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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, 2016

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 000-52602

Managed Futures Premier Aventis II L.P.

 

(Exact name of registrant as specified in its charter)

 

New York

    

20-2718952

(State or other jurisdiction of

incorporation or organization)

    

(I.R.S. Employer

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     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     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    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 

As of October 31, 2016, 79,338.9737 Limited Partnership Redeemable Units were outstanding.


Table of Contents

Managed Futures Premier Aventis II L.P.

FORM 10-Q

INDEX

 

     Page
Number
 

PART I — Financial Information:

  

Item 1. Financial Statements:

  

Statements of Financial Condition at September 30, 2016 and December 31, 2015 (unaudited)

     3   

Statements of Income and Expenses and Changes in Partners’ Capital for the three and nine months ended September 30, 2016 and 2015 (unaudited)

     4   

Notes to Financial Statements, including the Financial Statements of MB Master Fund L.P. (unaudited)

     5-21   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     22-24   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     25-26   

Item 4. Controls and Procedures

     27   

PART II — Other Information

  

Item 1. Legal Proceedings

     28-35   

Item 1A. Risk Factors

     36   

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

     36   

Item 3. Defaults Upon Senior Securities

     36   

Item 4. Mine Safety Disclosures

     36   

Item 5. Other Information

     36   

Item 6. Exhibits

     37-38   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Managed Futures Premier Aventis II L.P.

Statements of Financial Condition

(Unaudited)

 

     September 30,
2016
     December 31,
2015
 

Assets:

     

Investment in the Master (1), at fair value

    $     115,085,621          $ 137,625,666     

Cash at MS&Co.

     247,049           283,704     

Cash at bank

     412           -         
  

 

 

    

 

 

 

Total assets

    $ 115,333,082          $     137,909,370     
  

 

 

    

 

 

 

Liabilities and Partners’ Capital:

     

Liabilities:

     

Accrued expenses:

     

Ongoing selling agent fees

    $ 192,222          $ 229,849     

Management fees

     119,679           143,148     

General Partner fees

     95,744           114,519     

Professional fees

     248,377           257,197     

Redemptions payable to Limited Partners

     1,831,031           4,872,125     
  

 

 

    

 

 

 

Total liabilities

     2,487,053           5,616,838     
  

 

 

    

 

 

 

Partners’ Capital:

     

General Partner, 904.7535 and 1,310.9445 Redeemable Units outstanding at September 30, 2016 and December 31, 2015, respectively

     1,238,505           1,662,770     

Limited Partners, 81,531.5817 and 102,989.8117 Redeemable Units outstanding at September 30, 2016 and December 31, 2015, respectively

     111,607,524           130,629,762     
  

 

 

    

 

 

 

Total partners’ capital (net asset value)

     112,846,029           132,292,532     
  

 

 

    

 

 

 

Total liabilities and partners’ capital

    $ 115,333,082          $ 137,909,370     
  

 

 

    

 

 

 

Net asset value per Redeemable Unit

    $ 1,368.89          $ 1,268.38     
  

 

 

    

 

 

 

(1) Defined in Note 1.

See accompanying notes to financial statements.

 

3


Table of Contents

Managed Futures Premier Aventis II L.P.

Statements of Income and Expenses and Changes in Partners’ Capital

(Unaudited)

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2016      2015      2016      2015  

Investment Income:

           

Interest income allocated from the Master

    $ 63,429          $ 2,231          $ 163,316          $ 8,960     
  

 

 

    

 

 

    

 

 

    

 

 

 

Expenses:

           

Expenses allocated from the Master

     562,201           982,209           1,885,207           2,485,011     

Ongoing selling agent fees

     584,929           872,512           1,856,851           2,928,047     

Management fees

     364,200           543,578           1,156,392           1,824,788     

General Partner fees

     291,360           434,863           925,115           1,459,830     

Professional fees

     106,422           150,213           322,512           335,629     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     1,909,112           2,983,375           6,146,077           9,033,305     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net investment loss

     (1,845,683)          (2,981,144)          (5,982,761)          (9,024,345)    
  

 

 

    

 

 

    

 

 

    

 

 

 

Trading Results:

           

Net gains (losses) on investment in the Master:

           

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

     (1,064,122)          (7,700,628)          17,307,335           5,345,524     

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

     (5,130,319)          2,353,105           (2,115,804)          (4,571,181)    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total trading results

     (6,194,441)          (5,347,523)          15,191,531           774,343     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

     (8,040,124)          (8,328,667)          9,208,770           (8,250,002)    

Subscriptions—General Partner

     -               -               -               124,831     

Subscriptions—Limited Partners

     34,667           147,550           2,559,667           11,394,455     

Redemptions—General Partner

     -               (150,000)          (531,594)          (596,636)    

Redemptions—Limited Partners

     (4,067,304)          (12,858,954)          (30,683,346)          (43,442,581)    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net increase (decrease) in Partners’ Capital

     (12,072,761)          (21,190,071)          (19,446,503)          (40,769,933)    

Partners’ Capital, beginning of period

     124,918,790           183,295,497           132,292,532           202,875,359     
  

 

 

    

 

 

    

 

 

    

 

 

 

Partners’ Capital, end of period

    $   112,846,029          $     162,105,426          $ 112,846,029          $   162,105,426     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net asset value per Redeemable Unit (82,436.3352 and 121,900.6302 Redeemable Units outstanding at September 30, 2016 and 2015, respectively)

    $ 1,368.89          $ 1,329.82          $ 1,368.89          $ 1,329.82     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) per Redeemable Unit*

    $ (94.23)         $ (65.84)         $ 100.51          $ (68.44)    
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average Redeemable Units outstanding

     84,661.2275           127,691.0152           92,423.9446           138,641.9149     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

*

Represents the change in net asset value per Redeemable Unit during the period.

See accompanying notes to financial statements.

 

4


Table of Contents

Managed Futures Premier Aventis II L.P.

Notes to Financial Statements

(Unaudited)

 

1.

Organization:

Managed Futures Premier Aventis II L.P. (the “Partnership”) is a limited partnership organized on April 20, 2005 under the partnership laws of the State of New York to engage, directly or indirectly, in the speculative trading of commodity interests on U.S. and international futures, options on futures and forward markets. The Partnership may also engage, directly or indirectly, in swap transactions and other derivative transactions with the approval of the General Partner (defined below). Initially, the Partnership’s investment strategy focused on energy and energy-related investments. While the Partnership is expected to continue to have exposure to energy and energy-related markets, such trading will no longer be the Partnership’s primary focus. Therefore, the Partnership’s past trading performance will not necessarily be indicative of future results. The commodity interests that are traded by the Partnership, through its investment in MB Master Fund L.P. (the “Master”), are volatile and involve a high degree of market risk. The General Partner may also determine to invest up to all of the Partnership’s assets (directly or indirectly through its investment in the Master) in United States (“U.S.”) Treasury bills and/or money market mutual funds, including money market mutual funds managed by Morgan Stanley or its affiliates. During the initial offering period, the Partnership sold 11,925 redeemable units of limited partnership interest in the Partnership (“Redeemable Units”). The Partnership commenced trading on September 6, 2005. The Partnership privately and continuously offers Redeemable Units 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 equity 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. All trading decisions for the Partnership are made by Aventis Asset Management, LLC (“Aventis” or the “Advisor”).

On February 1, 2013, the Partnership allocated substantially all of its capital to the Master, a limited partnership organized under the partnership laws of the State of Delaware. The Partnership purchased an interest in the Master with cash equal to $262,944,186. The Master permits accounts managed by Aventis using its Aventis Diversified Commodity Strategy, a proprietary, discretionary trading system, to invest together in one trading vehicle. The General Partner is also the general partner of the Master. 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 should promote efficiency and economy in the trading process. Expenses to investors as a result of the investment in the Master are approximately the same as if the Partnership traded directly and redemption rights are not affected.

