CERES TACTICAL GLOBAL L.P. - FORM 10-Q - May 14, 2012

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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 March 31, 2012 or

o           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: 0-31563

 
MORGAN STANLEY SMITH BARNEY SPECTRUM CURRENCY AND COMMODITY L.P.
  
 
(Exact name of registrant as specified in its charter)
  

 
Delaware
  
13-4084211
 
(State or other jurisdiction of
incorporation or organization)
  
(I.R.S. Employer
Identification No.)
       
Ceres Managed Futures LLC
    
522 Fifth Avenue, 14th Floor
    
New York, NY
  
10036
(Address of principal executive offices)
  
(Zip Code)

Registrant’s telephone number, including area code
  
(212) 296-1999


(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x  No o

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.

Large accelerated filer o
Accelerated filer o
Non-accelerated filer x
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes 0  No T


 
 
 

MORGAN STANLEY SMITH BARNEY SPECTRUM CURRENCY AND COMMODITY L.P.
INDEX TO QUARTERLY REPORT ON FORM 10-Q

March 31, 2012



 
PART I. FINANCIAL INFORMATION
  
     
Item 1.
Financial Statements (Unaudited)
  
     
 
Statements of Financial Condition as of March 31, 2012 and December 31, 2011
2
     
 
Condensed Schedule of Investments as of March 31, 2012
3
     
 
Condensed Schedule of Investments as of December 31, 2011
4
     
 
Statements of Income and Expenses for the Quarters Ended March 31, 2012 and 2011
5
     
 
Statements of Changes in Partners’ Capital for the Quarters Ended March 31, 2012 and 2011
6
     
 
Notes to Financial Statements
  7-27
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
28-34
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
35-41
     
Item 4.
Controls and Procedures
41-42
     
 
PART II. OTHER INFORMATION
  
     
Item 1.
Legal Proceedings
43
     
Item 1A.
Risk Factors
43
     
Item 4.
Mine Safety Disclosures
43
     
Item 6.
Exhibits
43-44








 
 
 













PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements

MORGAN STANLEY SMITH BARNEY SPECTRUM CURRENCY AND COMMODITY L.P.
STATEMENTS OF FINANCIAL CONDITION

 
(Unaudited)
    
 
March 31,
  
December 31,
 
2012
  
2011
ASSETS
$
  
$
       
Investment in KR Master Fund
13,444,660
  
–
Investment in FL Master Fund
8,091,440
  
–
 
21,536,100
  
–
Trading Equity:
      
       
Unrestricted cash
11,554,833
  
35,693,205 
Restricted cash
48,689
  
125,600 
       
Total cash
11,603,522
  
35,818,805 
       
Net unrealized loss on open contracts (MS&Co.)
(13,508)
  
(88,387)
       
Options purchased (premiums paid $0 and $3,273, respectively)
–
  
1,534 
       
Total Trading Equity
33,126,114
  
35,731,952 
       
Receivable from FL Master Fund
478,282
  
       –
Interest receivable (MSSB)
1,830
  
98 
       
Total Assets
33,606,226
  
35,732,050 
       
LIABILITIES AND PARTNERS’ CAPITAL
      
       
Liabilities:
      
       
Redemptions payable
1,154,075
  
724,150 
Due to broker
478,282
  
          –
Accrued brokerage fees (MS&Co.)
129,354
  
134,931 
Accrued management fees
52,830
  
58,665 
       
Total Liabilities
1,814,541
  
917,746 
       
Partners’ Capital:
      
       
Limited Partners (3,728,714.607 and 3,983,851.059 Units, respectively)
31,383,971
  
34,396,076 
General Partner (48,440.343 and 48,440.343 Units, respectively)
407,714
  
418,228 
       
Total Partners’ Capital
31,791,685
  
34,814,304 
       
Total Liabilities and Partners’ Capital
33,606,226
  
35,732,050 
       
NET ASSET VALUE PER UNIT
              8.42
  
              8.63 


The accompanying notes are an integral part of these financial statements.

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MORGAN STANLEY SMITH BARNEY SPECTRUM CURRENCY AND COMMODITY L.P.
CONDENSED SCHEDULE OF INVESTMENTS
March 31, 2012 (Unaudited)



Futures and Forward Contracts Purchased
Net unrealized
 gain/(loss) on
open contracts
           % of
          Partners’ Capital
 
             $
  
Foreign currency
    (6,080) 
    (0.02)
     
Total Futures and Forward Contracts Purchased
   (6,080)
  (0.02)
     
     
Futures and Forward Contracts Sold
    
     
Foreign currency
      (42,609)
      (0.13)
     
Total Futures and Forward Contracts Sold
      (42,609)
      (0.13)
     
Unrealized Currency Gain
       35,181
        0.11 
     
Net fair value
              (13,508)
       (0.04)
     
     



























The accompanying notes are an integral part of these financial statements.

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MORGAN STANLEY SMITH BARNEY SPECTRUM CURRENCY AND COMMODITY L.P.
CONDENSED SCHEDULE OF INVESTMENTS
December 31, 2011



Futures and Forward Contracts Purchased
          Net unrealized
          gain/(loss) on
          open contracts
          % of
          Partners’ Capital
 
             $
  
Foreign currency
    (90,347)
    (0.25)
     
Total Futures and Forward Contracts Purchased
 (90,347)
  (0.25)
     

Futures and Forward Contracts Sold
    
     
Foreign currency
      (33,514)
      (0.10)
     
Total Futures and Forward Contracts Sold
      (33,514)
      (0.10)
     
Unrealized Currency Gain
       35,474
        0.10
     
Net fair value
              (88,387)
       (0.25)
     
     
 
Options Contracts
Fair Value
% of
Partners’ Capital
 
             $
  
Options purchased on Forward Contracts
1,534
   – (1)



(1)  Amounts less than 0.005%


















The accompanying notes are an integral part of these financial statements.


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MORGAN STANLEY SMITH BARNEY SPECTRUM CURRENCY AND COMMODITY L.P.
STATEMENTS OF INCOME AND EXPENSES
(Unaudited)


 
For the Quarters Ended March 31,
       
 
2012
  
2011
 
$
  
$
INVESTMENT INCOME
      
Interest income (MSSB)
3,623
  
10,706
       
EXPENSES
      
Brokerage fees (MS&Co.)
394,047
  
533,401
Management fees
160,682
  
231,913
       
Total Expenses
554,729
  
765,314
       
NET INVESTMENT LOSS
(551,106)
  
(754,608)
       
TRADING RESULTS
      
Trading profit (loss):
      
Net realized
(1,934)
  
(1,208,516)
Net change in unrealized
76,618
  
(1,177,017)
Realized loss on investment in KR Master Fund
(479,253)
  
–
Realized loss on investment in FL Master Fund
(1,825,238)
  
–
Unrealized appreciation on investment in FL Master Fund
1,779,118
  
–
Unrealized appreciation on investment in KR Master Fund
 151,040
  
–
       
Total Trading Results
(299,649)
  
(2,385,533)
       
NET LOSS
(850,755)
  
(3,140,141)
       
NET LOSS ALLOCATION
      
       
Limited Partners
(840,241)
  
(3,106,018)
General Partner
(10,514)
  
(34,123)
       
NET LOSS PER UNIT*
      
       
Limited Partners
(0.21)
  
(0.64)
General Partner
(0.21)
  
(0.64)
       
 
Units
  
Units
WEIGHTED AVERAGE NUMBER
      
OF UNITS OUTSTANDING
3,972,123.168
  
4,972,488.162


* Based on change in net asset value per Unit.


