by (used for) operating activities |
260,477 | (57,747 | ) | |||||
|
|
|
|
|||||
Cash at beginning of period(a) |
2,230,396 | 1,547,879 | ||||||
|
|
|
|
|||||
Cash at end of period(b) |
$ | 2,490,873 | $ | 1,490,132 | ||||
|
|
|
|
(a) | Cash at December 31, 2014 and prior reflects cash held by the Predecessor Commodity Broker. |
(b) | Cash at March 31, 2015 reflects cash held by the Custodian. |
See accompanying Notes to Unaudited Financial Statements which are an integral part of the financial statements.
7
Table of Contents
PowerShares DB Silver Fund
Notes to Unaudited Financial Statements
March 31, 2015
(1) Background
On October 24, 2014, DB Commodity Services LLC, a Delaware limited liability company (DBCS), DB U.S. Financial Markets Holding Corporation (DBUSH) and Invesco PowerShares Capital Management LLC (Invesco) entered into an Asset Purchase Agreement (the Agreement). DBCS is a wholly-owned subsidiary of DBUSH. DBCS agreed to transfer and sell to Invesco all of DBCS interest in PowerShares DB Silver Fund (the Fund), a separate series of PowerShares DB Multi-Sector Commodity Trust (the Trust), a Delaware statutory trust organized in seven separate series, including the sole and exclusive power to direct the business and affairs of the Trust and the Fund, as well as certain other assets pertaining to the management of the Trust and the Fund, pursuant to the terms and conditions of the Agreement (the Transaction).
The Transaction was consummated on February 23, 2015 (the Closing Date). Invesco now serves as the managing owner (the Managing Owner), commodity pool operator and commodity trading advisor of the Trust and the Fund, in replacement of DBCS (the Predecessor Managing Owner).
(2) Organization
The Fund is a separate series of the Trust. The Trust is a Delaware statutory trust organized in seven separate series and was formed on August 3, 2006. The Predecessor Managing Owner seeded the Fund with a capital contribution of $1,000 in exchange for 40 General Shares of the Fund. The General Shares were sold to the Managing Owner by the Predecessor Managing Owner pursuant to the terms of the Agreement. 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 Fifth Amended and Restated Declaration of Trust and Trust Agreement of the Trust (the Trust Agreement). The Fourth Amended and Restated Declaration of Trust and Trust Agreement of the Trust dated November 12, 2012 was effective for purposes of the reporting period up to and excluding the Closing Date. The Fund has an unlimited number of shares authorized for issuance.
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 January 3, 2007. The Fund commenced trading on the American Stock Exchange (which became the NYSE Alternext US LLC (the NYSE Alternext)) on January 5, 2007 and, as of November 25, 2008, is listed on the NYSE Arca, Inc. (the NYSE Arca).
This Report covers the three months ended March 31, 2015 and 2014 (hereinafter referred to as the Three Months Ended March 31, 2015 and the Three Months Ended March 31, 2014, respectively). The Funds performance information from inception up to and excluding the Closing Date is a reflection of the performance associated with the Predecessor Managing Owner. The Managing Owner has served as managing owner of the Fund since the Closing Date, and the Funds performance information since the Closing Date is a reflection of the performance associated with the Managing Owner. Past performance of the Fund is not necessarily indicative of future performance.
The accompanying unaudited financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions for Form 10-Q and the rules and regulations of the U.S. Securities and Exchange Commission (the SEC). In the opinion of management, all material adjustments, consisting only of normal recurring adjustments, considered necessary for a fair statement of the interim period financial statements have been made. Interim period results are not necessarily indicative of results for a full-year period. These financial statements and the notes thereto should be read in conjunction with the Funds financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2014 as filed with the SEC on March 9, 2015.
(3) Fund Investment Overview
The Fund invests with a view to tracking the changes, whether positive or negative, in the level of the DBIQ Optimum Yield Silver Index Excess Return (DBIQ-OY SI ER, or the Index) plus the excess, if any, of the Funds 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 Fund also holds United States Treasury Obligations and other high credit quality short-term fixed income securities for deposit with the Funds commodity broker as margin.
The Commodity Futures Trading Commission (the CFTC) and/or commodity exchanges, as applicable, impose position limits on market participants trading in the commodity futures contract included in the Index. The Index is comprised of futures contracts on the Index Commodity that expire in a specific month and trade on a specific exchange (the Index Contracts). If the Managing Owner
8
Table of Contents
PowerShares DB Silver Fund
Notes to Unaudited Financial Statements(Continued)
March 31, 2015
determines in its commercially reasonable judgment that it has become impracticable or inefficient for any reason for the Fund to gain full or partial exposure to the Index Commodity by investing in the Index Contract, the Fund may invest in a futures contract referencing the Index Commodity other than the Index Contract or, in the alternative, invest in other futures contracts not based on the Index Commodity if, in the commercially reasonable judgment of the Managing Owner, such futures contracts tend to exhibit trading prices that correlate with the Index Commodity.
The Fund holds United States Treasury Obligations for deposit with the Funds Commodity Broker as margin. The Fund does not borrow money to increase leverage. As of March 31, 2015 and December 31, 2014, the Fund had $15,899,840 (or 67.69% of its total assets) and $20,121,336 (or 100.00% of its total assets), respectively, of its holdings of cash, United States Treasury Obligations and unrealized appreciation/depreciation on futures contracts on deposit with its Commodity Broker (as defined below) or its Predecessor Commodity Broker (as defined below), as applicable. Of this, $15,899,840 (or 67.69%) and $1,951,950 (or 9.70%) are required to be deposited to satisfy maintenance margin required by the Commodity Broker for the Funds open futures positions as of March 31, 2015 and December 31, 2014, respectively. For additional information, please see the unaudited Schedule of Investments as of March 31, 2015 and December 31, 2014 for details of the Funds portfolio holdings.
(4) 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 Trust and 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 as the Funds commodity pool operator, commodity trading advisor and managing owner. The Fund pays the Managing Owner a management fee, monthly in arrears, in an amount equal to 0.75% per annum of the daily net asset value of the Fund. For purposes of the reporting period up to and excluding the Closing Date, all Management Fees were payable to the Predecessor Managing Owner (the Management Fee). The Managing Owner has served as managing owner of the Fund since the Closing Date and all Management Fee accruals since the Closing Date have been paid to the Managing Owner.
During the Three Months Ended March 31, 2015 and 2014, the Fund incurred Management Fees of $39,816 and $62,827, respectively. As of March 31, 2015 and December 31, 2014, Management Fees payable were $13,315 and $10,606, respectively.
The Commodity Broker
Effective as of the Closing Date, Morgan Stanley & Co. LLC, a Delaware limited liability company, serves as the Funds futures clearing broker (the Commodity Broker). Deutsche Bank Securities Inc. (DBSI), a Delaware corporation, served as the Funds futures clearing broker up to and excluding the Closing Date (the Predecessor Commodity Broker). DBSI is also an indirect wholly-owned subsidiary of Deutsche Bank AG and is an affiliate of the Predecessor Managing Owner. A variety of executing brokers execute futures transactions on behalf of the Fund. Such executing brokers give-up all such transactions to the Commodity Broker. In its capacity as clearing broker, the Commodity Broker may execute or receive transactions executed by others and clears all of the Funds futures transactions and performs certain administrative and custodial services for the Fund. The Commodity Broker is responsible, among other things, for providing periodic accountings of all dealings and actions taken by the Trust on behalf of 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 March 31, 2015 and 2014, the Fund incurred brokerage fees of $24 and $2,351, respectively. As of March 31, 2015 and December 31, 2014, brokerage fees payable were $5,359 and $5,385, respectively. For the avoidance of doubt, for purposes of the reporting period up to and excluding the Closing Date, commission payments were paid to the Predecessor Commodity Broker. The Commodity Broker has served as the Funds futures clearing broker since the Closing Date and all commission accruals since the Closing Date have been paid to the Commodity Broker.
The Administrator, Custodian and Transfer Agent
The Bank of New York Mellon (the Administrator and Custodian) is 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).
9
Table of Contents
PowerShares DB Silver Fund
Notes to Unaudited Financial Statements(Continued)
March 31, 2015
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 the Commodity Broker and other unaffiliated futures commission merchants.
As of December 31, 2014, the Fund held $2,230,396 of cash and $18,999,665 of United States Treasury Obligations at the Predecessor Commodity Broker. In conjunction with the Transaction, during the three-day period from February 24, 2015 to February 26, 2015, the Fund transferred $2,206,416 of cash and $19,999,251 of United States Treasury Obligations from the Predecessor Commodity Broker to the Custodian. Additionally, during that same three-day period, the Fund transferred all of its open positions of commodity futures contracts from the Predecessor Commodity Broker to the Commodity Broker and accordingly, $20,120 of futures variation margin was credited to the Commodity Broker account. $15,998,400 of United States Treasury Obligations was also transferred from the Custodian to the Commodity Broker to satisfy maintenance margin requirements. Effective February 26, 2015, the Managing Owner began transferring cash daily from the Custodian to the Commodity Broker to satisfy the previous days variation margin on open futures contracts. The cumulative amount of cash transferred to the Commodity Broker as of March 31, 2015 approximates the net unrealized appreciation (depreciation) on commodity futures contracts. As a result, only the current days variation margin is disclosed on the Statement of Financial Condition.
