PROSPECTUS
Filed pursuant to Rule 424(b)(3)
Registration No. 333-178376
19,900,000 iShares®
iShares® Dow Jones-UBS Roll Select Commodity Index Trust
The iShares® Dow Jones-UBS Roll Select Commodity Index Trust, or the Trust, is a Delaware statutory trust that issues units of beneficial interest, called Shares, representing fractional undivided beneficial interests in its net assets. The Trusts assets will consist of long positions in exchange-traded index futures contracts of various expirations, called Index Futures, on the Dow Jones-UBS Roll Select Commodity Index, or the DJ-UBS Roll Select CI, together with Collateral Assets consisting of cash, U.S. Treasury securities or other short-term securities and similar securities that are eligible as margin deposits for those Index Future positions. It is the objective of the Trust that the performance of the Shares correspond generally, but not necessarily be identical, to the performance of the Dow Jones-UBS Roll Select Commodity Index Total Return, or the Index, which represents the return on a fully collateralized investment in the DJ-UBS Roll Select CI, before payment of the Trusts expenses and liabilities. The Index is intended to reflect the performance of a diversified group of commodities, while also seeking to minimize the effect of contango and maximize the effect of backwardation in connection with periodically switching or rolling into new futures contracts.
The Shares are listed on NYSE Arca, Inc., or NYSE Arca, under the symbol CMDT. BlackRock Institutional Trust Company, N.A., or BTC, is the Trustee of the Trust. The Trust is a commodity pool, as defined in the Commodity Exchange Act and the applicable regulations of the Commodity Futures Trading Commission, or CFTC, and is operated by its Sponsor, iShares® Delaware Trust Sponsor LLC, a commodity pool operator registered with the CFTC. BlackRock Fund Advisors, or BFA, is an indirect subsidiary of BlackRock, Inc. that serves as the commodity trading advisor, or the Advisor, of the Trust and is registered with the CFTC. The Trust is not an investment company registered under the Investment Company Act of 1940, as amended.
The Trust expects to qualify as an emerging growth company subject to reduced public company reporting requirements under U.S. federal securities laws.
Investing in the Shares involves significant risks. See Risk Factors starting on page 16.
The Trust has no operating history.
The market price for the Shares could differ from the NAV, or net asset value per Share.
Past performance history of the Index is limited, and all historical results of the Index presented here are hypothetical and not necessarily indicative of its future results or the performance of the Shares.
The price of the Shares is expected to fluctuate based on the value of the Index and the prices of the futures contracts and commodities underlying the Index; commodities markets have historically been volatile.
The return on the Shares will not correlate precisely with the performance of the Index.
The Trust is subject to fees and expenses that are payable regardless of profitability. |
There may be conflicts of interest between you, on the one hand, and the Sponsor and its affiliates, the index providers and their affiliates, the Trusts clearing futures commission merchants and any other parties that transact in the Index Futures or its underlying futures contracts and commodities, on the other hand.
The classes of assets in which the Trust invests, and accordingly, the nature of an investment in the Shares, may change from time to time.
There are income tax risks associated with the offering.
Investors in the Shares will annually receive an IRS Schedule K-1, which reports their allocable share of the Trusts items of income, gain, loss and deduction. Tax information reporting on Schedule K-1 may be somewhat more complex than comparable reporting on IRS Form 1099. |
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the securities offered in this prospectus, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
THE COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE MERITS OF PARTICIPATING IN THIS POOL NOR HAS THE COMMISSION PASSED ON THE ADEQUACY OR ACCURACY OF THIS DISCLOSURE DOCUMENT.
The Shares are not deposits or other obligations of BlackRock Institutional Trust Company, N.A. or any of its subsidiaries or affiliates or any other bank, are not guaranteed by BlackRock Institutional Trust Company, N.A. or any of its subsidiaries or affiliates or any other bank and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency. An investment in the Shares is speculative and involves a high degree of risk.
The Trust intends to offer Shares on a continuous basis. The Trust issues and redeems Shares only in one or more blocks of 50,000 Shares called Baskets. Only institutions that become Authorized Participants may purchase or redeem Baskets, in exchange for Index Futures and Collateral Assets with an aggregate value equal to the NAV of the Shares being purchased or redeemed. Shareholders who are not Authorized Participants have no right to redeem their Shares. In order to liquidate their investment in the Shares, Shareholders who are not Authorized Participants must generally sell their Shares in the secondary market, assuming that demand for their Shares exists. The price obtained by the Shareholders for the Shares may be less than the NAV of those Shares.
The Trust will issue to UBS Securities LLC, or UBS Securities, as Initial Purchaser, in exchange for Index Futures and Collateral Assets with a value equal to $50.00 per Share, as calculated in a manner consistent with the calculation of NAV on such date of issuance, the Initial Shares, which consist of two Baskets comprising 100,000 Shares.
