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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to                 

Commission File Number 0-53211

EMERGING CTA PORTFOLIO L.P.

 

(Exact name of registrant as specified in its charter)

 

New York    04-3768983

 

(State or other jurisdiction of

incorporation or organization)

  

(I.R.S. Employer

Identification No.)

c/o Ceres Managed Futures LLC

522 Fifth Avenue

New York, New York 10036

 

(Address of principal executive offices) (Zip Code)

(855) 672-4468

 

(Registrant’s telephone number, including area code)

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

Yes X  No -

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

Yes X  No -

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

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

Yes -  No X

As of October 31, 2015, 72,892.8212 Limited Partnership Class A Redeemable Units were outstanding.


Table of Contents

EMERGING CTA PORTFOLIO L.P.

FORM 10-Q

INDEX

 

          Page
Number

PART I-Financial Information:

  

  Item 1.

  

Financial Statements:

  
  

Statements of Financial Condition at September 30, 2015 (unaudited) and December 31, 2014

   3
  

Condensed Schedules of Investments at September 30, 2015 (unaudited) and December 31, 2014

   4–5
   Statements of Income and Expenses and Changes in Partners’ Capital for the three and nine months ended September 30, 2015 and 2014 (unaudited)    6
  

Notes to Financial Statements (unaudited)

   7–21

  Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   22–24

  Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

   25–29

  Item 4.

  

Controls and Procedures

   30

PART II-Other Information

  

  Item 1.

  

Legal Proceedings

   31-37

  Item 1A.   

  

Risk Factors

   38

  Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

   38

  Item 3.

  

Defaults Upon Senior Securities

   38

  Item 4.

  

Mine Safety Disclosures

   38

  Item 5.

  

Other Information

   38

  Item 6.

  

Exhibits

   39-41

 

2


Table of Contents

PART I

Item 1. Financial Statements

Emerging CTA Portfolio L.P.

Statements of Financial Condition

 

     (Unaudited)
September 30,
2015
     December 31,
2014
 

Assets:

     

Investment in Funds (1), at fair value

     $ 63,061,528           $ 93,426,730     

Equity in trading account:

     

Investment in U.S. Treasury bills, at fair value (amortized cost $13,998,231 and $0 at September 30, 2015 and December 31, 2014, respectively)

     14,000,665           -         

Cash

     18,149,601           25,786,501     

Cash margin

     6,632,832           -         

Net unrealized appreciation on open futures contracts

     371,460           -         
  

 

 

    

 

 

 

Total trading equity

     102,216,086           119,213,231     

Redemptions receivable from Funds

     2,233,594           -         

Interest receivable

     81           152     
  

 

 

    

 

 

 

Total assets

     $ 104,449,761           $     119,213,383     
  

 

 

    

 

 

 

Liabilities and Partners’ Capital:

     

Liabilities:

     

 Net unrealized depreciation on open forward contracts

     $ 73,933           $ -         

Accrued expenses:

     

Ongoing selling agent fees

     173,960           198,685     

Management fees

     135,268           151,108     

General Partner fees

     86,784           99,297     

Incentive fees

     667,285           2,102,114     

General Partner incentive fees

     37,394           -         

Clearing fees due to MS&Co.

     -               2,151     

Other

     234,889           54,096     

Redemptions payable to General Partner

     99,988           -         

Redemptions payable to Limited Partners

     1,014,856           1,977,940     
  

 

 

    

 

 

 

Total liabilities

     2,524,357           4,585,391     
  

 

 

    

 

 

 

Partners’ Capital:

     

General Partner, 814.5646 and 942.3886 Class A Redeemable Units outstanding at September 30, 2015 and December 31, 2014, respectively

     1,118,434           1,276,279     

Limited Partners, 73,418.5872 and 83,697.5332 Class A Redeemable Units outstanding at September 30, 2015 and December 31, 2014, respectively

     100,806,970           113,351,713     
  

 

 

    

 

 

 

Total partners’ capital

     101,925,404           114,627,992     
  

 

 

    

 

 

 

Total liabilities and partners’ capital

     $     104,449,761           $ 119,213,383     
  

 

 

    

 

 

 

 Net asset value per unit, Class A

     $ 1,373.04           $ 1,354.30     
  

 

 

    

 

 

 

  (1)    Defined in Note 1.

See accompanying notes to financial statements.

 

3


Table of Contents

Emerging CTA Portfolio L.P.

Condensed Schedule of Investments

September 30, 2015

(Unaudited)

 

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

Futures Contracts Purchased

        

Energy

     3           $ (529)          (0.00)  *% 

Grains

     4           (1,655)          (0.00) 

Indices

     290           (1,032,936)          (1.01)    

Interest Rates U.S.

     470           54,686           0.05     

Interest Rates Non-U.S.

     1,363           313,363           0.31     

Livestock

     4           (192)          (0.00) 

Metals

     13           (1,021)          (0.00) 

Softs

     17           3,704           0.00  
     

 

 

    

 

 

 

Total futures contracts purchased

        (664,580)          (0.65)    
     

 

 

    

 

 

 

Futures Contracts Sold

        

Currencies

     13           (1,717)          (0.00) 

Energy

     35           27,349           0.02     

Grains

     4           (270)          (0.00) 

Indices

     446           1,342,658           1.32     

Interest Rates U.S.

     468           (90,333)          (0.09)    

Interest Rates Non-U.S.

     1,161           (217,413)          (0.21)    

Metals

     42           (24,644)          (0.03)    

Softs

     1           410           0.00  
     

 

 

    

 

 

 

Total futures contracts sold

        1,036,040           1.01     
     

 

 

    

 

 

 

Net unrealized appreciation on open futures contracts

        371,460           0.36     
     

 

 

    

 

 

 

Unrealized Appreciation on Open Forward Contracts

        

Currencies

     $     17,550,440           63,072           0.06     
     

 

 

    

 

 

 

Total unrealized appreciation on open forward contracts

        63,072           0.06     
     

 

 

    

 

 

 

Unrealized Depreciation on Open Forward Contracts

        

Currencies

     $     14,634,207           (137,005)          (0.13)    
     

 

 

    

 

 

 

Total unrealized depreciation on open forward contracts

        (137,005)          (0.13)    
     

 

 

    

 

 

 

Net unrealized depreciation on open forward contracts

        (73,933)          (0.07)    
     

 

 

    

 

 

 

U.S. Government Securities

        
Face Amount   Maturity Date            Description                     

    $14,000,000

   12/17/2015        U.S. Treasury bills, 0.05% (Amortized cost of $13,998,231)         14,000,665           13.74     
          

 

 

    

 

 

 

Investment in Funds:

        

SECOR Master Fund L.P.

        24,774,491           24.31     

Cambridge Master Fund L.P.

        25,742,479           25.25     

CMF Willowbridge Master Fund L.P.

        12,544,558           12.31     
     

 

 

    

 

 

 

Total Investment in Funds

        63,061,528           61.87     
     

 

 

    

 

 

 

Net fair value

        $ 77,359,720           75.90  
     

 

 

    

 

 

 

*      Due to rounding

See accompanying notes to financial statements.

 

4


Table of Contents

Emerging CTA Portfolio L.P.

Condensed Schedule of Investments

December 31, 2014

 

           Fair Value               % of Partners’   
Capital
 

Investment in Funds:

     

Blackwater Master Fund L.P.

     $ 3,980,034           3.47  

SECOR Master Fund L.P.

     29,604,763           25.83     

Cambridge Master Fund L.P.

     26,708,570           23.30     

CMF Willowbridge Master Fund L.P.

     12,341,418           10.76     

PGM Master Fund L.P.

     20,791,945           18.14     
  

 

 

    

 

 

 

Total Investment in Funds

     93,426,730           81.50     
  

 

 

    

 

 

 

 

Net fair value

  

 

  $

 

93,426,730  

 

  

  

 

 

 

81.50  

 

  

 

 

    

 

 

 

 

 

 

 

 

See accompanying notes to financial statements.

 

5


Table of Contents

Emerging CTA Portfolio L.P.

Statements of Income and Expenses and Changes in Partners’ Capital

(Unaudited)

 

    

Three Months Ended

September 30,

        

Nine Months Ended

September 30,

 
  

 

 

      

 

 

      

 

 

 
     2015          2014          2015          2014  

Investment Income:

                 

 Interest income

    $ 3,431            $ 1,007           $ 4,492           $ 4,174    

 Interest income allocated from Funds

     7,319             2,912            10,773            17,293    
  

 

 

      

 

 

      

 

 

      

 

 

 

Total investment income

     10,750             3,919            15,265            21,467    
  

 

 

      

 

 

      

 

 

      

 

 

 

Expenses:

                 

Clearing fees related to direct investments

     86,137             88,122            186,545            215,003    

Expenses allocated from funds

     127,288             385,076            566,516            985,115    

Ongoing selling agent fees

     522,959             759,211            1,642,656            2,932,408    

Management fees

     406,464             443,091            1,252,263            1,422,240    

General Partner fees

     260,886             151,686            820,278            510,083    

Incentive fees

     667,285             683,130            1,434,431            670,921    

General Partner incentive fees

     37,394             -                37,394            -        

Other

     150,986             150,497            410,545            372,084    
  

 

 

      

 

 

      

 

 

      

 

 

 

Total expenses

     2,259,399             2,660,813            6,350,628            7,107,854    
  

 

 

      

 

 

      

 

 

      

 

 

 

Net investment loss

     (2,248,649)            (2,656,894)           (6,335,363)           (7,086,387)   
  

 

 

      

 

 

      

 

 

      

 

 

 

Trading Results:

                 

Net realized gains (losses) on closed contracts

     (780,521)            (783,500)           (1,996,254)           (3,186,342)   

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

     5,267,432             3,804            11,971,439            1,492,945    

Net change in unrealized gains (losses) on open contracts

     896,063             (810,312)           906,237            (732,961)   

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

     880,966             5,242,218            (3,157,042)           (1,957,546)   
  

 

 

      

 

 

      

 

 

      

 

 

 

Total trading results

     6,263,940             3,652,210            7,724,380            (4,383,904)   
  

 

 

      

 

 

      

 

 

      

 

 

 

Net income (loss)

     4,015,291             995,316            1,389,017            (11,470,291)   

Subscriptions - Limited Partners

     793,167             645,260            3,384,167            6,466,983    

Redemptions - General Partner

     (99,987)            (702,619)           (175,894)           (702,619)   

Redemptions - Limited Partners

     (3,843,712)            (14,588,077)           (17,299,878)           (42,313,886)   
  

 

 

      

 

 

      

 

 

      

 

 

 

Net increase (decrease) in Partners’ Capital

     864,759             (13,650,120)           (12,702,588)           (48,019,813)   

Partners’ Capital, beginning of period

     101,060,645             127,751,995            114,627,992            162,121,688    
  

 

 

      

 

 

      

 

 

      

 

 

 

Partners’ Capital, end of period

    $     101,925,404            $    114,101,875           $    101,925,404           $ 114,101,875    
  

 

 

      

 

 

      

 

 

      

 

 

 

Net asset value per unit, Class A (74,233.1518 and 90,350.8908 units outstanding at September 30, 2015 and 2014, respectively)

    $ 1,373.04            $ 1,262.88           $ 1,373.04           $ 1,262.88    
  

 

 

      

 

 

      

 

 

      

 

 

 

Net income (loss) per unit, Class A*

    $ 52.69            $ 13.86           $ 18.74           $ (87.52)   
  

 

 

      

 

 

      

 

 

      

 

 

 

Weighted average Class A units outstanding

     75,799.4413             98,070.5265            79,922.2321            108,828.8182    
  

 

 

      

 

 

      

 

 

      

 

 

 

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

 

See accompanying notes to financial statements.

