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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT

OF 1934

For the quarterly period ended September 30, 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 000-50735

POTOMAC FUTURES FUND L.P.

 

(Exact name of registrant as specified in its charter)

 

New York    13-3937275
(State or other jurisdiction of    (I.R.S. Employer
incorporation or organization)    Identification No.)

c/o Ceres Managed Futures LLC

522 Fifth Avenue

New York, New York 10036

 

(Address of principal executive offices) (Zip Code)

(855) 672-4468

 

(Registrant’s telephone number, including area code)

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 X No   

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every 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 X 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer      Accelerated filer      Non-accelerated filer X      Smaller reporting company      

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

Yes    No X

As of October 31, 2015, 17,032.6438 Limited Partnership Redeemable Units were outstanding.


Table of Contents

POTOMAC FUTURES FUND L.P.

FORM 10-Q

INDEX

 

                Page
  Number  

PART I - Financial Information:

  
 

Item 1.

     Financial Statements:   
       Statements of Financial Condition at September 30, 2015 (unaudited) and December 31, 2014    3
       Statements of Income and Expenses and Changes in Partners’ Capital for the three and nine months ended September 30, 2015 (unaudited)    4
       Notes to Financial Statements, including the Financial Statements of CMF Campbell Master Fund L.P. (unaudited)    5 – 20
 

Item 2.

     Management’s Discussion and Analysis of Financial Condition and Results of Operations    21 – 23
 

Item 3.

     Quantitative and Qualitative Disclosures about Market Risk    24 – 25
 

Item 4.

     Controls and Procedures    26

PART II - Other Information

  
 

Item 1.

     Legal Proceedings    27 – 33
 

Item 1A.

     Risk Factors    34
 

Item 2.

     Unregistered Sales of Equity Securities and Use of Proceeds    35
 

Item 3.

     Defaults Upon Senior Securities    35
 

Item 4.

     Mine Safety Disclosures    35
 

Item 5.

     Other Information    35
 

Item 6.

     Exhibits    36 – 38

 

2


Table of Contents

PART I

Item 1. Financial Statements

Potomac Futures Fund L.P.

Statements of Financial Condition

 

    (Unaudited)
September 30,
2015
         December 31,
2014
 

Assets:

      

Investment in Master(1), at fair value

    $         28,057,638             $         30,700,788     

Cash

    108,689             132,084     
 

 

 

      

 

 

 

Total assets

    $ 28,166,327             $ 30,832,872     
 

 

 

      

 

 

 

Liabilities and Partners’ Capital:

      

Liabilities:

      

Accrued expenses:

      

Ongoing selling agent fee

    $ 46,944             $ 51,388     

Management fees

    35,031             38,353     

General Partner fees

    23,354             25,569     

Other

    94,790             99,221     

Redemptions payable

    511,892             375,913     
 

 

 

      

 

 

 

Total liabilities

    712,011             590,444     
 

 

 

      

 

 

 

Partners’ Capital:

      

General Partner, 192.5786 Redeemable Units outstanding at September 30, 2015 and December 31, 2014

    305,771             322,878     

Limited Partners, 17,098.4988 and 17,845.3078 Redeemable Units outstanding at September 30, 2015 and December 31, 2014, respectively

    27,148,545             29,919,550     
 

 

 

      

 

 

 

Total partners’ capital

    27,454,316             30,242,428     
 

 

 

      

 

 

 

Total liabilities and partners’ capital

    $ 28,166,327             $ 30,832,872     
 

 

 

      

 

 

 

Net asset value per unit

    $ 1,587.77             $ 1,676.61     
 

 

 

      

 

 

 
(1)

Defined in Note 1.

 

See accompanying notes to financial statements.

 

3

 


Table of Contents

Potomac Futures Fund L.P.

Statements of Income and Expenses and Changes in Partners’ Capital

(Unaudited)

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

Investment Income:

           

Interest income allocated from Master

     $ 842           $ 654           $ 1,843           $ 3,446     
  

 

 

    

 

 

    

 

 

    

 

 

 

Expenses:

           

Expenses allocated from Master

     53,028           65,903           187,244           212,542     

Ongoing selling agent fees

     142,571           202,702           453,525           821,825     

Management fees

     106,352           100,543           338,504           374,704     

General Partner fees

     70,901           -               225,667           -         

Incentive fees

     -               -               84,431           -         

Other

     64,353           20,895           164,006           215,341     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     437,205           390,043           1,453,377           1,624,412     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net investment income (loss)

     (436,363)          (389,389)          (1,451,534)          (1,620,966)    
  

 

 

    

 

 

    

 

 

    

 

 

 

Trading results:

           

Net realized gains (losses) on closed contracts allocated from Master

     85,115           2,375,311           941,226           894,975     

Net change in unrealized gains (losses) on open contracts allocated from Master

     1,182,043           1,405,822           (1,092,637)          1,313,109     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total trading results allocated from Master

     1,267,158           3,781,133           (151,411)          2,208,084     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

     830,795           3,391,744           (1,602,945)          587,118     

Subscriptions—Limited Partners

     322,474           125,000           2,157,466           3,686,764     

Redemptions—Limited Partners

     (1,472,420)          (1,870,314)          (3,342,633)          (6,929,239)    

Redemptions—General Partner

     -               (99,993)          -               (99,993)    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net increase (decrease) in Partners’ Capital

     (319,151)          1,546,437           (2,788,112)          (2,755,350)    

Partners’ Capital, beginning of period

     27,773,467           25,801,418           30,242,428           30,103,205     
  

 

 

    

 

 

    

 

 

    

 

 

 

Partners’ Capital, end of period

     $ 27,454,316           $ 27,347,855           $ 27,454,316           $ 27,347,855     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net asset value per unit (17,291.0774 and 18,620.3414 units outstanding at September 30, 2015 and 2014, respectively)

     $ 1,587.77           $ 1,468.71           $ 1,587.77           $ 1,468.71     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) per unit*

     $ 46.00           $ 176.81           $ (88.84)          $ 57.40     
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average units outstanding

      17,870.6984            19,484.2570            17,897.3525            21,290.2127     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

*

Represents the change in net asset value per unit during the period.

 

See accompanying notes to financial statements.

 

4

 


Table of Contents

Potomac Futures Fund L.P.

Notes to Financial Statements

September 30, 2015

(Unaudited)

 

1.

Organization:

Potomac Futures Fund L.P. (the “Partnership”) is a limited partnership organized on March 14, 1997 under the partnership laws of the State of New York to engage, directly or indirectly, in the speculative trading of a diversified portfolio of commodity interests including futures, option, swap and forward contracts. The sectors traded include currencies, energy, grains, indices, U.S. and non-U.S. interest rates, livestock, metals and softs. The commodity interests that are indirectly traded by the Partnership through its investment in CMF Campbell Master Fund L.P. (the “Master”), a limited partnership organized under the partnership laws of the state of New York, are volatile and involve a high degree of market risk. The General Partner (defined below) may also determine to invest up to all of the Partnership’s assets in United States (“U.S.”) Treasury bills. The Partnership was authorized to sell an unlimited number of redeemable units (“Redeemable Units”) during its initial offering period. The Partnership privately and continuously offers Redeemable Units in the Partnership to qualified investors. There is no maximum number of Redeemable Units that may be sold by the Partnership.

Ceres Managed Futures LLC, a Delaware limited liability company, acts as the general partner (the “General Partner”) and commodity pool operator of the Partnership. The General Partner is wholly owned by Morgan Stanley Smith Barney Holdings LLC (“MSSB Holdings”). MSSB Holdings is ultimately owned by Morgan Stanley. Morgan Stanley is a publicly held company whose shares are listed on the New York Stock Exchange. Morgan Stanley is engaged in various financial services and other businesses. Prior to June 28, 2013, Morgan Stanley indirectly owned a majority equity interest in MSSB Holdings and Citigroup Inc. indirectly owned a minority interest in MSSB Holdings. Prior to July 31, 2009, the date as of which MSSB Holdings became its owner, the General Partner was wholly owned by Citigroup Financial Products Inc., a wholly owned subsidiary of Citigroup Global Markets Holdings Inc., the sole owner of which is Citigroup Inc. As of September 30, 2015, all trading decisions for the Partnership are made by Campbell & Company, Inc. (the “Advisor”).

On January 1, 2005, the Partnership allocated substantially all of its capital to the Master. The Partnership purchased 173,788.6446 units of the Master with cash equal to $172,205,653 and a contribution of open commodity futures and forward contracts with a fair value of $1,582,992. The units of the Master are used solely for accounting purposes and do not represent units issued legally. The Master was formed in order to permit accounts managed by the Advisor using the Campbell Managed Futures Portfolio (formerly, Financial, Metal and Energy Large Portfolio), a proprietary, systematic trading program, to invest together in one trading vehicle. The General Partner is also the general partner of the Master. As of September 30, 2015, the Partnership’s/Master’s commodity broker was Morgan Stanley & Co. LLC (“MS&Co.”), a registered futures commission merchant. Individual and pooled accounts currently managed by the Advisor, including the Partnership, are permitted to be limited partners of the Master. The General Partner and the Advisor believe that trading through this master/feeder structure promotes efficiency and economy in the trading process. Expenses to investors as a result of the investment in the Master are approximately the same as they would be if the Partnership traded directly and redemption rights are not affected.

The General Partner is not aware of any material changes to the trading program discussed above during the fiscal quarter ended September 30, 2015.

The Master has entered into a foreign exchange brokerage account agreement and a futures brokerage account agreement with MS&Co. The Partnership has entered into a futures brokerage account agreement with MS&Co. and has transferred the brokerage account of the Partnership from Citigroup Global Markets Inc. to MS&Co. The Partnership, through its investment in the Master, pays MS&Co. trading fees for the clearing and, where applicable, execution of transactions.

The Partnership has also entered into a selling agreement with Morgan Stanley Smith Barney LLC (d/b/a Morgan Stanley Wealth Management). Pursuant to the selling agreement, Morgan Stanley Wealth Management receives a monthly selling agent fee equal to 2.0% per year of the Partnership’s adjusted month-end net assets. The selling agent fee received by Morgan Stanley Wealth Management will be shared with the properly registered/licensed financial advisers of Morgan Stanley Wealth Management who sell redeemable units in the Partnership.

Effective April 1, 2014, the monthly ongoing selling agent fee was reduced from an annual rate of 5.5% to an annual rate of 3.0%. Effective June 1, 2014, the management fee paid to the Advisor was reduced from an annual rate of 2.0% to an annual rate of 1.5%.

 

5


Table of Contents

Potomac Futures Fund L.P.

Notes to Financial Statements

September 30, 2015

(Unaudited)

 

Effective October 1, 2014, the monthly ongoing selling agent fee was reduced from an annual rate of 3.0% to an annual rate of 2.0%. As of the same date, the Partnership began paying a fee to the General Partner (formerly, the administrative fee) at an annual rate of 1.0%. The October 1, 2014 fee changes offset each other and, accordingly, there was no change to the aggregate fees incurred by the Partnership.

In July 2015, the General Partner delegated certain administrative functions to SS&C Technologies, Inc., a Delaware corporation, currently doing business as SS&C GlobeOp (the “Administrator”). Pursuant to a Master Services Agreement, the Administrator will furnish certain administrative, accounting, regulatory, reporting, tax and other services as agreed from time to time. In addition, the Administrator will maintain certain books and records of the Partnership. The costs of retaining the Administrator will be allocated among the pools operated by the General Partner, including the Partnership.

 

2.

Basis of Presentation and Summary of Significant Accounting Policies:

The accompanying financial statements and accompanying notes are unaudited but, in the opinion of the General Partner, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Partnership’s financial condition at September 30, 2015, and the results of its operations and changes in partners’ capital for the three and nine months ended September 30, 2015 and 2014. These financial statements present the results of interim periods and do not include all disclosures normally provided in annual financial statements. These financial statements should be read together with the financial statements and notes included in the Partnership’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) for the year ended December 31, 2014. The December 31, 2014 information has been derived from the audited financial statements as of and for the year ended December 31, 2014.

The preparation of financial statements and accompanying notes in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires the General Partner to make estimates and assumptions that affect the reported amounts of assets and liabilities, income and expenses, and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. As a result, actual results could differ from these estimates.

Certain prior period amounts have been reclassified to conform to current period presentation. In the financial highlights of the Partnership and the Master, the ongoing selling agent fees and clearing fees of the Partnership and the clearing fees of the Master, which were previously included in net realized and unrealized gains (losses) per unit and excluded from expenses per unit are now excluded from net realized and unrealized gains (losses) per unit and included in net investment loss per unit. This information was previously included as footnotes to the financial highlights tables.

As of September 30, 2015 and December 31, 2014, the Partnership owned 100% of the Master. The Partnership intends to continue to invest substantially all of its assets in the Master. The performance of the Partnership is directly affected by the performance of the Master. The Master’s trading of futures, forward, swap and option contracts, if applicable, on commodities is done primarily on U.S. and foreign commodity exchanges. The Master engages in such trading through a commodity brokerage account maintained with MS&Co. The Master’s Statements of Financial Condition, including Condensed Schedules of Investments and Statements of Income and Expenses and Changes in Partners’ Capital, are included herein.

The General Partner and each limited partner share in the profits and losses of the Partnership in proportion to the amount of partnership interest owned by each except that no limited partner shall be liable for obligations of the Partnership in excess of its capital contributions and profits, if any, net of distributions or redemptions and losses, if any.