The accompanying notes are an integral part of these financial statements.




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MORGAN STANLEY SMITH BARNEY SPECTRUM CURRENCY AND COMMODITY L.P.
STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL
For the Quarters Ended March 31, 2012 and 2011
(Unaudited)



 
Units of
            
 
Partnership
  
Limited
  
General
    
 
Interest
  
Partners
  
Partner
  
Total
     
$
  
$
  
$
Partners’ Capital,
              
December 31, 2011
4,032,291.402
  
34,396,076
  
418,228
  
34,814,304
               
Net Loss
–
  
(840,241)
  
(10,514)
  
(850,755)
               
Redemptions
(255,136.452)
  
(2,171,864)
  
–
  
(2,171,864)
               
Partners’ Capital,
              
March 31, 2012
3,777,154.950
  
31,383,971
  
407,714
  
31,791,685
               
               
               
               
Partners’ Capital,
              
December 31, 2010
5,020,573.947
  
47,504,374
  
517,432
  
48,021,806
               
Net Loss
–
  
(3,106,018)
  
(34,123)
  
(3,140,141)
               
Redemptions
(161,791.299)
  
(1,472,181)
  
–
  
(1,472,181)
               
Partners’ Capital,
              
March 31, 2011
4,858,782.648
  
42,926,175
  
483,309
  
43,409,484




















The accompanying notes are an integral part of these financial statements.


- 6 -

 
 
 

MORGAN STANLEY SMITH BARNEY SPECTRUM CURRENCY AND COMMODITY L.P.
NOTES TO FINANCIAL STATEMENTS

March 31, 2012

(Unaudited)

The unaudited financial statements contained herein include, in the opinion of management, all adjustments necessary for a fair presentation of the financial condition and results of operations of Morgan Stanley Smith Barney Spectrum Currency and Commodity L.P. (the “Partnership”).  The financial statements and condensed notes herein should be read in conjunction with the Partnership’s Annual Report on Form 10-K for the fiscal year ending December 31, 2011.

1.  Organization
Morgan Stanley Smith Barney Spectrum Currency and Commodity L.P. is a Delaware limited partnership organized in 1999 to engage primarily in the speculative trading of futures contracts, options on futures and forward contracts, and forward contracts on physical commodities and other commodity interests, including, but not limited to, foreign currencies, financial instruments, metals, energy, and agricultural products (collectively, “Futures Interests”) (refer to Note 4, Financial Instruments).  The Partnership is one of the Morgan Stanley Smith Barney Spectrum series of funds, comprised of the Partnership, Morgan Stanley Smith Barney Spectrum Global Balanced L.P., Morgan Stanley Smith Barney Spectrum Select L.P., Morgan Stanley Smith Barney Spectrum Strategic L.P., and Morgan Stanley Smith Barney Spectrum Technical L.P. (collectively, the “Spectrum Series”).









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MORGAN STANLEY SMITH BARNEY SPECTRUM CURRENCY AND COMMODITY L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

The Partnership’s general partner is Ceres Managed Futures LLC (“Ceres” or the “General Partner”).  The non-clearing commodity broker is Morgan Stanley Smith Barney LLC (“MSSB”).  The clearing commodity broker is Morgan Stanley & Co. LLC (“MS&Co.”).  MS&Co. also acts as the counterparty on all trading of foreign currency forward contracts. Morgan Stanley Capital Group Inc. (“MSCG”) acts as the counterparty on all trading of options on foreign currency forward contracts.  Ceres is a wholly-owned subsidiary of Morgan Stanley Smith Barney Holdings LLC (“MSSBH”).  MSSBH is majority-owned indirectly by Morgan Stanley and minority-owned indirectly by Citigroup Inc.  MSSB is the principal subsidiary of MSSBH.  MS&Co. and MSCG are wholly-owned subsidiaries of Morgan Stanley.  The trading advisors to the Partnership are C-View International Limited (“C-View”), Flintlock Capital Asset Management, LLC (“Flintlock”) and Krom River Investment Management (Cayman) Limited (together with its affiliate, Krom River Trading AG (“Krom River”) (each individually, a “Trading Advisor”, or collectively, the “Trading Advisors”).

Effective January 1, 2012 Flintlock and Krom River were added as trading advisors to manage assets of the Partnership through its investments in FL Master Fund L.P. (“FL Master Fund”) and KR Master Fund L.P. (“KR Master Fund”), respectively.  Ceres is a general partner to FL Master Fund and KR Master Fund.

As of January 2, 2012, the General Partner changed the trading strategy of the Partnership to a strategy in which the trading advisors employ proprietary trading models and methodologies that seek to identify favorable price relationships between and among various global currency and commodity markets through the analysis of

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MORGAN STANLEY SMITH BARNEY SPECTRUM CURRENCY AND COMMODITY L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

technical market information.  The Partnership aims to achieve capital appreciation through speculative trading, directly and indirectly, in U.S. and international markets for currencies, agricultural and energy products and precious and base metals.  The Partnership may employ futures, options on futures, and forward contracts in those markets.  In implementing this new trading strategy, the General Partner has decided to change the name of the Partnership and to make certain changes to the Trading Advisors managing the assets on behalf of the Partnership.  Effective December 30, 2011, the Partnership’s name was changed from Morgan Stanley Smith Barney Spectrum Currency L.P. to Morgan Stanley Smith Barney Spectrum Currency and Commodity L.P.




























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MORGAN STANLEY SMITH BARNEY SPECTRUM CURRENCY AND COMMODITY L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2.  
Financial Highlights
Financial Highlights for the three months ended March 31, 2012 and 2011 were as follows:
                                         For the Quarters Ended March 31,

 
2012
2011
         Per Unit Operating Performance:
    
         Net asset value, January 1:
   $    8.63
   $    9.57
     
                     Interest Income
         –    (3)
         –      (3)
                     Expenses
       (0.14)
       (0.15)
                     Realized/Unrealized Loss (1)
       (0.07)
       (0.49) (4)
                     Net Loss
       (0.21)
       (0.64)
     
         Net asset value, March 31:
  $     8.42
  $     8.93
     
         Ratios to average net assets:
    
                     Net Investment Loss (2)
       (6.7)%
       (6.8)%
                     Expenses before  Incentive Fees (2)
        6.7 %
        6.9 %
                     Expenses after Incentive Fees (2)
        6.7 %
        6.9 %
                     Net Loss (2)
    (10.3) %
    (28.4) %
         Total return before incentive fees
      (2.4)%
      (6.7)%
         Total return after incentive fees
      (2.4)%
      (6.7)%
     


  (1) Realized/Unrealized Loss is a balancing amount necessary to reconcile the change in net asset value per Unit
       with the other per Unit information.
 
   (2) Annualized (except for incentive fees, if applicable).
 
 
   (3) Amounts less than $0.005 per Unit.

   (4)
These amounts have been reclassified from the prior year financial statements to conform to the current year
 
presentation. Specifically, realized and unrealized loss per Unit amounts were combined in the 2011 Financial Highlights presentation.









