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EXCEL - IDEA: XBRL DOCUMENT - MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.Financial_Report.xls
EX-32.01 - EXHIBIT - MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.mscdex3201.htm
EX-32.02 - EXHIBIT - MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.mscdex3202.htm
EX-31.02 - EXHIBIT - MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.mscdex3102.htm
EX-31.01 - EXHIBIT - MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.mscdex3101.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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: 0-26282

 
MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
 
 
(Exact name of registrant as specified in its charter)
 

 
Delaware
 
13-3775071
 
(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
 
(855) 672-4468


(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 CHARTER ASPECT L.P.
INDEX TO QUARTERLY REPORT ON FORM 10-Q

September 30, 2012



 
PART I. FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements (Unaudited)
 
     
 
Statements of Financial Condition as of September 30, 2012 and December 31, 2011
2
     
 
Condensed Schedule of Investments as of September 30, 2012
3
     
 
Condensed Schedule of Investments as of December 31, 2011
4
     
 
Statements of Income and Expenses for the Three and Nine Months Ended September 30, 2012 and 2011
5
     
 
Statements of Changes in Partners’ Capital for the Nine Months Ended September 30, 2012 and 2011
6
     
 
Notes to Financial Statements
  7-23
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
24-33
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
33-41
     
Item 4.
Controls and Procedures
41-42
     
 
PART II. OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
43-46
     
Item 1A.
Risk Factors
46-47
     
Item 4.
Mine Safety Disclosures
47
     
Item 5.
Other Information
47-48
     
Item 6.
Exhibits
48-49



 
 

 

PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements

MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
       
 
September 30,
 
December 31,
 
2012
 
2011
ASSETS
$
 
$
       
Trading Equity:
     
       
Unrestricted cash
66,158,190
 
85,155,171
Restricted cash
7,280,597
 
9,058,228
       
Total cash
 73,438,787
 
 94,213,399
       
Net unrealized gain on open contracts (MS&Co.)
453,171
 
3,019,365
Net unrealized loss on open contracts (MSIP)
 
       (43,288)
       
Total net unrealized gain on open contracts
453,171
 
2,976,077
       
Total Trading Equity
  73,891,958
 
  97,189,476
       
Interest receivable (MS&Co. & MSSB)
4,188
 
820
       
Total Assets
  73,896,146
 
  97,190,296
       
LIABILITIES AND PARTNERS’ CAPITAL
     
       
Liabilities:
     
       
Redemptions payable
1,136,998
 
2,812,224
Accrued brokerage fees (MS&Co.)
381,977
 
474,378
Accrued management fees
95,494
 
158,126
       
Total Liabilities
1,614,469
 
3,444,728
       
Partners’ Capital:
     
       
Limited Partners (3,764,713.898 and 4,425,308.924 Units, respectively)
     71,496,218
 
     92,674,799
General Partner (41,359.223 and 51,130.223 Units, respectively)
785,459
 
1,070,769
       
Total Partners’ Capital
72,281,677
 
93,745,568
       
Total Liabilities and Partners’ Capital
  73,896,146
 
  97,190,296
       
NET ASSET VALUE PER UNIT
              18.99
 
              20.94






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

- 2 -

 
 

 

MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
CONDENSED SCHEDULE OF INVESTMENTS
September 30, 2012 (Unaudited)



Futures and Forward Contracts Purchased
Net unrealized
gain/(loss) on
open contracts
% of    
Partners’ Capital
 
$   
 
Commodity
410,942
0.57
Equity
(577,782)
(0.79)
Foreign currency
96,889
0.13
Interest rate
     688,867
   0.95
     
Total Futures and Forward Contracts Purchased
      618,916
   0.86
     
Futures and Forward Contracts Sold
   
     
     
Commodity
(988,099)
(1.37)
Equity
(17,863)
(0.02)
Foreign currency
79,315
0.11
Interest rate
       (44,716)
(0.06)
     
Total Futures and Forward Contracts Sold
   (971,363)
(1.34)
     
Unrealized Currency Gain
     805,618
   1.11
     
Net fair value
     453,171
   0.63






















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

- 3 -

 
 

 

MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
CONDENSED SCHEDULE OF INVESTMENTS
December 31, 2011



Futures and Forward Contracts Purchased
Net unrealized
gain/(loss) on
open contracts
% of   
Partners’ Capital
 
 $    
 
Commodity
(256,740)
 (0.27)
Equity
   43,794
 0.04
Foreign currency
56,385
0.06
Interest rate
    1,522,523
  1.62
     
Total Futures and Forward Contracts Purchased
    1,365,962
   1.45
     
Futures and Forward Contracts Sold
   
     
Commodity
    575,422
 0.61
Equity
 159,533
 0.17
Foreign currency
33,139
 0.04
Interest rate
      (6,585)
     (0.01)
     
Total Futures and Forward Contracts Sold
      761,509
   0.81
     
Unrealized Currency Gain
       848,606
        0.91
     
Net fair value
           2,976,077
  3.17
     
























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

- 4 -

 
 

 

MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
STATEMENTS OF INCOME AND EXPENSES
(Unaudited)


       
 