Due to the nature of commodity trading, the results of operations for the interim periods presented should not be considered indicative of the results that may be expected for the entire year.

 

6


Table of Contents

Potomac Futures Fund L.P.

Notes to Financial Statements

September 30, 2015

(Unaudited)

 

Partnership’s Investment: The Partnership carries its investment in the Master at fair value based on the Master’s net asset value per unit as calculated by the Master. The valuation of the Master’s investments including the classification within the fair value hierarchy of the investments held by the Master are described in Note 5.

Master’s Investments: Fair value of exchange-traded futures, option and forward contracts is determined by the various exchanges, and reflects the settlement price for each contract as of the close of business on the last business day of the reporting period. The fair value of foreign currency forward contracts is extrapolated on a forward basis from the spot prices quoted as of approximately 3:00 P.M. (E.T.) on the last business day of the reporting period from various exchanges. The fair value of non- exchange- traded foreign currency option contracts is calculated by applying an industry standard model application for options valuation of foreign currency options, using as inputs the spot prices, interest rates, and option implied volatilities quoted as of approximately 3:00 P.M. (E.T.) on the last business day of the reporting period. U.S. Treasury bills are valued at the last available bid price received from independent pricing services as of the close of the last business day of the reporting period.

All commodity interests of the Master (including derivative financial instruments and derivative commodity instruments) are held for trading purposes. The commodity interests are recorded on the trade date and open contracts are recorded at fair value at the measurement date. Investments in commodity interests denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing at the measurement date. Gains or losses are realized when contracts are liquidated. Unrealized gains or losses on open contracts are included as a component of equity in trading account on the Master’s Statements of Financial Condition. Net realized gains or losses and net change in unrealized gains or losses from the preceding period are reported on the Master’s Statements of Income and Expenses and Changes in Partners’ Capital.

Master’s Cash: The Master’s cash includes cash denominated in foreign currencies of $43,017 and $228,228 as of September 30, 2015 and December 31, 2014, respectively. The cost of foreign currencies was $42,329 as of September 30, 2015 and based on the General Partner’s assessment, the cost of foreign currencies was not materiality different from the fair value as of December 31, 2014.

Investment Company Status: Effective January 1, 2014, the Partnership adopted Accounting Standards Update (“ASU”) 2013- 08, “Financial Services — Investments Companies (Topic 946): Amendments to the Scope, Measurement and Disclosure Requirements” and based on General Partner’s assessment, the Partnership has been deemed to be an investment company since inception. Accordingly, the Partnership follows the investment company accounting and reporting guidance of Topic 946 and reflects its investments at fair value with unrealized gains and losses resulting from changes in fair value reflected in the Statements of Income and Expenses and Changes in Partners’ Capital.

Income Taxes: Income taxes have not been listed as each partner is individually liable for the taxes, if any, on its share of the Partnership’s income and expenses. The General Partner concluded that no provision for income tax is required in the Partnership’s financial statements. The Partnership files U.S. federal and various state and local tax returns. No income tax returns are currently under examination. The 2011 through 2014 tax years remain subject to examination by U.S. federal and most state tax authorities. The General Partner does not believe that there are any uncertain tax positions that require recognition of a tax liability.

Net Income (Loss) Per Unit: Net income (loss) per unit is calculated in accordance with investment company guidance. See Note 3, “Financial Highlights.”

Recent Accounting Pronouncement: In May 2015, Financial Accounting Standards Board issued ASU 2015-07 “Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)” which relates to disclosures for investments that calculate net asset value per share (potentially funds of fund structures). The ASU requires investments for which the practical expedient is used to measure fair value at NAV be removed from the fair value hierarchy. Instead, an entity is required to include those investments as a reconciling line item so that the total fair value amount of investments in the disclosure is consistent with the amount on the balance sheet. Further, the ASU requires entities to provide the disclosures in Accounting Standards Codification 820-10-50-6A only for investments for which they elect to use the NAV practical expedient to determine fair value. The standard is effective for public business entities for fiscal years beginning after December 15, 2015. Early adoption is permitted. The Partnership has elected to adopt the guidance as of June 30, 2015. The adoption did not have any impact on the Partnership’s fair value measurement disclosure.

There have been no material changes with respect to the Partnership’s critical accounting policies as reported in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

7


Table of Contents

Potomac Futures Fund L.P.

Notes to Financial Statements

September 30, 2015

(Unaudited)

 

The Master’s Statements of Financial Condition and Condensed Schedules of Investments as of September 30, 2015 and December 31, 2014 and Statements of Income and Expenses and Changes in Partners’ Capital for the three and nine months ended September 30, 2015 and 2014 are presented below:

CMF Campbell Master Fund L.P.

Statements of Financial Condition

 

     (Unaudited)
September 30,
2015
     December 31,
2014
 

Assets:

     

Equity in trading account:

     

Investment in U.S. Treasury bills, at fair value (amortized cost $18,119,716 and $0 at September 30, 2015 and December 31, 2014, respectively)

     $         18,120,312           $ -         

Cash

     5,730,916           25,309,115     

Cash margin

     3,802,131           3,907,451     

Net unrealized appreciation on open futures contracts

     333,139           871,621     

Net unrealized appreciation on open forward contracts

     95,661           649,816     
  

 

 

    

 

 

 

Total assets

     $ 28,082,159           $         30,738,003     
  

 

 

    

 

 

 

Liabilities and Partners’ Capital:

     

Liabilities:

     

Accrued expenses:

     

Clearing fees due to MS& Co.

     $ -               $ 2,220     

Professional Fees

     24,543           35,131     
  

 

 

    

 

 

 

Total liabilities

     24,543           37,351     
  

 

 

    

 

 

 

Partners’ Capital:

     

General Partner, 0.0000 units outstanding at September 30, 2015 and December 31, 2014

     -               -         

Limited Partner, 13,910.4874 and 15,031.5695 units outstanding at September 30, 2015 and December 31, 2014, respectively

     28,057,616           30,700,652     
  

 

 

    

 

 

 

Total liabilities and partners’ capital

     $ 28,082,159           $ 30,738,003     
  

 

 

    

 

 

 

Net asset value per unit

     $ 2,017.01           $ 2,042.41     
  

 

 

    

 

 

 

 

8


Table of Contents

Potomac Futures Fund L.P.

Notes to Financial Statements

September 30, 2015

(Unaudited)

 

CMF Campbell Master Fund L.P.

Condensed Schedule of Investments

September 30, 2015

(Unaudited)

 

     Notional ($)/Number
of Contracts
     Fair Value      % of Partners’
Capital
 

Futures Contracts Purchased

        

Grains

     7         $ (1,748)          (0.01) 

Indices

     65         (44,175)          (0.16)    

Interest Rates U.S.

     119         44,413           0.16     

Interest Rates Non-U.S.

     447                     170,954           0.61     

Metals

     4         (3,375)          (0.01)    

Softs

     1         (890)          0.00  
     

 

 

    

 

 

 

Total futures contracts purchased

        165,179                           0.59     
     

 

 

    

 

 

 

Futures Contracts Sold

        

Energy

     117         95,585           0.35     

Grains

     38         (33,513)          (0.12)    

Indices

     65         2,467           0.01     

Interest Rates Non-U.S.

     10         (5,191)          (0.02)    

Livestock

     31         85,323           0.30     

Metals

     25         17,810           0.06     

Softs

     58         5,479           0.02     
     

 

 

    

 

 

 

Total futures contracts sold

        167,960           0.60     
     

 

 

    

 

 

 

Net unrealized appreciation on open futures contracts

        333,139           1.19     
     

 

 

    

 

 

 

Unrealized Appreciation on Open Forward Contracts

        

Currencies

     $90,472,863         958,846           3.42     

Metals

     129         224,695           0.80     
     

 

 

    

 

 

 

Total unrealized appreciation on open forward contracts

        1,183,541           4.22     
     

 

 

    

 

 

 

Unrealized Depreciation on Open Forward Contracts

        

Currencies

     $77,569,649         (930,118)          (3.32)    

Metals

     69         (157,762)          (0.56)    
     

 

 

    

 

 

 

Total unrealized depreciation on open forward contracts

        (1,087,880)          (3.88)    
     

 

 

    

 

 

 

Net unrealized appreciation on open forward contracts

        95,661           0.34     
     

 

 

    

 

 

 

U.S. Government Securities

        

Face Amount

  

Maturity Date

  

Description

   Fair Value      % of Partners’
Capital
 

$18,120,000

   10/15/2015    U.S. Treasury bills, 0.005% (Amortized Cost of $18,119,716)      18,120,312           64.58     
        

 

 

    

 

 

 

Net fair value

           $       18,549,112           $         66.11   % 
        

 

 

    

 

 

 

 

*

Due to rounding

 

9


Table of Contents

Potomac Futures Fund L.P.

Notes to Financial Statements

September 30, 2015

(Unaudited)

 

CMF Campbell Master Fund L.P.

Condensed Schedule of Investments

December 31, 2014

 

     Notional ($)/Number
of Contracts
     Fair Value      % of Partners’
Capital
 

Futures Contracts Purchased

        

Energy

     1         $ (3,125)         (0.01) 

Grains

     28         (49,997)         (0.16)    

Indices

     110         2,926          0.01     

Interest Rates U.S.

     94         64,630          0.21     

Interest Rates Non-U.S.

     904         657,848          2.14     

Livestock

     10         (8,130)         (0.03)    

Metals

     2         (3,187)         (0.01)    

Softs

     2         (1,845)         (0.00) 
     

 

 

    

 

 

 

Total futures contracts purchased

                      659,120                            2.15     
     

 

 

    

 

 

 

Futures Contracts Sold

        

Energy

     68         152,712          0.49     

Grains

     43         14,237          0.05     

Indices

     6         (1,588)         (0.00) 

Interest Rates U.S.

     73         11,813          0.03     

Interest Rates Non-U.S.

     42         (7,538)         (0.02)    

Metals

     15         14,305          0.05     

Softs

     69         28,560          0.09     
     

 

 

    

 

 

 

Total futures contracts sold

        212,501          0.69     
     

 

 

    

 

 

 

Net unrealized appreciation on open futures contracts

        871,621          2.84     
     

 

 

    

 

 

 

Unrealized Appreciation on Open Forward Contracts

        

Currencies

   $           110,605,414         1,663,757          5.42     

Metals

     82         130,794          0.43     
     

 

 

    

 

 

 

Total unrealized appreciation on open forward contracts

        1,794,551          5.85     
     

 

 

    

 

 

 

Unrealized Depreciation on Open Forward Contracts

        

Currencies

   $ 78,295,483         (1,057,999)         (3.45)    

Metals

     60         (86,736)         (0.28)    
     

 

 

    

 

 

 

Total unrealized depreciation on open forward contracts

        (1,144,735)         (3.73)    
     

 

 

    

 

 

 

Net unrealized appreciation on open forward contracts

        649,816          2.12     
     

 

 

    

 

 

 

Net fair value

        $ 1,521,437          4.96  
     

 

 

    

 

 

 

 

*

Due to rounding

 

10


Table of Contents

Potomac Futures Fund L.P.

Notes to Financial Statements

September 30, 2015

(Unaudited)

 

CMF Campbell Master Fund L.P.

Statements of Income and Expenses and Changes in Partners’ Capital

(Unaudited)

 

    Three Months Ended
September 30,
          Nine Months Ended
September 30,
 
    2015           2014           2015           2014  

Investment Income:

                   

Interest income

    $ 842              $ 654              $ 1,843              $ 3,446     
 

 

 

       

 

 

       

 

 

       

 

 

 

Expenses:

                   

Clearing fees

    32,662              35,380              114,865              138,910     

Professional fees

    20,366              30,523              72,379              73,632     
 

 

 

       

 

 

       

 

 

       

 

 

 

Total expenses

    53,028              65,903              187,244              212,542     
 

 

 

       

 

 

       

 

 

       

 

 

 

Net investment income (loss)

    (52,186)             (65,249)             (185,401)             (209,096)    
 

 

 

       

 

 

       

 

 

       

 

 

 

Trading results:

                   

Net gains (losses) on trading of commodity interests:

                   

Net realized gains on closed contracts

    85,115              2,375,311              941,226              894,975     

Change in net unrealized gains (losses) on open contracts

    1,182,043              1,405,822              (1,092,637)             1,313,109     
 

 

 

       

 

 

       

 

 

       

 

 

 

Total trading results

    1,267,158              3,781,133              (151,411)             2,208,084     
 

 

 

       

 

 

       

 

 

       

 

 

 

Net income (loss)

    1,214,972              3,715,884              (336,812)             1,998,988     

Subscriptions—Limited Partner

    322,474              125,000              2,157,466              3,686,764     

Redemptions—Limited Partner

    (1,560,804)             (2,833,130)             (4,462,443)             (8,619,900)    

Distribution of interest income to feeder fund

    (246)             (654)             (1,247)             (3,446)    
 

 

 

       

 

 

       

 

 

       

 

 

 

Net increase (decrease) in Partners’ Capital

    (23,604)             1,007,100              (2,643,036)             (2,937,594)    

Partners’ Capital, beginning of period

    28,081,220              26,802,128              30,700,652              30,746,822     
 

 

 

       

 

 

       

 

 

       

 

 

 

Partners’ Capital, end of period

    $ 28,057,616              $ 27,809,228              $ 28,057,616              $ 27,809,228     
 

 

 

       

 

 

       

 

 

       

 

 

 

Net asset value per unit (13,910.4874 and 15,728.8056 units outstanding at September 30, 2015 and 2014, respectively)

    $ 2,017.01              $ 1,768.04              $ 2,017.01              $ 1,768.04     
 

 

 

       

 

 

       

 

 

       

 

 

 

Net income (loss) per unit*

    $ 84.89              $ 231.80              $ (25.32)             $ 151.78     
 

 

 

       

 

 

       

 

 

       

 

 

 

Weighted average units outstanding

      14,441.4800                16,896.0079                14,640.0030                18,736.8408     
 

 

 

       

 

 

       

 

 

       

 

 

 

 

*

Represents the change in net asset value per unit during the period before distribution of interest income to feeder fund.