The General Partner is not aware of any material changes to the Aventis Diversified Commodity Strategy during the fiscal quarter ended September 30, 2016.

Generally, a limited partner in the Master withdraws all or part of its capital contribution and undistributed profits, if any, from the Master as of the end of any month (the “Redemption Date”) after a request has been made to the General Partner at least three days in advance of the Redemption Date. Such withdrawals are classified as a liability when the limited partner in the Master elects to redeem and informs the Master. However, a limited partner in the Master may request a withdrawal as of the end of any day if such request is received by the General Partner at least three days in advance of the proposed withdrawal day.

 

5


Table of Contents

Managed Futures Premier Aventis II L.P.

Notes to Financial Statements

(Unaudited)

 

During the reporting periods ended September 30, 2016 and 2015, the Partnership’s and the Master’s commodity broker was Morgan Stanley & Co. LLC (“MS&Co.”), a registered futures commission merchant. The Partnership and the Master also deposit a portion of their cash in non-trading accounts at JPMorgan Chase Bank, N.A.

At September 30, 2016, the Partnership owned approximately 85.0% of the Master. At December 31, 2015, the Partnership owned approximately 86.4% of the Master. It is the Partnership’s intention 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 and option contracts, if applicable, on commodities is done primarily on U.S. commodity exchanges 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, Condensed Schedules of Investments and Statements of Income and Expenses and Changes in Partners’ Capital are included herein.

The Master has entered into a futures brokerage account agreement with MS&Co. The Partnership has also entered into a futures brokerage account agreement with MS&Co. The Partnership, through its investment in the Master, pays MS&Co. (or will reimburse MS&Co. if previously paid) its allocable share of all trading fees for the clearing and, where applicable, execution of transactions as well as exchange, clearing, user, give-up, floor brokerage and National Futures Association fees (collectively, the “clearing fees”).

The Partnership has also entered into a selling agreement (as amended, the “Selling Agreement”) with Morgan Stanley Smith Barney LLC (doing business as Morgan Stanley Wealth Management) (“Morgan Stanley Wealth Management”). Pursuant to the Selling Agreement, Morgan Stanley Wealth Management receives a monthly ongoing selling agent fee equal to 2.00% per year of the Partnership’s adjusted month-end net assets. The ongoing selling agent fee received by Morgan Stanley Wealth Management is shared with the properly registered or exempted financial advisors of Morgan Stanley Wealth Management who have sold Redeemable Units in 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 furnishes certain administrative, accounting, regulatory reporting, tax and other services as agreed from time to time. In addition, the Administrator maintains certain books and records of the Partnership. The cost of retaining the Administrator is allocated among the pools operated by the General Partner, including the Partnership.

 

6


Table of Contents

Managed Futures Premier Aventis II L.P.

Notes to Financial Statements

(Unaudited)

 

 

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, 2016, and the results of its operations and changes in partners’ capital for the three and nine months ended September 30, 2016 and 2015. These financial statements present the results for 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, 2015. The December 31, 2015 information has been derived from the audited financial statements as of and for the year ended December 31, 2015.

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.

Use of Estimates: 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.

Profit Allocation: The General Partner and each limited partner of the Partnership 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 is liable for obligations of the Partnership in excess of its capital contribution and profits, if any, net of distributions and losses, if any.

Statement of Cash Flows: The Partnership is not required to provide a Statement of Cash Flows.

Partnership’s Investment: The Partnership carries its investment in the Master based on the Partnership’s (1) net contribution to the Master and (2) its allocated share of the undistributed profits and losses, including realized gains or losses and net change in unrealized gains or losses, of 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, “Fair Value Measurements.”

Master’s Investments: 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 (as described in Note 5, “Fair Value Measurements”) 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 and are determined using the first-in, first-out method. Unrealized gains or losses on open contracts are included as a component of equity in trading account in the Master’s Statements of Financial Condition. Net realized gains or losses and net change in unrealized gains or losses are included in the Master’s Statements of Income and Expenses and Changes in Partners’ Capital.

Fair Value of Financial Instruments: The carrying value of the assets and liabilities presented in the Statements of Financial Condition that qualify as financial instruments under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 825,“Financial Instruments,” approximates the fair value due to the short term nature of such balances.

Master’s Cash: The Master’s cash includes cash denominated in foreign currencies of $(195,839) (proceeds of $198,950) and $89,402 (cost of $91,119) as of September 30, 2016 and December 31, 2015, respectively.

 

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Table of Contents

Managed Futures Premier Aventis II L.P.

Notes to Financial Statements

(Unaudited)

 

Investment Company Status: Effective January 1, 2014, the Partnership adopted Accounting Standards Update (“ASU”) 2013-08, “Financial Services — Investment Companies (Topic 946): Amendments to the Scope, Measurement and Disclosure Requirements” and based on the 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 2012 through 2015 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 Redeemable Unit: Net income (loss) per Redeemable Unit is calculated in accordance with ASC 946, “Financial Services – Investment Companies.” See Note 3, “Financial Highlights.”

Recent Accounting Pronouncement: In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in this update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments for all entities that hold financial assets or owe financial liabilities. One of the amendments in this update eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet or a description of changes in the methods and significant assumptions. Additionally, the update eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities. Investment companies are specifically exempted from ASU 2016-01’s equity investment accounting provisions and will continue to follow the industry specific guidance for investment accounting under Topic 946. For public business entities, this update is effective for fiscal years beginning after December 15, 2017, and interim periods therein. For other entities, it is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The General Partner is currently evaluating the impact this guidance will have on the Partnership’s financial statements and related disclosures.

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, 2015.

 

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Table of Contents

Managed Futures Premier Aventis II L.P.

Notes to Financial Statements

(Unaudited)

 

The Master’s Statements of Financial Condition and Condensed Schedules of Investments as of September 30, 2016 and December 31, 2015 and Statements of Income and Expenses and Changes in Partners’ Capital for the three and nine months ended September 30, 2016 and 2015 are presented below.

MB Master Fund L.P.

Statements of Financial Condition

(Unaudited)

 

     September 30,
2016
     December 31,
2015
 

Assets:

     

Equity in trading account:

     

Investment in U.S. Treasury bills, at fair value (amortized cost $87,950,992 and $136,740,453 at September 30, 2016 and December 31, 2015, respectively)

    $ 87,948,050          $ 136,729,500     

Cash at MS&Co.

     42,127,620           18,724,253     

Cash margin

     2,231,350           1,595,848     

Net unrealized appreciation on open futures contracts

     92,991           1,264,050     

Options purchased, at fair value (cost $9,089,501 and $1,962,640 at September 30, 2016 and December 31, 2015, respectively)

     6,254,044           1,870,654     
  

 

 

    

 

 

 

Total equity in trading account

     138,654,055           160,184,305     

Cash at bank

     412           -         

Expense reimbursement

     15,579           13,048     
  

 

 

    

 

 

 

Total assets

   $     138,670,046          $ 160,197,353     
  

 

 

    

 

 

 

Liabilities and Partners’ Capital:

     

Liabilities:

     

Options written, at fair value (premiums received $4,831,890 and $965,751 at September 30, 2016 and December 31, 2015, respectively)

    $ 3,255,741          $ 797,408     

Accrued expenses:

     

Professional fees

     30,229           27,299     
  

 

 

    

 

 

 

Total liabilities

     3,285,970           824,707     
  

 

 

    

 

 

 

Partners’ Capital:

     

General Partner

     -               -         

Limited Partners

     135,384,076           159,372,646     
  

 

 

    

 

 

 

Total partners’ capital (net asset value)

     135,384,076           159,372,646     
  

 

 

    

 

 

 

Total liabilities and partners’ capital

    $ 138,670,046          $     160,197,353     
  

 

 

    

 

 

 

 

9


Table of Contents

Managed Futures Premier Aventis II L.P.

Notes to Financial Statements

(Unaudited)

 

MB Master Fund L.P.