For the Three Months
  Ended September  30,
 
For the Nine Months
 Ended September 30,
               
 
2012
 
2011
 
2012
 
2011
 
$   
 
$   
 
$   
 
$   
INVESTMENT INCOME
             
Interest income (MS&Co. & MSSB)
13,999
 
3,646
 
32,789
 
30,016
               
EXPENSES
             
Brokerage fees (MS&Co.)
1,182,843
 
1,496,796
 
3,902,473
 
4,630,990
Management fees
295,711
 
498,932
 
1,166,455
 
1,543,664
               
Total Expenses
1,478,554
 
1,995,728
 
5,068,928
 
6,174,654
               
NET INVESTMENT LOSS
(1,464,555)
 
(1,992,082)
 
(5,036,139)
 
(6,144,638)
               
TRADING RESULTS
             
Trading profit (loss):
             
Net realized
(3,632,579)
 
8,812,863
 
(88,313)
 
12,783,528
Net change in unrealized
1,622,925
 
1,944,312
 
(2,522,906)
 
(3,269,240)
               
Total Trading Results
(2,009,654)
 
10,757,175
 
(2,611,219)
 
9,514,288
               
NET INCOME (LOSS)
(3,474,209)
 
8,765,093
 
(7,647,358)
 
3,369,650
               
NET INCOME (LOSS) ALLOCATION
             
               
Limited Partners
(3,442,250)
 
8,664,395
 
(7,562,060)
 
3,330,362
General Partner
(31,959)
 
100,698
 
(85,298)
 
39,288
               
NET INCOME (LOSS)  PER UNIT *
             
               
Limited Partners
(0.91)
 
1.80
 
(1.95)
 
0.70
General Partner
(0.91)
 
1.80
 
(1.95)
 
0.70
               
 
Units
 
Units
 
Units
 
Units
WEIGHTED AVERAGE NUMBER
             
OF UNITS OUTSTANDING
3,934,900.850
 
4,818,033.213
 
4,172,568.130
 
4,968,504.663



* Based on change in net asset value per Unit.




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

- 5 -

 
 

 

MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL
For the Nine Months Ended September 30, 2012 and 2011
(Unaudited)



 
Units of   
           
 
Partnership
 
Limited
 
General
   
 
Interest   
 
Partners
 
Partner
 
Total   
     
$     
 
$   
 
$      
Partners’ Capital,
             
December 31, 2011
4,476,439.147
 
92,674,799
 
1,070,769
 
93,745,568
               
Net Loss
 
(7,562,060)
 
(85,298)
 
(7,647,358)
               
Redemptions
(670,366.026)
 
(13,616,521)
 
(200,012)
 
(13,816,533)
               
Partners’ Capital,
             
September 30, 2012
3,806,073.121
 
71,496,218
 
785,459
 
72,281,677
               
               
               
               
Partners’ Capital,
             
December 31, 2010
5,169,640.931
 
105,911,284
 
1,157,861
 
107,069,145
               
Net Income
 
3,330,362
 
39,288
 
3,369,650
               
Redemptions
(426,895.873)
 
(8,878,071)
 
 
(8,878,071)
               
Partners’ Capital,
             
September  30, 2011
4,742,745.058
 
100,363,575
 
1,197,149
 
101,560,724


















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



- 6 -

 
 

 

MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
NOTES TO FINANCIAL STATEMENTS

September 30, 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 Charter Aspect 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 (the “Form 10-K”).

1.  Organization
Morgan Stanley Smith Barney Charter Aspect L.P. is a Delaware limited partnership organized in 1993 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 Charter series of funds, comprised of the Partnership, Morgan Stanley Smith Barney Charter WNT L.P., and Morgan Stanley Smith Barney Charter Campbell L.P. (collectively, the “Charter Series”).





- 7 -
 
 
 

 
MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Ceres Managed Futures LLC, a Delaware limited liability company, acts as a general partner (“Ceres” or the “General Partner”) and commodity pool operator of the Partnership.  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.  As of September 26, 2012, Morgan Stanley Smith Barney LLC (“MSSB”) is doing business as Morgan Stanley Wealth Management.  This entity, where the Partnership continues to maintain a cash account previously acted as a non-clearing commodity broker for the Partnership.  The clearing commodity broker is Morgan Stanley & Co. LLC (“MS&Co.”) and prior to July 1, 2012, Morgan Stanley & Co. International plc (“MSIP”).   MS&Co. also acts as the counterparty on all trading of foreign currency forward contracts. MSIP served as the commodity broker for trades on the London Metal Exchange (“LME”).  Morgan Stanley Wealth Management is a principal subsidiary of MSSBH.  MS&Co. and MSIP are wholly-owned subsidiaries of Morgan Stanley.  Aspect Capital Limited (“Aspect” or the “Trading Advisor”) is the trading advisor to the Partnership.









