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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549   

 

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FORM 10-Q

 

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☒ 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:  000-22887

  

(Exact name of registrant as specified in its charter)

 

 

c/o R.J. O’Brien Fund Management, LLC

222 South Riverside Plaza

Suite 900

(Address of principal executive offices) (Zip Code)

 

(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.

 

 Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ☐ Yes     ☒ No 

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

 

RJO GLOBAL TRUST AND SUBSIDIARIES
Consolidated Statements of Financial Condition
Assets
		September 30,				December 31,
		2016				2015
		UNAUDITED				AUDITED
Assets:
Equity in commodity Trading accounts:
Cash on deposit with broker		$	3,867,640			$	5,323,944
Net unrealized gain on open contracts			187,205				3,414
Total due from broker			4,054,845				5,327,358
Cash and cash equivalents on deposit with affiliate			1,796,443				1,449,723
Cash on deposit with bank			117,388				92,621
Interest receivable			448				304
Receivable from US Bank			17,890				20,248
Total Assets		$	5,987,014			$	6,890,254
Liabilities and Unitholders' Capital
Liabilities:
Equity in commodity Trading accounts:
Net unrealized loss on open contracts		$	2,873			$	-
Options written on futures contracts (premiums received - $21,315 and $7,356, respectively)			21,900				8,059
Accrued commissions			12,003				13,781
Accrued management fees			12,118				14,747
Accrued incentive fees			8,994				12,324
Accrued operating expenses			165,095				170,958
Accrued offering expenses			3,918				328
Redemptions payable-Trading			59,152				29,009
Distribution payable - Non-Trading			17,890				20,248
Total liabilities			303,943				269,454
Unitholders' capital:
Unitholders' capital (Trading):
Beneficial owners
Class A (97,100 and 110,812 units outstanding at September 30, 2016 and December 31, 2015, respectively)			5,503,273				6,437,129
Class B (839 and 955 units outstanding at September 30, 2016 and December 31, 2015, respectively)			55,538				63,836
Class C (0 and 0 units outstanding at September 30, 2016 and December 31, 2015, respectively)			-				-
Class D (0 and 0 units outstanding at September 30, 2016 and December 31, 2015, respectively)			-				-
Managing owner (535 Class A units outstanding at September 30, 2016 and December 31, 2015, respectively)			30,325				31,079
Total unitholders' capital			5,589,136				6,532,044
Non-Controlling Interests			93,935				88,756
Total Capital			5,683,071				6,620,800
Total Liabilities and Unitholders' Capital		$	5,987,014			$	6,890,254
Net asset value per unit:
Trading:
Class A		$	56.68			$	58.09
Class B		$	66.20			$	66.84

 

See accompanying notes to consolidated financial statements.

 

 

See accompanying notes to consolidated financial statements.

 

See accompanying notes to consolidated financial statements.

RJO GLOBAL TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)

 

The RJO Global Trust (the “Trust”), is a Delaware statutory trust organized on November 12, 1996 under the Delaware Statutory Trust Act.  The business of the Trust is the speculative trading of commodity interests, including U.S. and international futures, spot and forward contracts on currencies, interest rates, energy and agricultural products, metals and stock indices, hybrid instruments, swaps, any rights pertaining thereto and any options thereon or on physical commodities, as well as securities and any rights pertaining thereto and any options thereon, pursuant to the trading instructions of multiple independent commodity trading advisors (each a “Trading Advisor” and collectively, the “Trading Advisors”).

 

R.J. O’Brien Fund Management, LLC, the managing owner of the Trust (“RJOFM” or the “Managing Owner”), acquired the managing owner interest in the Trust from Refco Commodity Management, Inc. (“RCMI”) on November 30, 2006.  The Managing Owner of the Trust was initially formed as an Illinois corporation in November 2006, and became a Delaware limited liability company in July of 2007.  The Managing Owner has been registered with the Commodity Futures Trading Commission (“CFTC”) as a commodity pool operator, and has been a member in good standing of the National Futures Association (“NFA”) in such capacity, since December 1, 2006.  The Managing Owner is registered as a commodity pool operator under the Commodity Exchange Act, as amended (“CE Act”), and is responsible for administering the business and affairs of the Trust.  The Managing Owner is an affiliate of R.J. O’Brien & Associates LLC, the clearing broker for the Trust (“RJO” or the “Clearing Broker”) through its investment in RJ OASIS (as defined below).

Units of beneficial ownership of the Trust (“units”) commenced selling on April 3, 1997.  Effective July 1, 2011, the Managing Owner discontinued the public offering of the units and began offering the units on a private placement basis only.  The Trust filed a Post-Effective Amendment to its Registration Statement on Form S-1 with the Securities and Exchange Commission (the “SEC”) on July 5, 2011 to deregister the remaining units that were unsold under the public offering.  The Post-Effective Amendment was declared effective by the SEC on July 8, 2011.  Effective January 15, 2014, the Managing Owner began offering Class C and Class D units.  The Class A and Class B units are no longer offered.