As of March 31, 2015, the Fund had $7,491,769 (or 31.89% of total assets) of its holdings of cash and United Treasury obligations held with its Custodian. No assets were held at the Custodian at December 31, 2014.
The Managing Owner pays the Administrator administrative services fees out of the Management Fee.
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 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.
The Managing Owner pays the Distributor a distribution fee out of the Management Fee.
Index Sponsor
Effective as of the Closing Date, the Managing Owner, on behalf of the Fund, has appointed Deutsche Bank Securities Inc. to serve as the index sponsor (the Index Sponsor). Prior to the Closing Date, the index sponsor was Deutsche Bank AG London. The Index Sponsor calculates and publishes the daily index levels and the indicative intraday index levels. Additionally, the Index Sponsor also calculates the indicative value per Share of the Fund throughout each Business Day.
The Managing Owner pays the Index Sponsor a licensing fee and an index services fee out of the Management Fee for performing its duties.
Marketing Agent
Effective as of the Closing Date, the Managing Owner, on behalf of the Fund, has appointed Deutsche Bank Securities Inc. as the marketing agent (the Marketing Agent) to assist the Managing Owner by providing support to educate institutional investors about the Deutsche Bank indices and to complete governmental or institutional due diligence questionnaires or requests for proposals related to the Deutsche Bank indices.
The Managing Owner pays the Marketing Agent a marketing services fee out of the Management Fee.
The Marketing Agent will not open or maintain customer accounts or handle orders for the Fund. The Marketing Agent has no responsibility for the performance of the Fund or the decisions made or actions taken by the Managing Owner.
(5) Summary of Significant Accounting Policies
(a) Basis of Presentation
The Fund has determined that it meets the definition of an investment company and has prepared the unaudited financial statements in conformity with U.S. GAAP for investment companies in conformity with accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 946 Investment Companies.
In August 2014, the FASB issued a new standard, Accounting Standards Update No. 2014-15 Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern, which will explicitly require management to assess an entitys ability to continue as a going concern and to provide related footnote disclosure in certain circumstances. This new guidance is effective for all entities in the first annual reporting period ending after December 15, 2016. The Fund is currently evaluating this guidance and its impact on the Funds financial statement disclosures.
(b) Use of Estimates
The preparation of the financial statements in conformity with U.S. GAAP 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. There were no significant estimates used in the preparation of these financial statements.
10
Table of Contents
PowerShares DB Silver Fund
Notes to Unaudited Financial Statements(Continued)
March 31, 2015
(c) Financial Instruments and Fair Value
United States Treasury Obligations and commodity 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. U.S. GAAP defines fair value as 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, under current market conditions.
U.S. GAAP establishes a hierarchy that prioritizes the inputs to valuation methods, giving the highest priority to readily available unadjusted quoted prices in an active market for identical assets (Level 1) and the lowest priority to significant unobservable inputs (Level 3), generally when market prices are not readily available or are unreliable. Based on the valuation inputs, the securities or other investments are tiered into one of three levels. Changes in valuation methods or market conditions may result in transfers in or out of an investments assigned level:
Level 1Prices are determined using quoted prices in an active market for identical assets.
Level 2Prices are determined using other significant observable inputs. Observable inputs are inputs that other market participants may use in pricing a security. These may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves, loss severities, default rates, discount rates, volatilities and others.
Level 3Prices are determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable (for example, when there is little or no market activity for an investment at the end of the period), unobservable inputs may be used. Unobservable inputs reflect the Funds own assumptions about the factors market participants would use in determining fair value of the securities or instruments and would be based on the best available information.
The levels assigned to the securities valuations may not be an indication of the risk or liquidity associated with investing in those securities. Because of the inherent uncertainties of valuation, the values reflected in the financial statements may materially differ from the value received upon actual sale of those investments.
The following is a summary of the tiered valuation input levels as of March 31, 2015:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
United States Treasury Obligations |
$ | | $ | 20,999,296 | $ | | $ | 20,999,296 | ||||||||
Commodity Futures Contracts(a) |
$ | 211,980 | $ | | $ | | $ | 211,980 |
(a) | Unrealized appreciation (depreciation). |
The Funds policy is to recognize transfers in and out of the valuation levels as of the end of the reporting period. Effective on the Closing Date, the Fund revised certain policies with respect to level classification. As a result, United States Treasury Obligations were transferred from Level 1 to Level 2.
The Managing Owner will utilize the cash held at the Commodity Broker to offset any realized losses incurred in the commodity futures contracts, if available. To the extent that cash at the Commodity Broker is not adequate to cover an realized losses, a portion of the United States Treasury Bills will sold to make additional cash available.
The following is a summary of the tiered valuation input levels as of December 31, 2014:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
United States Treasury Obligations |
$ | 18,999,665 | $ | | $ | | $ | 18,999,665 | ||||||||
Commodity Futures Contracts(a) |
$ | (1,108,725 | ) | $ | | $ | | $ | (1,108,725 | ) |
(a) | Unrealized appreciation (depreciation). |
(d) Deposits with Commodity Broker
The Fund deposits cash and United States Treasury Obligations with its Commodity Broker subject to CFTC regulations and various exchange and broker requirements. The combination of the Funds 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 Funds overall equity in its broker trading account. To meet the Funds 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.
11
Table of Contents
PowerShares DB Silver Fund
Notes to Unaudited Financial Statements(Continued)
March 31, 2015
(e) Deposits with Custodian
The combination of the Funds deposits with its Custodian of cash and United States Treasury Obligations represents the Funds overall assets held with its Custodian.
(f) 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 Funds 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 in interest income over the life of the United States Treasury Obligations. The Fund purchased $2,000,000 face amount of United States Treasury Obligations valued at $1,999,861 which was recorded as payable for securities purchased as of March 31, 2015. As of December 31, 2014, the Fund did not have an amount payable for securities purchased.
(g) Cash Held by Commodity Broker
The Funds 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 assesses its variation margin requirements on a daily basis and additional cash required to satisfy the variation margin requirement is transferred from the Custodian to the Commodity Broker at the close of business each day. Effective February 24, 2015 only the current days variation margin receivable or payable is disclosed as an asset or liability on the Statement of Financial Condition. The Fund defines cash and cash equivalents to be highly liquid investments, with original maturities of three months or less when purchased. As of December 31, 2014, the Fund had cash held with the Predecessor Commodity Broker of $2,230,396, which was on deposit to satisfy the Funds variation margin requirement on open futures contracts. There was no cash held with the Commodity Broker at March 31, 2015. There were no cash equivalents held by the Fund as of March 31, 2015 and December 31, 2014.
(h) Receivable/(Payable) for Shares Issued and Redeemed
On any business day, an Authorized Participant may place an order to create or redeem Shares of the Fund. Cash settlement occurs at the creation order settlement date or the redemption order settlement date as discussed in Note 7.
(i) 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 Funds income, gain, loss, deductions and other items.
The Managing Owner has reviewed all of the Funds open tax years and major jurisdictions and concluded that there is no tax liability resulting from unrecognized tax benefits relating to uncertain income tax positions taken or expected to be taken in future tax returns. The Fund is also not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly change in the next twelve months. On an ongoing basis, the Managing Owner will monitor its tax positions taken under the interpretation (and consult with its tax counsel from time to time when appropriate) to determine if adjustments to conclusions are necessary based on factoring including, but not limited to, on-going analysis of tax law, regulation, and interpretations thereof. The major tax jurisdiction for the Fund and the earliest tax year subject to examination: United States, 2011.
(j) Futures Contracts
All commodity futures contracts are held and used for trading purposes. Commodity futures contracts are recorded on trade date. Open contracts are recorded in the statement of financial condition at fair value on trade date and on each successive date as well as on the last business day of each of the periods presented, which represent market value for those commodity futures contracts 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.