Condensed Schedule of Investments

September 30, 2016

(Unaudited)

 

            Number
of Contracts
     Fair Value     

% of Partners’
Capital

   

Futures Contracts Purchased

             

Energy

        678        $ 751,987         0.56     %

Grains

        3,861         (1,648,296)        (1.22)   

Softs

        476         (337,760)        (0.25)   
        

 

 

    

 

 

Total futures contracts purchased

           (1,234,069)        (0.91)   
        

 

 

    

 

 

Futures Contracts Sold

             

Energy

        765         (366,061)        (0.27)   

Grains

        3,896         1,477,521         1.09    

Softs

        472         215,600         0.16    
        

 

 

    

 

 

Total futures contracts sold

           1,327,060         0.98    
        

 

 

    

 

 

Net unrealized appreciation on open futures contracts

          $ 92,991         0.07     %
        

 

 

    

 

 

Options Purchased

             

Calls

             

Energy

        561        $ 1,419,891         1.05     %

Grains

        2,362         704,956         0.52    

Livestock

        134         2,210         0.00     **

Softs

        1,598         2,087,367         1.54    

Puts

             

Energy

        688         862,752         0.64    

Grains

        2,568         318,913         0.24    

Softs

        1,297         857,955         0.63    
        

 

 

    

 

 

Total options purchased (cost $9,089,501)

          $     6,254,044         4.62     %
        

 

 

    

 

 

Options Written

             

Calls

             

Energy

        561        $ (442,629)        (0.33)    %

Grains

        1,061         (271,538)        (0.20)   

Softs

        2,224         (488,452)        (0.36)   

Puts

             

Energy

        794         (1,552,592)        (1.15)   

Grains

        680         (280,500)        (0.21)   

Softs

        654         (220,030)        (0.16)   
        

 

 

    

 

 

Total options written (premiums received $4,831,890)

          $ (3,255,741)        (2.41)    %
        

 

 

    

 

 

U.S. Government Securities

             

 

Face Amount

  Maturity Date   

Description

   Fair Value     

% of Partners’
Capital

   
  $            13,000,000   11/17/2016   

U.S. Treasury bills, 0.28%*

(Amortized cost of $12,991,304)

     $     12,997,441         9.60     %
  $            75,000,000   12/29/2016   

U.S. Treasury bills, 0.215%*

(Amortized cost of $74,959,688)

     74,950,609         55.36    
       

 

 

    

 

 

Total U.S. Government Securities

        $ 87,948,050                     64.96     %
       

 

 

    

 

 

* Liquid non-cash held as collateral.

** Due to rounding.

 

10


Table of Contents

Managed Futures Premier Aventis II L.P.

Notes to Financial Statements

(Unaudited)

 

MB Master Fund L.P.

Condensed Schedule of Investments

December 31, 2015

 

               Number
of Contracts
     Fair Value    

% of Partners’
Capital

     

Futures Contracts Purchased

         

Energy

        546         $ 367,730       0.23       %   

Grains

        2,266         (1,136,894)      (0.71)   

Livestock

        72         60,157       0.04    

Softs

           912         342,061       0.21    
           

 

 

   

 

 

Total futures contracts purchased

        (366,946)      (0.23)   
        

 

 

   

 

 

Futures Contracts Sold

            

Energy

     505         (433,060)      (0.27)   

Grains

        2,317         2,490,319       1.57    

Softs

           908         (426,263)      (0.27)   
        

 

 

   

 

 

Total futures contracts sold

           1,630,996       1.03    
     

 

 

   

 

 

Net unrealized appreciation on open futures contracts

        $ 1,264,050       0.80       %   
        

 

 

   

 

 

Options Purchased

            

Calls

            

Grains

           1,293         $ 295,444       0.19       %   

Softs

           2,784         1,551,522       0.97    

Puts

               

Softs

           235         23,688       0.01    
           

 

 

   

 

 

Total options purchased (cost $1,962,640)

        $ 1,870,654       1.17       %   
           

 

 

   

 

 

Options Written

               

Calls

            

Grains

           644         $ (16,100)      (0.01)      %   

Softs

           3,460         (676,499)      (0.42)   

Puts

               

Softs

           402         (104,809)      (0.07)   
           

 

 

   

 

 

Total options written (premiums received $965,751)

        $       (797,408)      (0.50)      %   
           

 

 

   

 

 
U.S. Government Securities          

Face Amount

   Maturity Date   

Description

          Fair Value    

% of Partners’
Capital

     

  $    119,750,000

   3/3/2016   

U.S. Treasury bills, 0.015% *

(Amortized cost of $119,742,965)

  

  

     $     119,730,615      75.12       %   

  $      17,000,000

   1/21/2016   

U.S. Treasury bills, 0.190% *

(Amortized cost of $16,997,488)

  

  

     16,998,885      10.67    
           

 

 

   

 

 

Total U.S. Government Securities

           $     136,729,500              85.79       %   
           

 

 

   

 

 

*Liquid non-cash held as collateral.

 

11


Table of Contents

Managed Futures Premier Aventis II L.P.

Notes to Financial Statements

(Unaudited)

 

MB 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,
 
             2016                      2015                      2016                      2015          

Investment Income:

           

Interest income

    $ 75,048          $ 2,752          $ 192,354          $ 10,438     
  

 

 

    

 

 

    

 

 

    

 

 

 

Expenses:

           

Clearing fees

     642,205           1,115,875           2,147,688           2,738,644     

Professional fees

     20,104           21,644           61,147           69,867     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     662,309           1,137,519           2,208,835           2,808,511     

Expense reimbursements

     (48,322)          (58,000)          (161,741)          (94,462)    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net expenses

     613,987           1,079,519           2,047,094           2,714,049     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net investment loss

     (538,939)          (1,076,767)          (1,854,740)          (2,703,611)    
  

 

 

    

 

 

    

 

 

    

 

 

 

Trading Results:

           

Net gains (losses) on trading of commodity interests:

           

Net realized gains (losses) on closed contracts

     (1,258,952)          (8,882,045)          20,271,967           5,481,775     

Net change in unrealized gains (losses) on open contracts

     (6,045,662)          2,679,213           (2,501,896)          (5,053,526)    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total trading results

     (7,304,614)          (6,202,832)          17,770,071           428,249     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

     (7,843,553)          (7,279,599)          15,915,331           (2,275,362)    

Subscriptions—Limited Partners

     284,667           3,982,550           5,884,667           23,869,677     

Redemptions—Limited Partners

     (6,465,987)          (23,602,913)          (45,756,158)          (59,903,164)    

Distribution of interest income to feeder funds

     (11,988)          (1,835)          (32,410)          (9,521)    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net increase (decrease) in Partners’ Capital

     (14,036,861)          (26,901,797)          (23,988,570)          (38,318,370)    

Partners’ Capital, beginning of period

     149,420,937           216,732,298           159,372,646           228,148,871     
  

 

 

    

 

 

    

 

 

    

 

 

 

Partners’ Capital, end of period

    $  135,384,076          $   189,830,501          $   135,384,076          $  189,830,501     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

12


Table of Contents

Managed Futures Premier Aventis II L.P.