Pursuant to an Investment Management Agreement dated August 30, 2013 (the “Investment Management Agreement”), the Managing Owner appointed RPM Risk & Portfolio Management Aktiebolag, a limited liability company organized under the laws of Sweden, as investment manager to the Trust (“RPM” or the “Investment Manager”).  RPM has been registered with the CFTC as a commodity trading advisor (CTA), and has been a member in good standing of the NFA in such capacity, since August 27, 2015.  Prior to August 27, 2015, RPM was exempt from registration as a CTA pursuant CFTC Rule 4.14(a)(10) as (i) during the course of any 12-month periods, it had not furnished commodity trading advice to more than 15 persons; and (ii) it did not hold itself out generally to the public as a CTA.  The Trust remains a multi-advisor commodity pool where trading decisions for the Trust are delegated to the Trading Advisors, representing the Investment Manager’s “Evolving Manager Program”.  RPM is responsible for selecting, monitoring, and replacing each commodity trading advisor available for its Evolving Manager Program.  RPM is also responsible for the Trust’s allocations to each Trading Advisor through the Trust’s investment in RJ OASIS (as defined below).  RPM may also add, remove or replace any Trading Advisor without the consent of or advance notice to investors.  Investors will be notified of any material change in the basic investment policies or structure of the Trust.

The Evolving Manager Program seeks to identify and select commodity trading advisors with shorter track records and with smaller assets under management who, in the opinion of the Investment Manager, appear to have potential for long-term over-performance relative to their respective peer group.  RPM may add, delete or modify such categories of investment strategies in line with its investment objective and policy.  The strategies include three broad based categories that are described as follows (each, an “Eligible Strategy”):

 

 

 

The Investment Manager will, in its discretion, determine the minimum or maximum target allocation or allocation range, or the manner in which to rebalance the Trust or adjust relative weightings of the Trust.  RPM has complete flexibility in allocation and reallocating the Trust’s capital in any manner that it may deem appropriate.  There can be no assurance as to which factors the Investment Manager may consider in making capital allocations for the Trust, or as to which allocation the Investment Manager may make.

The Trust’s assets are currently allocated to O’Brien Alternative Strategic Investment Solutions, LLC (“RJ OASIS”), a Delaware series limited liability company operated by RJOFM.  Each “series” of RJ OASIS feeds into a separate trading company established to facilitate trading by a particular Trading Advisor (each, a “Trading Company” and collectively, the “Trading Companies”).  The Trading Companies are operated by RJOFM.  RJOFM is the managing member of each RJ OASIS series and each Trading Company.  RJOFM has no equity interest in any RJ OASIS series or Trading Company.

The Trust is governed by the Tenth Amended and Restated Declaration and Agreement of Trust dated January 31, 2015 (the “Trust Agreement”).

As of September 30, 2016, prior to quarter-end reallocation, RPM has delegated trading decisions for the Trust to six independent Trading Advisors:  Revolution Capital Management, LLC (“RCM”), PGR Capital LLP (“PGR”), ROW Asset Management, LLC (“ROW”), Turning Wheel Capital, Inc. (“TWC”), Claughton Capital, LLC (“Claughton”) and Degraves Capital Management PTY (“DCM”),  pursuant to advisory agreements executed between RJOFM (in its role as managing member of each RJ OASIS series and each Trading Company), and, as applicable, each Trading Company and each Trading Advisor (each an “Advisory Agreement” and collectively the “Advisory Agreements”).

The Advisory Agreements provide that each Trading Advisor has discretion in and responsibility for the selection of the Trading Company’s commodity transactions with respect to that portion of the series’ assets allocated to it.  As of September 30, 2016, prior to quarter-end reallocation, RCM was managing 17.82%, PGR 22.27%, ROW 13.31%, TWC 4.92%, Claughton 3.26% and DCM 6.05%% of the Trust’s assets, respectively.  Approximately 32.37% of the Trust’s assets were not allocated to any Trading Advisor.

RCM, PGR, ROW, TWC, Claughton and DCM are technical traders, and as such, their programs do not predict price movements.  No fundamental economic supply or demand analysis is used in attempting to identify mispricing in the market, and no macroeconomic assessments of the relative strengths of different national economies or economic sectors are made.  However, there are frequent periods during which fundamental factors external to the market dominate prices.  

The Trust has no officers, directors or employees.  

 

RJO is a “futures commission merchant,” the Managing Owner is a “commodity pool operator” and the Trading Advisors to the Trust are “commodity trading advisors,” as those terms are used in the CE Act.  As such, they are registered with and subject to regulation by the CFTC and are each a member of NFA in such respective capacities.  R.J. O’Brien Securities, LLC, an affiliate of RJOFM and the lead selling agent for the Trust, is registered as a broker-dealer with the SEC, and is a member of the Financial Industry Regulatory Authority (“FINRA”).