- 8 -
 
 
 

 
MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2.  
Financial Highlights
Financial Highlights for the three and nine months ended September 30, 2012 and 2011 were as follows:
 
                                For the Three Months                                                        For the Nine Months
                                Ended September 30,                                                           Ended September 30,

 
2012
2011
2012
2011
         Per Unit operating performance:
       
         Net asset value at the beginning of the period:
$     19.90
$     19.61
$     20.94
$     20.71
         
                     Interest Income
  –  (3)
  –  (3)
0.01
0.01
                     Expenses
        (0.38)
        (0.42)
        (1.23)
        (1.25)
                     Realized/Unrealized Income (Loss) (1)
        (0.53)
         2.22
        (0.73)
         1.94
                     Net Income (Loss)
        (0.91)
         1.80
        (1.95)
         0.70
         
         Net asset value, September 30:
$     18.99
$     21.41
$     18.99
$     21.41
         
         Ratios to average net assets:
       
                     Net Investment Loss  (2)
(7.6)%
(7.8)%
(8.0)%
(8.0)%
                     Expenses before Incentive Fees (2)
7.7%
7.8%
8.0%
8.1%
                     Expenses after Incentive Fees (2)
7.7%
7.8%
8.0%
8.1%
                     Net Income (Loss)  (2)
(18.1)%
34.2%
 (12.1)%
  4.4%
         Total return before incentive fees
(4.6)%
9.2%
(9.3)%
3.4%
         Total return after incentive fees
(4.6)%
9.2%
(9.3)%
3.4%




(1)
 
Realized/Unrealized Income (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.







- 9 -
 
 
 

 

MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


3.  Related Party Transactions
The Partnership’s cash is on deposit with MS&Co., in Futures Interests trading accounts to meet margin requirements as needed.  Monthly, MS&Co. pays the Partnership interest income on 100% of the average daily equity maintained in cash in the Partnership’s account during each month at a rate equal to 80% of the monthly average of the 4-week U.S. Treasury bill discount rate.  For purposes of such interest payments, daily funds do not include monies due to the Partnership on or with respect to futures, forwards or options contracts that have not been received.  MS&Co. retains any interest earned in excess of the interest paid to the Partnership.  The Partnership pays a flat rate brokerage fee 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) on 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




- 10 -
 
 
 

 
MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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 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 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.










- 11 -
 
 
 

 
MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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”).  A derivative is defined as a financial instrument or other contract that has all three of the following characteristics:
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 gains 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 Gains  on Open Contracts
Longest Maturities
Date
Exchange-Traded
Off-Exchange-Traded
Total
Exchange-Traded
Off-Exchange-Traded
 
$
$
$
   
Sep. 30, 2012
   272,166
181,005
   453,171
Mar. 2015
Oct. 2012
Dec. 31, 2011
2,898,002
  78,075
2,976,077
Jun. 2014
Jan. 2012


- 12 -
 
 
 

 
MORGAN STANLEY SMITH BARNEY CHARTER ASPECT 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 gains (losses) 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. 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., which is acting 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 its 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 gains (losses) on all open exchange-traded futures, exchange-traded forward, and exchange-traded futures-styled options contracts, which funds, in the aggregate, totaled $73,710,953 and $97,111,401 at September 30, 2012, and December 31, 2011, respectively.  With respect to the Partnership’s off-exchange-traded forward currency contracts, there are no daily settlements of variation in value, nor is there any requirement that

- 13 -
 
 
 

 
MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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 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. The Partnership has a netting agreement with MS&Co.  The primary terms are based on industry standard master agreements.  This agreement, which seeks to reduce both the Partnership’s and MS&Co.’s exposure on off-exchange-traded forward currency contracts, should materially decrease the Partnership’s credit risk in the event of MS&Co.’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 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

- 14 -

 
 

 

MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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.

5.  Derivatives and Hedging
The Partnership’s objective is to profit from speculative trading in Futures Interests.  Therefore, the Trading Advisor for the Partnership will take speculative positions in Futures Interests where it feels the best profit opportunities exist for its 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.











 - 15 -
 
 
 

 

MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


The following tables summarize the valuation of the Partnership’s investments as of September 30, 2012 and December 31, 2011, respectively.

The Effect of Trading Activities on the Statements of Financial Condition as of September 30, 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
nine months  
 (absolute quantity)
 
$
$
$
$
$
 
             
Commodity
604,757
(193,815)
91,229
(1,079,328)
(577,157)
897
Equity
24,248
(602,030)
  2,700
(20,563)
(595,645)
561
Foreign currency
229,034
(132,145)
141,332
(62,017)
176,204
957
Interest rate
    761,492
   (72,625)
         –     
    (44,716)
    644,151
3,113
Total
  1,619,531
(1,000,615)
  235,261
  (1,206,624)
(352,447)
 
             
Unrealized currency gain
       
    805,618
 
Total net unrealized gain on open contracts
       
 
  453,171
 

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
Average number of contracts
outstanding for the year (absolute quantity)
 
    $
$
$
$
$
 
             
Commodity
85,884
(342,624)
976,621
(401,199)
318,682
 673
Equity
59,202
(15,408)
183,235
(23,702)
203,327
 407
Foreign currency
59,707
(3,322)
175,112
(141,973)
89,524
    974
Interest rate
    1,708,363
   (185,840)
         –     
     (6,585)
  1,515,938
3,152
Total
  1,913,156
   (547,194)
1,334,968
  (573,459)
2,127,471
 
             
Unrealized currency gain
       
    848,606
 
Total net unrealized gain on open contracts
       
 
  2,976,077
 







 - 16 -
 
 
 

 
MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

The following tables summarize the net trading results of the Partnership for the three and nine months ended September 30, 2012 and 2011, respectively.