The Value of Derivative Instruments is as follows:
March 31, 2015 | December 31, 2014 | |||||||||||||||
Risk Exposure/Derivative Type |
Assets | Liabilities | Assets | Liabilities | ||||||||||||
Commodity risk |
||||||||||||||||
Commodity Futures Contracts |
$ | 211,980 | (a) | $ | | $ | | $ | (1,108,725 | )(b) |
(a) | Includes cumulative appreciation (depreciation) of commodity futures contracts. Only current days variation margin receivable (payable) is reported in the March 31, 2015 Statement of Financial Condition. |
(b) | Values are disclosed on the December 31, 2014 Statement of Financial Condition under Net unrealized appreciation (depreciation) on commodity futures contracts. |
12
Table of Contents
PowerShares DB Silver Fund
Notes to Unaudited Financial Statements(Continued)
March 31, 2015
The Effect of Derivative Instruments on the Statements of Income and Expenses is as follows:
Risk Exposure/Derivative Type |
Location of Gain or (Loss) on Derivatives |
For
the Three Months Ended March 31, 2015 |
For
the Three Months Ended March 31, 2014 |
|||||||
Commodity risk |
||||||||||
Commodity Futures Contracts |
Net Realized Gain (Loss) | $ | (13,625 | ) | $ | | ||||
Net Change in Unrealized Gain (Loss) | 1,320,705 | 583,010 | ||||||||
|
|
|
|
|||||||
Total |
$ | 1,307,080 | $ | 583,010 | ||||||
|
|
|
|
The brokerage agreement with the Commodity Broker provides for the net settlement of all financial instruments covered by the agreement in the event of default or termination of any one contract. The Managing Owner will utilize the cash held at the Commodity Broker to offset any realized losses incurred in the commodity futures contracts, if available. To the extent that cash held at the Commodity Broker is not adequate to cover any realized losses, a portion of the United States Treasury Obligations will be sold to make additional cash available. The table below summarizes the average monthly notional value of futures contracts outstanding during the period:
Commodity Futures Contracts | ||||||||
For the Three Months Ended | ||||||||
March 31, 2015 | March 31, 2014 | |||||||
Average Notional Value |
$ | 21,987,300 | $ | 34,599,568 |
The Fund utilizes derivative instruments to achieve its investment objective. For financial reporting purposes, the Fund offsets financial assets and financial liabilities that are subject to netting arrangements. In order for an arrangement to be eligible for netting, the Fund must have a basis to conclude that such netting arrangements are legally enforceable. The following table presents derivative instruments that are either subject to an enforceable netting agreement or offset by collateral arrangements as of March 31, 2015, net by contract:
Gross Amounts Not Offset in the Statement of Financial Condition |
||||||||||||||||||||||||
Gross Amounts Recognized(a) |
Gross Amounts Offset in the Statement of Financial Condition |
Net Amounts Presented in the Statement of Financial Condition |
Financial Instruments(b) |
Cash
Collateral Pledged(b) |
Net Amount |
|||||||||||||||||||
Assets |
||||||||||||||||||||||||
Commodity Futures Contracts |
$ | 211,980 | $ | | $ | 211,980 | $ | | $ | | $ | 211,980 |
The following table presents derivative instruments that are either subject to an enforceable netting agreement or offset by collateral arrangements as of December 31, 2014, net by contract:
Gross Amounts Not Offset in the Statement of Financial Condition |
||||||||||||||||||||||||
Gross Amounts Recognized(a) |
Gross Amounts Offset in the Statement of Financial Condition |
Net Amounts Presented in the Statement of Financial Condition |
Financial Instruments(b) |
Cash
Collateral Pledged(b) |
Net Amount |
|||||||||||||||||||
Liabilities |
||||||||||||||||||||||||
Commodity Futures Contracts |
$ | (1,108,725 | ) | $ | | $ | (1,108,725 | ) | $ | | $ | 1,108,725 | $ | |
(a) | Includes cumulative appreciation (depreciation) of futures contracts. |
(b) | As of March 31, 2015 and December 31, 2014, a portion of the Funds cash and US Treasury Obligations were required to be deposited as margin in support of the Funds futures positions as described in Note 3. |
(k) Brokerage Commissions and Fees
The Fund incurs all brokerage commissions, including applicable exchange fees, National Futures Association (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 Brokers brokerage commissions and trading fees are determined on a contract-by-contract basis. On average, total charges paid to the Commodity Broker and the Predecessor Commodity Broker, as applicable, were less than $6.00 and $10.00 per round-turn trade for the Three Months Ended March 31, 2015 and 2014, respectively.
13
Table of Contents
PowerShares DB Silver Fund
Notes to Unaudited Financial Statements(Continued)
March 31, 2015
(l) 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. Prior to the Closing Date, the Predecessor Managing Owner assumed all routine operational, administrative and other ordinary expenses of the Fund. Accordingly, all such expenses are not reflected in the statement of income and expenses of the Fund.
(m) Organizational and Offering Costs
All organizational and offering expenses (including continuous offering expenses for the offering of the Shares) incurred by the Fund were assumed by either the Predecessor Managing Owner or the Managing Owner. The Fund is not responsible to either the Predecessor Managing Owner or the Managing Owner for the reimbursement of organizational and offering costs (including continuous offering expenses for the offering of the Shares).
(n) Non-Recurring Fees and Expenses
The Fund pays all non-recurring and unusual fees and expenses (referred to as extraordinary fees and expenses in the Trust Declaration), if any, of itself, as determined by the Managing Owner. Non-recurring and unusual fees and expenses are fees and expenses which are non-recurring and unusual in nature, such as legal claims and liabilities, litigation costs or indemnification or other unanticipated expenses. Such non-recurring and unusual fees and expenses, by their nature, are unpredictable in terms of timing and amount. For the Three Months Ended March 31, 2015 and 2014, the Fund did not incur such expenses.
(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 in excess of the amounts shown on the Statement of Financial Condition. The financial instruments used by the Fund are commodity 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 commodity 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 the Commodity Broker and/or 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 Commodity Broker, when acting as the Funds 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, if any. The Funds 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.
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
On any business day, an Authorized Participant may place an order with the Administrator who serves as the Funds transfer agent (Transfer Agent) to create one or more Baskets. For purposes of processing both creation and redemption orders, a business day means any day other than a day when banks in New York City are required or permitted to be closed. Creation orders must be placed by 10:00 a.m., Eastern Time. The day on which the Transfer Agent receives a valid creation order is the creation order date. The day on which a creation order is settled is the creation order settlement date. As provided below, the creation order settlement date may occur up to 3 business days after the creation order date. By placing a creation order, and prior to delivery of such Baskets, an Authorized Participants DTC account is charged the non refundable transaction fee due for the creation order.
Unless otherwise agreed to by the Managing Owner and the Authorized Participant as provided in the next sentence, Baskets are issued on the creation order settlement date as of 2:45 p.m., Eastern Time, on the business day immediately following the creation order date at the applicable net asset value per Share as of the closing time of the NYSE Arca or the last to close of the exchanges on
14
Table of Contents
PowerShares DB Silver Fund
Notes to Unaudited Financial Statements(Continued)
March 31, 2015
which its futures contracts are traded, whichever is later, on the creation order date, but only if the required payment has been timely received. Upon submission of a creation order, the Authorized Participant may request the Managing Owner to agree to a creation order settlement date up to 3 business days after the creation order date. By placing a creation order, and prior to receipt of the Baskets, an Authorized Participants DTC account is charged the non-refundable transaction fee due for the creation order.
Creation orders may be placed either (i) through the Continuous Net Settlement (CNS) clearing processes of the National Securities Clearing Corporation (the NSCC) or (ii) if outside the CNS Clearing Process, only through the facilities of The Depository Trust Company (DTC or the Depository) (the DTC Process), or a successor depository.
(b) Redemptions
On any business day, an Authorized Participant may place an order with the Transfer Agent to redeem one or more Baskets. Redemption orders must be placed by 10:00 a.m., Eastern Time. The day on which the Managing Owner receives a valid redemption order is the redemption order date. The day on which a redemption order is settled is the redemption order settlement date. As provided below, the redemption order settlement date may occur up to 3 business days after the redemption order date. The redemption procedures allow Authorized Participants to redeem Baskets. Individual Shareholders may not redeem directly from the Fund. Instead, individual Shareholders may only redeem Shares in integral multiples of 200,000 and only through an Authorized Participant.
Unless otherwise agreed to by the Managing Owner and the Authorized Participant as provided in the next sentence, by placing a redemption order, an Authorized Participant agrees to deliver the Baskets to be redeemed through DTCs book-entry system to the Fund not later than the redemption order settlement date as of 2:45 p.m., Eastern Time, on the business day immediately following the redemption order date. Upon submission of a redemption order, the Authorized Participant may request the Managing Owner to agree to a redemption order settlement date up to 3 business days after the redemption order date. By placing a redemption order, and prior to receipt of the redemption proceeds, an Authorized Participants DTC account is charged the non-refundable transaction fee due for the redemption order.
Redemption orders may be placed either (i) through the CNS clearing processes of the NSCC or (ii) if outside the CNS Clearing Process, only through the DTC Process, or a successor depository, and only in exchange for cash. By placing a redemption order, and prior to receipt of the redemption proceeds, an Authorized Participants 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) of the Fund requested in the Authorized Participants redemption order as of the closing time of the NYSE Arca or the last to close of the exchanges on which the Funds futures contracts are traded, whichever is later, on the redemption order date. The Managing Owner will distribute the cash redemption amount at 2:45 p.m., Eastern Time, on the redemption order settlement date through DTC to the account of the Authorized Participant as recorded on DTCs book-entry system.