 

6


Table of Contents

Emerging CTA Portfolio L.P.

Notes to Financial Statements

September 30, 2015

(Unaudited)

1.    Organization:

Emerging CTA Portfolio L.P. (the “Partnership”) is a limited partnership that was organized on July 7, 2003 under the partnership laws of the State of New York. The objective of the Partnership is to achieve capital appreciation through the allocation of assets to early-stage commodity trading advisors or established advisors employing early-stage strategies, which engage, directly and indirectly through investments in the Funds (defined below), in speculative trading of a diversified portfolio of commodity interests, including futures, option on futures, forward, option on forward, spot and swap contracts, cash commodities and any other rights or interest pertaining thereto. The Partnership may also enter into swap and other derivative transactions directly and through its investments in the Funds with the approval of the General Partner (defined below). The sectors traded include currencies, livestock, lumber, energy, grains, metals, indices, softs and U.S. and non-U.S. interest rates. The commodity interests that are traded by the Partnership and the Funds are volatile and involve a high degree of market risk. The General Partner may also determine to invest up to all of the Partnership’s assets in United States (“U.S”) Treasury bills.

Between December 1, 2003 (commencement of the offering period) and August 5, 2004, 20,872 units of partnership interest (“Redeemable Units”) were sold at $1,000 per Redeemable Unit. The proceeds of the initial offering were held in an escrow account until August 6, 2004, at which time they were remitted to the Partnership for trading. The Partnership privately and continuously offers Redeemable Units in the Partnership to qualified investors. There is no maximum number of Redeemable Units that may be sold by the Partnership.

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

As of September 1, 2011, the Partnership began offering three classes of limited partnership interests: Class A Redeemable Units, Class D Redeemable Units and Class Z Redeemable Units; each of which will be referred to as a “Class” and collectively referred to as the “Classes.” All Redeemable Units issued prior to September 1, 2011 were deemed “Class A Redeemable Units.” The rights, liabilities, risks, and fees associated with investment in the Class A Redeemable Units were not changed. Class A Redeemable Units and Class D Redeemable Units are available to taxable U.S. individuals and institutions, as well as U.S. tax exempt individuals and institutions. Class Z Redeemable Units are offered to certain employees of Morgan Stanley and its subsidiaries (and their family members). The Class of Redeemable Units that a limited partner of the Partnership (each a “Limited Partner”) receives upon subscription will generally depend upon the amount invested in the Partnership or the status of the Limited Partner, although the General Partner may determine to offer a particular Class of Redeemable Units to investors at its discretion. As of September 30, 2015, there were no Redeemable Units outstanding in Class D or Class Z.

As of September 30, 2015, all trading decisions were made for the Partnership by its trading advisors (the “Advisors”) either directly, through individually managed accounts, or indirectly, through investments in other collective investment vehicles. As of the close of business on September 30, 2015, The Cambridge Strategy (Asset Management) Limited (“Cambridge”), Centurion Investment Management, LLC (“Centurion”), Perella Weinberg Partners Capital Management LP (“Perella”), SECOR Capital Advisors, LP (“SECOR”) and Willowbridge Associates Inc. (“Willowbridge”) served as the Partnership’s major commodity trading advisors. Prior to the termination of its management agreement effective September 30, 2015, Blackwater Capital Management, LLC (“Blackwater”) also served as one of the Partnerships’ major commodity trading advisors. In addition, the General Partner may allocate the Partnership’s assets to additional non-major trading advisors (i.e. commodity trading advisors intended to be allocated less than 10% of the Partnership’s assets). Information about advisors allocated less than 10% of the Partnership’s assets may not be disclosed.

 

7


Table of Contents

Emerging CTA Portfolio L.P.

Notes to Financial Statements

September 30, 2015

(Unaudited)

 

The General Partner may also allocate less than 10% of the Partnership’s assets to a new trading advisor or another trading program of a current Advisor. The Advisors are not affiliated with one another, are not affiliated with the General Partner or Morgan Stanley & Co. LLC (“MS&Co.”), and are not responsible for the organization or operation of the Partnership. References herein to the “Advisors” may also include, as relevant, reference to Blackwater, 300 North Capital LLC (“300 North Capital”) and Principle Capital Management LLC (“Principle”).

As of September 30, 2015, the Partnership’s/Funds’ commodity broker was MS&Co., a registered futures commission merchant.

The assets allocated to Centurion for trading are traded directly pursuant to Centurion’s Short Term Systemic Strategy Program. Since July 1, 2015, the assets allocated to Perella have been traded directly pursuant to a variation of the program traded by PWP Global Macro Master Fund L.P.

Cambridge Master Fund L.P. (“Cambridge Master”), CMF Willowbridge Master Fund L.P. (“Willowbridge Master”) and SECOR Master Fund L.P (“SECOR Master”) (together with Cambridge Master and Willowbridge Master, the “Funds”) have entered into a futures account agreement with MS&Co. and commenced trading through accounts at MS&Co. Principle Master Fund L.P. (“Principle Master”) (prior to its liquidation on July 31, 2014), 300 North Master Fund L.P. (“300 North Master”) (prior to its liquidation on October 31, 2014), PGM Master Fund L.P. (“PGM Master”) (prior to its liquidation on June 30, 2015) and Blackwater Master Fund L.P. (“Blackwater Master”) (prior to its liquidation as of the close of business on September 30, 2015) also entered into a futures brokerage agreement with MS&Co. Cambridge Master has also, and PGM Master had, entered into a foreign exchange prime brokerage agreement with MS&Co. References to “Funds” included in this report may include, as relevant, Principle Master, 300 North Master, PGM Master and Blackwater Master. The Partnership has also entered into a futures brokerage account agreement with MS&Co. The Partnership, directly and through its investment in the Funds, pays MS&Co. trading fees for the clearing and, where applicable, execution of transactions.

The Partnership has entered into a selling agreement with Morgan Stanley Wealth Management. Pursuant to the selling agreement, Morgan Stanley Wealth Management receives a selling agent fee equal to (i) 2.0% per year of adjusted month-end net assets for Class A Redeemable Units and (ii) 0.75% per year of adjusted month-end net assets for Class D Redeemable Units. The selling agent fee received by Morgan Stanley Wealth Management is shared with the properly registered/exempted financial advisors of Morgan Stanley Wealth Management who sell Redeemable Units in the Partnership.

Effective April 1, 2014, the monthly ongoing selling agent fee was reduced from an annual rate of 3.5% to an annual rate of 2.5% for Class A Redeemable Units.

Effective October 1, 2014, the monthly ongoing selling agent fee was (i) reduced from an annual rate of 2.5% to an annual rate of 2.0% for Class A Redeemable Units, (ii) reduced from an annual rate of 1.25% to an annual rate of 0.75% for Class D Redeemable Units and (iii) eliminated for Class Z Redeemable Units. As of the same date, the General Partner fees (formerly, the administrative fees) were increased from an annual rate of 0.5% to an annual rate of 1.0%. The October 1, 2014 fee changes offset each other and, accordingly, there was no change to the aggregate fees incurred by the Partnership.

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

 

8


Table of Contents

Emerging CTA Portfolio L.P.

Notes to Financial Statements

September 30, 2015

(Unaudited)

 

2.    Basis of Presentation and Summary of Significant Accounting Policies:

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

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

Certain prior period amounts have been reclassified to conform to current period presentation. Amounts reported as expenses allocated from Funds were previously reported separately as part of clearing fees and as part of other expenses. Amounts reported as clearing fees related to direct investments were previously reported as part of clearing fees.

In the financial highlights table, ongoing selling agent fees and clearing fees, which were previously included in net realized and unrealized gains (losses) per unit and excluded from expenses per unit, are now excluded from net realized and unrealized gains (losses) per unit and included in net investment loss per unit. This information was previously included as a footnote to the financial highlights table.

The General Partner and each Limited Partner share in the profits and losses of the Partnership in proportion to the amount of Partnership interest owned by each, except that no Limited Partner is liable for obligations of the Partnership in excess of its capital contribution and profits, if any, net of distributions or redemptions and losses, if any.

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

Partnership’s Investments in the Funds: The Partnership’s investments in the Funds are stated at fair value, which are based on (1) the Partnership’s net contribution to each Fund and (2) its allocated share of the undistributed profits and losses, including realized gains/losses and net change in unrealized gains/losses, of each Fund. The valuation of the Funds’ investments, including the classification within the fair value hierarchy of the investments held by the Funds, are described in Note 5.

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

 

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Emerging CTA Portfolio L.P.

Notes to Financial Statements

September 30, 2015

(Unaudited)

 

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

Partnership’s Cash: The Partnership’s cash includes cash denominated in foreign currencies of $441,243 and $133,847 as of September 30, 2015 and December 31, 2014, respectively. The cost of foreign currencies was $440,835 as of September 30, 2015 and based on the General Partner’s assessment, the cost of foreign currencies was not materiality different from the fair value as of December 31, 2014.

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

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

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

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

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

 

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Emerging CTA Portfolio L.P.