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MORGAN STANLEY SMITH BARNEY SPECTRUM CURRENCY AND COMMODITY L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


3.  Related Party Transactions
The Partnership’s cash is on deposit with MSSB and MS&Co. in Futures Interest trading accounts to meet margin requirements as needed.  At each month end, MSSB pays the Partnership interest income on 80% of the funds on deposit with the commodity broker at a rate equal to the monthly average of the 4-week U.S. Treasury bill discount rate during such month.  MSSB retains any interest earned in excess of the interest paid by MSSB to the Partnership.  For purposes of such interest payments, net assets do not include monies owed to the
Partnership on Futures Interests.  The Partnership pays brokerage fees to MS&Co.

4.  Financial Instruments
The Partnership trades Futures Interests.  Futures and forwards represent contracts for delayed delivery of an instrument at a specified date and price.  Futures Interests are open commitments until settlement date, at which time they are realized.  They are valued at fair value, generally on a daily basis, and the unrealized gains and losses on open contracts (the difference between contract trade price and market price) are reported in the Statements of Financial Condition as a net unrealized gain or loss on open contracts.  The resulting net change in unrealized gains and losses is reflected in the “Net change in unrealized” trading profit (loss), “Unrealized appreciation on investment in FL Master Fund” and “Unrealized appreciation on investment in KR Master Fund” for open contracts from one period to the next on the Statements of Income and Expenses.  The fair value of exchange-traded futures, options and forward contracts is determined by the various futures exchanges, and reflects the settlement price for each contract as of the close of business on the last business day of the reporting


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MORGAN STANLEY SMITH BARNEY SPECTRUM CURRENCY AND COMMODITY L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)




period.  The fair value of foreign currency forward contracts is extrapolated on a forward basis from the spot prices quoted as of approximately 3:00 P.M. (E.T.) of the last business day of the reporting period from various exchanges.  The fair value of non-exchange-traded foreign currency option contracts is calculated by applying an industry standard model application for options valuation of foreign currency options, using as 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.  Risk arises from changes in the value of these contracts and the potential inability of counterparties to perform under the terms of the contracts.  There are numerous factors which may significantly influence the fair value of these contracts, including interest rate volatility.

The Partnership may invest in Master Funds.  The Partnership records its investments in Master Funds at fair value.

The Partnership may buy or write put and call options through listed exchanges and the over-the-counter market.  The buyer of an option has the right to purchase (in the case of a call option) or sell (in the case of a put option) a specified quantity of a specific Futures Interest on the underlying assets at a specified price prior to or on a specified expiration date.  The writer of an option is exposed to the risk of loss if the fair value of the Futures Interest on the underlying asset declines (in the case of a put option) or increases (in the case of a call option).  The writer of an option can never profit by more than the premium paid by the buyer but can potentially lose an unlimited amount.


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MORGAN STANLEY SMITH BARNEY SPECTRUM CURRENCY AND COMMODITY L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


Premiums received/premiums paid from writing/purchasing options are recorded as liabilities/assets on the Statements of Financial Condition and are subsequently adjusted to fair values.  The difference between the fair value of the option and the premiums received/premiums paid is treated as an unrealized gain or loss within the Statements of Income and Expenses.

The fair value of exchange-traded contracts is based on the settlement price quoted by the exchange on the day with respect to which fair value is being determined.  If an exchange-traded contract could not have been liquidated on such day due to the operation of daily limits or other rules of the exchange, the settlement price will be equal to the settlement price on the first subsequent day on which the contract could be liquidated.

The Partnership’s contracts are accounted for on a trade-date basis and marked to market on a daily basis.  The Partnership accounts for its derivative investments as described in Note 5, Derivatives and Hedging as required by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC” or the “Codification”).  A derivative is defined as a financial instrument or other contract that has all three of the following characteristics:






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MORGAN STANLEY SMITH BARNEY SPECTRUM CURRENCY AND COMMODITY L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)



1)  
a) One or more “underlyings” and b) one or more “notional amounts” or payment provisions or both;

2)  
Requires no initial net investment or a smaller initial net investment than would be required for other types of contracts that would be expected to have a similar response relative to changes in market factors; and
3)  
Terms that require or permit net settlement.



Generally, derivatives include futures, forwards, swaps or options contracts, and other financial instruments with similar characteristics such as caps, floors, and collars.

The net unrealized losses on open contracts, reported as a component of “Trading Equity” on the Statements of Financial Condition, and their longest contract maturities were as follows:
 
Net Unrealized Losses on Open Contracts
Longest Maturities
Date
Exchange-Traded
Off-Exchange-Traded
Total
Exchange-Traded
Off-Exchange-Traded
 
$
$
$
    
Mar. 31, 2012
—
(13,508)
(13,508)
—
Jun. 2012
Dec. 31, 2011
—
(88,387)
(88,387)
—
Mar. 2012






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MORGAN STANLEY SMITH BARNEY SPECTRUM CURRENCY AND COMMODITY L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

In general, the risks associated with off-exchange-traded contracts are greater than those associated with exchange-traded contracts because of the greater risk of default by the counterparty to an off-exchange-traded contract.  The Partnership has credit risk associated with counterparty nonperformance.  As of the date of the financial statements, the credit risk associated with the instruments in which the Partnership trades is limited to the unrealized gain amounts reflected in the Partnership’s Statements of Financial Condition.  The net unrealized gains (losses) on open contracts is further disclosed gross by type of contract and corresponding fair value level in Note 6, Fair Value Measurements and Disclosures.

The Partnership also has credit risk because MS&Co. and/or MSCG acts as the futures commission merchant or the counterparty, with respect to most of the Partnership’s assets. Exchange-traded futures, exchange-traded forward, and exchange-traded futures-styled options contracts are fair valued on a daily basis, with variations in value settled on a daily basis. MS&Co., as a commodity futures broker for the Partnership’s exchange-traded futures, exchange-traded forward, and exchange-traded futures-styled options contracts, is required, pursuant to regulations of the Commodity Futures Trading Commission (“CFTC”), to segregate from their own assets, and for the sole benefit of its commodity customers, total cash held by it with respect to exchange-traded futures, exchange-traded forward, and exchange-traded futures-styled options contracts, including an amount equal to the net unrealized losses on all open exchange-traded futures, exchange-traded forward, and exchange-traded futures-styled options contracts, which funds, in the aggregate, totaled $11,603,522 and $35,818,805 at
March 31, 2012, and December 31, 2011, respectively.  With respect to the Partnership’s off-exchange-traded forward currency contracts and forward currency options contracts, there are no daily settlements of variation in

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MORGAN STANLEY SMITH BARNEY SPECTRUM CURRENCY AND COMMODITY L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


value, nor is there any requirement that an amount equal to the net unrealized gains (losses) on such contracts be segregated.  However, the Partnership is required to meet margin requirements equal to the net unrealized loss on open forward currency contracts in the Partnership accounts with the counterparty, which is accomplished by daily maintenance of the cash balance in a custody account held at MSSB for the benefit of MS&Co. With respect to those off-exchange-traded forward currency contracts, the Partnership is at risk to the ability of MS&Co., the sole counterparty on all such contracts, to perform. With respect to those off-exchange-traded forward currency options contracts, the Partnership is at risk to the ability of MSCG, the sole counterparty on all such contracts, to perform.   The Partnership has a netting agreement with each counterparty.  The primary terms are based on industry standard master agreements.  These agreements, which seek to reduce both the Partnership’s and the counterparties’ exposure on off-exchange-traded forward currency contracts, including options on such contracts, should materially decrease the Partnership’s credit risk in the event of MS&Co.’s or MSCG’s bankruptcy or insolvency.