 

The Managing Owner is responsible for the preparation of monthly and annual reports to the beneficial owners of the Trust (the “Beneficial Owners”); filing reports required by the CFTC, the NFA, the SEC and any state agencies having jurisdiction over the Trust calculation of the Trust’s net asset value (“NAV”) (meaning the total assets less total liabilities of the Trust); directing payment of the management and incentive fees payable to the Investment Manager under the Investment Management Agreement and (in its role as managing member of each RJ OASIS series and each Trading Company) directing payment of the management and incentive fees payable to the Trading Advisors under the Advisory Agreements, as applicable.

The Trust will be terminated on December 31, 2026, unless terminated earlier upon the occurrence of one of the following:  (1) Beneficial Owners holding more than 50% of the outstanding units notify the Managing Owner to dissolve the Trust as of a specific date; (2) 120 days after the filing of a bankruptcy petition by or against the Managing Owner, unless the bankruptcy court approves the sale and assignment of the interests of the Managing Owner to a purchaser/assignor that assumes the duties of the Managing Owner; (3) 120 days after the notice of the retirement, resignation, or withdrawal of the Managing Owner, unless Beneficial Owners holding more than 50% of the outstanding units appoint a successor; (4) 90 days after the insolvency of the Managing Owner or any other event that would cause the Managing Owner to cease being managing owner of the Trust, unless Beneficial Owners holding more than 50% of the outstanding units appoint a successor; (5) dissolution of the Managing Owner; (6) insolvency or bankruptcy of the Trust; (7) a decrease in the NAV to less than $2,500,000, except as provided in the Trust Agreement; (8) a decline in the NAV per unit to $50 or less of one or more share classes, except as provided in Trust Agreement; (9) dissolution of the Trust; or (10) any event that would make it unlawful for the existence of the Trust to be continued or require dissolution of the Trust.

A portion of the Trust’s net assets are deposited in the Trust’s accounts with RJO, the Trust’s clearing broker and currency dealer.  For U.S. dollar deposits, 100% of interest earned on the Trust’s assets, calculated by the average four-week Treasury bill rate, is paid to the Trust.  For non-U.S. dollar deposits, the current rate of interest is equal to a rate of one-month LIBOR less 100 basis points.  Any amounts received by RJO in excess of amounts paid to the Trust are retained by RJO.  For the three and nine month periods ended September 30, 2016 and 2015, RJO had paid or accrued to pay interest to the Trust of $1,939, $6,175, $166 and $621, respectively.  

On October 6, 2010, the Managing Owner appointed RJO Investment Management LLC (“RJOIM”), an affiliate of the Managing Owner, to manage the Trust’s cash deposited with Wells Fargo Bank, N.A. (“Wells”).  As of September 30, 2016, Wells held approximately $1,797,000 of the Trust’s assets.  To the extent excess cash is not invested in securities, such cash will be subject to the creditworthiness of the institution where such funds are deposited.  For the three and nine month periods ended September 30, 2016 and 2015, the assets held in this account earned $1,449, $5,132, $549 and $951 of interest income, respectively.

As of September 30, 2016, accounting and transfer agency services for the Trust are provided by NAV Consulting, Inc., the Trust’s administrator.

Effective January 1, 2007, JWH Special Circumstance LLC (the “LLC”), a limited liability company, was established to pursue additional claims against REFCO, LTD, and all Non-Trading Accounts were transferred to the LLC.  Any new funds received from REFCO, LTD by the LLC were distributed to unitholders who were investors in the Trust at the time of the bankruptcy of REFCO, LTD and Refco, Inc.  U.S. Bank National Association (“US Bank”) was appointed as manager of the LLC.  US Bank made distributions to the unitholders, as defined above, upon collection, sale, settlement or other disposition of the bankruptcy claim and after payment of all fees and expenses pro rata to the unitholders, as explained above, as follows:

 

(a) Any unitholder who had redeemed their entire interest in the Trust prior to distribution received cash (“Non-Participating Owners”).

 

(b) Any unitholder who had continued to own units in the Trust received additional units in the Trust at the then net asset value of the Trust (“Participating Owner”).

 

The unitholders had no rights to request redemptions from the LLC.

 

The LLC compensated US Bank, as manager, the following: (1) an initial acceptance fee of $120,000, (2) an annual fee of $25,000, (3) a distribution fee of $25,000 per distribution, (4) out-of-pocket expenses, and (5) an hourly fee for all personnel at the then expected hourly rate (initially $350 per hour).

 

Effective as of June 15, 2015 (the “Termination Date”), the LLC was dissolved by US Bank.  US Bank effected the dissolution based upon their belief that substantially all of the LLC’s claims had been liquidated and the related proceeds had been distributed to the unitholders, and that the LLC was not likely to receive further significant recoveries related to such claims.  Accordingly, the LLC has ceased to carry on its business as of the Termination Date except insofar as may be necessary for the winding up of its business.  As of the Termination Date, the LLC has taken full account of its assets and liabilities, and has made payment or has otherwise provided for all of its remaining debts and liabilities.  US Bank has established a contingency reserve with all remaining funds from the LLC in its possession in the approximate amount of $475,000 to pay for any future wind up expenses of, or other claims made against, the LLC on or prior to June 15, 2017 (the “Reserve Termination Date”).  To the extent no claims or obligations of the LLC remain outstanding as of the Reserve Termination Date (as determined in US Bank’s reasonable discretion), US Bank will distribute the then remaining funds to the unitholders, provided, however, if the amount of remaining funds available for distribution does not significantly exceed the cost of making such distribution, US Bank reserves the right to donate the remaining amounts to a nationally recognized charity.