Notes to Financial Statements

(Unaudited)

 

3. Financial Highlights:

Financial highlights for the limited partner class as a whole for the three and nine months ended September 30, 2016 and 2015 were as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2016     2015     2016     2015  

Per Redeemable Unit Performance

        

(for a unit outstanding throughout the period): *

        

Net realized and unrealized gains (losses)

    $ (72.43)        $ (42.50)        $ 165.24         $ (3.14)    

Net investment loss

     (21.80)         (23.34)         (64.73)         (65.30)    
  

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) for the period

     (94.23)         (65.84)         100.51          (68.44)    

Net asset value per Redeemable Unit, beginning of period

     1,463.12          1,395.66          1,268.38          1,398.26     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value per Redeemable Unit, end of period

    $   1,368.89         $   1,329.82         $   1,368.89         $   1,329.82     
  

 

 

   

 

 

   

 

 

   

 

 

 
     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2016     2015     2016     2015  

Ratios to Average Limited Partners’ Capital: **

        

Net investment loss ***

     (6.3)   %      (6.8)   %      (6.6)   %      (6.3)   % 
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

     6.5    %      6.9    %      6.8    %      6.3    % 

Incentive fees

     -       %      -       %      -       %      -       % 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     6.5    %      6.9    %      6.8    %      6.3    % 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total return:

        

Total return before incentive fees

     (6.4)   %      (4.7)   %      7.9    %      (4.9)   % 

Incentive fees

     -       %      -       %      -       %      -       % 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total return after incentive fees

     (6.4)   %      (4.7)   %      7.9    %      (4.9)   % 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

*

Net investment loss per Redeemable Unit is calculated by dividing the expenses net of interest income by the average number of Redeemable Units outstanding during the period. The net realized and unrealized gains (losses) per Redeemable Unit is a balancing amount necessary to reconcile the change in net asset value per Redeemable Unit with the other per unit information.

**

Annualized (except for incentive fees).

***

Interest income allocated from the 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 partners’ capital of the Partnership and includes the income and expenses allocated from the Master.

 

13


Table of Contents

Managed Futures Premier Aventis II L.P.

Notes to Financial Statements

(Unaudited)

 

Financial Highlights of the Master:

Financial highlights for the limited partner class as a whole for the three and nine months ended September 30, 2016 and 2015 were as follows:

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
        2016             2015             2016             2015      

Ratios to Average Limited Partners’ Capital: *

       

Net investment loss **

        (1.5)%            (2.1)%            (1.7)%            (1.6)%   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses before expense reimbursements

    1.9 %        2.2 %        2.0 %        1.7 %   

Expense reimbursements

    (0.1)%        (0.1)%        (0.1)%        (0.1)%   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses after expense reimbursements

    1.8 %        2.1 %        1.9 %        1.6 %   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total return

    (5.3)%        (3.5)%        11.8 %        (1.4)%   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

*

Annualized.

**

Interest income less total expenses, net of expense reimbursements.

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 partners’ capital.

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 is shown in the Statements of Income and Expenses and Changes in Partners’ Capital.

The futures brokerage account agreements with MS&Co. give the Partnership and the Master the legal right to net unrealized gains and losses on open futures, forward and option contracts. The Master nets, for financial reporting purposes, the unrealized gains and losses on open futures and forward contracts in its Statements of Financial Condition as the criteria under ASC 210-20, “Balance Sheet,” have been met.

Trading and transaction fees are based on the number of trades executed by the Advisor for the Master and the Partnership’s percentage ownership of the Master. All clearing fees paid to MS&Co. are borne by the Master and allocated to the Partnership.

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, 2016 and 2015 were 9,458 and 12,360, respectively. The monthly average number of futures contracts traded during the nine months ended September 30, 2016 and 2015 were 8,736 and 10,066, respectively. The monthly average number of option contracts traded during the three months ended September 30, 2016 and 2015 were 18,705 and 28,900, respectively. The monthly average number of option contracts traded during the nine months ended September 30, 2016 and 2015 were 19,286 and 29,168, respectively. The monthly average number of metals forward contracts traded during the three months ended September 30, 2016 and 2015 were 0 and 1,701, respectively. The monthly average number of metals forward contracts traded during the nine months ended September 30, 2016 and 2015 were 0 and 865, respectively.

 

14


Table of Contents

Managed Futures Premier Aventis II L.P.

Notes to Financial Statements

(Unaudited)

 

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, 2016 and December 31, 2015, respectively.

 

           Gross Amounts     Amounts     Gross Amounts Not Offset in the        
           Offset in the     Presented in the     Statements of Financial Condition        
     Gross     Statements of     Statements of                    
     Amounts     Financial     Financial     Financial     Cash Collateral        

September 30, 2016

   Recognized     Condition     Condition     Instruments       Received/Pledged*       Net Amount  

Assets

            

Futures

    $ 4,896,095        $     (4,803,104)      $ 92,991        $ -            $ -            $ 92,991    

Options purchased

     6,254,044         -             6,254,044         (3,255,741)        -             2,998,303    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    $ 11,150,139        $ (4,803,104)      $ 6,347,035        $   (3,255,741)       $ -            $ 3,091,294    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

            

Futures

    $ (4,803,104)       $ 4,803,104       $ -            $ -            $ -            $ -        

Options written

     (3,255,741)        -             (3,255,741)        3,255,741         -             -        
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    $ (8,058,845)       $ 4,803,104       $ (3,255,741)       $ 3,255,741        $ -            $ -        
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net fair value

              $ 3,091,294   * 
            

 

 

 
           Gross Amounts     Amounts     Gross Amounts Not Offset in the        
           Offset in the     Presented in the     Statements of Financial Condition        
     Gross     Statements of     Statements of                    
     Amounts     Financial     Financial     Financial     Cash Collateral        

December 31, 2015

   Recognized     Condition     Condition     Instruments     Received/Pledged*     Net Amount  

Assets

            

Futures

    $ 3,779,520         $ (2,515,470)       $ 1,264,050         $ -             $ -            $ 1,264,050     

Options purchased

     1,870,654          -               1,870,654          (797,408)         -             1,073,246     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    $ 5,650,174         $ (2,515,470)       $ 3,134,704         $ (797,408)        $ -            $ 2,337,296     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

            

Futures

    $ (2,515,470)        $ 2,515,470        $ -             $ -             $ -            $ -         

Options written

     (797,408)         -              (797,408)         797,408          -             -         
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    $  (3,312,878)        $ 2,515,470        $ (797,408)        $ 797,408         $ -            $ -         
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net fair value

              $   2,337,296   * 
            

 

 

 

 

*

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 and/or U.S. Treasury bills 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 in 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.

 

15


Table of Contents

Managed Futures Premier Aventis II L.P.

Notes to Financial Statements

(Unaudited)

The following tables indicate the Master’s gross fair values of derivative instruments of futures and option contracts as separate assets and liabilities as of September 30, 2016 and December 31, 2015, respectively.

 

        September 30, 2016      

Assets

     

Futures Contracts

     

Energy

      $ 987,077      

Grains

      3,560,971      

Softs

      348,047      
   

 

 

   

Total unrealized appreciation on open futures contracts

      4,896,095      
   

 

 

   

Liabilities

                                                   

Futures Contracts

     

Energy

      (601,151)     

Grains

      (3,731,746)     

Softs

      (470,207)     
   

 

 

   

Total unrealized depreciation on open futures contracts

      (4,803,104)     
   

 

 

   

Net unrealized appreciation on open futures contracts

      $ 92,991       *
   

 

 

   

Assets

     

Options Purchased

     

Energy

      $ 2,282,643      

Grains

      1,023,869      

Livestock

      2,210      

Softs

      2,945,322      
   

 

 

   

Total options purchased

      $ 6,254,044       **
   

 

 

   

Liabilities

     

Options Written

     

Energy

      $ (1,995,221)     

Grains

      (552,038)     

Softs

      (708,482)     
   

 

 

   

Total options written

      $ (3,255,741)      ***
   

 

 

   

 

 

*

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

**

This amount is in “Options purchased, at fair value” in the Master’s Statements of Financial Condition.

***

This amount is in “Options written, at fair value” in the Master’s Statements of Financial Condition.

 

16


Table of Contents

Managed Futures Premier Aventis II L.P.