Notes to Financial Statements

September 30, 2015

(Unaudited)

 

3. Financial Highlights:

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

 

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

Net realized and unrealized gains (losses)

     $ 82.33          $ 41.27          $ 97.91          $ (21.40)    

Net investment loss

     (29.64)         (27.41)         (79.17)         (66.12)    
  

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) for the period

     52.69          13.86          18.74          (87.52)    

Net asset value per unit, beginning of period

     1,320.35          1,249.02          1,354.30          1,350.40     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value per unit, end of period

     $         1,373.04          $         1,262.88          $         1,373.04          $         1,262.88     
  

 

 

   

 

 

   

 

 

   

 

 

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

Ratios to average net assets:1

        

Net investment loss

     (6.7)      (7.2)      (7.5)      (6.9) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expense

     6.1       6.6       6.1       6.5  

Incentive fees

     0.7       0.6       1.4       0.5  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     6.8       7.2       7.5       7.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total return:

        

Total return before incentive fees

     4.7       1.7       2.8       (6.0) 

Incentive fees

     (0.7)      (0.6)      (1.4)      (0.5) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total return after incentive fees

     4.0       1.1       1.4       (6.5) 
  

 

 

   

 

 

   

 

 

   

 

 

 

1       Interest income less total expenses.

The above ratios and total return may vary for individual investors based on the timing of capital transactions during the period. Additionally, these ratios are calculated for the Limited Partner class using the Limited Partners’ share of income, expenses and average net assets of the Partnership and includes the income and expenses allocated from the Funds, as applicable.

 

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Emerging CTA Portfolio L.P.

Notes to Financial Statements

September 30, 2015

(Unaudited)

 

4. Trading Activities:

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

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

All of the commodity interests owned by the Partnership are held for trading purposes. All of the commodity interests owned by the Funds are held for trading purposes. The monthly average number of futures contracts traded directly by the Partnership during the three months ended September 30, 2015 and 2014 were 4,642 and 197, respectively. The monthly average number of futures contracts traded directly by the Partnership during the nine months ended September 30, 2015 and 2014 were 1,635 and 563, respectively. The monthly average number of option contracts held directly by the Partnership during the three months ended September 30, 2015 and 2014 were 0 and 1,319, respectively. The monthly average number of option contracts held directly by the Partnership during the nine months ended September 30, 2015 and 2014 were 134 and 1,619, respectively. The monthly average notional value of currency forward contracts held directly by the Partnership during the three months ended September 30, 2015 and 2014 were $43,161,514 and $55,892,125, respectively. The monthly average notional values of currency forward contracts held directly by the Partnership during the nine months ended September 30, 2015 and 2014 were $14,387,171 and $79,892,256, respectively.

Trading and transaction fees are based on the number of trades executed by the Advisors and the Partnership’s percentage ownership of each respective Fund.

The following tables summarize the gross and net amounts recognized relating to assets and liabilities of the Partnership’s derivatives and their offsetting subject to master netting arrangements or similar agreements as of September 30, 2015. There were no direct investments as of December 31, 2014.

 

                      Gross Amounts not Offset in the
Statements of Financial Condition
       

September 30, 2015

  Gross Amounts
Recognized
    Gross Amounts
Offset in the
Statements of
  Financial Condition  
    Net Amounts
Presented in the
Statements of
 Financial Condition 
    Financial
    Instruments    
    Cash Collateral
 (Received)/Pledged* 
     Net Amount   

Assets

           

Futures

    $ 1,822,298         $ (1,450,838)        $ 371,460         $ -           $ -           $ 371,460     

Forwards

    63,072          (63,072)         -              -            -            -         
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Assets

    $ 1,885,370         $           (1,513,910)        $ 371,460         $ -           $ -           $ 371,460     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

           

Futures

    $ (1,450,838)        $ 1,450,838         $ -             $ -           $ -           $ -         

Forwards

    (137,005)         63,072          (73,933)         -            -            (73,933)    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Liabilities

    $     (1,587,843)        $ 1,513,910         $             (73,933)        $               -           $ -           $     (73,933)    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net fair value

             $ 297,527  
           

 

 

 

 

  *

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

 

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Emerging CTA Portfolio L.P.

Notes to Financial Statements

September 30, 2015

(Unaudited)

 

The following tables indicate the gross fair values of derivative instruments of futures contracts held directly by the Partnership as separate assets and liabilities as of September 30, 2015. There were no direct investments as of December 31, 2014.

 

Assets       September 30, 2015     

Futures Contracts

  

Currencies

    $ 251     

Energy

     27,349     

Indices

     1,342,658     

Interest Rates U.S.

     54,686     

Interest Rates Non-U.S.

     385,920     

Metals

     7,320     

Softs

     4,114     
  

 

 

 

Total unrealized appreciation on open futures contracts

     1,822,298     
  

 

 

 

Liabilities

  

Futures Contracts

  

Currencies

     (1,968)    

Energy

     (529)    

Grains

     (1,925)    

Indices

     (1,032,936)    

Interest Rates U.S.

     (90,333)    

Interest Rates Non-U.S.

     (289,970)    

Livestock

     (192)    

Metals

     (32,985)    
  

 

 

 

Total unrealized depreciation on open futures contracts

     (1,450,838)    
  

 

 

 

Net unrealized appreciation on open futures contracts

    $ 371,460  
  

 

 

 

Assets

  

Forward Contracts

  

Currencies

    $ 63,072     
  

 

 

 

Total unrealized appreciation on open forward contracts

     63,072     
  

 

 

 

Liabilities

  

Forward Contracts

  

Currencies

    $ (137,005)    
  

 

 

 

Total unrealized depreciation on open forward contracts

     (137,005)    
  

 

 

 

Net unrealized depreciation on open forward contracts

    $ (73,933)  ** 
  

 

 

 

 

*

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

 

**

This amount is included in “Net unrealized depreciation on open forward contracts” on the Statements of Financial Condition.

 

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Emerging CTA Portfolio L.P.

Notes to Financial Statements

September 30, 2015

(Unaudited)

 

The following tables indicate the trading gains and losses, by market sector, on derivative instruments traded directly by the Partnership for the three and nine months ended September 30, 2015 and 2014.

 

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

Sector

  2015         2014         2015         2014      

Currencies

    $     (340,240)           $ 310,584            $ (374,323)           $ 138,278       

Energy

    (28,528)           (1,876,447)           (1,107,157)           (2,914,078)      

Grains

    (167,058)           146,038            (148,711)           214,650       

Indices

    204,963            (292,559)           (65,052)           (922,817)      

Interest Rates U.S.

    (155,700)           30,009            (107,170)           295,483       

Interest Rates Non-U.S.

    429,943            59,703            619,140            (716,102)      

Livestock

    18,211            (95,957)           241            (59,067)      

Metals

    167,492            47,682            120,947            92,195       

Softs

    (13,541)           77,135            (27,932)           (47,845)      
 

 

 

     

 

 

     

 

 

     

 

 

   

Total

    $ 115,542        ***        $  (1,593,812)       ***       $    (1,090,017)       ***       $    (3,919,303)       ***
 

 

 

     

 

 

     

 

 

     

 

 

   

 

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

5. Fair Value Measurements:

Partnership’s and the Funds’ Fair Value Measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to fair values derived from unobservable inputs (Level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety.

The Partnership and the Funds consider prices for exchange-traded commodity futures, forward, swap and option contracts to be based on unadjusted quoted prices in active markets for identical assets and liabilities (Level 1). The values of the U.S. Treasury bills, non-exchange-traded forward, swap and certain option contracts for which market quotations are not readily available are priced by broker-dealers that derive fair values for those assets and liabilities from observable inputs (Level 2).

As of and for the periods ended September 30, 2015 and December 31, 2014, the Partnership and the Funds did not hold any derivative instruments that were priced at fair value using unobservable inputs through the application of the General Partner’s assumptions and internal valuation pricing models (Level 3). Transfers between levels are recognized at the end of the reporting period. During the nine months ended September 30, 2015 and the twelve months ended December 31, 2014, there were no transfers of assets or liabilities between Level 1 and Level 2.

There were no direct investments as of December 31, 2014.

 

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Emerging CTA Portfolio L.P.

Notes to Financial Statements

September 30, 2015

(Unaudited)

 

     September 30, 
2015
          Level 1                 Level 2                   Level 3          

Assets

       

Futures

    $ 1,822,298          $ 1,822,298          $ -              $ -        

Forwards

    63,072          -              63,072          -        

U.S. Treasury bills

    14,000,665          -              14,000,665          -        
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    $ 15,886,035          $ 1,822,298          $     14,063,737          $ -        
 

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

       

Futures

    $ 1,450,838          $ 1,450,838          $ -              $ -        

Forwards

    137,005          -              137,005          -        
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    $ 1,587,843          $     1,450,838          $ 137,005          $ -        
 

 

 

   

 

 

   

 

 

   

 

 

 

Net fair value

    $     14,298,192          $ 371,460          $ 13,926,732          $ -        
 

 

 

   

 

 

   

 

 

   

 

 

 

6. Investment in Funds:

On November 1, 2010, the assets allocated to Blackwater for trading were invested in Blackwater Master, a limited partnership organized under the partnership laws of the State of Delaware. The Partnership invested in Blackwater Master with cash equal to $15,674,694. Effective as of the close of business on September 30, 2015, the Partnership fully redeemed its investment in Blackwater Master for cash equal to $2,233,594.

On September 1, 2012, the assets allocated to Cambridge for trading were invested in Cambridge Master, a limited partnership organized under the partnership laws of the State of Delaware. The Partnership invested in Cambridge Master with cash equal to $3,000,000. Cambridge Master permits accounts managed by Cambridge using the Asian Markets Alpha Programme and the Emerging Markets Alpha Programme, each a proprietary, systematic trading program, to invest together in one trading vehicle. The General Partner is also the general partner of Cambridge Master. Individual and pooled accounts currently managed by Cambridge, including the Partnership, are permitted to be limited partners of Cambridge Master. The General Partner and Cambridge believe that trading through this structure promotes efficiency and economy in the trading process. The General Partner and Cambridge agreed that Cambridge will trade the Partnership’s assets allocated to Cambridge at a level that is up to 1.5 times the amount of assets allocated. The amount of leverage may be increased or decreased in the future. However, in no event will the amount of leverage be greater than 2 times the amount of assets allocated.