Accordingly, the LLC/Non-trading unitholders capital accounts were distributed to US Bank on the Termination Date.  Amounts estimated to be due to Participating Owners aggregating $17,890 and $20,248 as of September 30, 2016 and December 31, 2015, respectively, are reflected as a distribution payable and a receivable from US Bank in the Consolidated Statements of Financial Condition.

  

 

The accounting and reporting policies of the Trust conform to accounting principles generally accepted in the United States of America and to practices in the commodities industry.  The following is a description of the more significant of those policies that the Trust follows in preparing its consolidated financial statements.

 

 

The accompanying unaudited consolidated financial statements of the Trust have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the rules and regulations of the SEC.  

Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the financial condition and results of operations of the Trust for the periods presented have been included.

The Trust’s unaudited consolidated financial statements and the related notes should be read together with the consolidated financial statements and related notes included in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2015.

While the Trust is not registered, and is not required to be registered as an investment company under the Investment Company Act of 1940, as amended, it meets the definition of an investment company within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 946, Financial Services - Investment Companies, and follows the accounting and reporting guidance therein.

 

 

The accompanying consolidated financial statements include the accounts of the Trust, its wholly-owned subsidiaries: the LLC through the Termination Date (see Note (1) above), the OASIS Centurion Asset Mgmt Series (through January 31, 2016), OASIS Turing Wheel Capital Series, OASIS Claughton Capital Series, and OASIS Degraves Capital Mgmt PTY Series (effective January 9, 2016).  The consolidated financial statements also include the controlling and majority equity interest in the OASIS Revolution Capital Mgmt Series, OASIS PGR Capital Series and OASIS ROW Asset Mgmt Series.  Interests in such series of RJ OASIS not wholly-owned by the Trust are shown as non-controlling interests.  All material intercompany transactions have been eliminated upon consolidation.

 

Commodity futures contracts, forward contracts, physical commodities, and related options are recorded on their trade date.  All such transactions are recorded on a mark-to-market basis and measured at fair value daily.  Net unrealized gains on open contracts reflected in the consolidated statements of financial condition represent the difference between original contract amount and fair value (as determined by exchange settlement prices for futures contracts and related options and cash dealer prices at a predetermined time for forward contracts, physical commodities, and their related options) as of the last business day of the reporting period or as of the last date of the consolidated financial statements.  As the broker has the right of offset, the Trust presents net unrealized gains and losses on open futures contracts (the difference between contract trade price and quoted market price) as a net amount in the consolidated statements of financial condition.  Any change in net unrealized gain or loss on futures and forward contracts from the preceding period is reported in the consolidated statements of operations.  Gains or losses are realized when contracts are liquidated.

The Trust may write (sell) and purchase exchange listed 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 Trust writes an option, the premium received is recorded as a liability in the statement of financial condition and measured at fair value daily.  When the Trust purchases an option, the premium paid is recorded as an asset in the consolidated statements of financial condition and measured at fair value daily.  Realized gains (losses) and changes in net unrealized gains (losses) on options contracts are included in the consolidated statements of operations.  When a written option expires or the Trust enters into a closing purchase transaction, the difference between the net premium received and any amount paid at expiration or on executing a closing purchase transaction, including commission, is recognized as a component of realized gain (loss) on closed positions.  When a purchased option is exercised, the proceeds on the sale of an underlying instrument (for a purchased put option), or the purchase cost of an underlying instrument (for a purchased call option) is adjusted by the amount of the premium paid.

 

For each series of RJ OASIS in which the Trust invests, that portion of the Trust’s net assets are deposited into an account of the relevant Trading Company held at RJO,  the clearing broker and currency dealer for each Trading Company.  For U.S. dollar deposits, 100% of interest earned on the series’ assets, calculated by the average four-week Treasury bill rate, is paid to the series.  For non-U.S. dollar deposits, the current rate of interest is equal to a rate of one-month LIBOR less 100 basis points.  Any amounts received by RJO in excess of amounts paid to the series are retained by RJO.  On October 6, 2010, the Managing Owner appointed RJOIM, an affiliate of the Managing Owner, to manage the Trust’s cash deposited with Wells.  As of Sepetember 30, 2016, Wells held approximately $1,797,000 of the Trust’s assets.  To the extent excess cash is not invested in securities, such cash will be subject to the creditworthiness of the institution where such funds are deposited.

 

Ongoing offering costs, subject to a ceiling of 0.50% of the Trust’s average month-end net asset value, are paid by the Trust and accrued monthly.

 

 

Trading accounts in foreign currency denominations are susceptible to both movements in the underlying contract markets as well as fluctuation in currency rates.  Foreign currencies are translated into U.S. dollars for closed positions at an average exchange rate for the year, while quarter and year-end balances are translated at the quarter and year-end currency rates.  The impact of the translation is reflected in the consolidated statements of operations. 