Notes to Financial Statements

(Unaudited)

 

        December 31, 2015      

Assets

     

Futures Contracts

     

Energy

      $ 397,980      

Grains

      2,554,401      

Livestock

      64,005      

Softs

      763,134      
   

 

 

   

Total unrealized appreciation on open futures contracts

      3,779,520      
   

 

 

   

Liabilities

                                                                       

Futures Contracts

     

Energy

      (463,310)     

Grains

      (1,200,976)     

Livestock

      (3,848)     

Softs

      (847,336)     
   

 

 

   

Total unrealized depreciation on open futures contracts

      (2,515,470)     
   

 

 

   

Net unrealized appreciation on open futures contracts

      $ 1,264,050       *
   

 

 

   

Assets

     

Options Purchased

     

Grains

      295,444      

Softs

      1,575,210      
   

 

 

   

Total options purchased

      $ 1,870,654       **
   

 

 

   

Liabilities

     

Options Written

     

Grains

      $ (16,100)     

Softs

      (781,308)     
   

 

 

   

Total options written

      $ (797,408)      ***
   

 

 

   

 

*

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

**

This amount is in “Options purchased, at fair value” in the Master’s Statements of Financial Condition.

***

This amount is in “Options written, at fair value” in the Master’s Statements of Financial Condition.

 

17


Table of Contents

Managed Futures Premier Aventis II L.P.

Notes to Financial Statements

(Unaudited)

 

The following table indicates the Master’s total trading gains and losses, by market sector, on derivative instruments for the three and nine months ended September 30, 2016 and 2015.

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

Sector

  2016     2015     2016     2015  

Currencies

  $ 7,297       $ (26,599)      $ (8,509)      $ (26,599)   

Energy

    (3,887,113)        (582,835)        14,132,306         5,292,834    

Grains

    (3,616,262)        (1,627,097)        305,452         2,287,002    

Livestock

    (672,913)        (792,988)        (763,312)        1,205,155    

Metals

    (102,766)        (4,442,351)        (137,931)        (7,140,253)   

Softs

    967,143         1,269,038         4,242,065         (1,189,890)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $         (7,304,614)  *    $         (6,202,832)  *    $         17,770,071    $         428,249 
 

 

 

   

 

 

   

 

 

   

 

 

 

 

*

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

 

18


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Managed Futures Premier Aventis II L.P.

Notes to Financial Statements

(Unaudited)

 

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.

The 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 was 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 was calculated by applying an industry standard model application for options valuation of foreign currency options, using as input 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.

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 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 quotes or pricing services that derive fair values for those assets and liabilities from observable inputs (Level 2). As of September 30, 2016 and December 31, 2015 and for the periods ended September 30, 2016 and 2015, 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 reporting periods, there were no transfers of assets or liabilities between Level 1 and Level 2.

 

September 30, 2016

   Total      Level 1      Level 2      Level 3  

Assets

           

U.S. Treasury bills

     $ 87,948,050           $ -               $ 87,948,050           $             -       

Futures

     4,896,095           4,896,095           -               -       

Options purchased

     6,254,044           6,254,044           -               -       
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     $ 99,098,189           $         11,150,139           $ 87,948,050           $ -       
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Futures

     $ 4,803,104           $ 4,803,104           $ -               $ -       

Options written

     3,255,741           3,255,741           -               -       
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     $ 8,058,845           $ 8,058,845           $ -               $ -       
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

   Total      Level 1      Level 2      Level 3  

Assets

           

U.S. Treasury bills

     $ 136,729,500           $ -               $         136,729,500           $ -       

Futures

     3,779,520           3,779,520           -               -       

Options purchased

     1,870,654           1,870,654           -               -       
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     $         142,379,674           $ 5,650,174           $ 136,729,500           $ -       
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Futures

     $ 2,515,470           $ 2,515,470           $ -               $ -       

Options written

     797,408           797,408           -               -       
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     $ 3,312,878           $ 3,312,878           $ -               $ -       
  

 

 

    

 

 

    

 

 

    

 

 

 

 

19


Table of Contents

Managed Futures Premier Aventis II L.P.

Notes to Financial Statements

(Unaudited)

 

6. Financial Instrument Risks:

In the normal course of business, the Partnership, 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 futures, forwards, 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, 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, option 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 accurately be 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. None of the Master’s contracts are traded OTC, although contracts may be traded OTC in the future.

Futures Contracts. 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 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 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.

Options. The Master may purchase and write (sell) both exchange-listed and OTC options on commodities or financial instruments. An option is a contract allowing, but not requiring, its holder to buy (call) or sell (put) a specific or standard commodity or financial instrument at a specified price during a specified time period. The option premium is the total price paid or received for the option contract. When the Master writes an option, the premium received is recorded as a liability in the Master’s Statements of Financial Condition and marked-to-market daily. When the Master purchases an option, the premium paid is recorded as an asset in the Master’s Statements of Financial Condition and marked-to-market daily. Net realized gains (losses) and net change in unrealized gains (losses) on option contracts are included in the Master’s Statements of Income and Expenses and Changes in Partners’ Capital.

As both a buyer and seller of options, the Master pays or receives a premium at the outset and then bears the risk of unfavorable changes in the price of the contract underlying the option. Written options expose the Master to potentially unlimited liability; for purchased options the risk of loss is limited to the premiums paid. Certain written put options permit cash settlement and do not require the option holder to own the reference asset. The Partnership/Master does not consider these contracts to be guarantees.

London Metals Exchange Forward Contracts. 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 Master does not isolate the 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.

 

20


Table of Contents

Managed Futures Premier Aventis II L.P.

Notes to Financial Statements

(Unaudited)

 

Market risk is the potential for changes in the value of the financial instruments traded by the 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 Master is exposed to market risk equal to the value of the futures, options and forward contracts purchased and unlimited liability on such contracts sold short or written.

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, forward and option contracts by sector, margin requirements, gain and loss transactions and collateral positions.

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.

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 has determined that there were no subsequent events requiring adjustment to or disclosure in the financial statements.

 

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Table of Contents

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. The Partnership’s 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 cash at bank, expense reimbursement and equity in trading account, consisting of cash at MS&Co., cash margin, net unrealized appreciation on open futures contracts, options purchased at fair value and U.S. Treasury bills at fair value, if applicable. Because of the low margin deposits normally required in futures 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 2016.

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

For the nine months ended September 30, 2016, Partnership capital decreased 14.7% from $132,292,532 to $112,846,029. This decrease was attributable to redemptions of 23,474.4030 limited partner Redeemable Units totaling $30,683,346 and redemptions of 406.1910 General Partner Redeemable Units totaling $531,594, which was partially offset by subscriptions of 2,016.1730 limited partner Redeemable Units totaling $2,559,667 and net income of $9,208,770. 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 net realized and/or unrealized gains or losses on futures trading, interest income, expenses, subscriptions, redemptions and distributions of profits, if any.

For the nine months ended September 30, 2016, the Master’s capital decreased 15.1% from $159,372,646 to $135,384,076. This decrease was attributable to redemptions totaling $45,756,158 and distribution of interest income to feeder funds, including the Partnership, totaling $32,410, which was partially offset by subscriptions totaling $5,884,667 and net income of $15,915,331. Future redemptions can impact the amount of funds available for investment in commodity contract positions 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 expense 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, “Basis of Presentation and Summary of Significant Accounting Policies”, 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.

 

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Table of Contents

Results of Operations

During the Partnership’s third quarter of 2016, the net asset value per Redeemable Unit decreased 6.4% from $1,463.12 to $1,368.89, as compared to a decrease of 4.7% in the third quarter of 2015. The Partnership, through its investment in the Master, experienced a net trading loss before fees and expenses in the third quarter of 2016 of $6,194,441. Losses were primarily attributable to the Master’s trading of commodity futures in energy, grains, livestock and metals, and were partially offset by gains in currencies and softs. The Partnership, through its investment in the Master, experienced a net trading loss before fees and expenses in the third quarter of 2015 of $5,347,523. Losses were primarily attributable to the Master’s trading of commodity futures in currencies, energy, grains, livestock and metals, and were partially offset by gains in softs.