Effective January 1, 2013, the assets traded directly by Willowbridge using its wPraxis Futures Trading Approach were invested in Willowbridge Master, a limited partnership organized under the partnership laws of the State of New York. The Partnership purchased 14,103.3175 units of Willowbridge Master with cash equal to $29,484,306. Willowbridge Master permits accounts managed by Willowbridge using the wPraxis Futures Trading Approach, a proprietary, discretionary trading system, to invest together in one trading vehicle. The General Partner is also the general partner of Willowbridge Master. Individual and pooled accounts currently managed by Willowbridge, including the Partnership, are permitted to be limited partners of Willowbridge Master. The General Partner and Willowbridge believe that trading through this structure promotes efficiency and economy in the trading process. The General Partner and Willowbridge agreed that Willowbridge will trade the Partnership’s assets allocated to Willowbridge at a level that is up to 3 times the amount of assets allocated.

 

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Emerging CTA Portfolio L.P.

Notes to Financial Statements

September 30, 2015

(Unaudited)

 

On March 1, 2013, the assets allocated to Principle for trading were invested in Principle Master, a limited partnership organized under the partnership laws of the State of Delaware. The Partnership invested in Principle Master with cash equal to $6,503,661. Effective July 31, 2014, the Partnership fully redeemed its investment in Principle Master for cash equal to $12,165,827.

On March 1, 2013, the assets allocated to 300 North Capital for trading were invested in 300 North Master, a limited partnership organized under the partnership laws of the State of Delaware. The Partnership invested in 300 North Master with cash equal to $10,000,000. Effective October 31, 2014, the Partnership fully redeemed its investment in 300 North Master for cash equal to $12,374,970.

On August 1, 2013, the assets allocated to SECOR for trading were invested in SECOR Master, a limited partnership organized under the partnership laws of the State of Delaware. The Partnership invested in SECOR Master with cash equal to $10,000,000. SECOR Master permits accounts managed by SECOR using a variation of the program traded by SECOR Alpha Master Fund L.P., a proprietary, systematic trading program, to invest together in one trading vehicle. The General Partner is also the general partner of SECOR Master. Individual and pooled accounts currently managed by SECOR are permitted to be limited partners of SECOR Master. The General Partner and SECOR believe that trading through this structure promotes efficiency and economy in the trading process. The General Partner and SECOR agreed that SECOR will trade the Partnership’s assets allocated to SECOR at a level that is up to 1.5 times the amount of assets allocated.

On September 1, 2014, the assets allocated to Perella for trading were invested in PGM Master, a limited partnership organized under the partnership laws of the State of Delaware. The Partnership invested in PGM Master with cash equal to $10,500,000. Effective June 30, 2015, the Partnership fully redeemed its investment in PGM Master for cash equal to $20,531,604. Since July 1, 2015, Perella has traded the assets allocated to it directly in a managed account in the Partnership’s name.

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

The Funds’ and the Partnership’s trading of futures, forward and option contracts, as applicable, on commodities is done primarily on United States of America commodity exchanges and foreign commodity exchanges. The Funds engage in such trading through commodity brokerage accounts maintained with MS&Co.

A limited partner of the Funds may withdraw all or part of their capital contribution and undistributed profits, if any, from the Funds as of the end of any day (the “Redemption Date”) after a request for redemption has been made to the General Partner at least three business days in advance of the Redemption Date. Such withdrawals are classified as a liability when the limited partner elects to redeem and informs the Funds.

Management, General Partner and incentive fees are charged at the Partnership level. All trading, exchange, clearing, user, give-up, floor brokerage and National Futures Association fees (collectively, the “clearing fees”) are borne by the Partnership directly or by the Funds and allocated to the Funds’ limited partners, including the Partnership. Other expenses are borne by the Funds and allocated to the Partnership, and also charged directly at the Partnership level. All other fees are charged at the Partnership level.

At September 30, 2015, the Partnership owned approximately 3.0% of Willowbridge Master, 47.8% of SECOR Master and 63.8% of Cambridge Master. At December 31, 2014, the Partnership owned approximately 16.0% of Blackwater Master, 3.9% of Willowbridge Master, 100% of SECOR Master, 68.5% of Cambridge Master and 100% of PGM Master. It is the Partnership’s intention to continue to invest in the Funds. The performance of the Partnership is directly affected by the performance of the Funds. Expenses to investors as a result of investment in the Funds are approximately the same as they would be if the Partnership traded directly and the redemption rights are not affected.

 

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Emerging CTA Portfolio L.P.

Notes to Financial Statements

September 30, 2015

(Unaudited)

 

Summarized information reflecting the total assets, liabilities and partners’ capital of the Funds is shown in the following tables.

 

     September 30, 2015         
         Total Assets              Total Liabilities              Total Partners’    
Capital
      

Blackwater Master

     $ 9,919,970             $ 9,919,970             $ -               

SECOR Master

     51,803,496             13,962             51,789,534          

Cambridge Master

     40,367,675             36,610             40,331,065          

Willowbridge Master

     425,873,553             5,034,529             420,839,024          

 

     December 31, 2014         
           Total Assets                Total Liabilities                Total Partners’      
Capital
      

Blackwater Master

     $ 24,973,305           $ 43,208           $ 24,930,097          

SECOR Master

     29,645,057           40,459           29,604,598          

Cambridge Master

     39,046,641           48,456           38,998,185          

Willowbridge Master

     332,179,217           16,638,854           315,540,363          

PGM Master

     20,831,040           39,214           20,791,826          

Summarized information reflecting the net investment income (loss) from trading, total trading results and net income (loss) of the Funds is shown in the following tables.

 

     For the three months ended September 30, 2015  
          Net Investment     
Income (Loss)
             Total Trading      
Results
               Net Income        
(Loss)
 

Blackwater Master

     $ (16,617)            $ 297,125             $ 280,508     

SECOR Master

     (83,257)            3,610,700             3,527,443     

Cambridge Master

     (22,085)            5,593,830             5,571,745     

Willowbridge Master

     (145,834)            28,756,543             28,610,709     
     For the nine months ended September 30, 2015  
     Net Investment
Income (Loss)
       Total Trading
Results
       Net Income
(Loss)
 

Blackwater Master

     $ (39,750)            $ 87,198             $ 47,448     

SECOR Master

     (304,487)            6,168,503             5,864,016     

Cambridge Master

     (76,460)            8,794,035             8,717,575     

Willowbridge Master

     (636,638)            15,134,368             14,497,730     

PGM Master

     (136,430)            (923,314)            (1,059,744)    

 

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Emerging CTA Portfolio L.P.

Notes to Financial Statements

September 30, 2015

(Unaudited)

 

     For the three months ended September 30, 2014  
         Net Investment    
Income (Loss)
           Total Trading      
Results
               Net Income          
(Loss)
 

Blackwater Master

     $ (14,963)          $ 2,462,046           $ 2,447,083     

SECOR Master

     (155,854)          325,929           170,075     

Cambridge Master

     (54,962)          6,532,519           6,477,557     

Willowbridge Master

     (166,398)          3,692,929           3,526,531     

300 North Master

     (42,217)          (270,614)          (312,831)    

Principle Master

     (74,652)          (1,025,740)          (1,100,392)    

PGM Master

     (26,211)          733,796           707,585     
     For the nine months ended September 30, 2014  
     Net Investment
Income (Loss)
     Total Trading
Results
     Net Income
(Loss)
 

Blackwater Master

     $ (62,309)          $ 732,472           $ 670,163     

SECOR Master

     (400,635)          1,161,971           761,336     

Cambridge Master

     (121,681)          6,865,193           6,743,512     

Willowbridge Master

     (379,676)          2,654,368           2,274,692     

300 North Master

     (128,732)          (3,974,712)          (4,103,444)    

Principle Master

     (184,996)          (3,248,158)          (3,433,154)    

PGM Master

     (26,211)          733,796           707,585     

Summarized information reflecting the Partnership’s investments in, and the Partnership’s pro rata share of the results of operations of, the Funds is shown in the following tables.

 

    September 30, 2015     For the three months ended September 30, 2015          
    % of
Partnership’s
Net Assets
    Fair Value     Income
(Loss)
    Expenses     Net
Income
(Loss)
         

Funds

        Clearing
Fees
    Other       Investment
Objective
  Redemptions
Permitted

Blackwater Master(a)

    -             $ -            $ 70,025        $ 1,307        $ 4,326       $ 64,392        Commodity Portfolio   Monthly

SECOR Master

    24.31%         24,774,491         1,749,282         80,436         9,276        1,659,570        Commodity Portfolio   Monthly

Cambridge Master

    25.25%         25,742,479         3,619,120         12,234         15,105        3,591,781        Commodity Portfolio   Monthly

Willowbridge Master

    12.31%         12,544,558         717,290         4,009         595        712,686        Commodity Portfolio   Monthly
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Total

     $ 63,061,528        $ 6,155,717        $ 97,986        $ 29,302       $ 6,028,429         
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     
    September 30, 2015     For the nine months ended September 30, 2015          
    % of
Partnership’s
Net Assets
    Fair Value     Income
(Loss)
    Expenses     Net
Income
(Loss)
    Investment
Objective
   

Funds

        Clearing
Fees
    Other         Redemptions
Permitted

Blackwater Master(a)

    -             $ -            $ 73,712        $ 3,762        $ 10,276        $ 59,674       Commodity Portfolio   Monthly

SECOR Master

    24.31%         24,774,491         3,398,201         273,133         39,422         3,085,646       Commodity Portfolio   Monthly

Cambridge Master

    25.25%         25,742,479         5,700,537         34,702         48,446         5,617,389       Commodity Portfolio   Monthly

Willowbridge Master

    12.31%         12,544,558         575,206         17,250         2,267         555,689       Commodity Portfolio   Monthly

PGM Master (b)

    -             -             (922,486)        75,206         62,052         (1,059,744)      Commodity Portfolio   Monthly
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Total

     $ 63,061,528        $ 8,825,170        $ 404,053        $ 162,463        $ 8,258,654        
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

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Emerging CTA Portfolio L.P.