The redemption proceeds due from the Fund are delivered to the Authorized Participant at 2:45 p.m., Eastern Time, on the redemption order settlement date if, by such time, the Funds DTC account has been credited with the Baskets to be redeemed. If the Funds DTC account has not been credited with all of the Baskets to be redeemed by such time, the redemption distribution is delivered to the extent of whole Baskets received. Any remainder of the redemption distribution is delivered on the next business day to the extent of remaining whole Baskets received if the Transfer Agent 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 Funds DTC account by 2:45 p.m., Eastern Time, on such next business day. Any further outstanding amount of the redemption order will be cancelled. The Managing Owner is also authorized to deliver the redemption distribution notwithstanding that the Baskets to be redeemed are not credited to the Funds DTC account by 2:45 p.m., Eastern Time, on the redemption order settlement date if the Authorized Participant has collateralized its obligation to deliver the Baskets through DTCs book-entry system on such terms as the Managing Owner may determine from time-to-time.
(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. 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.
No distributions were paid for the Three Months Ended March 31, 2015 or 2014.
15
Table of Contents
PowerShares DB Silver Fund
Notes to Unaudited Financial Statements(Continued)
March 31, 2015
(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 March 31, 2015 and December 31, 2014, no claims had been received by the Fund. Further, the Fund has not had prior claims or losses pursuant to these contracts. Accordingly, the Managing Owner expects the risk of loss to be remote.
(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 March 31, 2015 and 2014. The net investment income (loss) and total expense ratios are calculated using average net asset value. The net asset value presentation is calculated using average daily Shares outstanding. The total return is based on the change in net asset value of the Shares during the period. An individual investors 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 at the date of each respective period presented.
Three Months Ended | ||||||||
March 31, 2015 |
March 31, 2014 |
|||||||
Net Asset Value |
||||||||
Net asset value per Share, beginning of period |
$ | 25.13 | $ | 32.22 | ||||
|
|
|
|
|||||
Net realized and change in unrealized gain (loss) on United States Treasury Obligations and Commodity futures contracts |
1.64 | 0.58 | ||||||
Net investment income (loss) |
(0.05 | ) | (0.06 | ) | ||||
|
|
|
|
|||||
Net income |
1.59 | 0.52 | ||||||
|
|
|
|
|||||
Net asset value per Share, end of period |
$ | 26.72 | $ | 32.74 | ||||
|
|
|
|
|||||
Market value per Share, beginning of period |
$ | 25.33 | $ | 32.28 | ||||
|
|
|
|
|||||
Market value per Share, end of period |
$ | 26.74 | $ | 32.80 | ||||
|
|
|
|
|||||
Ratio to average Net Assets* |
||||||||
Net investment income (loss) |
(0.73 | )% | (0.71 | )% | ||||
|
|
|
|
|||||
Total expenses |
0.75 | % | 0.78 | % | ||||
|
|
|
|
|||||
Total Return, at net asset value ** |
6.33 | % | 1.62 | % | ||||
|
|
|
|
|||||
Total Return, at market value ** |
5.57 | % | 1.61 | |||||
|
|
|
|
* | 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.
ITEM 2. | MANAGEMENTS 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, as amended, which reflect our current views with respect to future events and financial results. The matters discussed throughout this Report that are not historical facts are forward-looking statements. These forward-looking statements are based on the registrants current expectations, estimates and projections about the registrants business and industry and its beliefs and assumptions about future events. 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 Silver Funds (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.
16
Table of Contents
You should not place undue reliance on any forward-looking statements. Except as expressly required by the Federal securities laws, Invesco PowerShares Capital Management LLC, 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
On October 24, 2014, DB Commodity Services LLC, a Delaware limited liability company (DBCS), DB U.S. Financial Markets Holding Corporation (DBUSH) and Invesco PowerShares Capital Management LLC (Invesco) entered into an Asset Purchase Agreement (the Agreement). DBCS is a wholly-owned subsidiary of DBUSH. DBCS agreed to transfer and sell to Invesco all of DBCS interest in the PowerShares DB Silver Fund (the Fund), including the sole and exclusive power to direct the business and affairs of the Fund, as well as certain other assets of DBCS pertaining to the management of the Fund, pursuant to the terms and conditions of the Agreement (the Transaction).
The Transaction was consummated on February 23, 2015 (the Closing Date). Invesco now serves as the managing owner (the Managing Owner), commodity pool operator and commodity trading advisor of the Fund, in replacement of DBCS (the Predecessor Managing Owner).
The Fund seeks to track changes, whether positive or negative, in the level of the DBIQ Optimum Yield Silver Index Excess Return (DBIQ-OY SI ER, or the Index), over time, plus the excess, if any, of the Funds 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 Shares are designed for investors who want a cost-effective and convenient way to invest in commodity futures on U.S. and non-U.S. markets.
As of the date of this Report, each of Deutsche Bank Securities Inc., Merrill Lynch Professional Clearing Corp., Newedge USA LLC, Virtu Financial Capital Markets, LLC, Citigroup Global Markets Inc., J.P. Morgan Securities Inc., Credit Suisse Securities (USA) LLC, Virtu Financial BD LLC, Knight Capital Americas, LLC, Timber Hill LLC, Morgan Stanley & Co. LLC, Jefferies LLC, Nomura Securities International Inc., RBC Capital Markets, LLC, UBS Securities LLC, Cantor Fitzgerald & Co., BNP Paribas Securities Corp., Goldman, Sachs & Co. and Goldman Sachs Execution & Clearing, L.P. has executed a Participant Agreement and are the only Authorized Participants.
The Fund pursues its investment objective by investing in a portfolio of exchange-traded futures contracts that expire in a specific month and trade on a specific exchange (the Index Contracts), in the single commodity comprising the Index (the Index Commodity). The single Index Commodity is silver. The Index is composed of notional amounts of the Index Commodity. The Fund also holds United States Treasury Obligations and other high credit quality short-term fixed income securities for deposit with the Funds Commodity Broker as margin. After the Closing Date, the aggregate notional value of the futures contracts owned by the Fund is expected to approximate the aggregate net asset value of the Fund, as opposed to the aggregate Index value.
The Commodity Futures Trading Commission (the CFTC) and/or commodity exchanges, as applicable, impose position limits on market participants trading in the commodity included in the Index. As disclosed in the Funds Prospectus, if the Managing Owner determines in its commercially reasonable judgment that it has become impracticable or inefficient for any reason for the Fund to gain full or partial exposure to the Index Commodity by investing in a specific Index Contract, the Fund may invest in a futures contract referencing the Index Commodity other than the Index Contract or, in the alternative, invest in other futures contracts not based on the Index Commodity if, in the commercially reasonable judgment of the Managing Owner, such futures contracts tend to exhibit trading prices that correlate with the Index Commodity. Please see http://www.invescopowershares.com with respect to the most recently available weighted composition of the Fund and the composition of the Index on the Base Date.
The Fund is not sponsored or endorsed by Deutsche Bank AG, Deutsche Bank Securities Inc. or any subsidiary or affiliate of Deutsche Bank AG or Deutsche Bank Securities Inc. (collectively, Deutsche Bank). The DBIQ Optimum Yield Silver Index Excess Return (the Index) is the exclusive property of Deutsche Bank Securities Inc. DBIQ is a service mark of Deutsche Bank AG and has been licensed for use for certain purposes by Deutsche Bank Securities Inc. Neither Deutsche Bank nor any other party involved in, or related to, making or compiling the Index makes any representation or warranty, express or implied, concerning the Index, the Fund or the advisability of investing in securities generally. Neither Deutsche Bank nor any other party involved in, or related to, making or compiling the Index has any obligation to take the needs of the Managing Owner, or its clients into consideration in determining, composing or calculating the Index. Neither Deutsche Bank nor any other party involved in, or related to, making or compiling the Index is responsible for or has participated in the determination of the timing of, prices at, quantities or valuation of the Fund. Neither Deutsche Bank nor any other party involved in, or related to, making or compiling the Index has any obligation or liability in connection with the administration or trading of the Fund.