The Effect of Trading Activities on the Statements of Income and Expenses for the Three and Nine Months Ended September 30, 2012 included in Total Trading Results:

 
For the Three Months
 
For the Nine Months
 
Ended September 30, 2012
 
  Ended September 30, 2012
Type of Instrument
$     
 
$       
       
Commodity
(2,690,378)
 
(1,850,378)
Equity
(745,518)
 
(2,835,325)
Foreign currency
672,460
 
(1,811,920)
Interest rate
779,189
 
3,929,390
Unrealized currency loss
      (25,407)
 
      (42,986)
Total
  (2,009,654)
 
  (2,611,219)

Line Items on the Statements of Income and Expenses for the Three and Nine Months Ended September 30, 2012:
 
 
For the Three Months
 
For the Nine Months
 
Ended September 30, 2012
 
  Ended September 30, 2012
Trading Results
$      
 
$      
       
Net realized
(3,632,579)
 
(88,313)
Net change in unrealized
   1,622,925
 
  (2,522,906)
Total Trading Results
  (2,009,654)
 
   (2,611,219)

The Effect of Trading Activities on the Statements of Income and Expenses for the Three and Nine Months Ended September 30, 2011 included in Total Trading Results:

 
For the Three Months
 
For the Nine Months
 
Ended September 30, 2011
 
  Ended September 30, 2011
Type of Instrument
$     
 
$      
       
Commodity
(2,060,334)
 
(2,063,204)
Equity
294,786
 
(1,780,611)
Foreign currency
(1,707,139)
 
505,413
Interest rate
14,010,761
 
12,684,089
Unrealized currency gain
      219,101
 
      168,601
Total
  10,757,175
 
   9,514,288

Line Items on the Statements of Income and Expenses for the Three and Nine Months Ended September 30, 2011:
 
For the Three Months
 
For the Nine Months
 
Ended September 30, 2011
 
  Ended September 30, 2011
Trading Results
$    
 
$    
       
Net realized
8,812,863
 
12,783,528
Net change in unrealized
   1,944,312
 
  (3,269,240)
Total Trading Results
  10,757,175
 
   9,514,288
- 17 -

 
 

 

MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


6.  Fair Value Measurements and Disclosures
Effective January 1, 2012, the Partnership adopted Accounting Standards Update (“ASU”) 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in the accounting principles generally accepted in the United States of America (“U.S. GAAP”) and International Financial Reporting Standards (“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 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).

- 18 -
 
 
 

 
MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


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.


September 30, 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
           
Futures
1,487,553
            –      
n/a
 
1,487,553
    Forwards
         –      
        367,239
n/a
 
     367,239
           
  Total Assets
 1,487,553
        367,239
n/a
 
   1,854,792
           
     Liabilities
         
 Futures
    2,021,005
            –      
n/a
 
     2,021,005
     Forwards
         –      
       186,234
n/a
 
     186,234
           
  Total Liabilities
 2,021,005
       186,234
n/a
 
   2,207,239
           
Unrealized currency gain
       
     805,618
           
  *Net fair value
  (533,452)
       181,005
n/a
 
    453,171
           







- 19 -
 
 
 

 
MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


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
         
Futures
3,027,158
            –      
n/a
 
3,027,158
Forwards
         –      
        220,966
n/a
 
     220,966
           
  Total Assets
 3,027,158
        220,966
n/a
 
   3,248,124
           
     Liabilities
         
 Futures
      977,762
            –      
n/a
 
       977,762
 Forwards
         –      
       142,891
n/a
 
     142,891
           
  Total Liabilities
    977,762
       142,891
n/a
 
   1,120,653
           
Unrealized currency gain
       
     848,606
           
  *Net fair value
   2,049,396
         78,075
n/a
 
 2,976,077


* This amount comprises the “Total net unrealized gain on open contracts” on the Statements of Financial Condition.

During the period January 1, 2012 to September 30, 2012, there were no Level 3 assets and liabilities, and there were no transfers of assets or liabilities between Level 1 and Level 2.

7.  Other Pronouncements
In December 2011, the FASB issued 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



- 20 -
 
 
 

 
MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)


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 U.S. GAAP and those entities that prepare their financial statements on the basis of 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. 

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






- 21 -
 
 
 

 
MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

company be required to consolidate another investment company if it holds a controlling financial interest in the entity.  In August 2012, the FASB updated the proposed ASU to state that entities regulated under the Investment Company Act of 1940 should qualify to be investment companies within the proposed investment company guidance.  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 LME positions. All of these amounts are maintained separately.  Cash that is not classified as restricted cash is therefore classified as unrestricted cash.

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.

The 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

- 22 -
 

 
 

 
MORGAN STANLEY SMITH BARNEY CHARTER ASPECT L.P.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)

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 September 30, 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.  Generally, the 2009 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.