Notes to Financial Statements

September 30, 2015

(Unaudited)

 

    December 31, 2014     For the three months ended September 30, 2014          
    % of
Partnership’s
Net Assets
    Fair Value     Income
(Loss)
    Expenses     Net
Income
(Loss)
         

Funds

        Clearing
Fees
    Other       Investment
Objective
  Redemptions
Permitted

Blackwater Master

    3.47%        $ 3,980,034        $ 542,258        $ 4,222        $ 5,006        $ 533,030       Commodity Portfolio   Monthly

SECOR Master

    25.83%         29,604,763         326,625         132,688         23,862         170,075       Commodity Portfolio   Monthly

Cambridge Master

    23.30%         26,708,570         4,656,321         27,556         28,520         4,600,245       Commodity Portfolio   Monthly

Willowbridge Master

    10.76%         12,341,418         285,494         15,452         3,896         266,146       Commodity Portfolio   Monthly

300 North Master (c)

    -              -             (270,035)        17,054         25,742         (312,831)      Commodity Portfolio   Monthly

Principle Master (d)

    -              -             (1,025,560)        16,097         58,735         (1,100,392)      Commodity Portfolio   Monthly

PGM Master

    18.14%         20,791,945         733,831         13,746         12,500         707,585       Commodity Portfolio   Monthly
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Total

     $ 93,426,730        $ 5,248,934        $ 226,815        $ 158,261        $ 4,863,858        
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     
    December 31, 2014     For the nine months ended September 30, 2014          
    % of
Partnership’s
Net Assets
    Fair Value     Income
(Loss)
    Expenses     Net
Income
(Loss)
    Investment
Objective
  Redemptions
Permitted

Funds

        Clearing
Fees
    Other        

Blackwater Master

    3.47%        $ 3,980,034        $ (266,742)       $ 28,027        $ 22,901        $ (317,670)      Commodity Portfolio   Monthly

SECOR Master

    25.83%         29,604,763         1,164,738         335,246         68,156         761,336       Commodity Portfolio   Monthly

Cambridge Master

    23.30%         26,708,570         4,957,816         58,423         68,799         4,830,594       Commodity Portfolio   Monthly

Willowbridge Master

    10.76%         12,341,418         180,353         46,358         11,665         122,330       Commodity Portfolio   Monthly

300 North Master (c)

    -              -             (3,971,404)        62,977         69,063         (4,103,444)      Commodity Portfolio   Monthly

Principle Master (d)

    -              -             (3,245,900)        85,947         101,307         (3,433,154)      Commodity Portfolio   Monthly

PGM Master

    18.14%         20,791,945         733,831         13,746         12,500         707,585       Commodity Portfolio   Monthly
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

Total

     $ 93,426,730        $ (447,308)       $ 630,724        $ 354,391        $ (1,432,423)       
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

    (a)          From January 1, 2015 through September 30, 2015, the date the Partnership fully redeemed its interest in Blackwater Master.

    (b)          From January 1, 2015 through June 30, 2015, the date the Partnership fully redeemed its interest in PGM Master.

    (c)          From January 1, 2014 through October 31, 2014, the date the Partnership fully redeemed its interest in 300 North Master.

    (d)          From January 1, 2014 through July 31, 2014, the date the Partnership fully redeemed its interest in Principle Master.

7. Financial Instrument Risks:

In the normal course of business, the Partnership and the Funds are parties to financial instruments with off-balance sheet risk, including derivative financial instruments and derivative commodity instruments. These financial instruments may include forwards, futures, options and swaps, whose values are based upon an underlying asset, index, or reference rate, and generally represent future commitments to exchange currencies or cash balances, to purchase or sell other financial instruments at specific terms at specified future dates, or, in the case of derivative commodity instruments, to have a reasonable possibility to be settled in cash, through physical delivery or with another financial instrument. These instruments may be traded on an exchange, a swap execution facility or over-the-counter (“OTC”). Exchange-traded instruments include futures and certain standardized forward, option and swap contracts. Certain swap contracts may also be traded on a swap execution facility or OTC. OTC contracts are negotiated between contracting parties and also include certain forward and option contracts. Specific market movements of commodities or futures contracts underlying an option cannot accurately be predicted. The purchaser of an option may lose the entire premium paid for the option.

The writer or seller of an option has unlimited risk. Each of these instruments is subject to various risks similar to those relating to the underlying financial instruments, including market and credit risk. In general, the risks associated with OTC contracts are greater than those associated with exchange-traded instruments because of the greater risk of default by the counterparty to an OTC contract. The General Partner estimates that at any given time approximately 52.2% to 67.1% of the Partnership’s/Funds’ contracts are traded OTC.

 

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Emerging CTA Portfolio L.P.

Notes to Financial Statements

September 30, 2015

(Unaudited)

 

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

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

The Partnership and the Funds do not isolate the portion of the results of operations arising from the effect of changes in foreign exchange rates on investments from fluctuations due to changes in market prices of investments held. Such fluctuations are included in net income (loss) in the Statements of Income and Expenses and Changes in Partners’ Capital.

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

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

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

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

 

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Emerging CTA Portfolio L.P.

Notes to Financial Statements

September 30, 2015

(Unaudited)

 

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

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

The General Partner monitors and attempts to control the Partnership’s/Funds’ 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/Funds may be subject. These monitoring systems generally allow the General Partner to statistically analyze actual trading results with risk-adjusted performance indicators and correlation statistics. In addition, online monitoring systems provide account analysis of futures, forward and option contracts by sector, margin requirements, gain and loss transactions and collateral positions.

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

8. Subsequent Events

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

Effective September 30, 2015, the Partnership fully redeemed its investment in Blackwater Master. Effective on October 1, 2015, the Partnership reallocated the assets allocated to Blackwater to existing commodity trading advisors in the Partnership.

 

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Table of Contents

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

Liquidity and Capital Resources

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

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

For the nine months ended September 30, 2015, Partnership capital decreased 11.1% from $114,627,992 to $101,925,404. This decrease was attributable to redemptions of 12,760.5320 Class A Redeemable Units totaling $17,299,878 and 127.824 General Partner Class A Redeemable Units totaling $175,894, which was partially offset by subscriptions for 2,481.5860 Class A Redeemable Units totaling $3,384,167 and net income of $1,389,017. Future redemptions can impact the amount of funds available for investment in funds in subsequent periods.

Critical Accounting Policies

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

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

Results of Operations

During the Partnership’s third quarter of 2015, the net asset value per Class A Redeemable Unit increased 4.0% from $1,320.35 to $1,373.04, as compared to an increase of 1.1% in the third quarter of 2014. The Partnership experienced a net trading gain before fees and expenses in the third quarter of 2015 of $6,263,940. Gains were primarily attributable to the Partnership’s/Funds’ trading of commodity futures in currencies, energy, indices, U.S. and non-U.S. interest rates, livestock and metals, and were partially offset by losses in grains. The Partnership experienced a net trading gain before fees and expenses in the third quarter of 2014 of $3,652,210. Gains were primarily attributable to the Partnership’s/Funds’ trading of commodity futures in currencies, grains, metals and softs, and were partially offset by losses in energy, U.S. and non-U.S. interest rates, indices and livestock.

The most significant gains were achieved within the currency sector during July and August from short positions in various currencies, particularly the Korean won, Thai baht, Taiwan dollar, and Australian dollar against the U.S. dollar as the value of the U.S. dollar advanced amid signals from U.S. Federal Reserve Chair Janet Yellen that the central bank may raise interest rates later in 2015 on the back of an improving U.S. economy. Within the global equity index sector, gains were recorded during the middle of July from long positions in European equity index positions as prices rebounded with positive investor sentiment after Greece and its creditors finally came to an agreement over economic reform. Additional gains in this sector were recorded during August from short positions in U.S. and European equity index futures as prices declined amid signs of a slowdown in China, uncertainty surrounding the U.S. Federal Reserve’s interest rate policy and lackluster U.S. corporate earnings. Within the energy sector, gains were achieved during July and September from short positions in crude oil and oil related products as prices decreased due to high production in the U.S. and Middle East, which added to the growing global supply glut. Within the metals sector, gains were experienced during July from short futures positions in gold and silver as prices declined as a strengthening U.S. dollar decreased the appeal of precious metals as a store of value. Additional gains in this sector were recorded during July from short base metals futures positions as prices moved lower amid concern a slowdown in the Chinese economy would weaken demand. In the global interest rate sector, gains were recorded primarily during September from long positions in global fixed income futures as prices increased after the U.S. Federal Reserve (“Fed”) left interest rates unchanged and investors sought safe havens amid a global rout in stock prices. Additional gains were recorded within the agricultural markets during September from short positions in cattle futures as older, well-fed cattle pushed up slaughter weights and suppressed per-pound prices.

 

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During the Partnership’s nine months ended September 30, 2015, the net asset value per Class A Redeemable Unit increased 1.4% from $1,354.30 to $1,373.04, as compared to a decrease of 6.5% in the nine months ended September 30, 2014. The Partnership experienced a net trading gain before fees and expenses in the nine months ended September 30, 2015 of $7,724,380. Gains were primarily attributable to the Partnership’s/Funds’ trading of commodity futures in currencies, indices, U.S. and non-U.S. interest rates, livestock and metals, and were partially offset by losses in energy, grains and softs. The Partnership experienced a net trading loss before fees and expenses in the nine months ended September 30, 2014 of $4,383,904. Losses were primarily attributable to the Partnership’s/Funds’ trading of commodity futures in energy, indices, non-U.S. interest rates and metals, and were partially offset by gains in currencies, grains, U.S. interest rates, livestock and softs.