The General Partner monitors and attempts to control the Partnership’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 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



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MORGAN STANLEY SMITH BARNEY SPECTRUM CURRENCY AND COMMODITY L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)



account analysis of futures, forwards and options positions by sector, margin requirements, gain and loss transactions and collateral positions.

The futures, forwards and options traded by the Partnership involve varying degrees of related market risk.  Market risk is often dependent upon changes in the level or volatility of interest rates, exchange rates, and prices of financial instruments and commodities, factors that result in frequent changes in the fair value of the Partnership’s open positions, and consequently in its earnings, whether realized or unrealized, and cash flow.  Gains and losses on open positions of exchange-traded futures, exchange-traded forward, and exchange-traded futures-styled options contracts are settled daily through variation margin.  Gains and losses on off-exchange-traded forward currency contracts are settled upon termination of the contract.  Gains and losses on off-exchange-traded forward currency options contracts are settled on an agreed-upon settlement date.  However, the Partnership is required to meet margin requirements equal to the net unrealized loss on open forward currency contracts in the Partnership’s accounts with the counterparty, which is accomplished by daily maintenance of the cash balance in a custody account held at MSSB for the benefit of MS&Co.

5.  Derivatives and Hedging
The Partnership’s objective is to profit from speculative trading in Futures Interests.  Therefore, the Trading




- 17 -
 
 
 
 


MORGAN STANLEY SMITH BARNEY SPECTRUM CURRENCY AND COMMODITY L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


Advisors for the Partnership will take speculative positions in Futures Interests where they feel the best profit opportunities exist for their trading strategy.  As such, the average number of contracts outstanding in absolute quantities (the total of the open long and open short positions) has been presented as a part of the
volume disclosure, as position direction is not an indicative factor in such volume disclosures.  With regard to foreign currency forward trades, each notional quantity amount has been converted to an equivalent contract based upon an industry convention.

The following tables summarize the valuation of the Partnership’s investments as of March 31, 2012 and December 31, 2011, respectively.

The Effect of Trading Activities on the Statements of Financial Condition as of March 31, 2012:
Futures and Forward Contracts
Long Unrealized
       Gain
Long Unrealized
       Loss
 Short
Unrealized
Gain
  Short Unrealized
    Loss
Net   Unrealized
Gain/(Loss)
Average number of contracts outstanding
for the three months   (absolute quantity)
 
       $
       $
$
       $
    $
  
             
Foreign currency
      77,223
     (83,303)
    5,774
   (48,383)
    (48,689)
1,648
Total
      77,223
     (83,303)
    5,774
   (48,383)
(48,689)
  
             
Unrealized currency gain
        
      35,181
  
Total net unrealized loss on open contracts
        
 
      (13,508)
  


















- 18 -
 
 
 
 
MORGAN STANLEY SMITH BARNEY SPECTRUM CURRENCY AND COMMODITY L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)



   
Average number of
   
contracts outstanding
   
for the three months
   
(absolute quantity)
Option Contracts at Fair Value
$
  
Options purchased
–
1
Options written
–
1



The Effect of Trading Activities on the Statements of Financial Condition as of December 31, 2011:

Futures and Forward Contracts
Long Unrealized
Gain
Long Unrealized
Loss
 Short
Unrealized
Gain
  Short Unrealized
Loss
Net   Unrealized
 Gain/(Loss)
Average number of contracts
outstanding for the year  (absolute quantity)
 
       $
       $
    $
       $
    $
  
Foreign currency
      34,016
(124,363)
        4,823
   (38,337)
  (123,861)
4,996
Total
      34,016
 (124,363)
        4,823
   (38,337)
(123,861)
  
             
Unrealized currency gain
        
      35,474
  
Total net unrealized  loss on open contracts
        
 
    (88,387)
  



   
Average number of
   
contracts outstanding
   
for the year
   
(absolute quantity)
Option Contracts at Fair Value
$
  
Options purchased
1,534
1
Options written
–
1

The following tables summarize the net trading results of the Partnership for the quarters ended March 31, 2012 and 2011, respectively.


The Effect of Trading Activities on the Statements of Income and Expenses for the Quarter Ended March 31, 2012 included in Total Trading Results:

Type of Instrument
                        $
   
Commodity
(403,901)
Foreign currency
104,545
Unrealized currency loss
             (293)
Total
   (299,649)

- 19 -
 
 
 
 
MORGAN STANLEY SMITH BARNEY SPECTRUM CURRENCY AND COMMODITY L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Line Items on the Statements of Income and Expenses for the Quarter Ended March 31, 2012:
Trading Results
                        $
   
Net realized
(1,934)
Net change in unrealized
76,618
Realized loss on investment in KR Master Fund
(479,253)
Realized loss on investment in FL Master Fund
(1,825,238)
Unrealized appreciation on investment in KR Master Fund
 
151,040
Unrealized appreciation on investment in FL Master Fund
 
     1,779,118
Total Trading Results
      (299,649)


The Effect of Trading Activities on the Statements of Income and Expenses for the Quarter Ended March 31, 2011 included in Total Trading Results:

Type of Instrument
                        $
   
Foreign currency
(2,366,658)
Unrealized currency loss
     (18,875)
Total
  (2,385,533)



Line Items on the Statements of Income and Expenses for the Quarter Ended March 31, 2011:
Trading Results
                       $
   
Net realized
(1,208,516)
Net change in unrealized
   (1,177,017)
Total Trading Results
   (2,385,533)

6.  Fair Value Measurements and Disclosures
Effective January 1, 2012, the Partnership adopted ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.”  The amendments within this ASU change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to eliminate unnecessary wording differences between U.S. GAAP and IFRS.  However, some of the amendments clarify the FASB’s intent about the

- 20 -
 
 
 
 

MORGAN STANLEY SMITH BARNEY SPECTRUM CURRENCY AND COMMODITY L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


application of existing fair value measurement requirements and other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements.  This new guidance did not have a significant impact on the Partnership’s financial statements.

Financial instruments are carried at fair value, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  Assets and liabilities carried at fair value are classified and disclosed in the following three levels: Level 1 - unadjusted quoted market prices in active markets for identical assets and liabilities; Level 2 - inputs other than unadjusted quoted market prices that are observable for the asset or liability, either directly or indirectly (including unadjusted quoted market prices for similar investments, interest rates, credit risk); and Level 3 - unobservable inputs for the asset or liability (including the Partnership’s own assumptions used in determining the fair value of investments).

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy.  In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.  The Partnership’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.