- 23 -
 
 
 

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


As of September 30, 2012, the percentage of assets allocated to each market sector was approximately as follows: Interest Rate 16.58%; Currency 43.38 %; Equity  18.79%; and Commodity 21.25%.

Liquidity.  The Partnership deposits its assets with MS&Co. as clearing commodity broker in separate futures, forward and options trading accounts established for the 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.


- 24 -
 
 
 

 
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 September 30, 2012, approximately 56.95% of the Partnership’s total investments are futures contracts which are exchange-traded while approximately 43.05% 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.


- 25 -
 
 
 

 
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 Advisor and the ability of the Trading Advisor’s trading program to take advantage of price movements in the futures, forward and options markets.

The Trading Advisor trades the Partnership’s assets in accordance with its Diversified Program, a proprietary, systematic trading system.  The Diversified Program is a proprietary, systematic global futures trading program.  Its goal is the generation of significant long-term capital growth independent of stock and bond market returns.  This program continuously monitors price movements in a wide range of global financial, currency and commodity markets, searching for profit opportunities over periods ranging from a few hours to several months.

The Trading Advisor has designed the Diversified Program to have broad market diversification (subject to liquidity constraints).  Aspect’s quantitative resources are sufficient to enable it to design and implement a broadly diversified portfolio with a significant allocation to numerous different markets.

The Trading Advisor’s Diversified Program trades over 100 markets in the seven major sectors:  currencies, energy, metals, stock indices, bonds, agricultural commodities and interest rates

- 26 -
 
 
 

 
implementing momentum strategies.  Aspect is constantly examining new liquid and uncorrelated markets to incorporate in the program with the aim of improving its reward/risk ratio and capacity.  Aspect has no market or sector preferences, believing that allowing for liquidity effects, equal profitability can be achieved in the long-term in all markets.  The key factors in determining the asset allocation are correlation and liquidity.  Correlations are analyzed at the sector, sub-sector, economic block and market levels to design a portfolio which is highly diversified.

The following presents a summary of the Partnership’s operations for the three and nine months ended September 30, 2012 and 2011, and a general discussion of its trading activities during each period.  It is important to note, however, that the Trading Advisor trades 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 Advisor 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 Advisor’s trading activities on behalf of the Partnership during the period in question.  Past performance is no guarantee of future results.

The Partnership’s results of operations set forth in the financial statements on pages 2 through 23 of this report are prepared in accordance with U.S. GAAP, which requires 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) for open contracts, and recorded as “Net realized” trading profit (loss) when open positions are closed out.  The sum of these amounts

- 27 -
 
 
 

 
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 Three and Nine Months Ended September 30, 2012
The Partnership recorded total trading results including interest income totaling $(1,995,655) and expenses totaling $1,478,554, resulting in a net loss of $3,474,209 for the three months ended September 30, 2012.  The Partnership’s net asset value per Unit decreased from $19.90 at June 30, 2012 to $18.99 at September 30, 2012.

The most significant trading losses were incurred within the energy complex during July and August from short futures positions in crude oil and its related products as prices advanced on concern that instability in the Middle East will disrupt energy supplies. Within the metals markets, losses were recorded during August from short positions in platinum futures as prices rose following violent disturbances at South African mines. Additional metals losses were incurred during September from short futures positions in nickel, aluminum, and zinc as prices moved higher amid signs of increased infrastructure spending by the Chinese government. Losses were also recorded within the global stock

- 28 -
 
 
 

 
index sector during August and September from short positions in European equity index futures as prices rose amid optimism the European Central Bank will win support from policy makers to take steps to ease the euro-area’s debt crisis. A portion of the Partnership’s losses during the third quarter was offset by gains achieved within the global interest rate sector during July from long positions in European and U.S. fixed income futures as prices advanced after reports revealed a decline in German service industries and slower-than-forecast growth in U.S. payrolls, fueling concern the global economic recovery is slowing. Within the currency markets, gains were experienced during July from short positions in the euro versus the Swedish krona, U.S. dollar, and Polish zloty as the value of the euro declined against most of its currency counterparts after European Central Bank President Mario Draghi said the euro-zone still faces risks after policy makers cut interest rates to a record low. Gains were recorded within the agricultural complex during July and August from long futures positions in the soybean complex after prices rose as a heat wave and drought in the U.S. Midwest threatened to limit output.

The Partnership recorded total trading results including interest income totaling $(2,578,430) and expenses totaling $5,068,928, resulting in a net loss of $7,647,358 for the nine months ended September 30, 2012.  The Partnership’s net asset value per Unit decreased from $20.94 at December 31, 2011 to $18.99 at September 30, 2012.