The most significant gains were achieved within the currency sector during July and August from short positions in various currencies, particularly the Korean won, Thai baht, Taiwan dollar, and Australian dollar against the U.S. dollar as the value of the U.S. dollar advanced amid signals from U.S. Federal Reserve Chair Janet Yellen that the central bank may raise interest rates later in 2015 on the back of an improving U.S. economy. Additional gains in this sector were recorded during the first quarter from short euro positions versus the U.S. dollar as the value of the euro decreased due to an unprecedented economic stimulus program introduced by the European Central Bank (“ECB”). Gains achieved in the sector during April were from long Singapore dollar positions versus the U.S. dollar. Within the stock index sector, gains were experienced during February and March from long positions in European and U.S. index futures as prices were supported by the ECB’s asset purchasing program and positive economic data in the U.S. Further gains were recorded during the middle of July from long positions in European equity index positions as prices rebounded with positive investor sentiment after Greece and its creditors finally came to an agreement over economic reform. Additional gains in this sector were recorded during August from short positions in U.S. and European equity index futures as prices declined amid signs of a slowdown in China, uncertainty surrounding the Fed’s interest rate policy, and lackluster U.S. corporate earnings. In the metals sector, gains were achieved during April from long industrial metals futures positions as prices increased due to low stockpiles and the prospect of additional economic stimulus in China. Additional gains in this sector were achieved during July from short precious and base metals futures positions as prices moved lower due to a strengthening U.S. dollar and concern a slowdown in the Chinese economy would weaken demand. In the global interest rate sector, gains were recorded primarily during January from long European and Canadian fixed income futures positions as prices advanced after the central banks in both the European Union and Canada announced stimulus measures to combat widespread deflationary concerns and slowing economic growth. Additional gains were recorded during September from long positions in global fixed income futures as prices increased after the U.S. Federal Reserve left interest rates unchanged and investors sought safe havens amid a global rout in stock prices. A portion of the Partnership’s gains during the first nine months of the year was offset by losses recorded within the agricultural sector during January from long wheat futures positions as an expanding global grain surplus drove prices lower. Additional losses in the agricultural markets were recorded during March from long positions in cocoa futures as prices moved lower after industry reports indicated that cocoa production reached record highs in the Ivory Coast, the world’s top cocoa producing region. Further losses in this sector were recorded during April from short lean hog futures positions. Within the energy complex, losses were recorded from February through June as oil prices fluctuated without consistent direction as the market assessed global demand and the value of the U.S. dollar.

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

Interest income on 100% of the average daily equity maintained in cash in the Partnership’s (or the Partnership’s allocable portion of a Fund’s) brokerage account during each month was earned at the monthly average of the 4-week U.S. Treasury bill discount rate. All interest earned on U.S. Treasury bills purchased will be retained by the Partnership and/or the Funds, as applicable. Interest income for the three months ended September 30, 2015 increased by $6,831, as compared to the corresponding period in 2014. The increase in interest income is due to higher U.S. Treasury bills rates during the three months ended September 30, 2015, as compared to the corresponding period in 2014. Interest income for the nine months ended September 30, 2015 decreased by $6,202, as compared to the corresponding period in 2014. The decrease in interest income is due to lower U.S. Treasury bill rates and lower average net assets during the nine months ended September 30, 2015, as compared to the corresponding period in 2014. Interest earned by the Partnership will increase the net asset value of the Partnership. The amount of interest income earned by the Partnership and the Funds depends on the average daily equity in the Partnership’s and the Funds’ accounts and upon interest rates over which neither the Partnership/Funds nor MS&Co. has control.

Ongoing selling agent fees are calculated as a percentage of the Partnership’s adjusted net asset value as of the end of each month and are affected by trading performance, subscriptions and redemptions. Accordingly, they must be compared in relation to the fluctuations in monthly net asset values. Ongoing selling agent fees for the three and nine months ended September 30, 2015 decreased by $236,252 and $1,289,752, respectively, as compared to the corresponding periods in 2014. The decrease in ongoing selling agent fees is due to lower average net assets during the three and nine months ended September 30, 2015, as compared to the corresponding periods in 2014, as well as reductions in the ongoing selling agent fee rate effective October 1, 2014 and April 1, 2014.

 

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Certain clearing fees are based on the number of trades executed by the Advisors for the Partnership/Funds. Accordingly, they must be compared in relation to the number of trades executed during the period. Clearing fees related to direct investments for the three and nine months ended September 30, 2015 decreased by $1,985 and $28,458, respectively, as compared to the corresponding periods in 2014. The decrease in these clearing fees is primarily due to a decrease in the number of direct trades made by the Partnership during the three and nine months ended September 30, 2015, as compared to the corresponding periods in 2014.

Management fees are calculated as a percentage of the Partnership’s adjusted net asset value on the last day of each month and are affected by trading performance, subscriptions and redemptions. Accordingly, they must be compared in relation to the fluctuations in monthly net asset values. Management fees for the three and nine months ended September 30, 2015 decreased by $36,627 and $169,977, respectively, as compared to the corresponding periods in 2014. The decrease in management fees is due to lower average net assets during the three and nine months ended September 30, 2015, as compared to the corresponding periods in 2014.

General Partner fees are paid to the General Partner for administering the business and affairs of the Partnership including, among other things (i) selecting, appointing and terminating the Partnership’s commodity trading advisors, (ii) allocating and reallocating the Partnership’s assets among the commodity trading advisors and (iii) monitoring the activities of the commodity trading advisors. These fees are calculated as a percentage of the Partnership’s adjusted net asset value on the last day of each month and are affected by trading performance, subscriptions and redemptions. Accordingly, they must be compared in relation to the fluctuations in monthly net asset values. General Partner fees for the three and nine months ended September 30, 2015 increased by $109,200 and $310,195, respectively, as compared to the corresponding periods in 2014. The increase in General Partner fees is due to an increase in the General Partner fee effective October 1, 2014.

The General Partner is also paid an incentive fee payable annually equal to 5% of the Partnership’s overall New Trading Profits, as defined in the Limited Partnership Agreement, earned in each calendar year. Trading performance for the three and nine months ended September 30, 2015 resulted in General Partner incentive fees in the amount of $37,394.

Incentive fees paid by the Partnership to the Advisors are based on the new trading profits generated by each Advisor at the end of the quarter, as defined in the respective management agreements among the Partnership, the General Partner and each Advisor. Trading performance for the three and nine months ended September 30, 2015 resulted in incentive fees in the amounts of $667,285 and $1,434,431, respectively, and compares with $683,130 and $670,921, respectively, for the corresponding periods in 2014. To the extent an Advisor incurs a loss for the Partnership, the Advisor will not be paid incentive fees until such Advisor recovers any net loss incurred by the Advisor and earns additional new trading profits for the Partnership.

In allocating the assets of the Partnership among the Advisors, the General Partner conducts proprietary research and considers the background of the Advisors’ principals, as well as the Advisors’ trading styles, strategies and markets traded, expected volatility, trading results (to the extent available) and fee requirements. The General Partner may modify or terminate the allocation of assets among the Advisors and may allocate assets to additional advisors at any time.

As of September 30, 2015 and June 30, 2015, the Partnership’s assets were allocated among the Advisors in the following approximate percentages:

 

Advisor

           September 30, 2015                            June 30, 2015               

Blackwater

     $1,119,746         1%            $2,194,958         2%    

Cambridge

     $25,137,587         25%            $24,566,037         24%    

Centurion

     $18,288,194         18%            $16,882,272         17%    

Perella

     $20,415,145         20%            $20,452,858         20%    

SECOR

     $24,505,956         24%                      $25,851,383                   26%    

Willowbridge

               $12,458,776         12%            $5,043,073         5%    

Other

     -                      -                 $6,070,064         6%    

 

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Item 3.       Quantitative and Qualitative Disclosures about Market Risk

The Partnership/Funds are speculative commodity pools. The market sensitive instruments held by the Partnership and the Funds are acquired for speculative trading purposes, and all or substantially all of the Partnership’s/Funds’ assets are subject to the risk of trading loss. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Partnership’s main line of business.

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

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

The Partnership/Funds rapidly acquire and liquidate both long and short positions in a wide range of different markets. Consequently, it is not possible to predict how a particular future market scenario will affect performance, and the Partnership’s/Funds’ past performance is not necessarily indicative of their future results.

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

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

Value at Risk tables represent a probabilistic assessment of the risk of loss in market risk sensitive instruments. With the exception of certain Advisors, the Advisors currently trade the Partnership’s assets indirectly in master fund managed accounts established in the name of the master fund over which they have been granted limited authority to make trading decisions. The first two trading Value at Risk tables reflect the market sensitive instruments held by the Partnership directly and through its investments in the Funds. The remaining trading Value at Risk tables reflect the market sensitive instruments held by the Partnership directly (i.e., in the managed accounts in the Partnership’s name traded by certain Advisors), and indirectly by each Fund separately. There has been no material change in the trading Value at Risk information previously disclosed in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

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The following tables indicate the trading Value at Risk associated with the Partnership’s open positions by market category as of September 30, 2015 and December 31, 2014, as applicable. As of September 30, 2015, the Partnership’s total capitalization was $101,925,404.

 

September 30, 2015              

Market Sector

     Value at Risk        % of
 Total Capitalization 
 

Currencies

     $ 9,872,300          9.69%    

Energy

     595,146          0.58%    

Grains

     392,648          0.38%    

Indices

     5,774,328          5.67%    

Interest Rates U.S.

     751,319          0.74%    

Interest Rates Non-U.S.

     1,320,491          1.30%    

Livestock

     79,292          0.08%    

Metals

     856,973          0.84%    

Softs

     146,054          0.14%    
  

 

 

    

 

 

 

Total

     $   19,788,551          19.42%    
  

 

 

    

 

 

 

As of December 31, 2014, the Partnership’s total capitalization was $114,627,992.

 

December 31, 2014              

Market Sector

     Value at Risk        % of
 Total Capitalization 
 

Currencies

     $ 12,444,997          10.86%    

Energy

     896,409          0.78%    

Grains

     571,670          0.50%    

Indices

     5,068,663          4.42%    

Interest Rates U.S.

     737,928          0.65%    

Interest Rates Non-U.S.

     1,677,853          1.46%    

Livestock

     71,396          0.06%    

Metals

     744,638          0.65%    

Softs

     185,845          0.16%    
  

 

 

    

 

 

 

Total

     $   22,399,399          19.54%    
  

 

 

    

 

 

 

The following tables indicate the trading Value at Risk associated with the Partnership’s direct investments and through its investments in the Funds by market category as of September 30, 2015 and December 31, 2014, and the highest, lowest and average values during the three months ended September 30, 2015 and the twelve months ended December 31, 2014. All open contracts trading risk exposures have been included in calculating the figures set forth below. There were no direct investments as of December 31, 2014.

As of September 30, 2015, the Partnership’s Value at Risk for the portion of its assets that are traded directly was as follows:

 

     September 30, 2015                              
                   Three Months Ended September 30, 2015  
            % of Total      High      Low      Average  

 Market Sector          

       Value at Risk           Capitalization        Value at Risk        Value at Risk        Value at Risk*   

 Currencies

    $ 46,068          0.05%         $       289,828         $         6,600         $         15,356    

 Energy

     171,160          0.17%          480,700          39,600          211,383    

 Grains

     15,518          0.01%          229,735          4,125          17,786    

 Indices

     2,923,117          2.87%          3,530,916          1,711,893          2,721,443    

 Interest Rates U.S.