The Partnership’s assets and liabilities measured at fair value on a recurring basis are summarized in the following tables by the type of inputs applicable to the fair value measurements.
- 21 -
 
 
 
 
MORGAN STANLEY SMITH BARNEY SPECTRUM CURRENCY AND COMMODITY L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


March 31, 2012
  Unadjusted Quoted
Prices in Active
Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
  
Total
 
$
       $
    $
  
       $
Assets
          
 Investment in KR Master Fund
             –      
13,444,660
n/a
  
  13,444,660
 Investment in FL Master Fund
             –      
8,091,440
n/a
  
    8,091,440
     Forwards
             –      
          82,997      
n/a
  
         82,997                 
           
  Total Assets
             –      
   21,619,097
n/a
  
  21,619,097
           
     Liabilities
            
  Forwards
             –      
       131,686
n/a
  
    131,686
           
  Total Liabilities
             –      
      131,686
n/a
  
    131,686
           
     Unrealized currency gain
        
      35,181
           
*  Net fair value
             –      
  21,487,411
n/a
  
 21,522,592


December 31, 2011
  Unadjusted Quoted
Prices in Active
Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
  
Total
 
$
       $
$
  
          $
 Assets
          
     Forwards
             –      
38,838
n/a
  
    38,838
     Options Purchased
             –      
            1,534         
n/a
  
           1,534                  
           
  Total Assets
             –      
      40,372
n/a
  
     40,372
           
     Liabilities
          
     Forwards
             –      
     162,699
n/a
  
    162,699
           
  Total Liabilities
             –      
      162,699
n/a
  
    162,699
           
     Unrealized currency gain
        
      35,474
           
   *Net fair value
             –      
     (122,327)
n/a
  
  (86,853)

* This amount comprises the “Total net unrealized loss on open contracts” “Investment in KR Master Fund”, “Investment in FL Master Fund” and “Options purchased” on the Statements of Financial Condition.


During the period January 1, 2012 to March 31, 2012, there were no Level 3 assets and liabilities and there were no transfers of assets or liabilities between Level 1 and Level 2.
- 22 -
 
 
 
 
MORGAN STANLEY SMITH BARNEY SPECTRUM CURRENCY AND COMMODITY L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Investment in FL Master Fund and KR Master Fund

On January 1, 2012, the assets allocated to Flintlock for trading were invested in FL Master Fund, a limited partnership organized under the partnership laws of the State of Delaware.  FL Master Fund was formed to permit accounts managed now or in the future by Flintlock using the 2x Flintlock Commodity Opportunities Partners, LP, a proprietary, systematic trading program, to invest together in one trading vehicle.  The General Partner is also the general partner for FL Master Fund.  Individual and pooled accounts currently managed by Flintlock, including the Partnership, are permitted to be limited partners of FL Master Fund.  The General Partner and Flintlock believe that trading through this structure should promote efficiency and economy in the trading process.

On January 1, 2012, the assets allocated to Krom River for trading were invested in the KR Master Fund, a limited partnership organized under the partnership laws of the State of Delaware.  KR Master was formed in order to permit commodity pools managed now or in the future by Krom River using the Commodity Program at 150% Leverage, a fundamental and technical trading system, to invest together in one trading vehicle.  The General Partner is also the general partner of KR Master Fund.  Individual and pooled accounts currently managed by Krom River, including the Partnership, are permitted to be limited partners of KR Master Fund.  The General Partner and Krom River believe that trading through this structure should promote efficiency and economy in the trading process.



- 23 -
 
 
 
 
MORGAN STANLEY SMITH BARNEY SPECTRUM CURRENCY AND COMMODITY L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Summarized information reflecting the total assets, liabilities and capital of FL Master Fund and KR Master Fund is shown in the following tables.
                      March 31, 2012                                                      
      
 
    Total Assets
       Total Liabilities
     Total Capital
FL Master Fund
$32,006,201
$1,415,456
$30,590,745
KR Master Fund
  129,231,718
   1,776,754
  127,454,964
 
$161,237,919
$3,192,210
$158,045,709



Summarized information for the Partnership’s investment in FL Master Fund and KR Master Fund as of March 31, 2012 is as follows:
March 31, 2012
  % of
Partnership
 Net Assets
Fair
Value
 Partnership’s
 pro rata
Net Loss
Investment
Objective
   Redemption
 Permitted
 
       %
       $
   $
    
FL Master Fund
25.45
8,091,440
 (45,148)
Commodity
Monthly
       
Portfolio
  
KR Master Fund
42.29
13,444,660
(327,095)
 Commodity
Monthly
       
Portfolio
  

The Partnership’s investment into FL Master Fund and KR Master Fund do not pay any management, incentive, or administrative fee.  These fees are paid by the Partnership.  The Partnership reimburses FL Master Fund and KR Master Fund for all brokerage related fees borne by FL Master Fund and KR Master Fund on behalf of the Partnership’s investment.

At March 31, 2012, the Partnership owned approximately 26.43% and 10.55% of FL Master Fund and KR Master Fund, respectively.  It is the Partnership’s intention to continue to invest in FL Master Fund and KR Master Fund.  The performance of the Partnership is directly affected by the performance of FL Master Fund and KR Master Fund.

- 24 -
 
 
 
 
MORGAN STANLEY SMITH BARNEY SPECTRUM CURRENCY AND COMMODITY L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

The table below represents summarized Income Statement information for FL Master Fund and KR Master Fund for the three months ended March 31, 2012, to meet the requirements of Regulation S-X rule 3-09, as follows.
 
         Investment
       Income
       Net
        Investment Loss
    Total
    Trading Results
 
    Net
    Income
 
       $
       $
       $
       $
FL Master Fund
3,594
(58,252)
(181,171)
(239,423)
KR Master Fund
10,555
(109,287)
(3,145,845)
(3,255,132)

7.  Other Pronouncements
In December 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-11, “Disclosures about Offsetting Assets and Liabilities”, which creates a new disclosure requirement about the nature of an entity’s rights of setoff and the related arrangements associated with its financial instruments and derivative instruments. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The objective of this disclosure is to facilitate comparison between those entities that prepare their financial statements on the basis of accounting principles generally accepted in the United States of America (“U.S. GAAP”) and those entities that prepare their financial statement based on International Financial Reporting Standards (“IFRS”). The disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Partnership should also provide the disclosures retrospectively for all comparative periods presented.  The Partnership is currently evaluating the impact that the pronouncement would have on the financial statements. 



- 25 -
 
 
 
 
MORGAN STANLEY SMITH BARNEY SPECTRUM CURRENCY AND COMMODITY L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

In October 2011, the FASB issued a proposed ASU intended to improve and converge financial reporting by setting forth consistent criteria for determining whether an entity is an investment company.  Under longstanding U.S. GAAP, investment companies carry all of their investments at fair value, even if they hold a controlling interest in another company.  The primary changes being proposed by the FASB relate to which entities would be considered investment companies as well as certain disclosure and presentation requirements.

In addition to the changes to the criteria for determining whether an entity is an investment company, the FASB also proposes that an investment company be required to consolidate another investment company if it holds a controlling financial interest in the entity.  The Partnership will evaluate the impact that this proposed update would have on the financial statements once the pronouncement is issued.

 
8.  Restricted and Unrestricted Cash

As reflected on the Partnership’s Statements of Financial Condition, restricted cash equals the cash portion of assets on deposit to meet margin requirements plus the cash required to offset unrealized losses on foreign currency forwards and options contracts and offset unrealized losses on offset London Metal Exchange positions.

All of these amounts are maintained separately.  Cash that is not classified as restricted cash is therefore classified as unrestricted cash.


- 26 -
 
 
 
 
MORGAN STANLEY SMITH BARNEY SPECTRUM CURRENCY AND COMMODITY L.P.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)

9.  Income Taxes
No provision for income taxes has been made in the accompanying financial statements, as partners are individually responsible for reporting income or loss based upon their respective share of the Partnership’s revenues or expenses for income tax purposes. The Partnership files U.S. federal and state tax returns.