The Initial Purchaser will, and the Authorized Participants may, offer to the public, from time to time, Shares from any Baskets they purchase from the Trust (including the Initial Shares). Shares (including the Initial Shares) offered to the public by the Initial Purchaser or the Authorized Participants may be offered at a per-Share offering price that varies depending on, among other factors, the trading price of the Shares on NYSE Arca, the NAV and the supply of and demand for the Shares at the time of the offer. Shares initially comprising the same Basket but offered by the Initial Purchaser or Authorized Participants to the public at different times may have different offering prices. Neither the Initial Purchaser nor any Authorized Participant will receive from the Trust, the Sponsor or any of their affiliates, any fee or other compensation in connection with their sale of Shares to the public; however, the Sponsor has agreed to reimburse to the Initial Purchaser certain fees and expenses incurred in connection with the offering of the Initial Shares. The Initial Purchaser and any Authorized Participant may receive commissions or fees from investors who purchase Shares through their commission- or fee-based brokerage accounts.
The date of this prospectus is August 21, 2013
RISK DISCLOSURE STATEMENT
YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE AWARE THAT COMMODITY INTEREST TRADING CAN QUICKLY LEAD TO LARGE LOSSES, AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL.
FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT, AND ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY FOR THOSE POOLS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF EACH EXPENSE TO BE CHARGED THIS POOL AT PAGES 14-15, 56-57 AND 61-62, AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGES 3 AND 14-15.
THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL. THEREFORE, BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL, YOU SHOULD CAREFULLY STUDY THIS DISCLOSURE DOCUMENT, INCLUDING A DESCRIPTION OF THE PRINCIPAL RISK FACTORS OF THIS INVESTMENT, BEGINNING AT PAGE 16.
CERTAIN NOTICES
THIS PROSPECTUS DOES NOT INCLUDE ALL OF THE INFORMATION OR EXHIBITS IN THE REGISTRATION STATEMENT OF THE TRUST. YOU CAN READ AND COPY THE ENTIRE REGISTRATION STATEMENT AT THE PUBLIC REFERENCE FACILITIES MAINTAINED BY THE SEC IN WASHINGTON, D.C.
AUTHORIZED PARTICIPANTS MAY BE REQUIRED TO DELIVER A PROSPECTUS WHEN SELLING TO THE PUBLIC SHARES PURCHASED FROM THE TRUST. SEE PLAN OF DISTRIBUTION.
THE TRUST WILL FILE QUARTERLY AND ANNUAL REPORTS WITH THE SEC. YOU CAN READ AND COPY THESE REPORTS AT THE SEC PUBLIC REFERENCE FACILITIES IN WASHINGTON, D.C. PLEASE CALL THE SEC AT 1-800-SEC-0330 FOR FURTHER INFORMATION.
THE FILINGS OF THE TRUST ARE POSTED AT THE SECS WEBSITE AT http://www.sec.gov.
FOR RESIDENTS OF THE UNITED KINGDOM:
THE TRUST MAY CONSTITUTE A COLLECTIVE INVESTMENT SCHEME AS DEFINED IN THE FINANCIAL SERVICES AND MARKETS ACT 2000 (THE FSMA). THE TRUST IS NOT AUTHORIZED OR OTHERWISE RECOGNIZED IN THE UNITED KINGDOM AND THEREFORE WOULD BE CHARACTERIZED AS AN UNREGULATED COLLECTIVE INVESTMENT SCHEME FOR THE PURPOSES OF THE FSMA. AS SUCH, THE ISSUE AND DISTRIBUTION OF THIS PROSPECTUS IN THE UNITED KINGDOM IS RESTRICTED BY LAW. IN ADDITION, THIS PROSPECTUS HAS NOT BEEN APPROVED BY A PERSON AUTHORIZED BY THE FINANCIAL CONDUCT AUTHORITY IN THE UNITED KINGDOM (AN AUTHORIZED PERSON) FOR THE PURPOSES OF SECTION 21(2)(B) OF THE FSMA. ACCORDINGLY, THIS PROSPECTUS CAN ONLY BE ISSUED OR DISTRIBUTED IN THE UNITED KINGDOM TO PERSONS WHO ARE QUALIFIED INVESTORS WITHIN THE MEANING OF ARTICLE 2(1)(E) OF EU DIRECTIVE 2003/71/EC (AS AMENDED): (1) BY AN AUTHORIZED PERSON (I) TO PERSONS WHO ARE INVESTMENT PROFESSIONALS HAVING