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

 

The Trust recorded an impairment charge against its assets held at REFCO, LTD at December 31, 2005, based on management’s estimate of fair value at that time.  Subsequent recoveries from REFCO, LTD were credited against the then book value of the claim.  On June 28, 2007, the Trust’s cumulative recoveries from REFCO, LTD exceeded the book value of the impaired assets held at REFCO, LTD, which resulted in no remaining book value for those assets.  All recoveries in excess of the book value of the impaired assets have been recorded as “Collections in excess of impaired value” on the Trust’s consolidated statements of operations.  As part of the winding down of the LLC, US Bank, as Manager of the LLC, has taken into full account the LLC’s liabilities and assets, and has made payment and otherwise provided for all remaining LLC’s debits and liabilities.  

 

On May 28, 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.  The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective.  The standard permits the use of either the retrospective or cumulative effect transition method.  In July 2015, the FASB voted to delay the effective date of this ASU by one year.  The ASU will now be effective commencing with the Trust’s quarter ending March 31, 2018.  Early adoption of this ASU is allowed no sooner than the original effective date.  The Trust has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern: Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which requires management to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued or are available to be issued.  This ASU also requires management to disclose certain information depending on the results of the going concern evaluation.  The provisions of this ASU are effective for annual periods ending after December 15, 2016, and for interim and annual periods thereafter.  Early adoption is permitted.  This amendment is applicable to the Trust beginning in the first quarter of fiscal year 2017.  The adoption of this standard is not expected to have a material impact on the consolidated financial statements.

 

Management fees are accrued and paid monthly by the relevant series’ Trading Company.  Incentive fees are accrued monthly and paid quarterly, as applicable, by the relevant series’ Trading Company.  Trading decisions for the period of these financial statements were made by the Trading Advisors.

 

Management fees and incentive fees were not due on the LLC net assets.  See Note (1).

Pursuant to the Trust Agreement, the Trust pays the Managing Owner a fee of 0.50% of the Trust’s month-end net assets on an annual basis.  

 

Pursuant to the Investment Management Agreement, the Trust pays RPM a monthly management fee at a rate of 0.0625% (a 0.75% annual rate) of the Trust’s month-end net asset calculated after determined and before reduction for any RPM management fees then being calculated and all other fees and expenses as of such month end, and before giving effect to any subscriptions for units in the Trust made as of the beginning of the month immediately following such month end and to any distributions or redemptions accrued during or as of such month end.

 

Pursuant to the Investment Management Agreement, RPM will receive from the Class C and D units a quarterly incentive fee of 10% of any “New Appreciation”, if any, of any New Assets.  “New Assets” are that portion of the assets contributed to the Trust from the date of the Investment Management Agreement.  New Appreciation in any quarter is equal to the amount by which the net asset value of the New Assets, prior to reduction for any accrued RPM performance fee, but after reduction for all other fees and expenses allocable to the New Assets (including the RPM management fee and management and incentive fees paid to the Trading Advisors, as described below), exceeds the cumulative trading profit as of any previous calendar quarter-end.  Interest income shall not be taken into account in calculating New Appreciation.

Pursuant to the Advisory Agreements, each Trading Advisor receives from the relevant series’ Trading Company a monthly management fee ranging from 0.042% to 0.083% (a 0.5% to 1% annual rate) of the Trust’s month-end net assets calculated after deduction of brokerage fees, but before reduction for any incentive fee or other costs and before inclusion of new unitholder subscriptions and redemptions for the month. 

 

Pursuant to its Advisory Agreement, each Trading Advisor may also receive from the relevant series’ Trading Company a quarterly incentive fee ranging from 15% to 20% of the “New Trading Profit,” if any, of the Trust.  The incentive fee is based on the performance of each Trading Advisor’s portion of the assets allocated to them.  New Trading Profit in any quarter is equal to the “Trading Profit” for such quarter that is in excess of the highest level of such cumulative trading profit as of any previous calendar quarter-end.  Trading Profit is calculated by including realized and net unrealized profits and losses, excluding interest income, and deducting the management fee and brokerage fee.  

 

For a description of the fees paid by the Trust to RJOIM, the Trust’s cash manager, see Note (9).

It is expected that that the Trust will be treated as a “partnership” for both U.S. federal and state tax purposes.  As such, no provision for U.S. federal income taxes has been made in the accompanying consolidated financial statements as each beneficial owner is responsible for reporting income (loss) based on its pro rata share of the profits or losses of the Trust.  The only significant differences in financial and income tax reporting basis are ongoing offering costs.

 

The Trust files income tax returns in the U.S. federal jurisdiction and in various state and local jurisdictions.  The Trust’s U.S. federal income tax returns for all tax years ended on or after December 31, 2013 remain subject to examination by the Internal Revenue Service.  The Trust’s state and local income tax returns are subject to examination by the respective state and local authorities over various statutes of limitations, generally ranging from three to five years from the date of filing.