The most significant trading losses were incurred within the global stock index sector during April and May from long positions in U.S. and European equity index futures as prices declined amid an unexpected rise in the U.S. unemployment rate and weakening economic data from China and Europe. Additional losses were incurred during June from newly established short positions in

- 29 -
 
 
 

 
European equity index futures as prices rose amid optimism about the containment of the European debt crisis. Within the metals markets, losses were experienced during August from short positions in platinum futures as prices rose following violent disturbances at South African mines. During September, short futures positions in nickel, aluminum, and zinc resulted in losses as prices moved higher amid signs of increased infrastructure spending by the Chinese government. Within the currency markets, losses were recorded during March from long positions in the Australian dollar, New Zealand dollar, and South African rand as the value of these commodity-linked currencies fell against the U.S. dollar after concern over earnings in China reduced demand for higher-yielding currency assets. Additional currency losses were experienced during May from long positions in the Canadian dollar, Mexican peso, and South African rand against the U.S. dollar as the value of these “commodity-linked” currencies fell in tandem with commodity prices. Losses were also incurred within the energy sector during May from long futures positions in crude oil and its related products as prices declined after stockpiles rose in the U.S. Additional energy losses were recorded during July and August from short futures positions in crude oil and its related products as prices advanced on concern that instability in the Middle East will disrupt energy supplies. A portion of the Partnership’s losses during the first nine months of the year was offset by gains achieved within the global interest rate sector during January from long positions in U.S. and European fixed income futures as prices advanced amid increased demand for the relative “safety” of government debt on mounting concern about the European sovereign debt crisis. Additional gains were recorded in these markets during April and May from long positions in European and U.S. fixed income futures as prices advanced after Standard & Poor’s cut Spain’s credit rating and Greece failed to form a unified government, adding to concern central banks and politicians are failing to contain the European debt crisis. During July, long positions in European and U.S. fixed income futures resulted in gains as prices climbed higher on concern the global economic recovery is slowing.
- 30 -
 
 
 

 
For the Three and Nine Months Ended September 30, 2011
The Partnership recorded total trading results including interest income totaling $10,760,821 and expenses totaling $1,995,728, resulting in net income of $8,765,093 for the three months ended September 30, 2011.  The Partnership’s net asset value per Unit increased from $19.61 at June 30, 2011 to $21.41 at September 30, 2011.

The most significant trading gains were achieved within the global interest rate sector from long positions in European, U.S., and Australian fixed income futures as prices advanced higher throughout the majority of the quarter due to concern about the European sovereign debt crisis and a faltering global economy. Within the global stock index markets, gains were recorded primarily during September due to short positions in European and U.S. equity index futures as prices fell amid concern the global economy may be headed for a recession. Within the energy sector, gains were experienced primarily during September from short positions in natural gas futures as prices fell after a report revealed a bigger-than-expected increase in U.S. inventories. A portion of the Partnership’s gains during the quarter was offset by losses incurred within the currency markets, primarily during August, from long positions in the Australian dollar, New Zealand dollar, and South African rand versus the U.S. dollar as the value of the U.S. dollar was boosted higher against these currencies by “safe haven” demand following central bank intervention in the Japanese yen. Additional losses were
recorded in this sector during September due to long positions in the New Zealand dollar and South African rand versus the U.S. dollar as the value of these “commodity currencies” moved lower in tandem with declining commodity prices. Within the agricultural complex, losses were experienced primarily during September due to long positions in coffee futures as prices fell amid stable stockpiles. Within the metals markets, losses were incurred primarily during August from long futures

- 31 -
 
 
 

 
positions in copper, lead, and aluminum as prices declined after a report revealed U.S. manufacturing slowed more than estimated. Additional losses were recorded in this sector during September due to long positions in gold and silver futures as prices reversed lower amid a rise in the value of the U.S. dollar, which reduced demand for the precious metals.

The Partnership recorded total trading results including interest income totaling $9,544,304 and expenses totaling $6,174,654, resulting in net income of $3,369,650 for the nine months ended September 30, 2011.  The Partnership’s net asset value per Unit increased from $20.71 on December 31, 2010 to $21.41 at September 30, 2011.

The most significant trading gains were achieved within the global interest rate sector from long positions in European, U.S., and Australian fixed income futures as prices advanced higher throughout the majority of the third quarter due to concern about the European sovereign debt crisis and a faltering global economy. Within the energy markets, gains were recorded primarily during February, March, and April from long futures positions in crude oil and its related products as prices rose after political tension in Egypt stoked worries that protests may spread to crude-producing parts of the Middle East. Further gains were recorded after futures prices of crude oil and its related products continued to increase as geopolitical tensions extended to Libya. Within the currency markets, gains were recorded primarily during April from long positions in the euro, Australian dollar, and Swiss franc versus the U.S. dollar as the value of these currencies rose against the U.S. dollar after better-than-expected corporate earnings reports and signs of global growth spurred demand for higher-yielding currencies. During July, long positions in the Swiss franc and Japanese yen versus the U.S. dollar resulted in additional gains in the sector as the value of these currencies

- 32 -
 
rose against the U.S. dollar due to increased “safe haven” demand amid investor concern about a weakening global economy. A portion of the Partnership’s gains for the first nine months of the year was offset by losses incurred within the agricultural complex, primarily during March, from long positions in corn futures as prices fell after a U.S. Department of Agriculture report revealed increasing world stockpiles and declining U.S. exports of the crop. Additional losses were incurred within this sector during September due to long positions in coffee futures as prices fell amid stable stockpiles. Within the global stock index markets, losses were recorded primarily during March from long positions in Japanese equity index futures as prices moved sharply lower following the worst earthquake and tsunami in Japanese history. Additional losses were recorded within this sector during May and June from long positions in U.S., European, and Pacific Rim equity index futures. Losses were experienced within the metals markets, primarily during January, due to long futures positions in silver and gold as prices fell amid a strengthening U.S. dollar. In May, further losses were recorded due to long positions in silver futures as prices fell sharply after previously trending to a 31-year high.