     501,896          0.49%          950,987          345,771          600,541    

 Interest Rates Non-U.S.

     462,304          0.45%          1,322,437          439,554          685,559    

 Livestock

     5,280          0.01%          21,120          1,320          3,520    

 Metals

     177,947          0.17%          272,690          49,335          122,643    

 Softs

     17,596          0.02%          65,780          1,100          6,599    
  

 

 

    

 

 

          

 Total

    $          4,320,886          4.24%             
  

 

 

    

 

 

          

*  Average of month-end Values at Risk.

 

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As of September 30, 2015, Cambridge Master’s total capital was $40,331,065. The Partnership owned approximately 63.8% of Cambridge Master. As of September 30, 2015, Cambridge Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Cambridge for trading) was as follows:

 

     September 30, 2015                             
                  Three Months Ended September 30, 2015  
            % of Total     High      Low      Average  

Market Sector          

       Value at Risk           Capitalization       Value at Risk         Value at Risk        Value at Risk*   

Currencies

    $ 8,850,622          21.94     $    19,421,478         $     5,745,674         $    10,696,676    
  

 

 

    

 

 

         

Total

    $         8,850,622          21.94         
  

 

 

    

 

 

         

*    Average of month-end Values at Risk.

As of December 31, 2014, Cambridge Master’s total capitalization was $38,998,185. The Partnership owned approximately 68.5% of Cambridge Master. As of December 31, 2014, Cambridge Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Cambridge for trading) was as follows:

 

     December 31, 2014                             
                  Twelve Months Ended December 31, 2014  
            % of Total     High      Low      Average  

Market Sector          

       Value at Risk           Capitalization       Value at Risk         Value at Risk         Value at Risk*   

Currencies

    $ 9,794,931          25.12     $    25,372,185         $    5,011,812         $    15,522,722    
  

 

 

    

 

 

         

Total

    $         9,794,931          25.12         
  

 

 

    

 

 

         

*    Annual average of month-end Values at Risk.

As of September 30, 2015, Willowbridge Master’s total capitalization was $420,839,024. The Partnership owned approximately 3.0% of Willowbridge Master. As of September 30, 2015, Willowbridge Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Willowbridge for trading) was as follows:

 

     September 30, 2015                             
                  Three Months Ended September 30, 2015  
            % of Total     High      Low      Average  

Market Sector          

       Value at Risk           Capitalization       Value at Risk         Value at Risk         Value at Risk*   

Currencies

    $ 62,412,798          14.83     $    63,123,816         $    22,020,457         $    47,022,246    

Energy

     7,337,774          1.75      8,966,578          2,001,737          5,373,423    

Indices

     4,251,069          1.01      5,262,987          344,080          1,417,023    

Interest Rates U.S.

     3,407,089          0.81      6,150,738          589,871          2,302,515    

Interest Rates Non- U.S.

     510,242          0.12      528,790          510,242          170,081    
  

 

 

    

 

 

         

Total

    $        77,918,972          18.52         
  

 

 

    

 

 

         

*  Average of month-end Values at Risk.

 

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As of December 31, 2014, Willowbridge Master’s total capitalization was $315,540,363. The Partnership owned approximately 3.9% of Willowbridge Master. As of December 31, 2014, Willowbridge Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Willowbridge for trading) was as follows:

 

     December 31, 2014                             
                  Twelve Months Ended December 31, 2014  
            % of Total     High      Low      Average  

 Market Sector          

       Value at Risk           Capitalization       Value at Risk         Value at Risk         Value at Risk*   

 Currencies

    $ 12,241,960          3.88     $    17,429,568         $        12,311         $     3,182,580    

 Energy

     3,022,878          0.96      3,022,878          59,187          876,114    

 Interest Rates U.S.

     4,491,327          1.42      10,074,313          537,550          3,058,860    
  

 

 

    

 

 

         

 Total

    $         19,756,165          6.26         
  

 

 

    

 

 

         

*  Annual average of month-end Values at Risk.

As of September 30, 2015, SECOR Master’s total capitalization was $51,789,534. The Partnership owned approximately 47.8% of SECOR Master. As of September 30, 2015, SECOR Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to SECOR for trading) was as follows:

 

     September 30, 2015                             
                  Three Months Ended September 30, 2015  
            % of Total     High      Low      Average  

 Market Sector          

        Value at Risk            Capitalization       Value at Risk         Value at Risk         Value at Risk*   

 Currencies

    $ 4,826,677          9.32     $     6,837,090         $     4,799,234         $     5,300,357    

 Energy

     426,470          0.82      696,471          352,220          473,783    

 Grains

     788,975          1.52      788,975          438,900          703,230    

 Indices

     5,698,073          11.00      7,672,809          4,326,877          6,266,863    

 Interest Rates U.S.

     307,971          0.60      1,394,828          283,333          434,115    

 Interest Rates Non-U.S.

     1,763,346          3.41      1,856,141          664,719          1,557,296    

 Livestock

     154,836          0.30      191,400          63,063          117,612    

 Metals

     1,420,557          2.74      1,672,593          1,112,536          1,460,147    

 Softs

     268,741          0.52      462,165          229,956          305,371    
  

 

 

    

 

 

         

 Total

    $         15,655,646          30.23         
  

 

 

    

 

 

         

 *    Average of month-end Values at Risk

As of December 31, 2014, SECOR Master’s total capitalization was $29,604,598. The Partnership owned approximately 100% of SECOR Master. As of December 31, 2014, SECOR Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to SECOR for trading) was as follows:

 

     December 31, 2014                             
                  Twelve Months Ended December 31, 2014  
            % of Total     High      Low      Average  

 Market Sector          

        Value at Risk            Capitalization       Value at Risk         Value at Risk         Value at Risk*   

 Currencies

    $ 3,719,944          12.57     $     7,375,075         $     2,706,523         $     4,730,014    

 Energy

     614,870          2.08      614,870          34,891          200,989    

 Grains

     468,270          1.58      468,270          89,917          223,596    

 Indices

     3,739,846          12.63      4,233,658          15,514,753          3,067,950    

 Interest Rates U.S.

     326,876          1.10      892,672          97,422          452,147    

 Interest Rates Non-U.S.

     847,859          2.86      1,079,625          298,506          704,466    

 Livestock

     71,396          0.24      79,316          3,300          45,714    

 Metals

     573,024          1.94      1,148,317          306,271          761,476    

 Softs

     185,845          0.63      383,075          76,395          177,696    
  

 

 

    

 

 

         

 Total

    $         10,547,930          35.63         
  

 

 

    

 

 

         

*  Annual average of month-end Values at Risk.

 

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As of September 30, 2015, the Partnership has fully redeemed its investment in Blackwater Master As of December 31, 2014, Blackwater Master’s total capitalization was $24,930,097. The Partnership owned approximately 16.0% of Blackwater Master. As of December 31, 2014, Blackwater Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Blackwater for trading) was as follows:

 

     December 31, 2014                             
                  Twelve Months Ended December 31, 2014  
            % of Total     High      Low      Average  

 Market Sector          

       Value at Risk           Capitalization       Value at Risk         Value at Risk         Value at Risk*   

 Currencies

    $ 241,401          0.97     $     3,189,941         $       51,293         $     1,235,089    

 Energy

     13,200          0.05      658,814          10,560          296,649    

 Grains

     192,500          0.77      938,926          2,750          171,159    

 Indices

     201,959          0.81      3,462,814          145,756          999,140    

 Interest Rates U.S.

     92,400          0.37      655,463          8,580          221,480    

 Interest Rates Non-U.S.

     193,198          0.78      1,412,783          17,944          399,111    

 Metals

     608,528          2.44      2,895,022          340,845          928,952    
  

 

 

    

 

 

         

 Total

    $         1,543,186          6.19         
  

 

 

    

 

 

         

*    Annual average of month-end Values at Risk.

As of June 30, 2015, the Partnership has fully redeemed its investment in PGM Master. As of December 31, 2014, PGM Master’s total capitalization was $20,791,826. The Partnership owned 100% of PGM Master. As of December 31, 2014, PGM Master’s Value at Risk for its assets (including the portion of the Partnership’s assets allocated to Perella for trading) was as follows:

 

     December 31, 2014                             
                  Twelve Months Ended December 31, 2014  
            % of Total     High      Low      Average  

 Market Sector          

       Value at Risk           Capitalization       Value at Risk         Value at Risk         Value at Risk*   

 Currencies

    $ 1,499,465          7.21     $     1,817,528         $       595,843         $     1,139,339    

 Energy

     161,535          0.78      161,535          9,570          81,428    

 Grains

     72,600          0.35      207,625          72,600          124,231    

 Indices

     1,296,504          6.24      2,015,159          1,213,223          1,645,901    

 Interest Rates U.S.

     221,106          1.06      328,482          205,761          254,154    

 Interest Rates Non-U.S.

     799,082          3.84      1,057,290          145,466          799,725    

 Metals

     74,250          0.36      132,660          57,640          91,163    
  

 

 

    

 

 

         

 Total

    $         4,124,542          19.84         
  

 

 

    

 

 

         

 *    For the period September 1, 2014 (commencement of trading operations) to December 31, 2014 average of month-end Values at Risk.

 

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Item 4.       Controls and Procedures

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

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

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

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

 

   

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

 

   

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

 

   

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

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

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

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

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

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

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

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

Regulatory and Governmental Matters. 

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

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

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

 

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

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

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

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

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

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

 

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

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

Other Litigation

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

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

 

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

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

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

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

 

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

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

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

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

 

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

Settled Civil Litigation

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

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

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

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

 

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

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

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

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

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

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

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

 

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Item lA.         Risk Factors

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

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

For the three months ended September 30, 2015, there were subscriptions for 585.7080 Class A Redeemable Units totaling $793,167. The Redeemable Units were issued in reliance upon applicable exemptions from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, and Section 506 of Regulation D promulgated thereunder. The Redeemable Units were purchased by accredited investors as defined in Regulation D. In determining the applicability of the exemption, the General Partner relied on the fact that the Redeemable Units were purchased by accredited investors in a private offering.

Proceeds from the sale of Redeemable Units are used in the trading of commodity interests including futures contracts, options, forward and swap contracts.