 

11


Table of Contents

Potomac Futures Fund L.P.

Notes to Financial Statements

September 30, 2015

(Unaudited)

 

3.

Financial Highlights:

Financial highlights for the limited partner class as a whole for the three and nine months ended September 30, 2015 and 2014 were as follows:

 

     Three Months Ended
September 30,
         Nine Months Ended
September 30,
 
     2015          2014          2015          2014  

Net realized and unrealized gains (losses) allocated from Master

     $     70.42             $     196.81             $     (7.61)            $     132.55     

Net investment loss**

     (24.42)            (20.00)            (81.23)            (75.15)    
  

 

 

      

 

 

      

 

 

      

 

 

 

Increase (decrease) for the period

     46.00             176.81             (88.84)            57.40     

Net asset value per unit, beginning of period

     1,541.77             1,291.90             1,676.61             1,411.31     
  

 

 

      

 

 

      

 

 

      

 

 

 

Net asset value per unit, end of period

     $     1,587.77             $     1,468.71             $     1,587.77             $     1,468.71     
  

 

 

      

 

 

      

 

 

      

 

 

 
     Three Months Ended
September 30,
         Nine Months Ended
September 30,
 
     2015          2014          2015          2014  

Ratios to average net assets:*

                 

Net investment loss**

     (6.2)   %         (5.9)   %         (6.5)   %         (7.9)   % 
  

 

 

      

 

 

      

 

 

      

 

 

 

Operating expenses

     6.2    %         6.0    %         6.2    %         7.9    % 

Incentive fees

     -       %         -       %         0.3    %         -       % 
  

 

 

      

 

 

      

 

 

      

 

 

 

Total expenses

     6.2    %         6.0    %         6.5    %         7.9    % 
  

 

 

      

 

 

      

 

 

      

 

 

 

Total return:

                 

Total return before incentive fees

     3.0    %         13.7    %         (5.0)   %         4.1    % 

Incentive fees

     -       %         -       %         (0.3)   %         -       % 
  

 

 

      

 

 

      

 

 

      

 

 

 

Total return after incentive fees

     3.0    %         13.7    %         (5.3)   %         4.1    % 
  

 

 

      

 

 

      

 

 

      

 

 

 

 

*

Annualized. (other than incentive fees).

**

Interest income allocated from Master less total expenses

The above ratios and total return may vary for individual investors based on the timing of capital transactions during the period. Additionally, these ratios are calculated for the limited partner class using the limited partners’ share of income, expenses and average net assets of the Partnership and includes the income and expenses allocated from the Master.

 

12


Table of Contents

Potomac Futures Fund L.P.

Notes to Financial Statements

September 30, 2015

(Unaudited)

 

Financial Highlights of the Master:

 

     Three Months Ended
September 30,
         Nine Months Ended
September 30,
 
     2015          2014          2015          2014  

Net realized and unrealized gains (losses)

     $     88.57             $     235.81             $     (12.46)            $     163.34     

Net investment loss

     (3.68)            (4.01)            (12.86)            (11.56)    
  

 

 

      

 

 

      

 

 

      

 

 

 

Increase (decrease) for the period

     84.89             231.80             (25.32)            151.78     

Distribution of interest income to feeder fund

     (0.02)            (0.04)            (0.08)            (0.17)    

Net asset value per unit, beginning of period

     1,932.14             1,536.28             2,042.41             1,616.43     
  

 

 

      

 

 

      

 

 

      

 

 

 

Net asset value per unit, end of period

     $     2,017.01             $     1,768.04             $     2,017.01             $     1,768.04     
  

 

 

      

 

 

      

 

 

      

 

 

 
     Three Months Ended
September 30,
         Nine Months Ended
September 30,
 
     2015          2014          2015          2014  

Ratios to Average Net Assets:*

                 

Net investment income (loss)**

     (0.7)   %         (1.0)   %         (0.8)   %         (1.0)   % 
  

 

 

      

 

 

      

 

 

      

 

 

 

Operating expenses

     0.7    %         1.0    %         0.8    %         1.0    % 
  

 

 

      

 

 

      

 

 

      

 

 

 

Total return

     4.4    %         15.1    %         (1.2)   %         9.4    % 
  

 

 

      

 

 

      

 

 

      

 

 

 

 

*

Annualized.

**

Interest income less total expenses

 

4.

Trading Activities:

The Partnership was formed for the purpose of trading contracts in a variety of commodity interests, including derivative financial instruments and derivative commodity instruments. The Partnership invests substantially all of its assets through a “master/feeder” structure. The Partnership’s pro-rata share of the results of the Master’s trading activities are shown on the Statements of Income and Expenses and Changes in Partners’ Capital.

The customer agreement among the Partnership, the Master and MS&Co. gives, the Partnership and the Master, respectively, the legal right to net unrealized gains and losses on open futures and on open forward contracts. The Master nets, for financial reporting purposes, the unrealized gains and losses on open futures and on open forward contracts on the Statements of Financial Condition as the criteria under Accounting Standards Codification 210-20, “Balance Sheet,” have been met.

Trading and transaction fees are based on the number of trades executed by the Advisor. All trading, exchange, clearing, user, give-up, floor brokerage and National Futures Association fees (collectively, the “clearing fees”) paid to MS&Co. are borne by the Master and allocated to the Partnership.

 

13


Table of Contents

Potomac Futures Fund L.P.

Notes to Financial Statements

September 30, 2015

(Unaudited)

 

All of the commodity interests owned by the Master are held for trading purposes. The monthly average number of futures contracts traded during the three months ended September 30, 2015 and 2014 were 829 and 1,558, respectively. The monthly average number of futures contracts traded during the nine months ended September 30, 2015 and 2014 were 1,236 and 1,764, respectively. The monthly average number of metals forward contracts traded during the three months ended September 30, 2015 and 2014 were 457 and 336, respectively. The monthly average number of forward contracts traded during the nine months ended September 30, 2015 and 2014 were 481 and 551, respectively. The monthly average notional values of currency forward contracts held during the three months ended September 30, 2015 and 2014 were $304,427,503 and $390,495,929, respectively. The monthly average notional values of currency forward contracts held during the nine months ended September 30, 2015 and 2014 were $337,390,511 and $516,402,165, respectively.

The following tables summarize the gross and net amounts recognized relating to assets and liabilities of the Master’s derivatives and their offsetting subject to master netting arrangements or similar agreements as of September 30, 2015 and December 31, 2014, respectively.

 

                Gross Amounts
Offset in the
Statements of

Financial
Condition
         Net Amounts
Presented in the
Statements of

Financial
Condition
         Gross Amounts Not Offset in the
Statements of Financial Condition
 

September 30, 2015

   Gross Amounts
Recognized
                       Financial
Instruments
         Collateral
(Received)/Pledged*
         Net Amount  

Assets:

                           

Futures

     $ 498,978             $ (165,839)            $ 333,139             $                 -                 $                 -                 $ 333,139     

Forwards

     1,183,541             (1,087,880)            95,661             -                 -                 95,661     
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total assets

     $ 1,682,519             $ (1,253,719)            $ 428,800             $ -                 $ -                 $ 428,800     
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Liabilities:

                           

Futures

 

     $ (165,839)            $ 165,839             $ -                 $ -                 $ -                 $ -         

Forwards

     (1,087,880)            1,087,880             -                 -                 -                 -         
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total liabilities

     $     (1,253,719)            $     1,253,719             $ -                 $ -                 $ -                 $ -         
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Net fair value

                              $ 428,800    * 
                           

 

 

 
                Gross Amounts
Offset in the
Statements of

Financial
Condition
         Net Amounts
Presented in the
Statements of

Financial
Condition
         Gross Amounts Not Offset in the
Statements of Financial Condition
 

December 31, 2014

   Gross Amounts
Recognized
                       Financial
Instruments
         Collateral
(Received)/Pledged*
         Net Amount  

Assets:

                           

Futures

     $ 1,020,950             $ (149,329)            $ 871,621             $ -                 $ -                 $ 871,621     

Forwards

     1,794,551             (1,144,735)            649,816             -                 -                 649,816     
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total assets

     $ 2,815,501             $ (1,294,064)            $     1,521,437             $ -                 $ -                 $ 1,521,437     
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Liabilities:

                           

Futures

     $ (149,329)            $ 149,329             $ -                 $ -                 $ -                 $ -         

Forwards

     (1,144,735)            1,144,735             -                 -                 -                 -         
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total liabilities

     $ (1,294,064)            $     1,294,064             $ -                 $ -                 $ -                 $ -         
  

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Net fair value

                              $     1,521,437    * 
                           

 

 

 

 

  *

In the event of default by the Master, MS&Co., the Master’s commodity futures broker and the sole counterparty to the Master’s off exchange-traded contracts, as applicable, has the right to offset the Master’s obligation with the Master’s cash held by MS&Co., thereby minimizing MS&Co.’s risk of loss. There is no collateral posted by MS&Co. and as such, in the event of default by MS&Co., the Master is exposed to the amount shown on the Master’s Statements of Financial Condition. In the case of exchange-traded contracts, the Master’s exposure to counterparty risk may be reduced since the exchange’s clearinghouse interposes its credit between buyer and seller and the clearinghouse’s guarantee fund may be available in the event of a default.

 

14


Table of Contents

Potomac Futures Fund L.P.

Notes to Financial Statements

September 30, 2015

(Unaudited)

 

The following tables indicate the gross fair values of derivative instruments of futures and forward contracts as separate assets and liabilities as of September 30, 2015 and December 31, 2014.

 

Assets    September 30, 2015  

Futures Contracts

  

Energy

     $ 104,681     

Grains

     25     

Indices

     30,983     

Interest Rates U.S.

     46,226     

Interest Rates Non-U.S.

     175,553     

Livestock

     95,193     

Metals

     21,553     

Softs

     24,764     
  

 

 

 

Total unrealized appreciation on open futures contracts

     $ 498,978     
  

 

 

 

Liabilities

  

Futures Contracts

  

Energy

     $ (9,096)    

Grains

     (35,286)    

Indices

     (72,691)    

Interest Rates U.S.

     (1,813)    

Interest Rates Non-U.S.

     (9,790)    

Livestock

     (9,870)    

Metals

     (7,118)    

Softs

     (20,175)    
  

 

 

 

Total unrealized depreciation on open futures contracts

     $ (165,839)    
  

 

 

 

Net unrealized appreciation on open futures contracts

     $ 333,139    * 
  

 

 

 

Assets

  

Forward Contracts

  

Currencies

     $ 958,846     

Metals

     224,695     
  

 

 

 

Total unrealized appreciation on open forward contracts

     $     1,183,541     
  

 

 

 

Liabilities

  

Forward Contracts

  

Currencies

     $ (930,118)    

Metals

     (157,762)    
  

 

 

 

Total unrealized depreciation on open forward contracts

     $ (1,087,880)    
  

 

 

 

Net unrealized appreciation on open forward contracts

     $ 95,661    ** 
  

 

 

 

 

* This amount is in “Net unrealized appreciation on open futures contracts” on the Master’s Statements of Financial Condition.
** This amount is in “Net unrealized appreciation on open forward contracts” on the Master’s Statements of Financial Condition.

 

15


Table of Contents

Potomac Futures Fund L.P.

Notes to Financial Statements

September 30, 2015

(Unaudited)

 

    December 31, 2014  

Assets

 

Futures Contracts

 

Energy

    $ 153,320      

Grains

    15,187      

Indices

    59,941      

Interest Rates U.S.

    86,643      

Interest Rates Non-U.S.

    660,385      

Livestock

    1,690      

Metals

    14,305      

Softs

    29,479      
 

 

 

 

Total unrealized appreciation on open futures contracts

    $                 1,020,950      
 

 

 

 

Liabilities

 

Futures Contracts

 

Energy

    $ (3,733)     

Grains

    (50,947)     

Indices

    (58,603)     

Interest Rates U.S.

    (10,200)     

Interest Rates Non-U.S.

    (10,075)     

Livestock

    (9,820)     

Metals

    (3,187)     

Softs

    (2,764)     
 

 

 

 

Total unrealized depreciation on open futures contracts

    $ (149,329)     
 

 

 

 

Net unrealized appreciation on open futures contracts

    $ 871,621     * 
 

 

 

 

Assets

 

Forward Contracts

 

Currencies

    $ 1,663,757      

Metals

    130,794      
 

 

 

 

Total unrealized appreciation on open forward contracts

    $ 1,794,551      
 

 

 

 

Liabilities

 

Forward Contracts

 

Currencies

    $ (1,057,999)     

Metals

    (86,736)     
 

 

 

 

Total unrealized depreciation on open forward contracts

    $ (1,144,735)     
 

 

 

 

Net unrealized appreciation on open forward contracts

    $ 649,816     ** 
 

 

 

 

 

* This amount is in “Net unrealized appreciation on open futures contracts” on the Master’s Statements of Financial Condition.
** This amount is in “Net unrealized appreciation on open forward contracts” on the Master’s Statements of Financial Condition.