This guidance issued by the FASB on income taxes clarifies the accounting for uncertainty in income taxes recognized in the Partnership’s financial statements, and prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken.  The Partnership has concluded that there are no significant uncertain tax positions that would require recognition in the financial statements as of March 31, 2012 and December 31. 2011.  If applicable, the Partnership recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in other expenses in the Statements of Income and Expenses.  The 2008 through 2011 tax years remain subject to examination by U.S. federal and most state tax authorities.  No income tax returns are currently under examination.

10.  Subsequent Events

Management of Ceres performed its evaluation of subsequent events through the date of filing, and has determined that there were no subsequent events requiring adjustment of or disclosure in the financial statements.






- 27 -
 
 
 
 
Item 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

As of March 31, 2012, the percentage of assets allocated to each market sector was approximately as follows: Currency 43.13% and Commodity 56.87%.

Liquidity.  The Partnership deposits its assets with MSSB as non-clearing commodity broker, and MS&Co. as its clearing commodity broker in separate futures, forward and options trading accounts established for each Trading Advisor.  Such assets are used as margin to engage in trading and may be used as margin solely for the Partnership’s trading. The assets are held in either non-interest bearing bank accounts or in securities and instruments permitted by the CFTC for investment of customer segregated or secured funds.  Since the Partnership’s sole purpose is to trade in futures, forwards and options, it is expected that the Partnership will continue to own such liquid assets for margin purposes.

The Partnership’s investment in futures, forwards and options may, from time to time, be illiquid.  Most U.S. futures exchanges limit fluctuations in prices during a single day by regulations referred to as “daily price fluctuation limits” or “daily limits.”  Trades may not be executed at prices beyond the daily limit.  If the price for a particular futures or options contract has increased or decreased by an amount equal to the daily limit, positions in that futures or options contract can neither be taken nor liquidated unless traders are willing to effect trades at or within the limit. Futures prices have occasionally moved the daily limit for several consecutive days with little or no trading.  These market conditions could prevent the Partnership from promptly liquidating its futures or options contracts and result in restrictions on redemptions.


- 28 -

 
 
 

There is no limitation on daily price moves in trading forward contracts on foreign currencies.  The markets for some world currencies have low trading volume and are illiquid, which may prevent the Partnership from trading in potentially profitable markets or prevent the Partnership from promptly liquidating unfavorable positions in such markets, subjecting it to substantial losses.  Either of these market conditions could result in restrictions on redemptions.  For the periods covered by this report, illiquidity has not materially affected the Partnership’s assets.

There are no known material trends, demands, commitments, events, or uncertainties at the present time that are reasonably likely to result in the Partnership’s liquidity increasing or decreasing in any material way.

As of March 31, 2012, approximately 56.87% of the Partnership’s total investments are futures contracts which are exchange-traded while approximately 43.13% are forward contracts which are off-exchange traded.

Capital Resources.  The Partnership does not have, nor does it expect to have, any capital assets.  Redemptions of units of limited partnership interest (“Unit(s)”) in the future will affect the amount of funds available for investments in futures, forwards and options in subsequent periods.  It is not possible to estimate the amount, and therefore the impact, of future outflows of Units.

There are no known material trends, favorable or unfavorable, that would affect, nor any expected material changes to, the Partnership’s capital resource arrangements at the present time.


- 29 -

 
 
 

Off-Balance Sheet Arrangements and Contractual Obligations.  The Partnership does not have any off-balance sheet arrangements, nor does it have contractual obligations or commercial commitments to make future payments that would affect its liquidity or capital resources.

Results of Operations
General.  The Partnership’s results depend on the Trading Advisors and the ability of each Trading Advisor’s trading program to take advantage of price movements in the futures, forward and options markets.  C-View trades its C-View Limited Managed Account 3X Program at 2x leverage.  C-View’s program trades spot and forward foreign exchange in the interbank market, non-deliverable forwards and OTC currency options. C-View’s approach is discretionary, based on a combination of fundamental analysis, technical analysis and market psychology. The intention is to capture profits from short to medium-term price trends while maintaining profitability in ranging markets.

Flintlock’s trading program seeks to generate attractive risk-adjusted returns, while preserving capital and minimizing the correlation of the account’s returns to the U.S. commodity and equity markets.  Flintlock believes that this fundamental-focused strategy is effective in most business and economic climates.  In general, the market for thematic, pattern and event-driven parameters are used to form a fundamental view of global commodities.  Rigorous research and disciplined analysis are used to test and formulate a fundamental view of a certain commodity.  This fundamental view is then combined with technical indicators, market sentiment and flow analysis to gain a complete picture of a likely commodity price behavior.


- 30 -
 
 
 
 
Krom River trades its Krom River Commodity Program on behalf of the Partnership.  The Krom River Commodity Program trades in around 20 different markets including base metals, precious metals, energy, agricultural and softs. The trade types include long volatility, directional and relative value. The trading instruments are exchange-listed futures and options, which are traded on both fundamental and technical basis. The Krom River Commodity Program does not trade over-the-counter instruments, nor take physical deliveries.
 

 
The following chart sets forth the percentage and the amount of the Partnership’s net assets allocated to each Trading Advisor for the period ending March 31, 2012, and March 31, 2011, respectively, and the change during the applicable period.

Trading Advisor
Allocations as of
 March 31,
      2012 (%)
Allocations as of March 31,
2011 (%)
Allocations as of March 31,
 2012($)
  Allocations as of March 31,
2011 ($)
Change during the period
           
C-View
32.63
33.33
10,372,794
14,468,381
-28.31%
Krom River
42.05
–
13,368,554
–
–
Flintlock
25.32
–
8,050,337
–
–
JWH
–
25.00
–
10,852,371
–
Sunrise
–
25.00
–
10,852,371
–
DKR
–
16.67
–
7,236,361
–

The following presents a summary of the Partnership’s operations for the quarters ended March 31, 2012 and 2011, and a general discussion of its trading activities during each period.  It is important to note, however, that the Trading Advisors trade in various markets at different times and that prior activity in a particular market does not mean that such market will be actively traded by the Trading Advisors or will be profitable in the future.  Consequently, the results of operations of the Partnership are difficult to discuss other than in the context of the Trading Advisors’ trading activities on behalf of the Partnership during the period in question.  Past performance is no guarantee of future results.
- 31 -
 
 
 
 
The Partnership’s results of operations set forth in the financial statements on pages 2 through 27 of this report are prepared in accordance with U.S. GAAP, which require the use of certain accounting policies that affect the amounts reported in these financial statements, including the following: the contracts the Partnership trades are accounted for on a trade-date basis and marked to market on a daily basis.  The difference between their original contract value and market value is recorded on the Statements of Income and Expenses as “Net change in unrealized” trading profit (loss) and “Unrealized appreciation on investment” in FL Master Fund and KR Master Fund, respectively, for open (unrealized) contracts, and recorded as “Net realized” trading profit (loss) and “Realized loss on investment” in FL Master Fund and KR Master Fund, respectively, when open positions are closed out.  The sum of these amounts constitutes the Partnership’s trading results.  The market value of a futures contract is the settlement price on the exchange on which that futures contract is traded on a particular day.  The value of a foreign currency forward contract is based on the spot rate as of approximately 3:00 P.M. (E.T.) the close of the business day.  Interest income, as well as management fees, incentive fees, and brokerage fees of the Partnership are recorded on an accrual basis.