The most significant losses were incurred within the grains markets during July from long soybean futures positions as growing conditions were better-than-expected and prices moved lower. Additional losses were experienced during August in the grains from long wheat positions as prices decreased as favorable weather conditions in the world’s growing grain regions added to a global supply glut. Losses within the energy sector were incurred from long natural gas positions following a big selloff in the market at the start the July due to robust U.S. gas output and moderate summer temperatures. In Early August, further losses were recorded from long natural gas positions as prices trended lower driven by mild weather conditions in the eastern U.S. Within the livestock markets, losses were experienced during the third quarter from long positions in live cattle futures as prices trended lower due to excess supply and bearish investor sentiment. The Partnership’s losses for the quarter were partially offset by gains achieved during September within the soft commodities market from long positions in sugar futures as prices moved higher due to unfavorable growing conditions threatening crop yields in Brazil and India, the world’s largest sugar cane growers.

During the Partnership’s nine months ended September 30, 2016, the net asset value per Redeemable Unit increased 7.9% from $1,268.38 to $1,368.89, as compared to a decrease of 4.9% during the nine months ended September 30, 2015. The Partnership, through its investment in the Master, experienced a net trading gain before fees and expenses during the nine months ended September 30, 2016 of $15,191,531. Gains were primarily attributable to the Master’s trading of commodity futures in energy, grains and softs, and were partially offset by losses in currencies, livestock and metals. The Partnership, through its investment in the Master, experienced a net trading gain before fees and expenses during the nine months ended September 30, 2015 of $774,343. Gains were primarily attributable to the Master’s trading of commodity futures in energy, grains and livestock, and were partially offset by losses in currencies, metals and softs.

The most significant gains were achieved within the energy complex during March and April from long futures positions in crude oil and oil distillates as prices increased due to the unwinding of short positions, U.S. dollar weakness, and a decline in the rate of U.S. stock builds. Additional gains in this complex were experienced during June from long positions in natural gas as prices increased after warmer-than-expected weather in the U.S. spurred speculation of a tightening market. During September, gains were achieved in the energies from long crude oil positions as prices increased after reports surfaced and were confirmed that the Organization of the Petroleum Exporting Countries (“OPEC”) would curtail oil production. Within the soft commodities markets, gains were recorded during February, March, and April from long positions in sugar futures as prices advanced after industry reports indicated that the global sugar market could be headed to its first shortage in five years. Additional gains were recorded from long positions in sugar during September. Further gains in the sector were experienced during March from long coffee futures positions as prices were boosted by a combination of a stronger Brazilian real potentially reducing exports and concerns regarding dry weather in Colombian and Brazilian coffee growing regions. Additional gains in the soft commodities were achieved in early May from long coffee positions as prices rallied and again in June due to a stronger Brazilian currency and speculation that heavy rains may affect the Brazilian harvest. Gains within the grain sector were experienced during January and March from long corn and wheat positions as prices rose after strong U.S. export sales reports and adverse weather conditions in Brazil. Additional gains were recorded within the grain sector during June from long soybean futures positions as prices rose after a U.S. Department of Agriculture report reduced its crop estimates. A portion of the Partnership’s gains for the first nine months of the year was offset by losses incurred within the livestock markets during January, March, April, and June through September from long positions in live cattle as prices decreased amid ample supplies and cheaper alternative products.

 

23


Table of Contents

Commodity markets are highly volatile. Broad price fluctuations and rapid inflation increase the risks involved in commodity trading, but also increase the possibility of profit. The profitability of the Partnership and the Master depend 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 expect to increase capital through operations.

Interest income on 80% of the average daily equity maintained in cash in the Partnership’s (or the Partnership’s allocable portion of the Master’s) brokerage account during each month is earned at a rate equal to the monthly average of the 4-week U.S. Treasury bill discount rate. Any interest earned on the Partnership’s and/or the Master’s account in excess of the amounts described above, if any, will be retained by MS&Co. and/or shared with the General Partner. All interest earned on U.S. Treasury bills and money market mutual fund securities will be retained by the Partnership and/or the Master, as applicable. Interest income allocated from the Master for the three and nine months ended September 30, 2016 increased by $61,198 and $154,356, respectively, as compared to the corresponding periods in 2015. The increase in interest income is primarily due to higher 4-week U.S. Treasury bill discount rates along with additional interest income earned on U.S. Treasury bills during the three and nine months ended September 30, 2016, as compared to the corresponding periods in 2015. 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 (1) the average daily equity maintained in cash in the Partnership’s and the Master’s accounts, (2) the amount of U.S. Treasury bills and/or money market mutual fund securities held by the Partnership and/or the Master and (3) interest rates over which none of the Partnership, the Master or the commodity broker has 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, 2016 decreased by $287,583 and $1,071,196 respectively, as compared to the corresponding periods in 2015. This decrease is due to lower average net assets during the three and nine months ended September 30, 2016, as compared to the corresponding periods in 2015.

Management 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. Management fees for the three and nine months ended September 30, 2016 decreased by $179,378 and $668,396, respectively, as compared to the corresponding periods in 2015. This decrease is due to lower average net assets during the three and nine months ended September 30, 2016, as compared to the corresponding periods in 2015.

General Partner fees (formerly, administrative fees) are paid to the General Partner for administering the business and affairs of the Partnership including, among other things (i) selecting, appointing and terminating the Partnership’s commodity trading advisor and (ii) monitoring the activities of the commodity trading advisor. These 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. General Partner fees for the three and nine months ended September 30, 2016 decreased by $143,503 and $534,715, respectively, as compared to the corresponding periods in 2015. This decrease is due to lower average net assets during the three and nine months ended September 30, 2016, as compared to the corresponding periods in 2015.

Incentive fees are based on the new trading profits generated by the Advisor at the end of the quarter, as defined in the management agreement among the Partnership, the General Partner and the Advisor. There were no incentive fees paid for the three and nine months ended September 30, 2016 and 2015, respectively. The Advisor will not be paid incentive fees until the Advisor recovers the net loss incurred 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, among other factors, 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.

 

24


Table of Contents

Item 3. Quantitative and Qualitative Disclosures about Market Risk

All or substantially all of the Partnership’s assets are subject to the risk of trading loss through its investment in the Master. The Partnership and the Master are speculative commodity pools. The market sensitive instruments held by the Master are acquired for speculative trading purposes, and all or substantially all of the Master’s assets are subject to the risk of trading loss. 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 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.

Value at Risk tables represent a probabilistic assessment of the risk of loss in market 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, 2016 and December 31, 2015, and the highest, lowest and average value during the three months ended September 30, 2016 and during the twelve months ended December 31, 2015. 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, 2015.

 

25


Table of Contents

As of September 30, 2016, the Master’s total capitalization was $135,384,076 and the Partnership owned approximately 85.0% of the Master. The Partnership invests substantially all of its assets in the Master. The Master’s Value at Risk as of September 30, 2016 was as follows:

 

    

September 30, 2016

   

Three Months Ended September 30, 2016

 

Market Sector

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

Energy

     $ 886,318           0.65      $         2,367,747         $         165,805         $         793,251   

Grains

     2,557,536           1.89         3,398,503         534,805         1,907,249   

Softs

     169,320           0.13         1,069,920         87,071         484,252   
  

 

 

    

 

 

         

Total

     $         3,613,174           2.67         
  

 

 

    

 

 

         

 

*

Average of month-end Values at Risk.

As of December 31, 2015, the Master’s total capitalization was $159,372,646 and the Partnership owned approximately 86.4% of the Master. The Partnership invested substantially all of its assets in the Master. The Master’s Value at Risk as of December 31, 2015 was as follows:

 

    

December 31, 2015

   

Twelve Months Ended December 31, 2015

 

Market Sector

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

Energy

     $ 604,203         0.38      $         6,373,658         $         85,608         $         3,088,794   

Grains

     719,382         0.45         6,945,244         101,193         2,873,016   

Livestock

     142,560         0.09         2,777,359         10,005         361,832   

Softs

     371,327         0.23         2,986,688         336,168         1,723,568   
  

 

 

    

 

 

         

Total

     $         1,837,472         1.15         
  

 

 

    

 

 

         

 

*

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 (the “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, 2016 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, 2016 that materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

This section describes the major pending legal proceedings, other than ordinary routine litigation incidental to the business, to which MS&Co. or its subsidiaries is a party or to which any of their property is subject. There are no material legal proceedings pending against the Partnership or the General Partner.