17
Table of Contents
NEITHER DEUTSCHE BANK NOR ANY OTHER PARTY INVOLVED IN, OR RELATED TO, MAKING OR COMPILING THE INDEX, WARRANTS OR GUARANTEES THE ACCURACY AND/OR THE COMPLETENESS OF THE INDEX OR ANY DATA INCLUDED THEREIN AND SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. NEITHER DEUTSCHE BANK NOR ANY OTHER PARTY INVOLVED IN, OR RELATED TO, MAKING OR COMPILING THE INDEX, MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY INVESCO POWERSHARES CAPITAL MANAGEMENT LLC FROM THE USE OF THE INDEX OR ANY DATA INCLUDED THEREIN. NEITHER DEUTSCHE BANK NOR ANY OTHER PARTY INVOLVED IN, OR RELATED TO, MAKING OR COMPILING THE INDEX, MAKES ANY EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES, OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL DEUTSCHE BANK OR ANY OTHER PARTY INVOLVED IN, OR RELATED TO, MAKING OR COMPILING THE INDEX HAVE ANY LIABILITY FOR DIRECT, INDIRECT, PUNITIVE, SPECIAL, CONSEQUENTIAL OR ANY OTHER DAMAGES OR LOSSES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY THEREOF. EXCEPT AS EXPRESSLY PROVIDED TO THE CONTRARY, THERE ARE NO THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN DEUTSCHE BANK AND INVESCO POWERSHARES CAPITAL MANAGEMENT LLC.
No purchaser, seller or holder of the Shares of this Fund, or any other person or entity, should use or refer to any Deutsche Bank trade name, trademark or service mark to sponsor, endorse, market or promote this Fund without first contacting Deutsche Bank to determine whether Deutsche Banks permission is required. Under no circumstances may any person or entity claim any affiliation with Deutsche Bank without the written permission of Deutsche Bank.
The Index is composed of one underlying Index Commodity. The closing level of the Index is calculated on each business day by the Index Sponsor based on the closing price of the futures contracts for the underlying Index Commodity and the notional amount of such Index Commodity.
The composition of the Index may be adjusted in the event that the Index Sponsor is not able to calculate the closing price of the Index Commodity.
The Index includes provisions for the replacement of futures contracts as they approach maturity. This replacement takes place over a period of time in order to lessen the impact on the market for the futures contracts being replaced. With respect to the Index Commodity, the Fund employs a rule-based approach when it rolls from one futures contract to another.
Rather than select a new futures contract based on a predetermined schedule (e.g., monthly), the Index Commodity rolls to the futures contract which generates the best possible implied roll yield. The futures contract with a delivery month within the next thirteen months which generates the best possible implied roll yield will be included in the Index. As a result, the Index Commodity is able to potentially maximize the roll benefits in backwardated markets and minimize the losses from rolling in contangoed markets.
In general, as a futures contract approaches its expiration date, its price will move towards the spot price in a contangoed market. Assuming the spot price does not change, this would result in the futures contract price decreasing and a negative implied roll yield. The opposite is true in a backwardated market. Rolling in a contangoed market will tend to cause a drag on the Index Commoditys contribution to the Funds return while rolling in a backwardated market will tend to cause a push on the Index Commoditys contribution to the Funds return.
The DBIQ Optimum Yield Silver Index is calculated in USD on both an excess return (unfunded) and total return (funded) basis.
The futures contract price for the Index Commodity will be the exchange closing price for the Index Commodity on each weekday when banks in New York, New York are open (the Index Business Days). If a weekday is not an Exchange Business Day (as defined in the following sentence) but is an Index Business Day, the exchange closing price from the previous Index Business Day will be used for the Index Commodity. Exchange Business Day means, in respect of the Index Commodity, a day that is a trading day for the Index Commodity on the relevant exchange (unless either an Index disruption event or force majeure event has occurred).
On the first New York business day (the Verification Date) of each month, the Index Commodity futures contract will be tested in order to determine whether to continue including it in the Index. If the Index Commodity futures contract requires delivery of the underlying commodity in the next month, known as the Delivery Month, a new Index Commodity futures contract will be selected for inclusion in the Index. For example, if the first New York business day is October 1, 2015, and the Delivery Month of the Index Commodity futures contract currently in such Index is November 2015, a new Index Commodity futures contract with a later Delivery Month will be selected.
For the underlying Index Commodity of the Index, the new Index Commodity futures contract selected will be the Index Commodity futures contract with the best possible implied roll yield based on the closing price for each eligible Index Commodity futures contract. Eligible Index Commodity futures contracts are any Index Commodity futures contracts having a Delivery Month (i) no sooner than the month after the Delivery Month of the Index Commodity futures contract currently in the Index, and (ii) no later
18
Table of Contents
than the 13th month after the Verification Date. For example, if the first New York business day is October 1, 2015 and the Delivery Month of an Index Commodity futures contract currently in the Index is November 2015, the Delivery Month of an eligible new Index Commodity futures contract must be between December 2015 and October 2016. The implied roll yield is then calculated and the futures contract on the Index Commodity with the best possible implied roll yield is then selected. If two futures contracts have the same implied roll yield, the futures contract with the minimum number of months prior to the Delivery Month is selected.
After the futures contract selection, the monthly roll for the Index Commodity subject to a roll in that particular month unwinds the old futures contract and enters a position in the new futures contract. This takes place between the 2nd and 6th Index Business Day of the month.
On each day during the roll period, new notional holdings are calculated. The calculations for the futures contracts on the old Index Commodity that are leaving the Index and the futures contracts on the new Index Commodity are then calculated.
On all days that are not monthly index roll days, the notional holdings of the Index Commodity future remains constant.
Under the Fifth Amended and Restated Declaration of Trust and Trust Agreement of the Trust (the Trust Agreement), Wilmington Trust Company, the Trustee of the Trust, has delegated to the Managing Owner the exclusive management and control of all aspects of the business of the Trust and 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 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 Funds 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 clients 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 contracts historical volatility. Collateral deposited in support of an over-the-counter instrument serves a similar purpose.
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, except in certain instances where midday variation margin calls are made. In contrast to initial margin, variation margin represents a system of marking to market the futures contracts value. Thus, traders in exchange-traded futures contracts are assessed daily in an amount equal to that days 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 contracts 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.
19
Table of Contents
Performance Summary
This Report covers the three months ended March 31, 2015 and 2014 (hereinafter referred to as the Three Months Ended March 31, 2015 and the Three Months Ended March 31, 2014, respectively). The Fund commenced trading on the American Stock Exchange (which became the NYSE Alternext US LLC (the NYSE Alternext)) on January 5, 2007, and, as of November 25, 2008, is listed on the NYSE Arca, Inc. (the NYSE Arca).
Performance of the Fund and the exchange traded Shares are detailed below in Results of Operations. The Funds performance information from inception up to and excluding the Closing Date is a reflection of the performance associated with the Predecessor Managing Owner. The Managing Owner has served as managing owner of the Fund since the Closing Date, and the Funds performance information since the Closing Date is a reflection of the performance associated with the Managing Owner. Past performance of the Fund is not necessarily indicative of future performance.
The Index is intended to reflect the change in market value of the Index Commodity. In turn, the Index is intended to reflect the silver sector. The DBIQ Optimum Yield Silver Index Total Return (DBIQ-OY SI TR) consists of the Index plus 3-month United States Treasury Obligations returns. Past Index results are not necessarily indicative of future changes, positive or negative, in the Index closing levels.
The section Summary of DBIQ-OY SI TR and Underlying Index Commodity Returns for the Three Months Ended March 31, 2015 and 2014 below provides an overview of the changes in the closing levels of the DBIQ-OY SI TR by disclosing the change in market value of the underlying component Index Commodity through a surrogate (and analogous) index plus 3-month United States Treasury Obligations returns. Please note also that the Funds objective is to track the Index (not the DBIQ-OY SI TR), and the Fund does not attempt to outperform or underperform the Index.
Summary of DBIQ-OY SI TR and Underlying Index Commodity Returns for the Three Months Ended March 31, 2015 and 2014
Underlying Index |
Three Months Ended March 31, 2015 |
Three Months Ended March 31, 2014 |
||||||
DB Silver Indices |
6.20 | % | 1.74 | % | ||||
|
|
|
|
|||||
AGGREGATE RETURN |
6.20 | % | 1.74 | % | ||||
|
|
|
|
If the Funds interest income from its holdings of fixed income securities were to exceed the Funds fees and expenses, the aggregate return on an investment in the Fund is expected to outperform the Index and underperform the DBIQ-OY SI TR. The only difference between (i) the Index and (ii) the DBIQ-OY SI TR is that the Index does not include interest income from a hypothetical basket of fixed income securities while the DBIQ-OY SI TR does include such a component. Thus, the difference between the Index and the DBIQ-OY SI TR is attributable entirely to the hypothetical interest income from this hypothetical basket of fixed income securities. If the Funds interest income from its holdings of fixed income securities exceeds the Funds 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 Funds 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 Funds fees and expenses, the aggregate return on the Fund is expected to underperform the DBIQ-OY SI TR. If the Funds fees and expenses were to exceed the Funds 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 (U.S. GAAP), consistently applied under the accrual method of accounting. In particular, net asset value includes any unrealized appreciation or depreciation on open commodity futures contracts, and any other credit or debit accruing to the Fund but unpaid or not received by the Fund. All open commodity futures contracts will be calculated at their then current market value, which will be based upon the settlement price for that particular commodity futures contract traded on the applicable exchange on the date with respect to which net asset value is being determined; provided, that if a commodity 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 only under circumstances, including, 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
20
Table of Contents
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 Funds 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.