 

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Potomac Futures Fund L.P.

Notes to Financial Statements

September 30, 2015

(Unaudited)

 

The following table indicates the trading gains and losses, by market sector, on derivative instruments for the three and nine months ended September 30, 2015 and 2014.

 

     Three Months Ended September 30     Nine Months Ended September 30  

Sector

   2015     2014     2015     2014  

Currencies

     $ 600,643          $ 1,959,885          $ 1,047,582          $ 1,299,471     

Energy

     442,964          317,059          (363,968)         (440,522)    

Grains

     (245,228)         716,634          (791,925)         657,645     

Indices

     97,026          85,911          492,119          (485,290)    

Interest Rates U.S.

     (238,183)         (112,802)         (271,309)         (88,783)    

Interest Rates Non-U.S.

     105,463          673,007          (187,268)         1,649,480     

Livestock

     852,577          (11,440)         795,757          135,680     

Metals

     (24,613)         149,878          (577,024)         (402,375)    

Softs

     (323,491)         3,001          (295,375)         (117,222)    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     $         1,267,158    ***      $         3,781,133    ***      $         (151,411)   ***      $         2,208,084    *** 
  

 

 

   

 

 

   

 

 

   

 

 

 

*** This amount is included in “Total trading results” on the Master’s Statements of Income and Expenses and Changes in Partners’ Capital.

 

  5.

Fair Value Measurements:

Master’s Fair Value Measurements. Fair value is defined 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. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to fair values derived from unobservable inputs (Level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety.

 

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Potomac Futures Fund L.P.

Notes to Financial Statements

September 30, 2015

(Unaudited)

 

The Master considers prices for exchange-traded commodity futures, forward, swap and option contracts to be based on unadjusted quoted prices in active markets for identical assets and liabilities (Level 1). The values of the U.S. Treasury bills, non-exchange-traded forward, swap and certain option contracts for which market quotations are not readily available are priced by broker-dealers or pricing services who derive fair values for those assets and liabilities from observable inputs (Level 2). As of and for the periods ended September 30, 2015 and December 31, 2014, the Master did not hold any derivative instruments that were priced at fair value using unobservable inputs through the application of the General Partner’s assumptions and internal valuation pricing models (Level 3). Transfers between levels are recognized at the end of the reporting period. During the nine months ended September 30, 2015 and for the year ended December 31, 2014, there were no transfers of assets or liabilities between Level 1 and Level 2.

 

    September 30, 2015
Total
        Level 1         Level 2         Level 3  

Assets

             

Futures

    $ 498,978            $ 498,978            $ -                $ -       

Forwards

    1,183,541            224,695            958,846            -       

U.S. Treasury bills

    18,120,312            -                18,120,312            -       
 

 

 

     

 

 

     

 

 

     

 

 

 

Total assets

    $ 19,802,831            $ 723,673            $             19,079,158            $                         -       
 

 

 

     

 

 

     

 

 

     

 

 

 

Liabilities

             

Futures

    $ 165,839            $ 165,839            $ -                $ -       

Forwards

    1,087,880            157,762            930,118            -       
 

 

 

     

 

 

     

 

 

     

 

 

 

Total liabilities

    $ 1,253,719            $ 323,601            $ 930,118            $ -       
 

 

 

     

 

 

     

 

 

     

 

 

 

Net fair value

    $             18,549,112            $ 400,072            $ 18,149,040            $ -       
 

 

 

     

 

 

     

 

 

     

 

 

 
    December 31, 2014
Total
        Level 1         Level 2         Level 3  

Assets

             

Futures

    $ 1,020,950            $ 1,020,950            $ -                $ -       

Forwards

    1,794,551            130,794            1,663,757            -       
 

 

 

     

 

 

     

 

 

     

 

 

 

Total assets

    $ 2,815,501            $             1,151,744            $ 1,663,757            $ -       
 

 

 

     

 

 

     

 

 

     

 

 

 

Liabilities

             

Futures

    $ 149,329            $ 149,329            $ -                $ -       

Forwards

    1,144,735            86,736            1,057,999            -       
 

 

 

     

 

 

     

 

 

     

 

 

 

Total liabilities

    $ 1,294,064            $ 236,065            $ 1,057,999            $ -       
 

 

 

     

 

 

     

 

 

     

 

 

 

Net fair value

    $ 1,521,437            $ 915,679            $ 605,758            $ -       
 

 

 

     

 

 

     

 

 

     

 

 

 

 

18


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Potomac Futures Fund L.P.

Notes to Financial Statements

September 30, 2015

(Unaudited)

 

6.

Financial Instrument Risks:

In the normal course of business, the Partnership, indirectly through its investment in the Master, is party to financial instruments with off-balance-sheet risk, including derivative financial instruments and derivative commodity instruments. These financial instruments may include forwards, futures, options and swaps, whose values are based upon an underlying asset, index, or reference rate, and generally represent future commitments to exchange currencies or cash balances, or to purchase or sell other financial instruments at specific terms at specified future dates, or, in the case of derivative commodity instruments, to have a reasonable possibility to be settled in cash, through physical delivery or with another financial instrument. These instruments may be traded on an exchange, a swap execution facility or over-the-counter (“OTC”). Exchange-traded instruments include futures and certain standardized forward, options and swap contracts. Certain swap contracts may also be traded on a swap execution facility or OTC. OTC contracts are negotiated between contracting parties and also include certain forward and option contracts. Specific market movements of commodities or futures contracts underlying an option cannot be accurately predicted. The purchaser of an option may lose the entire premium paid for the option. The writer or seller of an option has unlimited risk. Each of these instruments is subject to various risks similar to those related to the underlying financial instruments including market and credit risk. In general, the risks associated with OTC contracts are greater than those associated with exchange-traded instruments because of the greater risk of default by the counterparty to an OTC contract. The General Partner estimates that at any given time approximately 27.3% to 48.8% of the Partnership’s/Master’s contracts are traded OTC.

The Master trades futures contracts. A futures contract is a firm commitment to buy or sell a specified quantity of investments, currency or a standardized amount of a deliverable grade commodity, at a specified price on a specified future date, unless the contract is closed before the delivery date or if the delivery quantity is something where physical delivery cannot occur (such as the S&P 500 Index), whereby such contract is settled in cash. Payments (“variation margin”) may be made or received by the Master on each business day, depending on the daily fluctuations in the value of the underlying contracts, and are recorded as unrealized gains or losses by the Master. When the contract is closed, the Master records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Transactions in futures contracts require participants to make both initial margin deposits of cash or other assets and variation margin deposits, through the futures broker, directly with the exchange on which the contracts are traded. Net realized gains (losses) and net change in unrealized gains (losses) on futures contracts are included in the Master’s Statements of Income and Expenses and Changes in Partners’ Capital.

Forward foreign currency contracts are those contracts where the Master agrees to receive or deliver a fixed quantity of foreign currency for an agreed-upon price on an agreed-upon future date. Forward foreign currency contracts are valued daily, and the Master’s net equity therein, representing unrealized gain or loss on the contracts as measured by the difference between the forward foreign exchange rates at the dates of entry into the contracts and the forward rates at the reporting date, is included in the Master’s Statements of Financial Condition. Net realized gains (losses) and changes in net unrealized gains (losses) on forward foreign currency contracts are recognized in the period in which the contract is closed or the changes occur, respectively, and are included in the Master’s Statements of Income and Expenses and Changes in Partners’ Capital.

The Master does not isolate that portion of the results of operations arising from the effect of changes in foreign exchange rates on investments from fluctuations from changes in market prices of investments held. Such fluctuations are included in total trading results in the Master’s Statements of Income and Expenses and Changes in Partners’ Capital.

 

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Metal contracts traded on the London Metals Exchange (“LME”) represent a firm commitment to buy or sell a specified quantity of aluminum, copper, lead, nickel, tin or zinc. LME contracts traded by the Master are cash settled based on prompt dates published by the LME. Payments (“variation margin”) may be made or received by the Master on each business day, depending on the daily fluctuations in the value of the underlying contracts, and are recorded as unrealized gains or losses by the Master. A contract is considered offset when all long positions have been matched with a like number of short positions settling on the same prompt date. When the contract is closed at the prompt date, the Master records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Transactions in LME contracts require participants to make both initial margin deposits of cash or other assets and variation margin deposits, through the broker, directly with the LME. Net realized gains (losses) and net change in unrealized gains (losses) on metal contracts are included in the Master’s Statements of Income and Expenses and Changes in Partners’ Capital.

The risk to the limited partners that have purchased Redeemable Units is limited to the amount of their share of the Partnership’s net assets and undistributed profits. This limited liability is a result of the organization of the Partnership as a limited partnership under New York law.

Market risk is the potential for changes in the value of the financial instruments traded by the Partnership/Master due to market changes, including interest and foreign exchange rate movements and fluctuations in commodity or security prices. Market risk is directly impacted by the volatility and liquidity in the markets in which the related underlying assets are traded. The Partnership/Master is exposed to a market risk equal to the value of futures and forward contracts purchased and unlimited liability on such contracts sold short.

Credit risk is the possibility that a loss may occur due to the failure of a counterparty to perform according to the terms of a contract. The Partnership’s/Master’s risk of loss in the event of a counterparty default is typically limited to the amounts recognized in the Statements of Financial Condition and is not represented by the contract or notional amounts of the instruments. The Partnership’s/Master’s risk of loss is reduced through the use of legally enforceable master netting agreements with counterparties that permit the Partnership/Master to offset unrealized gains and losses and other assets and liabilities with such counterparties upon the occurrence of certain events. The Partnership/Master has credit risk and concentration risk, as MS&Co. or an MS&Co. affiliate is the sole counterparty or broker with respect to the Partnership’s/Master’s assets. Credit risk with respect to exchange-traded instruments is reduced to the extent that, through MS&Co. or an MS&Co. affiliate, the Partnership’s/Master’s counterparty is an exchange or clearing organization.

The General Partner monitors and attempts to control the Partnership’s/Master’s risk exposure on a daily basis through financial, credit and risk management monitoring systems, and accordingly believes that it has effective procedures for evaluating and limiting the credit and market risks to which the Partnership/Master may be subject. These monitoring systems generally allow the General Partner to statistically analyze actual trading results with risk-adjusted performance indicators and correlation statistics. In addition, online monitoring systems provide account analysis of futures, forwards and options positions by sector, margin requirements, gain and loss transactions and collateral positions.

The majority of these financial instruments mature within one year of the inception date. However, due to the nature of the Partnership’s/Master’s business, these instruments may not be held to maturity.

 

7.

Subsequent Events

The General Partner evaluates events that occur after the balance sheet date but before financial statements are issued. The General Partner has assessed the subsequent events through the date of issuance and determined that there were no subsequent events requiring adjustment of, or disclosure in the financial statements.

 

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Item 2.    Management’s

Discussion and Analysis of Financial Condition and Results of Operations.

Liquidity and Capital Resources

The Partnership does not engage in sales of goods or services. Its only assets are its investment in the Master and cash. The Master does not engage in sales of goods or services. The Master’s only assets are its equity in its trading account, consisting of cash, cash margin, net unrealized appreciation on open futures contracts, net unrealized appreciation on open forward contracts, options purchased, and investment in U.S. Treasury bills at fair value, if applicable. Because of the low margin deposits normally required in commodity trading, relatively small price movements may result in substantial losses to the Partnership, through its investment in the Master. While substantial losses could lead to a material decrease in liquidity, no such illiquidity occurred in the third quarter of 2015.

The Partnership’s capital consists of the capital contributions of the partners, as increased or decreased by income (loss) from its investment in the Master, expenses, interest income, redemptions of Redeemable Units and distributions of profits, if any.

For the nine months ended September 30, 2015, Partnership capital decreased 9.2% from $30,242,428 to 27,454,316. This decrease was attributable to the net loss of $1,602,945, coupled with the redemptions of 2,008.1430 Redeemable Units totaling $3,342,633, which was partially offset by the subscriptions of 1,261.3340 Redeemable Units totaling $2,157,466. Future redemptions can impact the amount of funds available for investment in the Master in subsequent periods.

The Master’s capital consists of the capital contributions of the partners as increased or decreased by realized and/or unrealized gains or losses on trading, expenses, interest income, redemptions of units and distributions of profits, if any.

For the nine months ended September 30, 2015, the Master’s capital decreased 8.6% from $30,700,652 to $28,057,616. This decrease was attributable to the net loss of $336,812, coupled with the redemptions of 2,137.2323 Redeemable Units totaling $4,462,443, which was partially offset by the subscriptions of 1,016.1522 Redeemable Units totaling $2,157,466 and the distribution of interest income to the feeder fund totaling $1,247. Future redemptions can impact the amount of funds available for investment in funds in subsequent periods.

Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires the General Partner to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. The General Partner believes that the estimates and assumptions utilized in preparing the financial statements are reasonable. Actual results could differ from those estimates. The Partnership’s significant accounting policies are described in detail in Note 2 of the Financial Statements.

The Partnership records all investments at fair value in its financial statements, with changes in fair value reported as a component of net realized gains (losses) and net change in unrealized gains (losses) in the Statements of Income and Expenses and Changes in Partners’ Capital.

 

21


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Results of Operations

During the Partnership’s third quarter of 2015, the net asset value per unit increased 3.0% from $1,541.77 to $1,587.77 as compared to an increase of 13.7% in the third quarter of 2014. The Partnership, through its investment in the Master, experienced a net trading gain before fees and expenses in the third quarter of 2015 of $1,267,158. Gains were primarily attributable to the Master’s trading of commodity futures in currencies, energy, indices, livestock, and non-U.S. interest rates and were partially offset by losses in grains, metals, softs and U.S. interest rates. The Partnership, through its investment in the Master, experienced a net trading gain before fees and expenses in the third quarter of 2014 of $3,781,133. Gains were primarily attributable to the Master’s trading of commodity futures in currencies, energy, grains, indices, metals, softs and non-U.S. interest rates and were partially offset by losses in U.S interest rates and livestock.

The most significant gains were achieved within the metals sector primarily during July from short futures positions in gold and silver as prices declined as a strengthening U.S. dollar decreased the appeal of precious metals. Additional gains were recorded during July from short base metals futures positions as prices moved lower amid concern a slowdown in the Chinese economy would weaken demand. Within the currency sector, gains were achieved during the third quarter from short Canadian, Australian and New Zealand dollar positions versus the U.S. dollar as “commodity currencies” were pressured lower as global commodities prices fell. In the energy complex, gains were achieved during the third quarter from short positions in crude oil and oil related products as prices decreased due to high production in the U.S. and Middle East, which added to a growing global supply glut. A portion of the Partnership’s gains for the quarter was offset by losses incurred within the global stock index sector in the middle of July from short positions in European index futures as prices rebounded with positive investor sentiment after Greece and its creditors came to an agreement over economic reform. In the agricultural sector, losses were experienced during July from long soybean and wheat futures positions as prices decreased following reports of strong U.S. crop yields and concern that China’s economic slowdown will reduce demand. Short futures positions in both corn and wheat also produced losses during September as grain prices rose amid a variety of more bullish news. In the global interest rate sector, losses were recorded during the first half of July from short global fixed income futures positions as prices rose as a selloff in Chinese stocks, together with the Greek bailout standoff, boosted demand for the relative safety of government securities.

During the Partnership’s nine months ended September 30, 2015, the net asset value per unit decreased 5.3% from $1,676.61 to $1,587.77 as compared to an increase of 4.1% in the nine months ended September 30, 2014. The Partnership, through its investment in the Master, experienced a net trading loss before fees and expenses in the nine months ended September 30, 2015 of $151,411. Losses were primarily attributable to the Master’s trading of commodity futures in energy, grains, U.S. and non-U.S. interest rates, metals and softs and were partially offset by gains in currencies, indices and livestock. The Partnership, through its investment in the Master, experienced a net trading gain before fees and expenses in the nine months ended September 30, 2014 of $2,208,084. Gains were primarily attributable to the Master’s trading of commodity futures in currencies, grains, non-U.S. interest rates and livestock and were partially offset by losses in energy, indices, U.S. interest rates, metals and softs.

The most significant losses were recorded within the agricultural sector during the second half of June from short corn and wheat futures positions as prices spiked due to crop concerns following heavy rainfall in the U.S. Midwest region. Additional losses were recorded during July and September from both long and short corn and wheat futures positions as prices fluctuated amid changes in crop estimates. Within the global interest rate markets, losses were incurred primarily during February, April, May and June from long positions in European and U.S. fixed income futures as prices declined as the probability the U.S. Federal Reserve would raise interest rates increased. Additional losses were incurred in this sector during the first half of July from short global fixed income futures positions as prices rose as a selloff in Chinese stocks, coupled with the Greek bailout standoff, boosted demand for the relative safety of government securities. In the energy complex, losses were primarily during February, April and June as oil prices fluctuated without consistent direction as the market assessed global demand and the value of the U.S. dollar. Within the global stock index sector, losses were recorded primarily during June from long positions in U.S., European and Asian index futures as prices decreased amid investor anxiety over Greece’s debt obligations and China’s slowing economy. Further losses in this sector were experienced during the middle of July from short positions in European index futures as prices rebounded with positive investor sentiment after Greece and its creditors came to an agreement over economic reform. A portion of the Partnership’s losses during the first nine months of the year was offset by gains experienced within the currency sector during January from short Canadian dollar and euro positions versus the U.S. dollar as the values of these two currencies decreased against the U.S. dollar after the Bank of Canada unexpectedly cut interest rates and the European Central Bank announced a larger-than-expected bond buying program. Additional gains were achieved from short euro positions versus the U.S. dollar during March and May. Further gains in currencies were achieved during the third quarter from short Canadian, Australian and New Zealand dollar positions versus the U.S. dollar as “commodity currencies” were pressured lower as global commodities prices fell. Within the metals complex, gains were achieved primarily during July from short futures positions in gold and silver as prices declined as a strengthening U.S. dollar decreased the appeal of precious metals. Additional gains were recorded during July from short base metals futures positions as prices moved lower amid concern a slowdown in the Chinese economy would weaken demand.

 

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Table of Contents

Commodity markets are highly volatile. The potential for broad and rapid price fluctuations increases the risks involved in commodity trading, but also increases the possibility for profit. The profitability of the Partnership (and the Master) depends on the existence of major price trends and the ability of the Advisor to correctly identify those price trends. Price trends are influenced by, among other things, changing supply and demand relationships, weather, governmental, agricultural, commercial, and trade programs and policies, national and international political and economic events and changes in interest rates. To the extent that market trends exist and the Advisor is able to identify them, the Partnership (and the Master) expects to increase capital through operations.

Interest income on 80% of the Partnership’s average daily equity allocated to it by the Master during each month was earned at a rate equal to the monthly average of the 4-week U.S. Treasury bill discount rate. All interest earned on Treasury bills will be retained by the Partnership. Interest income allocated from the Master for the three and nine months ended September 30, 2015 increased by $188 and decreased by $1,603, respectively, as compared to the corresponding period in 2014. The increase in interest income was primarily due to the additional interest income earned on U.S. Treasury bills during the three months ended September 30, 2015 as compared to the corresponding period in 2014, while the decrease in interest income was primarily due to lower U.S. Treasury bill rates during the nine months ended September 30, 2015 as compared to the corresponding period in 2014. Interest earned by the Partnership will increase the net asset value of the Partnership. The amount of interest income earned by the Partnership depends on the average daily equity in the Partnership’s (or the Partnership’s allocable portion of the Master’s) account and upon interest rates over which the Partnership, the Master and MS&Co. have no control.

Ongoing selling agent fees are calculated as a percentage of the Partnership’s adjusted net asset value as of the end of each month and are affected by trading performance, subscriptions and redemptions. Accordingly, they must be analyzed in relation to the fluctuations in the monthly net asset values. Ongoing selling agent fees for the three and nine months ended September 30, 2015 decreased by $60,131 and $368,300, respectively, as compared to the corresponding periods in 2014. The decrease in ongoing selling agent fees is due to a reduction in the ongoing selling agent fees rate during the three and nine months ended September 30, 2015, as compared to the corresponding periods in 2014.

Management fees are calculated as a percentage of the Partnership’s net asset value as of the end of each month and are affected by trading performance, subscriptions and redemptions. Accordingly, they must be analyzed in relation to the fluctuations in the monthly net asset values. Management fees for the three and nine months ended September 30, 2015 increased by $5,809 and decreased by $36,200, respectively as compared to the corresponding periods in 2014. The increase in management fees is due to an increase in the average net assets during the three months ended September 30, 2015 as compared to the corresponding period in 2014. The decrease in management fees is due to a reduction in the management fee rate during the nine months ended September 30, 2015 as compared to the corresponding period in 2014.

General Partner fees are calculated as a percentage of the Partnership’s adjusted net assets on the last day of each month and are affected by trading performance, subscriptions and redemptions. Accordingly, they must be analyzed in relation to the fluctuations in month end net asset values. General Partner fees for the three and nine months ended September 30, 2015 were $70,901 and $225,667, respectively. This fee was implemented by the Partnership effective October 1, 2014.

Incentive fees are based on the new trading profits generated by the Advisor at the end of the quarter, as defined in the advisory agreement between the Partnership, the General Partner and the Advisor. Trading performance for the three and nine months ended September 30, 2015 resulted in incentive fees of $0 and $84,431, respectively. There were no incentive fees earned for the three and nine months ended September 30, 2014. To the extent the Advisor incurs a loss for the Partnership, the Advisor will not be paid incentive fees until the Advisor recovers any net loss incurred by the Advisor and earns additional new trading profits for the Partnership.

In allocating substantially all of the assets of the Partnership to the Master, the General Partner considers the Advisor’s past performance, trading style, volatility of markets traded and fee requirements. The General Partner may modify or terminate the allocation of assets to the Advisor at any time.

 

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Table of Contents

Item 3.    Quantitative and Qualitative Disclosures about Market Risk

All of the Partnership’s assets are subject to the risk of trading loss through its investment in the Master. The Master is a speculative commodity pool. The market sensitive instruments held by the Master are acquired for speculative trading purposes, and all or substantially all of the Partnership’s assets are subject to the risk of trading loss through its investment in the Master. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Master’s and the Partnership’s main line of business.

The limited partners will not be liable for losses exceeding the current net asset value of their investment.

Market movements result in frequent changes in the fair market value of the Master’s open positions and, consequently, in its earnings and cash balances. The Master’s market risk is influenced by a wide variety of factors, including the level and volatility of interest rates, exchange rates, equity price levels, the market value of financial instruments and contracts, the diversification effects among the Master’s open contracts and the liquidity of the markets in which it trades.

The Master rapidly acquires and liquidates both long and short positions in a wide range of different markets. Consequently, it is not possible to predict how a particular future market scenario will affect performance, and the Master’s past performance is not necessarily indicative of its future results.

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

Exchange margin requirements have been used by the Master as the measure of its Value at Risk. Margin requirements are set by exchanges to equal or exceed the maximum losses reasonably expected to be incurred in the fair value of any given contract in 95%-99% of any one-day interval. The margin levels are established by dealers and exchanges using historical price studies as well as an assessment of current market volatility (including the implied volatility of the options on a given futures contract) and economic fundamentals to provide a probabilistic estimate of the maximum expected near-term one-day price fluctuation.

 

24


Table of Contents

Value at Risk tables represent a probabilistic assessment of the risk of loss in market risk sensitive instruments. The following tables indicate the trading Value at Risk associated with the Master’s open positions by market category as of September 30, 2015 and December 31, 2014, and the highest, lowest and average values during the three months ended September 30, 2015 and for the twelve months ended December 31, 2014. All open position trading risk exposures of the Master have been included in calculating the figures set forth below. There has been no material change in the trading Value at Risk information previously disclosed in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2014.

As of September 30, 2015, the Master’s total capitalization was $28,057,616 and the Partnership owned 100% of the Master. The Partnership invests substantially all of its assets in the Master. The Master’s Value at Risk as of September 30, 2015 was as follows:

 

            September 30, 2015                      
                  Three Months Ended September 30, 2015  

Market Sector

   Value at Risk      % of Total
Capitalization
    High
Value at Risk
     Low
Value at Risk
     Average
Value at Risk*
 

Currencies

     $           1,785,112           6.36    %        $     1,996,495             $     787,370             $     1,310,000     

Engery

     367,180           1.31    %      445,132           113,688           270,312     

Grains

     70,807           0.25    %      181,940           16,039           64,288     

Indices

     438,511           1.57    %      893,819           286,805           395,076     

Interest Rates U.S.

     235,290           0.84    %      299,915           59,792           184,103     

Interest Rates Non-U.S.

     469,250           1.67    %      607,621           123,456           291,637     

Livestock

     42,075           0.15    %      44,880           792           26,345     

Metals

     245,221           0.88    %      995,771           179,115           403,901     

Softs

     144,396           0.51    %      194,547           59,620           121,725     
  

 

 

    

 

 

         

Total

     $           3,797,842                       13.54    %         
  

 

 

    

 

 

         

 

*

Average of month-end Values at Risk.

As of December 31, 2014, the Master’s total capitalization was $30,700,652 and the Partnership owned 100% of the Master. The Partnership invests substantially all of its assets in the Master. The Master’s Value at Risk as of December 31, 2014 was as follows:

 

            December 31, 2014                      
                  Twelve Months Ended December 31, 2014  

Market Sector

   Value at Risk      % of Total
Capitalization
    High
Value at Risk
     Low
Value at Risk
     Average
Value at Risk*
 

Currencies

     $           1,444,101           4.71    %        $     4,065,490             $       93,251             $     1,997,481     

Engery

     287,691           0.94    %      503,195           49,192           243,528     

Grains

     50,126           0.16    %      779,225           28,958           250,260     

Indices

     442,230           1.44    %      2,195,726           197,902           1,228,701     

Interest Rates U.S.

     114,006           0.37    %      434,440           24,978           201,310     

Interest Rates Non-U.S.