 

 

The Trust, through its indirect investment in the Trading Companies, engages in the speculative trading of U.S. and international futures contracts, options, and forward contracts (collectively derivatives).  These derivatives include both financial and non-financial contracts held as part of a diversified trading strategy.  The Trading Companies are exposed to both market risk - the risk arising from changes in the market value of the contract - and credit risk - the risk of failure by another party to perform according to the terms of a contract.

The purchase and sale of futures requires initial and on-going margin deposits with a futures commission merchant (“FCM”).  The CE Act requires an FCM to segregate or secure all customer transactions and assets from the FCM’s proprietary activities.  A customer’s cash and other property, such as U.S. Treasury Bills, deposited with an FCM are considered commingled with all other customer funds subject to the FCM’s segregation requirements.  In the event of an FCM’s insolvency, recovery may be limited to a customer’s pro rata share of segregated funds.  It is possible that the recovered amount could be less than the total of cash and other property deposited by the customer.

 

The Trust, through its indirect investment in the Trading Companies, has cash on deposit with the FCM in connection with its trading of forward contracts.  In the normal course of business, the Trust does not require collateral from such interbank market maker.  Due to forward contracts being traded in unregulated markets between principals, the Trust also assumes a credit risk, the risk of loss from counterparty non-performance.

 

For derivatives, risks arise from changes in the market value of the contracts.  Theoretically, the Trading Companies are exposed to a market risk equal to the value of futures and forward contracts purchased and unlimited liability on such contracts sold short.

 

A Trading Company, as writer of an option, has no control over whether the underlying instrument may be sold (called) and as a result bears the risk of an unfavorable change in the market value of the instrument underlying the written option.  There is also the risk the Trading Company may not be able to enter into a closing transaction because of an illiquid market.

The Trading Companies may purchase exchange-traded options.  As such, the relevant Trading Company pays a premium at the outset and then bears the risk of unfavorable changes in the price of the contract underlying the option.  Purchased options expose the Trading Companies to a risk of loss limited to the premiums paid.

 

Net trading results from derivatives for the nine month periods ended September 30, 2016 and 2015, respectively, are reflected in the consolidated statements of operations and are equal to the gain or loss from trading less brokerage commissions.  Such trading results reflect the net gain or loss arising from the Trust’s speculative trading of futures contracts, options and forward contracts through its indirect investment with the Trading Companies.

The Trust, through its indirect investment in the Trading Companies, may invest its margin in fixed income securities as permitted by CFTC regulations regarding acceptable securities for investment of segregated assets and the RJOIM agreement with the Trust.  Such acceptable securities, include, but are not limited to, U.S. Treasury and government agencies’ securities, purchase agreements collateralized by U.S. Treasury and government agencies, corporate debt securities, and bank debt securities.  The Trust’s total investment in corporate debt securities, bank deposit securities, and certificate of deposits combined cannot exceed 40% of the Trust’s total assets.

 

The Beneficial Owners bear the risk of loss only to the extent of the market value of their respective investments in the Trust.

 

See Note (10) for further details on Derivative Instruments and Hedging Activities.

In accordance with the Fair Value Measurements Topic of the Financial Accounting Standards Board Accounting Standards Codification, the Trust established a three-level valuation hierarchy for disclosure of fair value measurements.  The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.  The three levels are defined as follows:

 

          Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Trust has the ability to access at the measurement date.  An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.  The value of any exchange-traded futures contracts and options fall into this category.

          Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.  This category includes forward currency contracts, options on forward currency contracts and fixed income securities that are valued using models or other valuation methodologies derived from observable market data.  As of September 30, 2016 and December 31, 2015, respectively, the Trust did not have any Level 2 assets or liabilities.

 

          Level 3 inputs are unobservable inputs for an asset or liability.  Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.  As of September 30, 2016 and December 31, 2015, respectively, the Trust did not have any Level 3 assets or liabilities.

 

An asset or liability’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.  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 unobservable inputs (Level 3).

The Trust’s exchange-traded futures contracts and options on futures contracts are valued based on quoted prices (unadjusted) in active markets for identical assets or liabilities.  

The following table presents the Trust’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015, respectively:

 

		September 30, 2016
		Level 1				Level 2				Level 3				Total
Assets
Net unrealized gain on open contracts:
Futures positions		$	187,205			$	-			$	-			$	187,205
			187,205				-				-				187,205
Liabilities
Net unrealized loss on open contracts:
Futures positions			(2,873	)			-				-				(2,873	)
Options written on futures contracts			(21,900	)			-				-				(21,900	)
			(24,773	)			-				-				(24,773	)
Total fair value		$	162,432			$	-			$	-			$	162,432

		December 31, 2015
		Level 1				Level 2				Level 3				Total
Assets
Net unrealized gain on open contracts:
Futures positions		$	3,414			$	-			$	-			$	3,414
			3,414				-				-				3,414
Liabilities
Options written on futures contracts			(8,059	)			-				-				(8,059	)
			(8,059	)			-				-				(8,059	)
Total fair value		$	(4,645	)		$	-			$	-			$	(4,645	)

 

 

Redemptions

 

A beneficial owner may cause any or all of his or her units to be redeemed by the Trust effective as of the last business day of any month based on the net asset value per unit on such date on five business days’ written notice to NAV Consulting, Inc., the Trust’s administrator, or the Managing Owner.  Payment will generally be made within 10 business days of the effective date of the redemption.  The Trust Agreement contains a full description of redemption and distribution policies.