Ceres believes that, based on the nature of the operations of the Partnership, no assumptions relating to the application of critical accounting policies other than those presently used could reasonably affect reported amounts.

For the Quarter Ended March 31, 2012
The Partnership recorded total trading results including interest income totaling $(296,026) and expenses totaling $554,729, resulting in a net loss of $850,755 for the quarter ended March 31, 2012.  The Partnership’s net asset value per Unit decreased from $8.63 at December 31, 2011 to $8.42 at March 31, 2012.

- 32 -
 
 
 
 
The most significant losses were recorded within the metals markets throughout February and March from long positions in gold and silver futures as prices moved lower amid a rise in the value of the U.S. dollar, which reduced demand for the precious metals. Within the agricultural markets, losses were incurred primarily during March from long positions in corn futures as prices declined on speculation that rising U.S. ethanol stockpiles will slow demand for the grain, boosting supply.

A portion of the Partnership’s losses for the quarter was offset by gains achieved within the energy sector in February from long futures positions in crude oil and its related products as prices rose after Iran denied nuclear inspectors access to a military base, adding to concern that global oil supplies may be disrupted. Within the currency markets, gains were recorded during January from long positions in the Canadian dollar and Japanese yen versus the U.S. dollar as the value of the U.S. dollar weakened following the U.S. Federal Reserve’s suggestion they would likely keep short-term interest rates low through 2014. During February, additional gains were incurred from short positions in the Japanese yen versus the U.S. dollar as the value of the Japanese yen fell against the U.S. dollar after the Bank of Japan said it would increase the size of its asset-purchase fund. During March, further gains were incurred from short positions in the Japanese yen and Australian dollar versus the U.S. dollar as concern over earnings in China reduced demand for these currencies.

For the Quarter Ended March 31, 2011
The Partnership recorded total trading results including interest income totaling $(2,374,827) and expenses totaling $765,314, resulting in a net loss of $3,140,141 for the quarter ended March 31, 2011.  The Partnership’s net asset value per Unit decreased from $9.57 at December 31, 2010 to $8.93 at March 31, 2011.

- 33 -
 
 
 
 
The most significant trading losses were incurred, primarily during January, from long positions in the South African rand, Japanese yen, and Australian dollar versus the U.S. dollar as the value of the U.S. dollar rose relative to these currencies following stronger-than-expected U.S. factory data and the release of minutes from the U.S. Federal Reserve meeting, which produced optimism for the U.S. economy. Furthermore, the U.S. dollar rose relative to these currencies after reports on American jobs growth and service industries topped forecasts, boosting demand for the U.S. dollar. Additional losses were recorded during March from long positions in the Japanese yen versus the U.S. dollar as the value of the Japanese yen fell relative to the U.S. dollar after the Bank of Japan and the G-7 successfully intervened in the foreign exchange markets to halt the yen’s rise. Further, losses were experienced from long positions in the Australian dollar and New Zealand dollar versus the U.S. dollar as the value of these currencies fell relative to the U.S. dollar amid flight to quality after the nuclear crisis in Japan and on concerns that global demand would slow.

A portion of these losses for the quarter was offset by gains that were achieved, primarily during March, from long positions in the Indian rupee versus the U.S. dollar as the value of the U.S. dollar moved lower relative to the Indian rupee after “safe haven” demand for the U.S. dollar subsided following a better-than-expected U.S. employment report. Additional gains were achieved from long positions in the euro versus the U.S. dollar as the value of the euro rose relative to the U.S. dollar amid expectations of a rate increase by the European Central Bank.








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Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Introduction
The Partnership is a commodity pool engaged primarily in the speculative trading of futures, forwards and options.  The market-sensitive instruments held by the Partnership are acquired for speculative trading purposes only and, as a result, all or substantially all of the Partnership’s assets are at risk of trading loss.  Unlike an operating company, the risk of market-sensitive instruments is inherent to the primary business activity of the Partnership.

The futures, forwards and options on such contracts traded by the Partnership involve varying degrees of related market risk.  Market risk is often dependent upon changes in the level or volatility of interest rates, exchange rates, and prices of financial instruments and commodities, factors that result in frequent changes in the fair value of the Partnership’s open positions, and consequently in its earnings, whether realized or unrealized, and cash flow.  Gains and losses on open positions of exchange-traded futures, exchange-traded forward, and exchange-traded futures-styled options contracts are settled daily through variation margin.  Gains and losses on off-exchange-traded forward currency contracts and forward currency options contracts are settled upon termination of the contract.  Gains and losses on off-exchange-traded forward currency options contracts are settled upon an agreed upon settlement date.  However, the Partnership is required to meet margin requirements equal to the net unrealized loss on open forward currency contracts in the Partnership accounts with the counterparty, which is accomplished by daily maintenance of the cash balance in a custody account held at MSSB for the benefit of MS&Co.



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The Partnership’s total market risk may increase or decrease as it is influenced by a wide variety of factors, including, but not limited to, the diversification among the Partnership’s open positions, the volatility present within the markets, and the liquidity of the markets.

The face value of the market sector instruments held by the Partnership is typically many times the applicable margin requirements.  Margin requirements generally range between 2% and 15% of contract face value.  Additionally, the use of leverage causes the face value of the market sector instruments held by the Partnership typically to be many times the total capitalization of the Partnership.

The Partnership’s past performance is no guarantee of its future results.  Any attempt to numerically quantify the Partnership’s market risk is limited by the uncertainty of its speculative trading.  The Partnership’s speculative trading and use of leverage may cause future losses and volatility (i.e., “risk of ruin”) that far exceed the Partnership’s experience to date as discussed under the “Partnership’s Value at Risk in Different Market Sectors” section and significantly exceed the Value at Risk (“VaR”) tables disclosed.

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

Quantifying the Partnership’s Trading Value at Risk
The following quantitative disclosures regarding the Partnership’s market risk exposures contain “forward-looking statements” within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934).  All quantitative disclosures in this section are deemed to be forward-looking statements for purposes of the safe harbor, except for statements of historical fact.
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The Partnership accounts for open positions on the basis of fair value accounting principles.  Any loss in the market value of the Partnership’s open positions is directly reflected in the Partnership’s earnings and cash flow.

The Partnership’s risk exposure in the market sectors traded by the Trading Advisors is estimated below in terms of VaR.  Please note that the VaR model is used to numerically quantify market risk for historic reporting purposes only and is not utilized by either Ceres or the Trading Advisors in their daily risk management activities.

VaR is a measure of the maximum amount which the Partnership could reasonably be expected to lose in a given market sector.  However, the inherent uncertainty of the Partnership’s speculative trading and the recurrence in the markets traded by the Partnership of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated VaR of the Partnership’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 Partnership’s losses in any market sector will be limited to VaR or by the Partnership’s attempts to manage its market risk.

Exchange maintenance margin requirements have been used by the Partnership as the measure of its VaR.  Maintenance 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.  Maintenance margin has been used rather than the more generally available initial margin, because initial margin includes a credit risk component, which is not relevant to VaR.

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The Partnership’s Value at Risk in Different Market Sectors
The following tables indicate the trading VaR associated with the Partnership’s open positions by market category as of March 31, 2012 and the highest, lowest and average values during the quarter ended March 31, 2012.  All open position trading risk exposures of the Partnership have been included in calculating the figures set forth below.  There has been no material change in the trading VaR information previously disclosed in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2011.  As of March 31, 2012, the Partnership’s total capitalization was approximately $32 million.