     1,080,676           3.52    %      1,178,306           285,885           806,280     

Livestock

     9,792           0.03    %      67,736           1,980           14,951     

Metals

     384,064           1.25    %      1,237,339           195,027           677,977     

Softs

     94,765           0.31    %      225,280           34,540           97,015     
  

 

 

    

 

 

         

Total

     $           3,907,451                           12.73    %         
  

 

 

    

 

 

         

 

*

Annual average of month-end Values at Risk.

 

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Item 4.    Controls and Procedures

The Partnership’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Partnership on the reports that it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods expected in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by the Partnership in the reports it files is accumulated and communicated to management, including the President and Chief Financial Officer (“CFO”) of the General Partner, to allow for timely decisions regarding required disclosure and appropriate SEC filings.

The General Partner is responsible for ensuring that there is an adequate and effective process for establishing, maintaining and evaluating disclosure controls and procedures for the Partnership’s external disclosures.

The General Partner’s President and CFO have evaluated the effectiveness of the Partnership’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2015 and, based on that evaluation, the General Partner’s President and CFO have concluded that, at that date, the Partnership’s disclosure controls and procedures were effective.

The Partnership’s internal control over financial reporting is a process under the supervision of the General Partner’s President and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. These controls include policies and procedures that:

 

   

pertain to the maintenance of records, that in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Partnership;

 

   

provide reasonable assurance that (i) transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and (ii) the Partnership’s receipts are handled and expenditures are made only pursuant to authorizations of the General Partner; and

 

   

provide reasonable assurance regarding prevention or timely detection and correction of unauthorized acquisition, use or disposition of the Partnership’s assets that could have a material effect on the financial statements.

There were no changes in the Partnership’s internal control over financial reporting process during the fiscal quarter ended September 30, 2015 that materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting other than the engagement of an Administrator to provide the services described in Note 1 of Item 1 of this Part under the supervision of the General Partner.

 

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PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

There are no material legal proceedings pending against the Partnership, nor the General Partner.

The following information supplements and amends the discussion set forth under Part I, Item 3 “Legal Proceedings” in the Partnership’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, as updated by the Partnership’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2015 and June 30, 2015.

On June 1, 2011, Morgan Stanley & Co. Incorporated converted from a Delaware corporation to a Delaware limited liability company. As a result of that conversion, Morgan Stanley & Co. Incorporated is now named Morgan Stanley & Co. LLC (“MS&Co.” or the “Company”).

MS&Co. is a wholly owned, indirect subsidiary of Morgan Stanley, a Delaware holding company. Morgan Stanley files periodic reports with the SEC as required by the Securities Exchange Act of 1934, which include current descriptions of material litigation and material proceedings and investigations, if any, by governmental and/or regulatory agencies or self-regulatory organizations concerning Morgan Stanley and its subsidiaries, including MS&Co. As a consolidated subsidiary of Morgan Stanley, MS&Co. does not file its own periodic reports with the SEC that contain descriptions of material litigation, proceedings and investigations. As a result, please refer to the “Legal Proceedings” section of Morgan Stanley’s SEC 10-K filings for 2014, 2013, 2012, 2011 and 2010.

In addition to the matters described in those filings, in the normal course of business, each of Morgan Stanley and MS&Co. has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions, and other litigation, arising in connection with its activities as a global diversified financial services institution. Certain of the legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. Each of Morgan Stanley and MS&Co. is also involved, from time to time, in investigations and proceedings by governmental and/or regulatory agencies or self-regulatory organizations, certain of which may result in adverse judgments, fines or penalties. The number of these investigations and proceedings has increased in recent years with regard to many financial services institutions, including Morgan Stanley and MS&Co.

MS&Co. is a Delaware limited liability company with its main business office located at 1585 Broadway, New York, New York 10036. Among other registrations and memberships, MS&Co. is registered as a futures commission merchant and is a member of the National Futures Association.

Regulatory and Governmental Matters.

The Company has received subpoenas and requests for information from certain federal and state regulatory and governmental entities, including among others various members of the RMBS Working Group of the Financial Fraud Enforcement Task Force, such as the United States Department of Justice, Civil Division and several state Attorney General’s Offices, concerning the origination, financing, purchase, securitization and servicing of subprime and non-subprime residential mortgages and related matters such as residential mortgage backed securities (“RMBS”), collateralized debt obligations (“CDOs”), structured investment vehicles (“SIVs”) and credit default swaps backed by or referencing mortgage pass-through certificates. These matters, some of which are in advanced stages, include, but are not limited to, investigations related to the Company’s due diligence on the loans that it purchased for securitization, the Company’s communications with ratings agencies, the Company’s disclosures to investors, and the Company’s handling of servicing and foreclosure related issues.

On February 25, 2015, the Company reached an agreement in principle with the United States Department of Justice, Civil Division and the United States Attorney’s Office for the Northern District of California, Civil Division (collectively, the “Civil Division”) to pay $2.6 billion to resolve certain claims that the Civil Division indicated it intended to bring against the Company. While the Company and the Civil Division have reached an agreement in principle to resolve this matter, there can be no assurance that the Company and the Civil Division will agree on the final documentation of the settlement.

In May 2014, the California Attorney General’s Office (“CAAG”), which is one of the members of the RMBS Working Group, indicated that it has made certain preliminary conclusions that the Company made knowing and material misrepresentations regarding RMBS and that it knowingly caused material misrepresentations to be made regarding the Cheyne SIV, which issued securities marketed to the California Public Employees Retirement System. The CAAG has further indicated that it believes the Company’s conduct violated California law and that it may seek treble damages, penalties and injunctive relief. The Company does not agree with these conclusions and has presented defenses to them to the CAAG.

 

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        On September 16, 2014, the Virginia Attorney General’s Office filed a civil lawsuit, styled Commonwealth of Virginia ex rel. Integra REC LLC v. Barclays Capital Inc., et al., against the Company and several other defendants in the Circuit Court of the City of Richmond related to RMBS. The lawsuit alleges that the Company and the other defendants knowingly made misrepresentations and omissions related to the loans backing RMBS purchased by the Virginia Retirement System (“VRS”). The complaint alleges VRS suffered total losses of approximately $384 million on these securities, but does not specify the amount of alleged losses attributable to RMBS sponsored or underwritten by the Company. The complaint asserts claims under the Virginia Fraud Against Taxpayers Act, as well as common law claims of actual and constructive fraud, and seeks, among other things, treble damages and civil penalties. On January 20, 2015, the defendants filed a demurrer to the complaint and a plea in bar seeking dismissal of the complaint.

In October 2014, the Illinois Attorney General’s Office (“IL AG”) sent a letter to the Company alleging that the Company knowingly made misrepresentations related to RMBS purchased by certain pension funds affiliated with the State of Illinois and demanding that the Company pay the IL AG approximately $88 million. The Company does not agree with these allegations and has presented defenses to them to the IL AG.

        On January 13, 2015, the New York Attorney General’s Office (“NYAG”), which is also a member of the RMBS Working Group, indicated that it intends to file a lawsuit related to approximately 30 subprime securitizations sponsored by the Company. NYAG indicated that the lawsuit would allege that the Company misrepresented or omitted material information related to the due diligence, underwriting and valuation of the loans in the securitizations and the properties securing them and indicated that its lawsuit would be brought under the Martin Act. The Company does not agree with NYAG’s allegations and has presented defenses to them to NYAG.

On June 5, 2012, the Company consented to and became the subject of an Order Instituting Proceedings Pursuant to Sections 6(c) and 6(d) of the Commodity Exchange Act, as amended, Making Findings and Imposing Remedial Sanctions by The Commodity Futures Trading Commission (the “CFTC”) to resolve allegations related to the failure of a salesperson to comply with exchange rules that prohibit off-exchange futures transactions unless there is an Exchange for Related Position (“EFRP”). Specifically, the CFTC found that from April 2008 through October 2009, the Company violated Section 4c(a) of the Commodity Exchange Act and Commission Regulation 1.38 by executing, processing and reporting numerous off-exchange futures trades to the Chicago Mercantile Exchange (“CME”) and Chicago Board of Trade (“CBOT”) as EFRPs in violation of CME and CBOT rules because those trades lacked the corresponding and related cash, OTC swap, OTC option, or other OTC derivative position. In addition, the CFTC found that the Company violated CFTC Regulation 166.3 by failing to supervise the handling of the trades at issue and failing to have adequate policies and procedures designed to detect and deter the violations of the Act and Regulations. Without admitting or denying the underlying allegations and without adjudication of any issue of law or fact, the Company accepted and consented to entry of findings and the imposition of a cease and desist order, a fine of $5,000,000, and undertakings related to public statements, cooperation and payment of the fine. The Company entered into corresponding and related settlements with the CME and CBOT in which the CME found that the Company violated CME Rules 432.Q and 538 and fined the Company $750,000 and CBOT found that the Company violated CBOT Rules 432.Q and 538 and fined the Company $1,000,000.

On July 23, 2014, the SEC approved a settlement by MS&Co. and certain affiliates to resolve an investigation related to certain subprime RMBS transactions sponsored and underwritten by those entities in 2007. Pursuant to the settlement, MS&Co. and certain affiliates were charged with violating Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, as amended, agreed to pay disgorgement and penalties in an amount of $275 million and neither admitted nor denied the SEC’s findings.

On April 21, 2015, the Chicago Board Options Exchange, Incorporated (“CBOE”) and the CBOE Futures Exchange, LLC (“CFE”) filed statements of charges against the Company in connection with trading by one of the Company’s former traders of EEM options contracts that allegedly disrupted the final settlement price of the November 2012 VXEM futures. CBOE alleged that the Company violated CBOE Rules 4.1, 4.2 and 4.7, Sections 9(a) and 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. CFE alleged that the Company violated CFE Rules 608, 609 and 620. Both matters are ongoing.

 

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        On June 18, 2015, the Company entered into a settlement with the SEC and paid a fine of $500,000 as part of the Municipalities Continuing Disclosure Cooperation Initiative to resolve allegations that the Company failed to form a reasonable basis through adequate due diligence for believing the truthfulness of the assertions by issuers and/or obligors regarding their compliance with previous continuing disclosure undertakings pursuant to Rule 15c2-12 in connection with offerings in which the Company acted as senior or sole underwriter.

On August 6, 2015, the Company consented to and became the subject of an order by the CFTC to resolve allegations that the Company violated CFTC Regulation 22.9(a) by failing to hold sufficient US Dollars in cleared swap segregated accounts in the United States to meet all US Dollar obligations to cleared swaps customers. Specifically, the CFTC found that while the Company at all times held sufficient funds in segregation to cover its obligations to its customers, on certain days during 2013 and 2014, it held currencies, such as euros, instead of US dollars, to meet its US dollar obligations. In addition, the CFTC found that the Company violated Regulation 166.3 by failing to have in place adequate procedures to ensure that it complied with Regulation 22.9(a). Without admitting or denying the findings or conclusions and without adjudication of any issue of law or fact, the Company accepted and consented to the entry of findings, the imposition of a cease and desist order, a civil monetary penalty of $300,000, and undertakings related to public statements, cooperation, and payment of the monetary penalty.

Other Litigation

On December 23, 2009, the Federal Home Loan Bank of Seattle filed a complaint against the Company and another defendant in the Superior Court of the State of Washington, styled Federal Home Loan Bank of Seattle v. Morgan Stanley & Co. Inc., et al. The amended complaint, filed on September 28, 2010, alleges that defendants made untrue statements and material omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sold to plaintiff by the Company was approximately $233 million. The complaint raises claims under the Washington State Securities Act and seeks, among other things, to rescind the plaintiff’s purchase of such certificates. On October 18, 2010, defendants filed a motion to dismiss the action. By orders dated June 23, 2011 and July 18, 2011, the court denied defendants’ omnibus motion to dismiss plaintiff’s amended complaint and on August 15, 2011, the court denied the Company’s individual motion to dismiss the amended complaint. On March 7, 2013, the court granted defendants’ motion to strike plaintiff’s demand for a jury trial. At September 25, 2015, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $48 million, and the certificates had not yet incurred actual losses. Based on currently available information, the Company believes it could incur a loss in this action up to the difference between the $48 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against the Company, plus pre- and post-judgment interest, fees and costs. The Company may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

On March 15, 2010, the Federal Home Loan Bank of San Francisco filed two complaints against the Company and other defendants in the Superior Court of the State of California. These actions are styled Federal Home Loan Bank of San Francisco v. Credit Suisse Securities (USA) LLC, et al., and Federal Home Loan Bank of San Francisco v. Deutsche Bank Securities Inc. et al., respectively. Amended complaints filed on June 10, 2010 allege that defendants made untrue statements and material omissions in connection with the sale to plaintiff of a number of mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The amount of certificates allegedly sold to plaintiff by the Company in these cases was approximately $704 million and $276 million, respectively. The complaints raise claims under both the federal securities laws and California law and seek, among other things, to rescind the plaintiff’s purchase of such certificates. On August 11, 2011, plaintiff’s federal securities law claims were dismissed with prejudice. The defendants filed answers to the amended complaints on October 7, 2011. On February 9, 2012, defendants’ demurrers with respect to all other claims were overruled. On December 20, 2013, plaintiff’s negligent misrepresentation claims were dismissed with prejudice. On January 26, 2015, as a result of a settlement with certain other defendants, the plaintiff requested and the court subsequently entered a dismissal with prejudice of certain of the plaintiff’s claims, including all remaining claims against the Company in the Federal Home Loan Bank of San Francisco v. Credit Suisse Securities (USA) LLC, et al. action. On February 18, 2015, the court entered an order setting a number of claims for trial throughout 2016. Claims against the Company have not yet been set for trial. At September 25, 2015, the current unpaid balance of the mortgage pass-through certificates at issue in these cases was approximately $61 million, and the certificates had incurred actual losses of approximately $1 million. Based on currently available information, the Company believes it could incur a loss for this action up to the difference between the $61 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against the Company, or upon sale, plus pre- and post-judgment interest, fees and costs. The Company may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

 

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        On July 15, 2010, China Development Industrial Bank (“CDIB”) filed a complaint against the Company, styled China Development Industrial Bank v. Morgan Stanley & Co. Incorporated et al., which is pending in the Supreme Court of the State of New York, New York County (“Supreme Court of NY”). The complaint relates to a $275 million credit default swap referencing the super senior portion of the STACK 2006-1 CDO. The complaint asserts claims for common law fraud, fraudulent inducement and fraudulent concealment and alleges that the Company misrepresented the risks of the STACK 2006-1 CDO to CDIB, and that the Company knew that the assets backing the CDO were of poor quality when it entered into the credit default swap with CDIB. The complaint seeks compensatory damages related to the approximately $228 million that CDIB alleges it has already lost under the credit default swap, rescission of CDIB’s obligation to pay an additional $12 million, punitive damages, equitable relief, fees and costs. On February 28, 2011, the court denied the Company’s motion to dismiss the complaint. Based on currently available information, the Company believes it could incur a loss of up to approximately $240 million plus pre- and post-judgment interest, fees and costs.