Net asset value per share is the net asset value of the Fund divided by the number of outstanding Shares.
Critical Accounting Policies
The Funds critical accounting policies are as follows:
Preparation of the financial statements and related disclosures in conformity with U.S. GAAP 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 Funds 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 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 Funds financial statements. U.S. GAAP defines fair value as 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, under current market conditions.
U.S. GAAP establishes a hierarchy that prioritizes the inputs to valuation methods, giving the highest priority to readily available unadjusted quoted prices in an active market for identical assets (Level 1) and the lowest priority to significant unobservable inputs (Level 3), generally when market prices are not readily available or are unreliable. Based on the valuation inputs, the securities or other investments are tiered into one of three levels. Changes in valuation methods may result in transfers in or out of an investments assigned level. See Note 5(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 commodity at a specified date and price. The market risk associated with the Funds commitments to purchase commodities is limited to the gross or face amount of the contracts held.
The Funds 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 Funds 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.
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 and on most foreign futures 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.
21
Table of Contents
The Commodity Broker, when acting as the Funds 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
The Funds entire source of capital is derived from the Funds offering of Shares to Authorized Participants. The Fund in turn allocates its net assets to commodities trading. A significant portion of the net asset value is held in United States Treasury Obligations and cash, which is used as margin for the Funds trading in commodities. 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 Funds commodity interests change. The balance of the net assets is held in the Funds commodity trading account. Interest earned on the Funds interest-bearing funds is paid to the Fund.
The Funds commodity contracts may be subject to periods of illiquidity because of market conditions, regulatory considerations or for other reasons. For example, commodity exchanges generally have the ability to limit fluctuations in certain commodity 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 commodity futures contract can neither be taken nor liquidated unless the traders are willing to effect trades at or within the limit. Commodity futures prices have occasionally moved the daily limit for several consecutive days with little or no trading. Such market conditions could prevent the Fund from promptly liquidating its commodity 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 the Commodity Broker and/or exchange clearinghouses) to perform under the terms of the contracts (credit risk).
On any business day, an Authorized Participant may place an order with the Transfer Agent to redeem one or more Baskets. Redemption orders must be placed by 10:00 a.m., Eastern Time. The day on which the Managing Owner receives a valid redemption order is the redemption order date. The day on which a redemption order is settled is the redemption order settlement date. As provided below, the redemption order settlement date may occur up to 3 business days after 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. Instead, individual Shareholders may only redeem Shares in integral multiples of 200,000 and only through an Authorized Participant.
Unless otherwise agreed to by the Managing Owner and the Authorized Participant as provided in the next sentence, by placing a redemption order, an Authorized Participant agrees to deliver the Baskets to be redeemed through DTCs book-entry system to the Fund not later than the redemption order settlement date as of 2:45 p.m., Eastern Time, on the business day immediately following the redemption order date. Upon submission of a redemption order, the Authorized Participant may request the Managing Owner to agree to a redemption order settlement date up to 3 business days after the redemption order date. By placing a redemption order, and prior to receipt of the redemption proceeds, an Authorized Participants DTC account is charged the non-refundable transaction fee due for the redemption order.
Redemption orders may be placed either (i) through the Continuous Net Settlement (CNS) clearing processes of the National Securities Clearing Corporation (the NSCC) or (ii) if outside the CNS Clearing Process, only through the facilities of The Depository Trust Company (DTC or the Depository) (the DTC Process), or a successor depository, and only in exchange for cash. By placing a redemption order, and prior to receipt of the redemption proceeds, an Authorized Participants DTC account is charged the non-refundable transaction fee due for the redemption order and such fee is not borne by the Fund.
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 (used for) operating activities was $0.3 million and $(0.1) million for the Three Months Ended March 31, 2015 and 2014, respectively. These amounts primarily include net income (loss) and net purchases and sales of United States Treasury Obligations which are held at fair value on the statement of financial condition.
22
Table of Contents
During the Three Months Ended March 31, 2015, $19.0 million was paid to purchase United States Treasury Obligations and $19.0 million was received from sales and maturing United States Treasury Obligations. During the Three Months Ended March 31, 2014, $31.0 million was paid to purchase United States Treasury Obligations and $31.0 million was received from sales and maturing United States Treasury Obligations. Unrealized appreciation/depreciation on United States Treasury Obligations and futures increased(decreased) Net cash provided by (used for) operating activities by $(1.3) million and $(0.6) million during the Three Months Ended March 31, 2015 and 2014, respectively.
Financing Activities
There were no sales or redemptions of shares to Authorized Participants during the Three Months Ended March 31, 2015 and 2014.
Results of Operations
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
The Fund was launched on January 3, 2007 at $25.00 per Share. The Shares traded on the NYSE Alternext from January 5, 2007 to November 25, 2008 and have been trading on the NYSE Arca since November 25, 2008. The Funds performance information from inception up to and excluding the Closing Date is a reflection of the performance associated with the Predecessor Managing Owner. The Managing Owner has served as Managing Owner of the Fund since the Closing Date, and the Funds performance information since the Closing Date is a reflection of the performance associated with the Managing Owner. Past performance of the Fund is not necessarily indicative of future performance.
The Fund seeks to track changes in the closing levels of the DBIQ Optimum Yield Silver Index Excess Return (the DBIQ-OY SI ER, or the Index) over time, plus the excess, if any, of the Funds 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 DBS), (ii) the Funds NAV (as reflected by the graph DBSNV), and (iii) the closing levels of the Index (as reflected by the graph DBSLIX). 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 Funds collateral holdings whereas the Index does not consider such interest income. There can be no assurances that the price of the Shares will 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 or certain other similar limitations on the ability of the Fund to trade the Index Commodity. 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 and certain other limitations on its ability to trade the Index Commodity, which may compel the Fund to trade futures or other instruments that are not the Index Commodity as proxies for the Index Commodity. 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. The extent to which the Fund has invested at an aggregate notional level approximating the Index value as opposed to the Funds aggregate net asset value also may contribute to discrepancies. 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 Commodity as proxies for the Index Commodity 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.
23
Table of Contents
COMPARISON OF DBS, DBSNV AND DBSLIX FOR THE THREE MONTHS ENDED
MARCH 31, 2015 AND 2014
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 FUNDS FUTURE PERFORMANCE.
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 FUNDS FUTURE PERFORMANCE.
See Additional Legends below.
24
Table of Contents
Additional Legends
DBIQ Optimum Yield Silver Index Excess Return is an index and does not reflect (i) actual trading and (ii) any fees or expenses.
WHILE THE FUNDS OBJECTIVE IS NOT TO GENERATE PROFIT THROUGH ACTIVE PORTFOLIO MANAGEMENT, BUT IS TO TRACK THE INDEX, BECAUSE THE INDEX WAS ESTABLISHED IN JUNE 2006 (RENAMED OCTOBER 2010), 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 FUNDS 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 DECEMBER 1988 THROUGH MAY 2006, THE INDEX CLOSING LEVELS REFLECT THE APPLICATION OF THE INDEX METHODOLOGY, AND SELECTION OF INDEX COMMODITY, 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 FUNDS ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2014, RELATED TO THE COMMODITIES MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF THE FUNDS 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 AND ITS TRADING PRINCIPALS HAVE LIMITED EXPERIENCE MANAGING THE DAY-TO-DAY OPERATIONS FOR THE FUND AND, PRIOR TO THE CLOSING DATE, HAD ONLY MANAGED AN EXCHANGE-TRADED FUND THAT RELATES TO A BROAD-BASED COMMODITY INDEX FOR A SHORT PERIOD. BECAUSE THERE ARE LIMITED ACTUAL PERFORMANCE RESULTS OF THE MANAGING OWNER THAT ARE COMPARABLE TO THE INDEX CLOSING LEVELS SET FORTH HEREIN, PROSPECTIVE INVESTORS SHOULD BE PARTICULARLY WARY OF PLACING UNDUE RELIANCE ON INDEX RESULTS IN RESPECT OF ANY PERIOD. FOR THE AVOIDANCE OF DOUBT, NONE OF THE PERFORMANCE RELATED INFORMATION THAT IS COVERED BY THE PERIOD OF THIS REPORT UP TO AND EXCLUDING THE CLOSING DATE CAN BE ATTRIBUTED TO THE MANAGING OWNER.
THE PREDECESSOR MANAGING OWNER, AN INDIRECT WHOLLY OWNED SUBSIDIARY OF DEUTSCHE BANK AG, COMMENCED OPERATIONS IN JANUARY 2006. AS THE PREDECESSOR MANAGING OWNER, THE PREDECESSOR MANAGING OWNER AND ITS TRADING PRINCIPALS MANAGED THE DAY-TO-DAY OPERATIONS FOR THE FUND FROM INCEPTION UP TO AND EXCLUDING THE CLOSING DATE. 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 INDEX RESULTS IN RESPECT OF ANY PERIOD. FOR THE AVOIDANCE OF DOUBT, NONE OF THE PERFORMANCE RELATED INFORMATION THAT IS COVERED BY THE PERIOD OF THIS REPORT ON AND AFTER THE CLOSING DATE CAN BE ATTRIBUTED TO THE PREDECESSOR MANAGING OWNER.