 

Subscriptions

Investors that are eligible to participate in the private offering of the units may purchase units in the Trust pursuant to the terms of the Trust’s Confidential Private Placement Memorandum and disclosure document (the “Memorandum”) and a signed subscription form.  The Trust Agreement and the Memorandum contain a full description of subscription policies.  An investment in the Trust does not include a beneficial interest or investment in the LLC.

 

Commissions

The Managing Owner and/or affiliates act as commodity brokers for the Trust through RJO.  

Commodity brokerage commissions on a per trade (“half-turn”) basis, in addition to any transactional (floor brokerage, give-up charges, NFA, clearing and exchange) fees are typically paid to the clearing broker at the time of the initial purchase (or sale) and again at the subsequent sale (or purchase) of a commodity futures contract.  These half-turn commission and fees are charged to expense when incurred.

“Commission and fees” included the following across each class of units (1):

(1)  The above costs, fees and expenses are reflected in the commission by class line on the consolidated statement of operations.  Commissions are not paid with respect to the LLC’s net assets.

(2)  As of September 30, 2016, no Class D units had been sold.

(3)  Class D units may be subject to an initial sales charge of up to 2.00% of the subscription amount upon investment.

(4)  The Class C and Class D units are subject to a wholesaling fee of .35% to the Managing Owner to compensate agents who may facilitate distribution of such units.

(5)  Fees are charged as actually incurred.

 

The following financial highlights show the Trust’s financial performance of the Trading units by class for the three and nine month periods ended September 30, 2016, and 2015, respectively.  Total return is calculated as the change in a theoretical beneficial owner’s investment over the entire period, and is not annualized.  Total return is calculated based on the aggregate return of the Trust’s Trading units taken as a whole.  No financial highlights per share operating performance has been presented for Class C units for the third quarter of 2015 and 2016, respectively, since all Class C units were purchased and fully redeemed in January 2015 and no further Class C units have been issued subsequently.  As of September 30, 2016, no Class D units had been sold and, therefore, the Trust’s financial performance with respect to the class D units is not reflected below.

The calculations above do not include activity within the Trust’s Non-Trading Accounts.

 

The net income and expense ratios are computed based upon the weighted average net assets for the Trust for the three and nine month periods ended September 30, 2016 and 2015, respectively.  The amounts are not annualized.  Total return is calculated for each class of unitholders’ capital taken as a whole.  An individual investor’s return may vary from these returns.

On October 6, 2010, the Managing Owner retained RJOIM, an SEC registered investment adviser and an affiliate of the Managing Owner, as cash manager.  The assets managed by RJOIM are held in segregated accounts in custody at Wells.  RJOIM is paid an annual fee, currently 0.20% calculated and accrued daily at a rate equal to 1/360 of the principal balance.  As of August 1, 2014, RJOIM agreed to waive all advisory fees previously charged to the Trust, back to January 1, 2014, in response to a request by the Managing Owner for said rebate.  This request was made due to the decrease in the size of the Trust’s deposit with RJOIM and the current interest rate environment.  As of September 30, 2016, the Trust’s deposits held by RJOIM consisted of cash of $1,797,000.  Since August 1, 2014, RJOIM continues to waive its advisory fee. 

 

The Trust does not utilize “hedge accounting” and instead “marks-to-market” any derivatives through operations.

 

Derivatives not designated as hedging instruments:

 

As of September 30, 2016
		Asset				Liability
Type of		Derivatives				Derivatives				Net
Futures Contracts		Fair Value				Fair Value				Fair Value
Agriculture		$	156,017			$	(46,445	)		$	109,572
Currency			38,761				(12,351	)			26,410
Energy			57,186				(52,599	)			4,587
Indices			33,695				(13,653	)			20,042
Interest rates			30,041				(15,745	)			14,296
Metals			11,901				(24,376	)			(12,475	)
		$	327,601			$	(165,169	)		$	162,432

As of December 31, 2015
		Asset				Liability
Type of		Derivatives				Derivatives				Net
Futures Contracts		Fair Value				Fair Value				Fair Value
Agriculture		$	32,649			$	(61,049	)		$	(28,400	)
Currency			26,412				(863	)			25,549
Energy			104,889				(74,035	)			30,854
Indices			5,225				(23,774	)			(18,549	)
Interest rates			4,782				(21,653	)			(16,871	)
Metals			11,985				(9,213	)			2,772
		$	185,942			$	(190,587	)		$	(4,645	)

 

The above reported fair values are included in equity in commodity trading accounts – net unrealized gain on open contracts and in purchased options on futures and written options on futures contracts in the consolidated statements of financial condition as of September 30, 2016 and December 31, 2015, respectively. 