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

 

Period   Class A (a) Total
Number of
Redeemable Units
Purchased*
    Class A (b) Average
Price Paid per
Redeemable Unit**
   

 

(c) Total Number of  

Redeemable Units  

Purchased as Part of  

Publicly Announced  

Plans or Programs  

  (d) Maximum Number (or
Approximate Dollar Value)  of
Redeemable Units that May Yet
Be Purchased Under the Plans
or Programs

 

July 1, 2015 - July 31, 2015

    1,162.8060      $ 1,353.16      N/A   N/A

 

August 1, 2015 - August 31, 2015

    918.4910      $ 1,366.80      N/A   N/A

 

September 1, 2015 - September 30, 2015

    739.1310      $ 1,373.04      N/A   N/A
      2,820.4280      $ 1,362.81           

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

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

Item 3.       Defaults Upon Senior Securities. None.

Item 4.       Mine Safety Disclosures. Not Applicable.

Item 5.       Other Information. None.

 

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Item 6.       Exhibits

 

3.1(a)   Certificate of Limited Partnership dated June 30, 2003 (filed as Exhibit 3.1 to the General Form for Registration of Securities on Form 10 filed on April 30, 2008 and incorporated herein by reference).
     (b)   Certificate of Amendment of the Certificate of Limited Partnership dated September 21, 2005 (filed as Exhibit 3.1(a) to the General Form for Registration of Securities on Form 10 filed on April 30, 2008 and incorporated herein by reference).
     (c)   Certificate of Amendment of the Certificate of Limited Partnership dated September 19, 2008 (filed as Exhibit 3.1(c) to the Quarterly Report on Form 10-Q filed on November 16, 2009 and incorporated herein by reference).
     (d)   Certificate of Amendment of the Certificate of Limited Partnership dated September 28, 2009 (filed as Exhibit 99.1 to the Current Report on Form 8-K filed on September 30, 2009 and incorporated herein by reference).
     (e)   Certificate of Amendment of the Certificate of Limited Partnership dated June 29, 2010 (filed as Exhibit 3.1(e) to the Current Report on Form 8-K filed on July 2, 2010 and incorporated herein by reference).
     (f)   Certificate of Amendment of the Certificate of Limited Partnership dated September 2, 2011 (filed as Exhibit 3.1 to the Current Report on Form 8-K filed on September 7, 2011 and incorporated herein by reference).
     (g)   Certificate of Amendment of the Certificate of Limited Partnership dated August 7, 2013 (filed as Exhibit 3.1(g) to the Quarterly Report on Form 10-Q filed on August 14, 2013 and incorporated herein by reference).
3.2   Fourth Amended and Restated Limited Partnership Agreement effective May 1, 2012 (filed as Exhibit 3.2 to the Annual Report on Form 10-K filed on March 27, 2013 and incorporated herein by reference).
10.1   Customer Agreement among the Partnership, the General Partner and CGM (filed as Exhibit 10.9 to the General Form for Registration of Securities on Form 10 filed on April 30, 2008 and incorporated herein by reference).
10.2  

Form of Subscription Agreement (filed as Exhibit 10.5 to the Quarterly Report on Form 10-Q filed on November 14, 2012 and incorporated herein by reference).

10.3(a)  

Alternative Investment Selling Agent Agreement among the Partnership, the General Partner and Morgan Stanley Wealth Management effective October 1, 2013 (filed as Exhibit 10.6 to the Quarterly Report on Form 10-Q filed on November 14, 2013 and incorporated herein by reference).

       (b)  

Letter Amendment to the Alternative Investment Selling Agent Agreement among the Partnership, the General Partner and Morgan Stanley Wealth Management, effective April 1, 2014 (filed as Exhibit 10.4(b) to the Quarterly Report on Form 10-Q filed on May 14, 2014 and incorporated herein by reference).

       (c)   Letter Amendment to the Alternative Investment Selling Agent Agreement among the Partnership, the General Partner and Morgan Stanley Wealth Management effective October 1, 2014 (filed as Exhibit 10.4(c) to the Quarterly Report on Form 10-Q filed on August 13, 2014 and incorporated herein by reference).
10.4(a)  

Amended and Restated Management Agreement among the Partnership, the General Partner and Blackwater Capital Management, LLC (filed as Exhibit 10.13 to the Current Report on Form 8-K filed on November 4, 2010 and incorporated herein by reference).

       (b)   Amendment No.1 to the Amended and Restated Management Agreement among the Partnership, the General Partner and Blackwater Capital Management, LLC (filed as Exhibit 10.6(b) to the Quarterly Report on Form 10-Q filed on May 14, 2014 and incorporated herein by reference).
       (c)  

Letter from the General Partner to Blackwater Capital Management, LLC extending the Management Agreement from June 30, 2014 to June 30, 2015 (filed as Exhibit 10.7(c) to the Annual Report on Form 10-K filed on March 30, 2015 and incorporated herein by reference).

 

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10.5(a)  

Amended and Restated Management Agreement among the Partnership, the General Partner and Willowbridge Associates Inc. (filed as Exhibit 10.9(a) to the Quarterly Report on Form 10-Q filed on November 13, 2014 and incorporated herein by reference).

       (b)  

Amendment to the Management Agreement among the Partnership, the General Partner and Willowbridge Associates Inc. (filed as Exhibit 10.1 to the Current Report on Form 8-K filed on January 7, 2013 and incorporated herein by reference).

       (c)   Letter from the General Partner to Willowbridge Associates Inc. extending the Management Agreement from June 30, 2014 to June 30, 2015 (filed as Exhibit 10.10(c) to the Annual Report on Form 10-K filed on March 30, 2015 and incorporated herein by reference).
10.6(a)  

Amended and Restated Management Agreement among the Partnership, the General Partner and The Cambridge Strategy (Asset Management) Limited (filed as Exhibit 10.1 to the Current Report on Form 8-K filed on October 7, 2013 and incorporated herein by reference).

       (b)  

Letter from the General Partner to The Cambridge Strategy (Asset Management) Limited extending the Management Agreement from June 30, 2014 to June 30, 2015 (filed as Exhibit 10.12(b) to the Annual Report on Form 10-K filed on March 30, 2015 and incorporated herein by reference).

10.7(a)  

Management Agreement among the Partnership, the General Partner and Bleecker Street Capital, LLC (filed as Exhibit 10.15 to the Quarterly Report on Form 10-Q filed on November 14, 2012 and incorporated herein by reference).

       (b)  

Letter from the General Partner to Bleecker Street Capital, LLC extending the Management Agreement from June 30, 2014 to June 30, 2015 (filed as Exhibit 10.13(b) to the Annual Report on Form 10-K filed on March 30, 2015 and incorporated herein by reference).

10.8(a)  

Escrow Agreement among the General Partner, Morgan Stanley Wealth Management and The Bank of New York (filed as Exhibit 10.14(a) to the Annual Report on Form 10-K filed on March 27, 2013 and incorporated herein by reference).

       (b)  

Amendment No. 5 to Escrow Agreement among the General Partner, Morgan Stanley Wealth Management and The Bank of New York (filed as Exhibit 10.14(b) to the Annual Report on Form 10-K filed on March 27, 2013 and incorporated herein by reference).

10.9(a)  

Management Agreement among the Partnership, the General Partner and SECOR Capital Advisors, LP (filed as Exhibit 10.1 to the Current Report on Form 8-K filed on August 7, 2013 and incorporated herein by reference).

       (b)  

Letter from the General Partner to SECOR Capital Advisors, LP extending the Management Agreement from June 30, 2014 to June 30, 2015 (filed as Exhibit 10.14(b) to the Annual Report on Form 10-K filed on March 30, 2015 and incorporated herein by reference).

10.10(a)  

Amended and Restated Commodity Futures Customer Agreement between the Partnership and MS&Co., effective August 21, 2013 (filed as Exhibit 10.17 to the Quarterly Report on Form 10-Q filed on November 14, 2013 and incorporated herein by reference).

       (b)  

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

10.11(a)  

Management Agreement among the Partnership, the General Partner and Principle Capital Management LLC (filed as Exhibit 10.18 to the Quarterly Report on Form 10-Q filed on November 14, 2013 and incorporated herein by reference).

       (b)  

Letter from the General Partner to Principle Capital Management LLC extending the Management Agreement from June 30, 2014 to June 30, 2015 (filed as Exhibit 10.16(b) to the Annual Report on Form 10-K filed on March 30, 2015 and incorporated herein by reference).

 

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10.12(a)  

Management Agreement among the Partnership, the General Partner and 300 North Capital LLC (filed as Exhibit 10.19 to the Quarterly Report on Form 10-Q filed on November 14, 2013 and incorporated herein by reference).

         (b)  

Letter from the General Partner to 300 North Capital LLC extending the Management Agreement from June 30, 2014 to June 30, 2015 (filed as Exhibit 10.17(b) to the Annual Report on Form 10-K filed on March 30, 2015 and incorporated herein by reference).

10.13   Management Agreement among the Partnership, the General Partner and Centurion Investment Management, LLC (filed as Exhibit 10.18 to the Quarterly Report on Form 10-Q filed on November 13, 2014 and incorporated herein by reference).
10.14   Amended and Restated Management Agreement among the Partnership, the General Partner and Perella Weinberg Partners Capital Management LP (filed as Exhibit 10.1 to the Current Report on Form 8-K filed on July 6, 2015 and incorporated herein by reference).
10.15  

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

31.1 — Rule 13a-14(a)/15d-14(a) Certification (Certification of President & Director) (filed herewith).

31.2 — Rule 13a-14(a)/15d-14(a) Certification (Certification of Chief Financial Officer) (filed herewith).

32.1 — Section 1350 Certification (Certification of President & Director) (filed herewith).

32.2 — Section 1350 Certification (Certification of Chief Financial Officer) (filed herewith).

101.INS XBRL Instance Document.

101.SCH XBRL Taxonomy Extension Schema Document.

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.

101.LAB XBRL Taxonomy Extension Label Linkbase Document.

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.

101.DEF XBRL Taxonomy Extension Definition Document.

 

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SIGNATURES

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

 

EMERGING CTA PORTFOLIO L.P.
By:   Ceres Managed Futures LLC
  (General Partner)
By:   /s/  Patrick T. Egan
  Patrick T. Egan
  President & Director
Date: November 12, 2015
  By: /s/  Steven Ross                                                     
       Steven Ross
       Chief Financial Officer
       (Principal Accounting Officer)
Date: November 12, 2015

 

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