On October 15, 2010, the Federal Home Loan Bank of Chicago filed a complaint against the Company and other defendants in the Circuit Court of the State of Illinois, styled Federal Home Loan Bank of Chicago v. Bank of America Funding Corporation et al. A corrected amended complaint was filed on April 8, 2011. The corrected amended complaint alleges that defendants made untrue statements and material omissions in the sale to plaintiff of a number of mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans and asserts claims under Illinois law. The total amount of certificates allegedly sold to plaintiff by the Company at issue in the action was approximately $203 million. The complaint seeks, among other things, to rescind the plaintiff’s purchase of such certificates. The defendants filed a motion to dismiss the corrected amended complaint on May 27, 2011, which was denied on September 19, 2012. On December 13, 2013, the court entered an order dismissing all claims related to one of the securitizations at issue. After that dismissal, the remaining amount of certificates allegedly issued by the Company or sold to plaintiff by the Company was approximately $78 million. At September 25, 2015, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $52 million, and the certificates had not yet incurred actual losses. Based on currently available information, the Company believes it could incur a loss in this action up to the difference between the $52 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against the Company, plus pre- and post-judgment interest, fees and costs. The Company may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

On April 25, 2012, The Prudential Insurance Company of America and certain affiliates filed a complaint against the Company and certain affiliates in the Superior Court of the State of New Jersey, styled The Prudential Insurance Company of America, et al. v. Morgan Stanley, et al. On October 16, 2012, plaintiffs filed an amended complaint. The amended complaint alleges that defendants made untrue statements and material omissions in connection with the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by the Company is approximately $1.073 billion. The amended complaint raises claims under the New Jersey Uniform Securities Law, as well as common law claims of negligent misrepresentation, fraud, fraudulent inducement, equitable fraud, aiding and abetting fraud, and violations of the New Jersey Racketeer Influenced and Corrupt Organizations Act, and includes a claim for treble damages. On March 15, 2013, the court denied the defendants’ motion to dismiss the amended complaint. On January 2, 2015, the court denied defendants’ renewed motion to dismiss the amended complaint. At September 25, 2015, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $581 million, and the certificates had not yet incurred actual losses. Based on currently available information, the Company believes it could incur a loss in this action up to the difference between the $581 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against the Company, or upon sale, plus pre- and post-judgment interest, fees and costs. The Company may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

        On April 20, 2011, the Federal Home Loan Bank of Boston filed a complaint against the Company and other defendants in the Superior Court of the Commonwealth of Massachusetts styled Federal Home Loan Bank of Boston v. Ally Financial, Inc. F/K/A GMAC LLC et al. An amended complaint was filed on June 29, 2012 and alleges that defendants made untrue statements and material omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly issued by the Company or sold to plaintiff by the Company was approximately $385 million. The amended complaint

 

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raises  claims  under  the Massachusetts  Uniform Securities  Act, the  Massachusetts Consumer   Protection Act  and common  law  and seeks, among other things, to rescind the plaintiff’s purchase of such certificates. On May 26, 2011, defendants removed the case to the United States District Court for the District of Massachusetts. On October 11, 2012, defendants filed motions to dismiss the amended complaint, which were granted in part and denied in part on September 30, 2013. The defendants filed an answer to the amended complaint on December 16, 2013. Plaintiff has voluntarily dismissed its claims against the Company with respect to two of the securitizations at issue, such that the remaining amount of certificates allegedly issued by the Company or sold to plaintiff by the Company is approximately $358 million. At September 25, 2015, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $56 million, and the certificates had not yet incurred actual losses. Based on currently available information, the Company believes it could incur a loss in this action up to the difference between the $56 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against the Company, or upon sale, plus pre- and post-judgment interest, fees and costs. The Company may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

On May 3, 2013, plaintiffs in Deutsche Zentral-Genossenschaftsbank AG et al. v. Morgan Stanley et al. filed a complaint against the Company, certain affiliates, and other defendants in the Supreme Court of NY. The complaint alleges that defendants made material misrepresentations and omissions in the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by the Company to plaintiff was approximately $694 million. The complaint alleges causes of action against the Company for common law fraud, fraudulent concealment, aiding and abetting fraud, negligent misrepresentation, and rescission and seeks, among other things, compensatory and punitive damages. On June 10, 2014, the court denied the defendants’ motion to dismiss. On August 4, 2014, claims regarding two certificates were dismissed by stipulation. After these dismissals, the remaining amount of certificates allegedly issued by the Company or sold to plaintiff by the Company was approximately $644 million. On September 12, 2014, the Company filed a notice of appeal from the denial of the motion to dismiss. On January 12, 2015, the Company filed an amended answer to the complaint. At September 25, 2015, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $277 million, and the certificates had incurred actual losses of approximately $81 million. Based on currently available information, the Company believes it could incur a loss in this action up to the difference between the $277 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against the Company, or upon sale, plus pre- and post-judgment interest, fees and costs. The Company may be entitled to be indemnified for some of these losses.

On May 17, 2013, the plaintiff in IKB International S.A. in Liquidation, et al. v. Morgan Stanley, et al. filed a complaint against the Company and certain affiliates in the Supreme Court of NY. The complaint alleges that defendants made material misrepresentations and omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by the Company to plaintiff was approximately $132 million. The complaint alleges causes of action against the Company for common law fraud, fraudulent concealment, aiding and abetting fraud, and negligent misrepresentation, and seeks, among other things, compensatory and punitive damages. On October 29, 2014, the court granted in part and denied in part the Company’s motion to dismiss. All claims regarding four certificates were dismissed. After these dismissals, the remaining amount of certificates allegedly issued by the Company or sold to plaintiff by the Company was approximately $116 million. On August 26, 2015, the Company appealed from the portion of the Court’s decision denying the Company’s motion to dismiss. At September 25, 2015, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $29 million, and the certificates had incurred actual losses of $58 million. Based on currently available information, the Company believes it could incur a loss in this action up to the difference between the $29 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against the Company, or upon sale, plus pre- and post-judgment interest, fees and costs. The Company may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

On September 23, 2013, the plaintiff in National Credit Union Administration Board v. Morgan Stanley & Co. Inc., et al. filed a complaint against the Company and certain affiliates in the United States District Court for the Southern District of New York (“SDNY”). The complaint alleges that defendants made untrue statements of material fact or omitted to state material facts in the sale to the plaintiff of certain mortgage pass-through certificates issued by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by the Company to plaintiffs was approximately $417 million. The complaint alleges causes of action against the Company for violations of Section 11 and Section 12(a)(2) of the Securities Act of 1933, as amended, violations of the Texas Securities Act, and violations of the Illinois Securities Law of 1953 and seeks, among other things,

 

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rescissory and compensatory damages. The defendants filed a motion to dismiss the complaint on November 13, 2013. On January  22, 2014 the court granted defendants’ motion to dismiss with respect to claims arising under the Securities Act of 1933, as amended and denied defendants’ motion to dismiss with respect to claims arising under Texas Securities Act and the Illinois Securities Law of 1953. On November 17, 2014, the plaintiff filed an amended complaint. On December 15, 2014, defendants answered the amended complaint. At September 25, 2015, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $194 million, and the certificates had incurred actual losses of $31 million. Based on currently available information, the Company believes it could incur a loss in this action up to the difference between the $194 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against the Company, or upon sale, plus pre- and post-judgment interest, fees and costs. The Company may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

Settled Civil Litigation

On August 25, 2008, the Company and two ratings agencies were named as defendants in a purported class action related to securities issued by a structured investment vehicle called Cheyne Finance PLC and Cheyne Finance LLC (together, the “Cheyne SIV”). The case was styled Abu Dhabi Commercial Bank, et al. v. Morgan Stanley & Co. Inc., et al. The complaint alleged, among other things, that the ratings assigned to the securities issued by the Cheyne SIV were false and misleading, including because the ratings did not accurately reflect the risks associated with the subprime residential mortgage backed securities held by the Cheyne SIV. The plaintiffs asserted allegations of aiding and abetting fraud and negligent misrepresentation relating to approximately $852 million of securities issued by the Cheyne SIV. On April 24, 2013, the parties reached an agreement to settle the case, and on April 26, 2013, the court dismissed the action with prejudice. The settlement does not cover certain claims that were previously dismissed.

On July 9, 2010 and February 11, 2011, Cambridge Place Investment Management Inc. filed two separate complaints against the Company and/or its affiliates and other defendants in the Superior Court of the Commonwealth of Massachusetts, both styled Cambridge Place Investment Management Inc. v. Morgan Stanley & Co., Inc., et al. The complaints asserted claims on behalf of certain clients of plaintiff’s affiliates and allege that defendants made untrue statements and material omissions in the sale of a number of mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly issued by the Company and/or its affiliates or sold to plaintiff’s affiliates’ clients by the Company and/or its affiliates in the two matters was approximately $263 million. On February 11, 2014, the parties entered into an agreement to settle the litigation. On February 20, 2014, the court dismissed the action.

On October 25, 2010, the Company, certain affiliates and Pinnacle Performance Limited, a special purpose vehicle (“SPV”), were named as defendants in a purported class action related to securities issued by the SPV in Singapore, commonly referred to as “Pinnacle Notes.” The case is styled Ge Dandong, et al. v. Pinnacle Performance Ltd., et al. and was pending in the SDNY. On January 31, 2014, the plaintiffs filed a second amended complaint, which asserted common law claims of fraud, aiding and abetting fraud, fraudulent inducement, aiding and abetting fraudulent inducement, and breach of the implied covenant of good faith and fair dealing. On July 17, 2014, the parties reached an agreement to settle the litigation, which received final court approval on July 2, 2015.

On July 5, 2011, Allstate Insurance Company and certain of its affiliated entities filed a complaint against the Company in the Supreme Court of NY, styled Allstate Insurance Company, et al. v. Morgan Stanley, et al. An amended complaint was filed on September 9, 2011, and alleges that the defendants made untrue statements and material omissions in the sale to the plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly issued and/or sold to the plaintiffs by the Company was approximately $104 million. The complaint raised common law claims of fraud, fraudulent inducement, aiding and abetting fraud, and negligent misrepresentation and seeks, among other things, compensatory and/or recessionary damages associated with the plaintiffs’ purchases of such certificates. On March 15, 2013, the court denied in substantial part the defendants’ motion to dismiss the amended complaint, which order the Company appealed on April 11, 2013. On May 3, 2013, the Company filed its answer to the amended complaint. On January 16, 2015, the parties reached an agreement to settle the litigation.

 

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        On July 18, 2011, the Western and Southern Life Insurance Company and certain affiliated companies filed a complaint against the Company and other defendants in the Court of Common Pleas in Ohio, styled Western and Southern Life Insurance Company, et al. v. Morgan Stanley Mortgage Capital Inc., et al. An amended complaint was filed on April 2, 2012 and alleges that defendants made untrue statements and material omissions in the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The amount of the certificates allegedly sold to plaintiffs by the Company was approximately $153 million. On June 8, 2015, the parties reached an agreement to settle the litigation.

On September 2, 2011, the Federal Housing Finance Agency, as conservator for Fannie Mae and Freddie Mac, filed 17 complaints against numerous financial services companies, including the Company and certain affiliates. A complaint against the Company and certain affiliates and other defendants was filed in the Supreme Court of NY, styled Federal Housing Finance Agency, as Conservator v. Morgan Stanley et al. The complaint alleges that defendants made untrue statements and material omissions in connection with the sale to Fannie Mae and Freddie Mac of residential mortgage pass-through certificates with an original unpaid balance of approximately $11 billion. The complaint raised claims under federal and state securities laws and common law and seeks, among other things, rescission and compensatory and punitive damages. On February 7, 2014, the parties entered into an agreement to settle the litigation. On February 20, 2014, the court dismissed the action.