Trading gain (loss) for the following periods:

 

See Note (5) for additional information on the trading of derivatives not designed as hedging instruments and the related risks.

As indicated in Note (1), the Trust’s assets are currently indirectly allocated to each of the Trading Companies.  All of the Trading Companies utilize RJO as their clearing broker.  Each Trading Company has its own separate clearing agreement with RJO, under which each of the Trading Companies are subject to master netting agreements or similar arrangements that allow RJO to offset any assets of the individual entity by any liabilities of the individual Trading Company, as necessary, if RJO determines that the amount of margin is not appropriate or the Trading Company is not able to perform.  Each of the Trading Companies hold significant cash deposits with RJO, which can be and is used by the Trading Companies to settle any obligations due to RJO.  The master netting agreements or similar arrangements do not apply to amounts owed to/from different counterparties and they do not apply across different Trading Companies.

 

For financial reporting purposes, the Trust nets its similar derivative assets and liabilities that are subject to netting arrangements in the Statements of Financial Condition.  The following tables present the Trust’s derivative assets and liabilities by investment type and by counterparty, net of amounts available for offset under a master netting agreement, along with the related collateral received or pledged by the Trading Companies (cash on deposit with broker) as of September 30, 2016 and December 31, 2015:

 

		Offsetting of Derivative Assets
		As of September 30, 2016												As of December 31, 2015
		Gross				Gross Amounts				Net Amounts of Assets				Gross				Gross Amounts				Net Amounts of Assets
		Amounts of				Offset in the				Presented in the				Amounts of				Offset in the				Presented in the
		Recognized				Statement of				Statement of				Recognized				Statement of				Statement of
Description		Assets				Financial Condition				Financial Condition				Assets				Financial Condition				Financial Condition
Futures and forward contracts		$	327,601			$	(140,396	)		$	187,205			$	185,942			$	(182,528	)		$	3,414
		$	327,601			$	(140,396	)		$	187,205			$	185,942			$	(182,528	)		$	3,414

 

 

		Derivative Assets and Collateral Held by Counterparty
		As of September 30, 2016																As of December 31, 2015
		Net Amount of				Gross Amounts Not												Net Amount of				Gross Amounts Not
		Assets in the				Offset in theStatement												Assets in the				Offset in the Statement
Individual Trading Companies		Statement of				of Financial Condition												Statement of				of Financial Condition
(with derivative assets and		Financial				Financial				Cash Collateral				Net				Financial				Financial				Cash Collateral				Net
collateral held by RJO)		Condition				Instruments				Received				Amount				Condition				Instruments				Received				Amount
OASIS PGR, LLC		$	56,693			$	-			$	-			$	56,693			$	(26,242	)		$	-			$	-			$	(26,242	)
OASIS ROW, LLC			101,364				-				-				101,364				11,674				-				-				11,674
OASIS TWC, LLC			-				-				-				-				(715	)			-				-				(715	)
OASIS Claughton, LLC			29,148				-				-				29,148				18,697				-				-				18,697
		$	187,205			$	-			$	-			$	187,205			$	3,414			$	-			$	-			$	3,414

 

 

		Offsetting of Derivative Liabilities
		As of September 30, 2016												As of December 31, 2015
										Net Amounts of												Net Amounts of
		Gross				Gross Amounts				Liabilities				Gross				Gross Amounts				Liabilities
		Amounts of				Offset in the				Presented in the				Amounts of				Offset in the				Presented in the
		Recognized				Statement of				Statement of				Recognized				Statement of				Statement of
Description		Liabilities				Financial Condition				Financial Condition				Liabilities				Financial Condition				Financial Condition
Futures and forward contracts		$	143,269			$	(140,396	)		$	2,873			$	182,528			$	(182,528	)		$	-
Options written on futures contracts			21,900				-				21,900				8,059				-				8,059
		$	165,169			$	(140,396	)		$	24,773			$	190,587			$	(182,528	)		$	8,059

 

 

		Derivative Liabilities and Collateral Pledged by Counterparty
		As of September 30, 2016															As of December 31, 2015
		Net Amount of			Gross Amounts Not												Net Amount of				Gross Amounts Not
		Liabilities in			Offset in the Statement of Financial Condition												Liabilities in				Offset in the Statement of Financial Condition
Individual Trading Companies		the Statement															the Statement
(with derivative liabilities and		of Financial			Financial				Cash Deposits				Net				of Financial				Financial				Cash Deposits				Net
collateral held by RJO)		Condition			Instruments				Held by Broker				Amount				Condition				Instruments				Held by Broker				Amount
OASIS RCM, LLC		$	2,679			$	(2,679	)		$	-			$	-			$	-			$	-			$	-			$	-
OASIS ROW, LLC			21,900				(21,900	)			-				-				8,059				(8,059	)			-				-
OASIS TWC, LLC			194				(194	)			-				-				-				-				-				-
		$	24,773			$	(24,773	)		$	-			$	-			$	8,059			$	(8,059	)		$	-			$	-