Primary Market
  
% of Total
Risk Category
VaR
Capitalization
     
Currency
$1,367,588
4.30%
     
Commodity
      1,801,584
    5.67%
     
Total
$3,169,172
    9.97%


                             Three Months Ended March 31, 2012
Market Sector
High VaR
Low VaR
Average VaR*
Currency
$1,724,576
$397,902
$883,085
Commodity
$2,268,597
$104,395
$1,330,575
* Average of month-end VaR

The following tables indicate the trading VaR associated with the Partnership’s open positions by market category as of December 31, 2011 and the highest, lowest and average values during the twelve months ended December 31, 2011.  All open position trading risk exposure of the Partnership have been included in calculating the figures set forth below.  As of December 31, 2011, the Partnership’s total capitalization was approximately $35 million.

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Primary Market
  
% of
Risk Category
VaR
Total Capitalization
     
Currency
$662,978
1.90%


                         Twelve Months Ended December 31, 2011
Market Sector
High VaR
Low VaR
Average VaR*
Currency
$5,786,605
$556,613
$1,775,236
*Average of month-end VaR.
      

Limitations on Value at Risk as an Assessment of Market Risk
VaR models permit estimation of a portfolio’s aggregate market risk exposure, incorporating a range of varied market risks, reflect risk reduction due to portfolio diversification or hedging activities, and can cover a wide range of portfolio assets. However, VaR risk measures should be viewed in light of the methodology’s limitations, which include, but may not be limited to the following:
·  
past changes in market risk factors will not always result in accurate predictions of the distributions and correlations of future market movements;
·  
changes in portfolio value caused by market movements may differ from those of the VaR model;
·  
VaR results reflect past market fluctuations applied to current trading positions while future risk depends on future positions;
·  
VaR using a one-day time horizon does not fully capture the market risk of positions that cannot be liquidated or hedged within one day; and
·  
the historical market risk factor data used for VaR estimation may provide only limited insight into losses that could be incurred under certain unusual market movements.
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Non-Trading Risk
The Partnership has non-trading market risk on its foreign cash balances not needed for margin.  These balances and any market risk they may represent are immaterial.

The Partnership also maintains a substantial portion of its available assets in unrestricted cash at MSSB; as of March 31, 2012, such amount was equal to approximately 36% of the Partnership’s net asset value.  A decline in short-term interest rates would result in a decline in the Partnership’s cash management income. This cash flow risk is not considered to be material.

Materiality, as used throughout this section, is based on an assessment of reasonably possible market movements and any associated potential losses, taking into account the leverage, optionality, and multiplier features of the Partnership’s market-sensitive instruments, in relation to the Partnership’s net assets.

Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Partnership’s market risk exposures - except for (A) those disclosures that are statements of historical fact and (B) the descriptions of how the Partnership manages its primary market risk exposures - constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. The Partnership’s primary market risk exposures, as well as the strategies used and to be used by Ceres and the Trading Advisors for managing such exposures, are subject to numerous uncertainties, contingencies and risks, any one of which could cause the actual results of the Partnership’s risk controls to differ materially from the objectives of such strategies.  Government interventions, defaults and expropriations, illiquid markets, the emergence of dominant

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fundamental factors, political upheavals, changes in historical price relationships, an influx of new market participants, increased regulation, and many other factors could result in material losses, as well as in material changes to the risk exposures and the risk management strategies of the Partnership.  Investors must be prepared to lose all or substantially all of their investment in the Partnership.

Qualitative Disclosures Regarding Means of Managing Risk Exposure
The Partnership and the Trading Advisors, separately, attempt to manage the risk of the Partnership’s open positions in essentially the same manner in all market categories traded. Ceres attempts to manage market exposure by diversifying the Partnership’s assets among different market sectors and trading approaches through the selection of the commodity trading advisors and by daily monitoring of their performance.  In addition, the Trading Advisors establish diversification guidelines, often set in terms of the maximum margin to be committed to positions in any one market sector or market-sensitive instrument.

Ceres monitors and controls the risk of the Partnership’s non-trading instrument, cash. Cash is the only Partnership investment directed by Ceres, rather than the Trading Advisors.



Item 4.   CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the management of Ceres, at the time this quarterly report was filed, Ceres’ President (Ceres’ principal executive officer) and Chief Financial Officer (Ceres’ principal financial officer) have evaluated the effectiveness of the design and operation of the Partnership’s

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disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2012.  The Partnership’s disclosure controls and procedures are designed to provide reasonable assurance that information the Partnership is required to disclose in the reports that the Partnership files or submits under the Exchange Act are recorded, processed and summarized and reported within the time period specified in the applicable rules and forms.  Based on this evaluation, the President and Chief Financial Officer of Ceres have concluded that the disclosure controls and procedures of the Partnership were effective at March 31, 2012.

Changes in Internal Control over Financial Reporting
There have been no changes during the period covered by this quarterly report in the Partnership’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected or are reasonably likely to materially affect the Partnership’s internal control over financial reporting.

Limitations on the Effectiveness of Controls
Any control system, no matter how well designed and operated, can provide reasonable (not absolute) assurance that its objectives will be met.  Furthermore, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.





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PART II.  OTHER INFORMATION
Item 1.  LEGAL PROCEEDINGS
There were no additional information to supplement or amend the discussion set forth under Part I, Item 3, “Legal Proceedings” in the Partnership’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

Item 1A.  RISK FACTORS
There have been no material changes from the risk factors previously referenced in the Partnership’s Report on Form 10-K for the fiscal year ended December 31, 2011.

Item 4.  MINE SAFETY DISCLOSURES
Not applicable.

Item 6.
EXHIBITS

31.01
Certification of President of Ceres Managed Futures LLC, the General Partner of the Partnership, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
31.02
Certification of Chief Financial Officer of Ceres Managed Futures LLC, the General Partner of the Partnership, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
32.01
Certification of President of Ceres Managed Futures LLC, the General Partner of the Partnership, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
32.02
Certification of Chief Financial Officer of Ceres Managed Futures LLC, the General Partner of the Partnership, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 

 

 

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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 Document
 
101.PRE*
XBRL Taxonomy Extension Presentation Document
 
101.DEF*
XBRL Taxonomy Extension Definition Document
 

 
 
Notes to Exhibits List
 
 
*Submitted electronically herewith.
 
 
Pursuant to applicable securities laws and regulations, the Partnership is deemed to have complied with the reporting obligation relating to the submission of interactive data files in Exhibit 101 to this report and is not subject to liability under any anti-fraud provisions of the federal securities laws as long as the Partnership has made a good faith attempt to comply with the submission requirements and promptly amends the interactive data files after becoming aware that the interactive data files fails to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not subject to liability.
 

 

 

 

 

 
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SIGNATURE



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.




 
Morgan Stanley Smith Barney Spectrum Currency and Commodity L.P.
 
(Registrant)
     
 
By:
Ceres Managed Futures LLC
   
(General Partner)
     
May 14, 2012
By:
/s/Brian Centner
   
Brian Centner
   
Chief Financial Officer




The General Partner which signed the above is the only party authorized to act for the registrant.  The registrant has no principal executive officer, principal financial officer, controller, or principal accounting officer and has no Board of Directors.




















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CERES TACTICAL GLOBAL L.P. Reports