        On April 25, 2012, Metropolitan Life Insurance Company and certain affiliates filed a complaint against the Company and certain affiliates in the Supreme Court of NY, styled Metropolitan Life Insurance Company, et al. v. Morgan Stanley, et al. An amended complaint was filed on June 29, 2012, and alleges that the defendants made untrue statements and material omissions in the sale to the plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten, and/or sold by the Company was approximately $758 million. The amended complaint raised common law claims of fraud, fraudulent inducement, and aiding and abetting fraud and seeks, among other things, rescission, compensatory, and/or rescissionary damages, as well as punitive damages, associated with the plaintiffs’ purchases of such certificates. On April 11, 2014, the parties entered into a settlement agreement.

In re Morgan Stanley Mortgage Pass-Through Certificates Litigation, which had been pending in the SDNY, was a putative class action involving allegations that, among other things, the registration statements and offering documents related to the offerings of certain mortgage pass-through certificates in 2006 and 2007 contained false and misleading information concerning the pools of residential loans that backed these securitizations. On December 18, 2014, the parties’ agreement to settle the litigation received final court approval, and on December 19, 2014, the court entered an order dismissing the action.

On November 4, 2011, the Federal Deposit Insurance Corporation, as receiver for Franklin Bank S.S.B, filed two complaints against the Company in the District Court of the State of Texas. Each was styled Federal Deposit Insurance Corporation as Receiver for Franklin Bank, S.S.B v. Morgan Stanley & Company LLC F/K/A Morgan Stanley & Co. Inc. and alleged that the Company made untrue statements and material omissions in connection with the sale to plaintiff of mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The amount of certificates allegedly underwritten and sold to plaintiff by the Company in these cases was approximately $67 million and $35 million, respectively. On July 2, 2015, the parties reached an agreement to settle the litigation.

On February 14, 2013, Bank Hapoalim B.M. filed a complaint against the Company and certain affiliates in the Supreme Court of NY, styled Bank Hapoalim B.M. v. Morgan Stanley et al. The complaint alleges that defendants made material misrepresentations and omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by the Company to plaintiff was approximately $141 million. On July 28, 2015, the parties reached an agreement to settle the litigation, and on August 12, 2015, the plaintiff filed a stipulation of discontinuance with prejudice.

Additional lawsuits containing claims similar to those described above may be filed in the future. In the course of its business, MS&Co., as a major futures commission merchant, is party to various civil actions, claims and routine regulatory investigations and proceedings that the General Partner believes do not have a material effect on the business of MS&Co. MS&Co. may establish reserves from time to time in connections with such actions.

 

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Item lA.    Risk Factors

There have been no material changes to the risk factors set forth under Part 1, Item 1A “Risk Factors” in the Partnership’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014 and under Part II, Item 1A, “Risk Factors” in the Partnership’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2015 and June 30, 2015.

 

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

For the three months ended September 30, 2015, there were additional subscriptions of 206.7740 Redeemable Units totaling $322,474. The Redeemable Units were issued in reliance upon applicable exemptions from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, and Section 506 of Regulation D promulgated thereunder. The Redeemable Units were purchased by accredited investors as defined in Regulation D. In determining the applicability of the exemption, the General Partner relied on the fact that the Redeemable Units were purchased by accredited investors in a private offering.

Proceeds of net offering were used for the trading of commodity interests, including futures contracts, options, forward and swap contracts.

The following chart sets forth the purchases of Redeemable Units by the Partnership.

 

Period  

(a) Total

Number of

Reedemable

Units Purchased  

*

 

(b) Average Price  

Paid per

Redeemable Unit  

**

 

(c) Total Number of

Redeemable Units

Purchased as Part of

Publicly Announced Plans  

or Programs

 

(d) Maximum Number (or

Approximate Dollar

Value) of Redeemable

Units that May Yet Be

Purchased Under the

Plans or Programs

July 1, 2015 - July 31, 2015

  295.2390   $          1,585.43   N/A   N/A

August 1, 2015 - August 31, 2015

  312.0980   $          1,577.86   N/A   N/A

September 1, 2015 - September 30, 2015

  322.3970   $          1,587.77   N/A   N/A
    929.7340   $          1,583.70        

 

*

Generally, Limited Partners are permitted to redeem their Redeemable Units as of the end of each month on three business days’ notice to the General Partner. Under certain circumstances, the General Partner can compel redemption, although to date the General Partner has not exercised this right. Purchases of Redeemable Units by the Partnership reflected in the chart above were made in the ordinary course of the Partnership’s business in connection with effecting redemptions for Limited Partners.

 

**

Redemptions of Redeemable Units are effected as of the end of each month at the net asset value per Redeemable Unit as of that day. No fee will be charged for redemptions.

Item 3.    Defaults Upon Senior Securities – None.

Item 4.    Mine Safety Disclosures – Not Applicable.

Item 5.    Other Information – None.

 

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Item 6.    Exhibits

 

3.1

 

Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated March 13, 1997 (filed as Exhibit 3.1 to the General Form for Registration of Securities on Form 10 filed on April 30, 2004 and incorporated herein by reference).

     (a)

 

Certificate of Amendment of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated February 26, 1999 (filed as Exhibit 3.4 to the General Form for Registration of Securities on Form 10 filed on April 30, 2004 and incorporated herein by reference).

     (b)

 

Certificate of Change of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, effective January 31, 2000 (filed as Exhibit 3.3 to the General Form for Registration of Securities on Form 10 filed on April 30, 2004 and incorporated herein by reference).

     (c)

 

Certificate of Amendment of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated April 1, 2001 (filed as Exhibit 3.2 to the General Form for Registration of Securities on Form 10 filed on April 30, 2004 and incorporated herein by reference).

     (d)

 

Certificate of Amendment of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated May 21, 2003 (filed as Exhibit 3.5 to the General Form for Registration of Securities on Form 10 filed on April 30, 2004 and incorporated herein by reference).

     (e)

 

Certificate of Amendment of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated September 21, 2005 (filed as Exhibit 3.1(e) to the Quarterly Report on Form 10-Q filed on November 16, 2009 and incorporated herein by reference).

     (f)

 

Certificate of Amendment of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated September 19, 2008 (filed as Exhibit 3.1(f) to the Quarterly Report on Form 10-Q filed on November 16, 2009 and incorporated herein by reference).

     (g)

 

Certificate of Amendment of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated September 28, 2009 (filed as Exhibit 99.1 to the Current Report on Form 8-K filed on September 30, 2009 and incorporated herein by reference).

     (h)

 

Certificate of Amendment of the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated June 29, 2010 (filed as Exhibit 3.1(h) to the Current Report on Form 8-K filed on July 2, 2010 and incorporated herein by reference).

     (i)

 

Certificate of Amendment to the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated September 2, 2011 (filed as Exhibit 3.1 to the Current Report on Form 8-K filed on September 7, 2011 and incorporated herein by reference).

     (j)

 

Certificate of Amendment to the Certificate of Limited Partnership as filed in the office of the Secretary of State of the State of New York, dated August 7, 2013 (filed as Exhibit 3.1(j) to the Quarterly Report on Form 10-Q filed on August 14, 2013 and incorporated herein by reference).

3.2(a)

 

Third Amended and Restated Limited Partnership Agreement, dated February 22, 2010 (filed as Exhibit 3.1 to the Current Report on Form 8-K filed on February 25, 2010 and incorporated herein by reference).

 

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3.2(b)

  Amendment to the Third Amended and Restated Limited Partnership Agreement, effective October 1, 2014 (filed as Exhibit 3.2(b) to the Quarterly Report on Form 10-Q filed on August 13, 2014 and incorporated herein by reference).

10.1

  Form of Subscription Agreement (filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q filed on November 14, 2012 and incorporated herein by reference).

10.2(a)

  Second Amended and Restated Customer Agreement between the Partnership and Salomon Smith Barney Inc., dated April 1, 2001 (filed as Exhibit 10.2 to the General Form for Registration of Securities on Form 10 filed on April 30, 2004 and incorporated herein by reference).

10.2(b)

  Commodity Futures Customer Agreement between the Partnership and MS&Co., effective August 2, 2013 (filed as Exhibit 10.2(b) to the Quarterly Report on Form 10-Q filed on November 14, 2013 and incorporated herein by reference).

10.2(c)

  U.S. Treasury Securities Purchase Authorization Agreement, between the Partnership and MS&Co., effective June 1, 2015 (filed as Exhibit 10.1 to the Current Report on Form 8-K filed on November 4, 2015 and incorporated herein by reference).

10.3(a)

  Second Amended and Restated Agency Agreement among the Partnership, the General Partner, CGM and Morgan Stanley Smith Barney LLC, dated July 29, 2010 (filed as Exhibit 10.3 to the Current Report on Form 8-K filed on August 3, 2010 and incorporated herein by reference).

10.3(b)

  Alternative Investment Selling Agent Agreement between the Partnership, the General Partner and Morgan Stanley Wealth Management, effective October 1, 2013 (filed as Exhibit 10.3(b) to the Quarterly Report on Form 10-Q filed on November 14, 2013 and incorporated herein by reference).

10.3(c)

  Letter amending the Alternative Investment Selling Agent Agreement between the Partnership, the General Partner and Morgan Stanley Wealth Management, effective April 1, 2014 (filed as Exhibit 10.3(c) to the Quarterly Report on Form 10-Q filed on May 14, 2014 and incorporated herein by reference).

10.3(d)

  Letter amending the Alternate Investment Selling Agent Agreement between the Partnership, the General Partner and Morgan Stanley Wealth Management, effective October 1, 2014 (filed as Exhibit 10.3(d) to the Quarterly Report on Form 10-Q filed on August 14, 2014 and incorporated herein by reference).

10.4

  Escrow Agreement among the Partnership, Smith Barney Futures Management Inc., Smith Barney Inc. and European American Bank, dated April 15, 1997 (filed as Exhibit 10.5 to the Quarterly Report on Form 10-Q filed on November 16, 2009 and incorporated herein by reference).

10.5

  Management Agreement among the Partnership, Smith Barney Futures Management Inc. and Campbell & Company, Inc., dated April 1, 1997 (filed as Exhibit 10.1 to the General Form for Registration of Securities on Form 10 filed on April 30, 2004 and incorporated herein by reference).

        (a)

  First Amendment to the Management Agreement among the Partnership, Smith Barney Futures Management Inc., Campbell & Company, Inc. and SFG Global Investments, Inc., dated March 1, 1999 (filed as Exhibit 10.1(a) to the General Form for Registration of Securities on Form 10 filed on April 30, 2004 and incorporated herein by reference).

        (b)

  Second Amendment to the Management Agreement among the Partnership, Smith Barney Futures Management LLC and Campbell & Company, Inc., dated April 1, 2001 (filed as Exhibit 10.1(b) to the General Form for Registration of Securities on Form 10 filed on April 30, 2004 and incorporated herein by reference).

        (c)

  Letter extending Management Agreement between the General Partner and Campbell & Company, Inc. for 2014, dated June 1, 2014 (filed as Exhibit 10.5(c) to the Annual Report on Form 10-K filed on March 30, 2015 and incorporated herein by reference).

        (d)

  Third Amendment to the Management Agreement among the Partnership, the General Partner and Campbell & Company, Inc., dated May 27, 2014 (filed as Exhibit 10.5(d) to the Quarterly Report on Form 10-Q filed on August 12, 2015 and incorporated herein by reference).

10.6

  (a) Escrow Agreement among Ceres Managed Futures LLC, Morgan Stanley Smith Barney LLC and The Bank of New York, dated July 25, 2007 (filed as Exhibit 10.7(a) to the Annual Report on Form 10-K, filed on March 27, 2013 and incorporated herein by reference).
  (b) Fifth Amendment to the Escrow Agreement among Bank of New York, the General Partner and Morgan Stanley Smith Barney LLC, dated October 4, 2012 (filed as Exhibit 10.7(b) to the Annual Report on Form 10-K, filed on March 27, 2013 and incorporated herein by reference).

10.7

  Amended and Restated Master Services Agreement by and among the Partnership, the General Partner and SS&C Technologies, Inc. (filed as Exhibit 10.1 to the current report on Form 8-K filed on August 6, 2015 and incorporated herein by reference).

 

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31.1    Rule 13a-14(a)/15d-14(a) Certification (Certification of President and Director) (filed herewith).
31.2    Rule 13a-14(a)/15d-14(a) Certification (Certification of Chief Financial Officer) (filed herewith).
32.1    Section 1350 Certification (Certification of President and Director) (filed herewith).
32.2    Section 1350 Certification (Certification of Chief Financial Officer) (filed herewith).
101.INS    XBRL Instance Document.
101.SCH    XBRL Taxonomy Extension Schema Document.
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB    XBRL Taxonomy Extension Label Linkbase Document.
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document.

 

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SIGNATURES

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

 

  POTOMAC FUTURES FUND L.P.
  By:  

            Ceres Managed Futures LLC

            (General Partner)

  By:               /s/ Patrick T. Egan
  Patrick T. Egan
  President & Director

Date:          November 12, 2015

  By:               /s/ Steven Ross
  Steven Ross
  Chief Financial Officer
  (Principal Accounting Officer)

Date:          November 12, 2015

 

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