 
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.



- 33 -
 
 
 

 
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.

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.




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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.

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 Advisor is estimated below in terms of VaR.  Please note that the VaR model is used to numerically quantify market risk

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for historic reporting purposes only and is not utilized by either Ceres or the Trading Advisor 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 or 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.

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 September 30, 2012 and December 31, 2011, and the highest, lowest and average values during the three months ended September 30, 2012 and for the twelve months ended December 31, 2011.  All open position trading risk exposures of the Partnership have been included in

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calculating the figures set forth below.  There has been no material change in the trading VaR information previously disclosed in the Form 10-K.


As of September 30, 2012, the Partnership’s total capitalization was approximately $72 million.

                               September 30, 2012
Primary Market
 
% of Total
Risk Category
VaR   
Capitalization
     
Currency
 $5,545,087
7.67%
     
Interest Rate
2,119,163
2.93%
     
Equity
2,402,877
3.32%
     
Commodity
2,716,453
3.76%
     
Total
$12,783,580
17.68%


                                       Three Months Ended September 30, 2012
Market Sector
High VaR
$      
Low VaR
$    
Average VaR*
$     
Currency
5,545,087  
1,926,024
3,848,189
Interest Rate
3,289,350
1,882,686
2,828,054
Equity
2,441,320
848,694
1,566,697
Commodity
3,653,457
2,716,453
3,181,148
Total
     
* Average of month-end VaR





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As of December 31, 2011, the Partnership’s total capitalization was approximately $94 million.

                                  December 31, 2011

Primary Market
 
% of    
Risk Category
VaR   
Total Capitalization
     
Currency
 $1,562,741
1.67%
     
Interest Rate
4,400,840
4.69%
     
Equity
1,341,297
1.43%
     
Commodity
3,260,381
3.48%
     
Total
$10,565,259
11.27%

                                  Twelve Months Ended December 31, 2011
Market Sector
High VaR
$
Low VaR
$
Average VaR*
$
Currency
3,649,575
672,098
 1,445,024
Interest Rate
5,505,309
689,590
 2,731,414
Equity
1,582,774
201,774
     842,983
Commodity
3,260,381
657,901
1,977,851
*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;
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·  
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.

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.

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.





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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 Advisor 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 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 Advisor, 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 through the selection of a commodity trading advisor and by daily monitoring of its performance.  In addition, the Trading Advisor establishes diversification guidelines, often set in terms of the maximum margin to be committed to positions in any one market sector or market-sensitive instrument.

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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 Advisor.



Item 4.    CONTROLS AND PROCEDURES


Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the management of Ceres, 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 disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 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 September 30, 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.






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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
Unless the context otherwise requires, for purposes of this section, the terms the “Company,” “we,” “us” and “our” mean Morgan Stanley and its consolidated subsidiaries. In addition to the matters described in the Form 10-K, those described in the Partnership’s Quarterly Report on Form 10-Q for the quarterly period ending June 30, 2012 (the “Second Quarter Form 10-Q”), and those described below, in the normal course of business, the Company has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with its activities as a global diversified financial services institution. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. In some cases, the entities that would otherwise be the primary defendants in such cases are bankrupt or in financial distress.

The Company is also involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental and self-regulatory agencies regarding the Company’s business, including, among other matters, accounting and operational matters, certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief.

The Company contests liability and/or the amount of damages as appropriate in each pending matter. Where available information indicates that it is probable a liability had been incurred at the date of the condensed consolidated financial statements and the Company can reasonably estimate the amount of that loss, the Company accrues the estimated loss by a charge to income.




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In many proceedings, however, it is inherently difficult to determine whether any loss is probable or even possible or to estimate the amount of any loss. The Company cannot predict with certainty if, how or when such proceedings will be resolved or what the eventual settlement, fine, penalty or other relief, if any, may be, particularly for proceedings that are in their early stages of development or where plaintiffs seek substantial or indeterminate damages. Numerous issues may need to be resolved, including through potentially lengthy discovery and determination of important factual matters, determination of issues related to class certification and the calculation of damages, and by addressing novel or unsettled legal questions relevant to the proceedings in question, before a loss or additional loss or range of loss or additional loss can be reasonably estimated for any proceeding. Subject to the foregoing, the Company believes, based on current knowledge and after consultation with counsel, that the outcome of such proceedings will not have a material adverse effect on the consolidated financial condition of the Company, although the outcome of such proceedings could be material to the Company’s operating results and cash flows for a particular period depending on, among other things, the level of the Company’s revenues or income for such period.