THE FUNDS PERFORMANCE INFORMATION FROM INCEPTION UP TO AND EXCLUDING THE CLOSING DATE IS A REFLECTION OF THE PERFORMANCE ASSOCIATED WITH THE PREDECESSOR MANAGING OWNER. THE MANAGING OWNER HAS SERVED AS MANAGING OWNER OF THE FUND SINCE THE CLOSING DATE, AND THE FUNDS PERFORMANCE INFORMATION SINCE THE CLOSING DATE IS A REFLECTION OF THE PERFORMANCE ASSOCIATED WITH THE MANAGING OWNER. PAST PERFORMANCE OF THE FUND IS NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE.
25
Table of Contents
FOR THE THREE MONTHS ENDED MARCH 31, 2015 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2014
Fund Share Price Performance
For the Three Months Ended March 31, 2015, the NYSE Arca market value of each Share increased 5.57% from $25.33 per Share to $26.74 per Share. The Share price low and high for the Three Months Ended March 31, 2015 and related change from the Share price on December 31, 2014 was as follows: Shares traded from a low of $24.92 per Share (-1.60%) on March 11, 2015, to a high of $29.89 per Share (+18.03%) on January 22, 2015.
For the Three Months Ended March 31, 2014, the NYSE Arca market value of each Share increased 1.61% from $32.28 per Share to $32.80 per Share. The Share price low and high for the Three Months Ended March 31, 2014 and related change from the Share price on December 31, 2013 was as follows: Shares traded from a low of $31.76 per Share (-1.61%) on January 31, 2014, to a high of $36.63 per Share (+13.46%) on February 24, 2014.
Fund Share Net Asset Performance
For the Three Months Ended March 31, 2015, the net asset value of each Share increased 6.33% from $25.13 per Share to $26.72 per Share. Rising prices of silver futures contracts during the Three Months Ended March 31, 2015 contributed to an overall 6.20% increase in the level of the DBIQ Optimum Yield Silver Index Total Return.
Net income for the Three Months Ended March 31, 2015 was $1.3 million, primarily resulting from net change in unrealized gains of $1.3 million.
For the Three Months Ended March 31, 2014, the net asset value of each Share increased 1.62% from $32.22 per Share to $32.74 per Share. Rising prices of silver futures contracts during the Three Months Ended March 31, 2014 contributed to an overall 1.74% increase in the level of the DBIQ Optimum Yield Silver Index Total Return.
Net income for the Three Months Ended March 31, 2014 was $0.5 million, primarily resulting from net change in unrealized gains of $0.6 million and operating expenses of $0.1 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 commodity 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.
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 Funds exposure under such indemnification provisions cannot be estimated, these general business indemnifications are not expected to have a material impact on the Funds financial position.
The Funds 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 Funds 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. For the avoidance of doubt, for purposes of the reporting period up to and excluding the Closing Date, all Management Fees and commission payments were paid to the Predecessor Managing Owner and the Predecessor Commodity Broker, respectively. Since the Closing, the Managing Owner has served as managing owner of the Fund and the Commodity Broker has served as the Funds futures clearing broker and all Management Fee accruals and commision accruals since the Closing Date have been paid to the Managing Owner and the Commodity Broker, respectively.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
INTRODUCTION
The Fund is designed to replicate positions in a commodity 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 Funds main line of business.
Market movements can produce frequent changes in the fair market value of the Funds open positions and, consequently, in its earnings and cash flow. The Funds market risk is primarily influenced by changes in the price of commodities.
26
Table of Contents
Value at Risk, or 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 Funds 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 Funds losses in any market sector will be limited to VaR or by the Funds 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 effects of margin, and any other multiplier features, as applicable, of the Funds market sensitive instruments.
QUANTIFYING THE FUNDS TRADING VALUE AT RISK
Quantitative Forward-Looking Statements
The following quantitative disclosures regarding the Funds 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 Exchange Act). 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).
Value at risk, or 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 Funds 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 Funds losses in any market sector will be limited to VaR or by the Funds attempts to manage its market risk.
THE FUNDS TRADING VALUE AT RISK
The Fund calculates VaR using the actual historical market movements of the Funds net assets.
The following table indicates the trading VaR associated with the Funds net assets as of March 31, 2015.
Description |
Net Assets | Daily Volatility | VaR* (99 Percentile) |
Three Months Ended March 31, 2015 Number of times VaR Exceeded |
||||||||||||
PowerShares DB Silver Fund |
$ | 21,373,074 | 1.67 | % | $ | 830,927 | 2 |
The following table indicates the trading VaR associated with the Funds net assets as of December 31, 2014.
Description |
Net Assets | Daily Volatility | VaR* (99 Percentile) |
For the Year
Ended December 31, 2014 Number of times VaR Exceeded |
||||||||||||
PowerShares DB Silver Fund |
$ | 20,105,345 | 1.48 | % | $ | 684,793 | 7 |
* | 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 Funds net 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. As such, the market risk represented by these investments is expected to be immaterial.
27
Table of Contents
QUALITATIVE DISCLOSURES REGARDING PRIMARY TRADING RISK EXPOSURES
The following qualitative disclosures regarding the Funds 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 Exchange Act. The Funds 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 Funds current market exposure will not change materially. Investors may lose all or substantially all of their investment in the Fund.
The primary trading risk exposure of the Fund as of March 31, 2015 relating to the Index Commodity is as follows:
Silver
The price of silver is volatile and is affected by numerous factors. The largest industrial users of silver (e.g., photographic, jewelry, and electronic industries) may influence its price. A change in economic conditions, such as a recession, can adversely affect industries which are significant users of silver. In turn, such a negative economic impact may decrease demand for silver, and, consequently, its price. Worldwide speculation and hedging activity by silver producers may also impact its price.
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.
QUALITATIVE DISCLOSURES REGARDING MEANS OF MANAGING RISK EXPOSURE
Under ordinary circumstances, the Managing Owners discretionary power is limited to determining whether the Fund will make a distribution. Under emergency or extraordinary circumstances, the Managing Owners 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 actively manage the Fund to avoid losses. The Fund initiates positions only on the long 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 Andrew Schlossberg, its Principal Executive Officer, and Steven Hill, its Principal Financial and Accounting Officer, Investment Pools, 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 Exchange Act) as of the end of the period covered by this quarterly report, and, based upon that evaluation, Andrew Schlossberg, the Principal Executive Officer, and Steven Hill, the Principal Financial and Accounting Officer, Investment Pools, of the Managing Owner, concluded that the Funds 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 SECs 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 Principal Executive Officer and Principal Financial and Accounting Officer, Investment Pools, 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 Funds quarter ended March 31, 2015 that has materially affected, or is reasonably likely to materially affect, the Funds internal control over financial reporting.
28
Table of Contents
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, 2014, filed March 9, 2015.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
(a) There have been no unregistered sales of the Funds 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 March 31, 2015:
Period of Redemption |
Total Number of Shares Redeemed |
Average Price Paid per Share |
||||||
January 1, 2015 to January 31, 2015 |
| $ | | |||||
February 1, 2015 to February 28, 2015 |
| $ | | |||||
March 1, 2015 to March 31, 2015 |
| $ | | |||||
|
|
|
|
|||||
Total |
| $ | | |||||
|
|
|
|
Item 3. | Defaults Upon Senior Securities. |
None.
Item 4. | Mine Safety Disclosures. |
Not applicable.
Item 5. | Other Information. |
Neither the Managing Owner nor any affiliates of the Managing Owner engaged in any activities as defined under Section 13(r) of the U.S. Securities Exchange Act of 1934, as amended, during the reporting periods covered by this report.
29
Table of Contents
Deutsche Bank AG, the ultimate parent company of the Predecessor Managing Owner, has provided us the disclosure set forth below describing the ITRA-relevant activities of it and its affiliates for the Three Months Ended March 31, 2015. All references in this quoted disclosure to we, us and our are to Deutsche Bank AG and its affiliates. None of the disclosed activities or transactions were conducted by the Registrant.
Disclosures Under Iran Threat Reduction and Syria Human Rights Act of 2012
Under Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) of the U.S. Securities Exchange Act of 1934, as amended, an issuer of securities registered under the Securities Exchange Act of 1934 is required to disclose in its periodic reports filed under the Securities Exchange Act of 1934 certain of its activities and those of its affiliates relating to Iran and to other persons sanctioned by the U.S. under programs relating to terrorism and proliferation of weapons of mass destruction that occurred during the period covered by the report. We describe below a number of potentially disclosable activities of Deutsche Bank AG and its affiliates. Disclosure is generally required regardless of whether the activities, transactions or dealings were conducted in compliance with applicable law.