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.”).

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 Exchange Act, 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 2015, 2014, 2013, 2012 and 2011. In addition, MS&Co. annually prepares an Audited, Consolidated Statement of Financial Condition (“Audited Financial Statement”) that is publicly available on Morgan Stanley’s website at www.morganstanley.com. Please refer to the Commitments, Guarantees and Contingencies – Legal section of MS&Co.’s 2015 Audited Financial Statement.

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 

MS&Co. 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 MS&Co.’s due diligence on the loans that it purchased for securitization, MS&Co.’s communications with ratings agencies, MS&Co.’s disclosures to investors, and MS&Co.’s handling of servicing and foreclosure related issues.

On February 25, 2015, MS&Co. 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 MS&Co. That settlement was finalized on February 10, 2016.

 

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On April 1, 2016, the California Attorney General’s Office filed an action against MS&Co. and certain affiliates in California state court styled California v. Morgan Stanley, et al., on behalf of California investors, including the California Public Employees’ Retirement System and the California Teachers’ Retirement System. The complaint alleges that MS&Co. made misrepresentations and omissions regarding residential mortgage-backed securities and notes issued by the Cheyne SIV (defined below), and asserts violations of the California False Claims Act and other state laws and seeks treble damages, civil penalties, disgorgement, and injunctive relief. On July 20, 2016, MS&Co. filed a demurrer, which was granted on September 30, 2016. On October 21, 2016, the California Attorney General filed an amended complaint.

In October 2014, the Illinois Attorney General’s Office (“ILAG”) sent a letter to MS&Co. alleging that MS&Co. knowingly made misrepresentations related to RMBS purchased by certain pension funds affiliated with the State of Illinois and demanding that MS&Co. pay ILAG approximately $88 million. MS&Co. and ILAG reached an agreement to resolve the matter on February 10, 2016.

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 intended to file a lawsuit related to approximately 30 subprime securitizations sponsored by MS&Co. NYAG indicated that the lawsuit would allege that MS&Co. 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. MS&Co. and NYAG reached an agreement to resolve the matter on February 10, 2016.

On June 5, 2012, MS&Co. 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 (“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, MS&Co. violated Section 4c(a) of the Commodity Exchange Act and CFTC 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 MS&Co. 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 Commodity Exchange Act and CFTC Regulations. Without admitting or denying the underlying allegations and without adjudication of any issue of law or fact, MS&Co. 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. MS&Co. entered into corresponding and related settlements with the CME and CBOT in which the CME found that MS&Co. violated CME Rules 432.Q and 538 and fined MS&Co. $750,000 and CBOT found that MS&Co. violated CBOT Rules 432.Q and 538 and fined MS&Co. $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 MS&Co. in connection with trading by one of MS&Co.’s former traders of EEM options contracts that allegedly disrupted the final settlement price of the November 2012 VXEM futures. CBOE alleged that MS&Co. violated CBOE Rules 4.1, 4.2 and 4.7, Sections 9(a) and 10(b) of the Exchange Act, and Rule 10b-5 thereunder. CFE alleged that MS&Co. violated CFE Rules 608, 609 and 620. The matters were resolved on June 28, 2016 without any findings of fraud.

 

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On June 18, 2015, MS&Co. 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 MS&Co. 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 under the Exchange Act in connection with offerings in which MS&Co. acted as senior or sole underwriter.

On August 6, 2015, MS&Co. consented to and became the subject of an order by the CFTC to resolve allegations that MS&Co. violated CFTC Regulation 22.9(a) by failing to hold sufficient U.S. dollars in cleared swap segregated accounts in the United States to meet all U.S. dollar obligations to cleared swaps customers. Specifically, the CFTC found that while MS&Co. 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 U.S. dollars, to meet its U.S. dollar obligations. In addition, the CFTC found that MS&Co. violated CFTC Regulation 166.3 by failing to have in place adequate procedures to ensure that it complied with CFTC Regulation 22.9(a). Without admitting or denying the findings or conclusions and without adjudication of any issue of law or fact, MS&Co. 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.

Civil Litigation

On December 23, 2009, the Federal Home Loan Bank of Seattle filed a complaint against MS&Co. 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 MS&Co. 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. 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 MS&Co.’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. The defendants’ joint motions for partial summary judgment were denied on November 9, 2015. At September 25, 2016, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $43 million, and the certificates had not yet incurred actual losses. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $43 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., plus pre- and post-judgment interest, fees and costs. MS&Co. 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 a complaint against MS&Co. and other defendants in the Superior Court of the State of California styled Federal Home Loan Bank of San Francisco v. Deutsche Bank Securities Inc. et al. An amended complaint, filed on June 10, 2010, alleges that defendants made untrue statements and material omissions in connection with the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The amount of certificates allegedly sold to plaintiff by MS&Co. was approximately $276 million. The complaint raises claims under both the federal securities laws and California law and seeks, 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. 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. At September 25, 2016, the current unpaid balance of the mortgage pass-through certificates at issue in these cases was approximately $52 million, and the certificates had incurred actual losses of approximately $2 million. Based on currently available information, MS&Co. believes it could incur a loss for this action up to the difference between the $55 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. 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 MS&Co., 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 MS&Co. misrepresented the risks of the STACK 2006-1 CDO to CDIB, and that MS&Co. 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 MS&Co.’s motion to dismiss the complaint. Based on currently available information, MS&Co. 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 MS&Co. 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, which 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 MS&Co. 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 MS&Co. or sold to plaintiff by MS&Co. was approximately $78 million. At September 25, 2016, 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, MS&Co. 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 MS&Co., plus pre- and post-judgment interest, fees and costs. MS&Co. 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 MS&Co. 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 MS&Co. or sold to plaintiff by MS&Co. was approximately $385 million. The amended complaint 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. The defendants’ motions to dismiss the amended complaint were granted in part and denied in part on September 30, 2013. On November 25, 2013, July 16, 2014, and May 19, 2015, respectively, the plaintiff voluntarily dismissed its claims against MS&Co. with respect to three of the securitizations at issue. After these voluntary dismissals, the remaining amount of certificates allegedly issued by MS&Co. or sold to plaintiff by MS&Co. was approximately $332 million. At September 25, 2016, 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, MS&Co. 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 MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. 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 May 3, 2013, plaintiffs in Deutsche Zentral-Genossenschaftsbank AG et al. v. Morgan Stanley et al. filed a complaint against MS&Co., 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 MS&Co. to plaintiff currently at issue in this action was approximately $644 million. The complaint alleges causes of action against MS&Co. 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 granted in part and denied in part MS&Co.’s motion to dismiss the complaint. MS&Co. perfected its appeal from that decision on June 12, 2015. At September 25, 2016, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $252 million, and the certificates had incurred actual losses of approximately $85 million. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $252 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses.

On May 17, 2013, plaintiff in IKB International S.A. in Liquidation, et al. v. Morgan Stanley, et al. filed a complaint against MS&Co. 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 MS&Co. to plaintiff was approximately $132 million. The complaint alleges causes of action against MS&Co. 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 MS&Co.’s motion to dismiss. All claims regarding four certificates were dismissed. After these dismissals, the remaining amount of certificates allegedly issued by MS&Co. or sold to plaintiff by MS&Co. was approximately $116 million. On August 26, 2015, MS&Co. perfected its appeal from the court’s October 29, 2014 decision. On August 11, 2016, the Appellate Division, First Department affirmed the trial court’s decision denying in part MS&Co.’s motion to dismiss the complaint. At September 25, 2016, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $26 million, and the certificates had incurred actual losses of $58 million. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $26 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. 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, MS&Co. 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.