Over the last several years, the level of litigation and investigatory activity focused on residential mortgage and credit crisis related matters has increased materially in the financial services industry. As a result, the Company expects that it may become the subject of increased claims for damages and other relief regarding residential mortgages and related securities in the future and, while the Company has identified below certain proceedings that the Company believes to be material, individually or collectively, there can be no assurance that additional material losses will not be incurred from residential mortgage claims that have not yet been notified to the Company or are not yet determined to be material.
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The following developments have occurred with respect to certain matters previously reported in the Form 10-K or the Second Quarter Form 10-Q or concern new actions that have been filed since the Second Quarter Form 10-Q:

The Company
Residential Mortgage and Credit Crisis Related Matters.
Class Actions.
On September 12, 2012, the Company filed its answer to the third amended complaint in In re Morgan Stanley Pass-Through Certificates Litigation. On September 20, 2012, the plaintiffs filed a motion seeking to expand the offerings at issue in the litigation, relying on recent precedent from the United States Court of Appeals for the Second Circuit (“Second Circuit”). Defendants have opposed the motion. If the motion is granted, plaintiffs will be purporting to represent investors who purchased approximately $7.82 billion in mortgage pass through certificates issued in 2006 by thirteen trusts.

Other Litigation.
On August 17, 2012, the court in Abu Dhabi Commercial Bank, et al. v. Morgan Stanley & Co. Inc., et al. granted the Company’s motion for summary judgment with respect to the plaintiffs’ fraud claim, denied the Company’s motion for summary judgment with respect to the plaintiffs’ aiding and abetting fraud claim, and ordered plaintiffs to show cause why the negligent misrepresentation claim should not be dismissed. The court dismissed all or part of the claims of three of the fifteen plaintiffs based on lack of standing or reliance and plaintiffs have moved for reconsideration of the dismissal. On September 17, 2012, plaintiffs filed expert reports with the court alleging that they are seeking $713 million in compensatory damages on behalf of all fifteen plaintiffs. On October 5, 2012, the court ruled that plaintiffs sufficiently showed cause as to why the negligent misrepresentation claim against the Company should not be dismissed.
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On October 2, 2012, the court in Cambridge Place Investment Management Inc. v. Morgan Stanley & Co., Inc. et al. denied, in substantial part, defendants’ motion to dismiss plaintiff’s amended complaints.

On October 11, 2012, defendants filed motions to dismiss the amended complaint in Federal Home Loan Bank of Boston v. Ally Financial, Inc. F/K/A GMAC LLC et al.


 

Item 1A.  RISK FACTORS
There have been no material changes from the risk factors previously referenced in Part II, Item 1A, Risk Factors in the Partnership’s Report on Form 10-Q for the quarter ended June 30, 2012 other than as set forth below.

Speculative position and trading limits may reduce profitability.
The CFTC and U.S. exchanges have established speculative position limits on the maximum net long or net short positions which any person may hold or control in particular futures and options on futures.  The trading instructions of an advisor may have to be modified, and positions held by the Partnership may have to be liquidated in order to avoid exceeding these limits.  Such modification or liquidation could adversely affect the operations and profitability of the Partnership by increasing transaction costs to liquidate positions and foregoing potential profits.


In October 2011, the CFTC adopted new rules governing position limits.  In September 2012, these rules were vacated by the United States District Court for the District of Columbia and remanded to the CFTC


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for further consideration.  It is possible, nevertheless, that these rules may take effect in some form via re-promulgation or a successful appeal by the CFTC of the District Court’s ruling.  The vacated rules established position limits on certain futures contracts and any economically equivalent futures, options and swaps.


Item 4.  MINE SAFETY DISCLOSURES
Not applicable.


Item 5.  OTHER INFORMATION
The registrant does not have a board of directors.  The registrant’s general partner, Ceres Managed Futures LLC, is managed by a board of directors.

Effective November 14, 2012, Mr. Damian George will be appointed a director of Ceres.

Damian George, age 45, has been a Director of the General Partner since November 2012.  Since June 2012, Mr. George has been the Chief Financial Officer and a principal of the General Partner and is an associate member of the National Futures Association.  Since August 2009, Mr. George has been employed by Morgan Stanley Smith Barney LLC (“Morgan Stanley Smith Barney”), a financial services firm, where his responsibilities include oversight of budgeting, finance and Sarbanes-Oxley testing for the Alternative Investments–Managed Futures group.  Since August 2009, Mr. George has been registered as an associated person of Morgan Stanley Smith Barney.  From November 2005 through July 2009, Mr. George was employed by Citi Alternative Investments, a division of Citigroup Inc. (“Citigroup”), a financial services firm, which administered Citigroup’s hedge fund and fund of

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funds business, where he served as Director and was responsible for budgeting, finance and Sarbanes-Oxley testing for the Hedge Fund Management group.  From November 2004 through July 2009, Mr. George was registered as an associated person of Citigroup Global Markets Inc.  Mr. George earned his Bachelor of Science degree in Accounting in May 1989 from Fordham University and his Master of Business Administration degree in International Finance in February 1998 from Fordham University.  Mr. George is a Certified Public Accountant.


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.
 
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
 

 

 
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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 Charter Aspect L.P.
 
(Registrant)
     
 
By:
Ceres Managed Futures LLC
   
(General Partner)
     
November 13, 2012
By:
/s/Damian George
   
Damian George
   
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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