Legacy Financing Arrangements. Despite having ceased entering into new business in or with Iran in 2007, we continue to be engaged as lender, sponsoring bank and/or facility agent or arranger in several long-term financing agreements relating to the construction or acquisition of plant or equipment for the petroleum and petrochemical industries, under which Iranian entities were the direct or indirect borrowers. Before 2007, as part of banking consortia, we entered into a number of financing arrangements, three of which remained outstanding as of March 31, 2015, with the National Petrochemical Company (NPC) and its group entities as borrowers. The latest final maturity under these loan facilities is in 2019. These loan facilities were guaranteed by national export credit agencies representing two European governments. In principle, the obligations of the borrowers under these loan facilities are secured by assignments of receivables from oil and oil products exported by NPC and/or its trading subsidiaries to buyers, mostly in Asia. These delivery obligations, however, were waived for the period covered by this report, because of the current sanctions environment. For some of these arrangements, we act as escrow agent, holding escrow accounts for the Iranian borrowers mentioned above, into which receivables are, in principle, paid by the buyers of the oil and oil products. During the period covered by this report, no such receivables were paid to the said escrow accounts. Such accounts are pledged in favor of the relevant banking consortium. We have no involvement in the contractual arrangements related to, or in the physical settlement of, the oil and oil product exports mentioned above. Iranian entities in whose names the escrow accounts are held are not permitted to draw on such accounts, either because they are sanctioned parties or, where this is not the case, because of our business decision to not allow access to such accounts in light of the overall sanctions environment.
During the first quarter of 2015, approximately 9.0 million were paid into the escrow account. We in our role as agent distributed to the participants in the banking consortia approximately 2.2 million, including the portion attributable to us totaling 1.5 million.
In the first quarter of 2015 we generated revenues of approximately 170,000 in respect of these financing arrangements, of which approximately 125,000 consisted of escrow account revenues, 30,000 consisted of loan interest revenues and 14,000 consisted of fee revenues. The net profits were less than these amounts.
As of March 31, 2015, we have an undrawn commitment of approximately 1.3 million under one of the financing agreements referred to above. Due to the export credit agency coverage, this remainder cannot be cancelled without German government approval, for which we have applied but which we have not yet received. We do not intend to make further disbursements upon this undrawn commitment.
Our portion of the outstanding principal amount of the remaining loan facilities amounted to approximately 22 million as of March 31, 2015. We intend to continue pursuing repayment and fulfilling our administrative role under these agreements, but we do not intend to engage in any new extensions of credit to these or other Iranian entities.
Legacy Contractual Obligations Related to Guarantees and Letters of Credit. Prior to 2007, we provided guarantees to a number of Iranian entities. In almost all of these cases, we issued counter-indemnities in support of guarantees issued by Iranian banks because the Iranian beneficiaries of the guarantees required that they be backed directly by Iranian banks. In 2007, we made a decision to discontinue issuing new guarantees to Iranian or Iran-related beneficiaries. Although the pre-existing guarantees stipulate that they must be either extended or honored if we receive such a demand and we are legally not able to terminate these guarantees, we decided in 2011 to reject any extend or pay demands under such guarantees. Even though we exited, where possible, many of these guarantees, guarantees with an aggregate face amount of approximately 7.6 million are still outstanding as of March 31, 2015. The gross revenues from this business were approximately 11,000 and the net profit we derived from these activities was less than this amount.
30
Table of Contents
We also have outstanding legacy guarantees in relation to a Syrian bank sanctioned by the U.S. under its non-proliferation program. The aggregate face amount of these legacy guarantees was approximately 10 million as of March 31, 2015, the gross revenues received from non-Syrian parties for these guarantees were approximately 29,000 and the net profit we derived from these activities was less than this amount. In one case we paid cancellation fees of less than 300 to the frozen account of the Syrian bank.
We intend to exit these guarantee arrangements as soon as possible.
Payments Received. In the first quarter of 2015, we received less than 10 payments adding up to approximately 2.5 million in favor of non-Iranian clients in Germany and the Netherlands, which payments stemmed ultimately from relevant Iranian entities. Revenues for these incoming payments were less than 2,000. These figures include relevant payments in favor of clients of our subsidiary Postbank. We expect that we will also have to execute such transactions in the future.
On behalf of one of our clients in Poland we transferred to an account of the Iranian embassy in Poland, held by another bank, two payments in sum of approximately 100. We do not intend to make such payments in the future.
Operations of Iranian Bank Branches and Subsidiaries in Germany and/or France. Several Iranian banks, including Bank Melli Iran, Bank Saderat, Bank Tejarat and Europäisch-Iranische Handelsbank, have branches or offices in Germany and/or France, even though their funds and other economic resources are frozen under European law. As part of the payment clearing system in Germany and other European countries, when these branches or offices need to make payments in Germany or Europe to cover their day-to-day operations such as rent, taxes, insurance premia and salaries for their remaining staff, or for any other kind of banking-related operations necessary to wind down their legacy trade business, the German Bundesbank and French banks accept fund transfers from these Iranian banks and disburse them to the applicable (mainly German) payees, some of whom hold accounts with us. In the first quarter of 2015, we received approximately 2.1 million in such disbursements in approximately 300 transactions via the German Bundesbank and French banks in respect of payments from the above-mentioned Iranian banks, and the gross revenues derived from these payments were less than 1,000. Relevant transactions of our subsidiary Postbank are included in these figures. We expect that we will also have to execute such transactions in the future.
Maintaining of Accounts for Iranian Consulates and Embassies. In the first quarter of 2015, Iranian embassies and consulates in Germany and the Netherlands were holding accounts with us as well as with Postbank. This includes the provision by a subsidiary of Postbank to the Iranian consulate of girocard (debitcard/ATM)-terminals as well as the processing of transactions of cardholders using the terminals; the terminals are used to facilitate the payment of fees for the issuance of visas and other administrative measures by the consulate. The additional purpose of these accounts was the funding of day-to-day operational costs of the embassies and consulates, such as salaries, rent, and electricity. One of the account relationships was between Deutsche Bank Netherlands N.V. and the Agent Bureau of the Embassy of the Islamic Republic of Iran in The Hague (which is responsible for all Iran-U.S. Claims Tribunal activities). The total volume of outgoing payments from these accounts was approximately 6.2 million as of March 31, 2015, which payments were made with the involvement of the competent authorities in the relevant European countries under applicable law. We derived gross revenues of approximately 4,500 and net profits which were less than this amount from these activities. Deutsche Bank in the Netherlands will discontinue providing these services, Deutsche Bank in Germany will continue to provide these services in the future to enable the Government of Iran to conduct its diplomatic relations in Germany.
Activities of Entities in Which We Have Interests. Section 13(r) requires us to provide the specified disclosure with respect to ourselves and our affiliates, as defined in Exchange Act Rule 12b-2. Although we have minority equity interests in certain entities that could arguably result in these entities being deemed affiliates, we do not have the authority or the legal ability to acquire in every instance the information from these entities that would be necessary to determine whether they are engaged in any disclosable activities under Section 13(r). In some cases, legally independent entities are not permitted to disclose the details of their activities to us because of German privacy and data protection laws or the applicable banking laws and regulations. In such cases, voluntary disclosure of such details could violate such legal and/or regulatory requirements and subject the relevant entities to criminal prosecution or regulatory investigations.
31
Table of Contents
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 Chief 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 of PowerShares DB Silver Fund March 31, 2015 (unaudited) and December 31, 2014, (ii) the Unaudited Schedule of Investments of PowerShares DB Silver Fund March 31, 2015, (iii) the Schedule of Investments of PowerShares DB Silver Fund December 31, 2014, (iv) the Unaudited Statements of Income and Expenses of PowerShares DB Silver Fund Three Months Ended March 31, 2015 and 2014, (v) the Unaudited Statements of Changes in Shareholders Equity of PowerShares DB Silver Fund Three Months Ended March 31, 2015, (vi) the Unaudited Statements of Changes in Shareholders Equity of PowerShares DB Silver Fund Three Months Ended March 31, 2014, (vii) the Unaudited Statements of Cash Flows of PowerShares DB Silver Fund Three Months Ended March 31, 2015 and 2014, and (viii) Notes to Unaudited Financial Statements of PowerShares DB Silver Fund. |
32
Table of Contents
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 Multi-Sector Commodity Trust with respect to PowerShares DB Silver Fund | ||
By: | Invesco PowerShares Capital Management LLC, its Managing Owner | |
By: | /S/ ANDREW SCHLOSSBERG | |
Name: |
Andrew Schlossberg Principal Executive Officer | |
Title: | ||
By: | /S/ STEVEN HILL | |
Name: Title: |
Steven Hill Principal Financial and Accounting Officer, Investment Pools | |
Dated: May 8, 2015
33