 

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On March 15, 2010, the Federal Home Loan Bank of San Francisco filed a complaint against MS&Co. and other defendants in the Superior Court of the State of California styled Federal Home Loan Bank of San Francisco v. Credit Suisse Securities (USA) LLC, et al. An amended complaint filed on June 10, 2010 alleged 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 MS&Co. was approximately $704 million. The complaint raised claims under both the federal securities laws and California law and sought, among other things, to rescind the plaintiff’s purchase of such certificates. 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 MS&Co.

On July 9, 2010 and February 11, 2011, Cambridge Place Investment Management Inc. filed two separate complaints against MS&Co. 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 alleged 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 MS&Co. and/or its affiliates or sold to plaintiff’s affiliates’ clients by MS&Co. 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, MS&Co., certain affiliates and Pinnacle Performance Limited, a special purpose vehicle (“SPV”), were named as defendants in a purported class action in the United States District Court for the Southern District of New York (“SDNY”), styled Ge Dandong, et al. v. Pinnacle Performance Ltd., et al. On January 31, 2014, the plaintiffs in the action, which related to securities issued by the SPV in Singapore, 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 MS&Co. 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 alleged 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 MS&Co. 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 January 16, 2015, the parties reached an agreement to settle the litigation.

On July 18, 2011, the Western and Southern Life Insurance Company and certain affiliated companies filed a complaint against MS&Co. 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 alleged 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 MS&Co. was approximately $153 million. On June 8, 2015, the parties reached an agreement to settle the litigation.

 

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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 MS&Co. and certain affiliates. A complaint against MS&Co. 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 alleged 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 sought, 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 MS&Co. 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 alleged 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 MS&Co. was approximately $758 million. The amended complaint raised common law claims of fraud, fraudulent inducement, and aiding and abetting fraud and sought, 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.

On April 25, 2012, The Prudential Insurance Company of America and certain affiliates filed a complaint against MS&Co. 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 alleged 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 MS&Co. was approximately $1.073 billion. The amended complaint raised 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 included a claim for treble damages. On January 8, 2016, the parties reached an agreement to settle the litigation.

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 MS&Co. 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 MS&Co. 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 MS&Co. 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 MS&Co. and certain affiliates in the Supreme Court of NY, styled Bank Hapoalim B.M. v. Morgan Stanley et al. The complaint alleged 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 MS&Co. 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.

 

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On September 23, 2013, the plaintiff in National Credit Union Administration Board v. Morgan Stanley & Co. Inc., et al. filed a complaint against MS&Co. and certain affiliates in the SDNY. The complaint alleged 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 MS&Co. to plaintiffs in the matter was approximately $417 million. The complaint alleged violations of federal and various state securities laws and sought, among other things, rescissionary and compensatory damages. On November 23, 2015, the parties reached an agreement to settle the matter.

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 MS&Co. and several other defendants in the Circuit Court of the City of Richmond related to RMBS. The lawsuit alleged that MS&Co. and the other defendants knowingly made misrepresentations and omissions related to the loans backing RMBS purchased by the Virginia Retirement System. The complaint asserted claims under the Virginia Fraud Against Taxpayers Act, as well as common law claims of actual and constructive fraud, and sought, among other things, treble damages and civil penalties. On January 6, 2016, the parties reached an agreement to settle the litigation. An order dismissing the action with prejudice was entered on January 28, 2016.

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 I, Item 1A. “Risk Factors” in the Partnership’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 and under Part II, Item 1A. “Risk Factors” in the Partnership’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2016 and June 30, 2016.

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

For the three months ended September 30, 2016, there were subscriptions for 25.4450 Redeemable Units totaling $34,667. 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 from the sale of Redeemable Units are used for the trading of commodity interests, including futures, option and forward contracts and any other interests pertaining thereto, including interests in commodity pools.

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

 

Period   (a) Total Number of  
Redeemable 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, 2016 - July 31, 2016

    547.3940      $ 1,390.52      N/A   N/A

August 1, 2016 - August 31, 2016

    1,082.6820      $ 1,362.46      N/A   N/A

September 1, 2016 - September 30, 2016

    1,337.6030      $ 1,368.89      N/A   N/A
      2,967.6790      $ 1,370.53           

 

*

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 last day 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

Exhibit

 

3.1    (a)  

Certificate of Limited Partnership dated April 15, 2005 (filed as Exhibit 3.1 to the General Form for Registration of Securities on Form 10 filed on April 30, 2007 and incorporated herein by reference).

   (b)  

Certificate of Amendment of the Certificate of Limited Partnership dated September 21, 2005 (filed as Exhibit 3.1(a) to the General Form for Registration of Securities on Form 10 filed on April 30, 2007 and incorporated herein by reference).

   (c)  

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

   (d)  

Certificate of Amendment of the Certificate of Limited Partnership 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).

   (e)  

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

   (f)  

Certificate of Amendment of the Certificate of Limited Partnership 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).

   (g)  

Certificate of Amendment of the Certificate of Limited Partnership dated January 28, 2013 (filed as Exhibit 3.1 to the Current Report on Form 8-K filed on February 4, 2013 and incorporated herein by reference).

   (h)  

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

3.2    (a)  

Fourth Amended and Restated Limited Partnership Agreement (filed as Exhibit 3.2 to the Current Report on Form 8-K filed on February 4, 2013 and incorporated herein by reference).

   (b)  

Amendment No. 1 to the Fourth Amended and Restated Limited Partnership Agreement, effective January 1, 2016 (filed as Exhibit 3.1 to the Current Report on Form 8-K filed on January 6, 2016 and incorporated herein by reference).

10.1    (a)  

Amended and Restated Commodity Futures Customer Agreement between the Partnership and MS&Co., effective September 4, 2013 (filed as Exhibit 10.9 to the Quarterly Report on Form 10-Q filed on November 14, 2013 and incorporated herein by reference).

   (b)  

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).

 

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10.2  

Amended and Restated Alternative Investment Selling Agent Agreement among the Partnership, the General Partner and Morgan Stanley Wealth Management, effective March 3, 2016 (filed as Exhibit 10.1 to the Current Report on Form 8-K filed on March 8, 2016 and incorporated herein by reference).

10.3  

Form of Subscription Agreement (filed as Exhibit 10.4 to the Quarterly Report on Form 10-Q filed on November 14, 2012 and incorporated herein by reference).

10.4  

(a)    Management Agreement among the Partnership, the General Partner and Aventis Asset Management, LLC (filed as Exhibit 10.1 to the Current Report on Form 8-K filed on February 4, 2013 and incorporated herein by reference).

 

(b)    Amendment No. 1 to the Management Agreement among the Partnership, the General Partner and Aventis Asset Management, LLC (filed as Exhibit 10.1 to the Current Report on Form 8-K filed on March 6, 2014 and incorporated herein by reference).

 

(c)    Letter from the General Partner to Aventis Asset Management, LLC extending the Management Agreement through June 30, 2016 (filed as Exhibit 10.6(b) to the Annual Report on Form 10-K filed on March 28, 2016 and incorporated herein by reference).

10.5  

(a)    Escrow Agreement among the General Partner, Morgan Stanley Smith Barney LLC and The Bank of New York (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)    Amendment No. 5 to Escrow Agreement among the General Partner, Morgan Stanley Smith Barney LLC and The Bank of New York (filed as Exhibit 10.7(b) to the Annual Report on Form 10-K filed on March 27, 2013 and incorporated herein by reference).

10.6  

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).

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 and Director) (filed herewith).

32.1  

Section 1350 Certification (Certification of President and Director) (filed herewith).

32.2  

Section 1350 Certification (Certification of Chief Financial Officer and Director) (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.

MANAGED FUTURES PREMIER AVENTIS II L.P.

By:

 

Ceres Managed Futures LLC

 

(General Partner)

By:

 

/s/ Patrick T. Egan

 

Patrick T. Egan

 

President and Director

Date: November 10, 2016

By:

 

/s/ Steven Ross

 

Steven Ross

 

Chief Financial Officer and Director

 

(Principal Accounting Officer)

Date: November 10, 2016

 

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