PROFESSIONAL EXPERIENCE IN PARTICIPATING IN UNREGULATED SCHEMES (ONLY AS DEFINED IN ARTICLE 14(5) OF THE FSMA (PROMOTION OF COLLECTIVE INVESTMENT SCHEMES) (EXEMPTIONS) ORDER 2001 (AS AMENDED) (THE CIS ORDER)) OR (II) TO PERSONS WHO ARE WITHIN ANY OF THE CATEGORIES OF PERSONS DESCRIBED IN ARTICLE 22 OF THE CIS ORDER; OR (2) IF SUCH PROMOTION IS NOT CARRIED OUT THROUGH AN AUTHORIZED PERSON, (I) TO PERSONS WHO ARE INVESTMENT PROFESSIONALS (AS DEFINED IN ARTICLE 19(5) OF THE FINANCIAL SERVICES AND MARKETS ACT 2000 (FINANCIAL PROMOTION) ORDER 2005, AS AMENDED (THE FINANCIAL PROMOTION ORDER), OR (II) TO PERSONS WHO ARE WITHIN ANY OF THE CATEGORIES OF PERSONS DESCRIBED IN ARTICLE 49(2)(A) TO (D) OF THE FINANCIAL PROMOTION ORDER. ANY OTHER DISTRIBUTION OF THIS PROSPECTUS IN OR INTO THE UNITED KINGDOM IS UNAUTHORIZED. ANY PERSON ISSUING OR DISTRIBUTING THIS PROSPECTUS OR ANY PART OF IT MAY BE ACTING IN BREACH OF APPLICABLE LAW OR REGULATIONS AND ANY PERSONS RECEIVING THIS PROSPECTUS IN OR FROM THE UNITED KINGDOM IN CIRCUMSTANCES NOT FALLING WITHIN (1) OR (2) ABOVE MAY NOT RELY ON ITS CONTENTS. NO PART OF THIS PROSPECTUS SHOULD THEREFORE BE PUBLISHED, DISTRIBUTED OR OTHERWISE MADE AVAILABLE WITH UNRESTRICTED ACCESS IN ANY FORM IN THE UNITED KINGDOM.
Other Information
iShares is a registered trademark of BlackRock Fund Advisors or its affiliates.
The Dow Jones-UBS Commodity IndexesSM are a joint product of DJI Opco, LLC, or DJI Opco, a subsidiary of S&P Dow Jones Indices LLC, and UBS Securities, and have been licensed for use by the Trust. Dow Jones® and DJ® are trademarks of Dow Jones Trademark Holdings LLC; UBS® is a registered trademark of UBS AG; S&P® is a registered trademark of Standard & Poors Financial Services LLC; and these trademarks have been licensed for use by DJI Opco and sublicensed for certain purposes by the Trust. Although the performance of the Shares is intended to correspond generally, but not necessarily be identical, to the performance of the Dow Jones-UBS Roll Select Commodity Index Total Return, before payment of the Trusts expenses and liabilities, the Shares are not sponsored, endorsed, sold or promoted by Dow Jones, UBS, DJI Opco or any of their respective subsidiaries or affiliates, and none of Dow Jones, UBS, DJI Opco or any of their respective affiliates, makes any representation regarding the advisability of investing in the Shares.
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THE SECURITIES DEPOSITORY; BOOK-ENTRY-ONLY SYSTEM; GLOBAL SECURITY |
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INDEX TO THE AUDITED FINANCIAL STATEMENT |
F-1 |
You should rely only on the information contained in this prospectus. None of the Sponsor, the Trustee, the Delaware Trustee, the Trust, the Advisor or the Initial Purchaser has authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. None of the Sponsor, the Trustee, the Delaware Trustee, the Trust, the Advisor or the Initial Purchaser is making an offer to sell the Shares in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus.
Certain defined terms used in this prospectus are set forth in the Glossary in the Statement of Additional Information attached hereto.
This summary highlights some of the information contained in this prospectus. This summary does not contain all of the information you should consider before investing in the Shares. You should carefully read this entire prospectus, including Risk Factors beginning on page 16, before making a decision to invest in the Shares. This prospectus is intended to be used beginning August 21, 2013.
Structure of the Trust
iShares® Dow Jones-UBS Roll Select Commodity Index Trust, or the Trust, was formed as a Delaware statutory trust on December 7, 2011. It is governed by a First Amended and Restated Trust Agreement, dated as of July 29, 2013, among iShares® Delaware Trust Sponsor LLC, as Sponsor, BlackRock Institutional Trust Company, N.A., or BTC, as Trustee, and Wilmington Trust, National Association, as Delaware Trustee. The Trust intends continuously to offer units of beneficial interest in the Trust, or Shares, to the public but may suspend issuances of Shares at any time. The Sponsor will maintain a limited equity interest in the Trust in connection with its role as Tax Matters Partner of the Trust.
Each Share represents a unit of fractional undivided beneficial interest in the net assets of the Trust. The Trusts assets will consist of long positions in exchange-traded index futures contracts of various expirations, called Index Futures, on the Dow Jones-UBS Roll Select Commodity Index, or the DJ-UBS Roll Select CI, together with Collateral Assets consisting of cash, U.S. Treasury securities or other short-term securities and similar securities that are eligible as margin deposits for those Index Future positions. It is the objective of the Trust that the performance of the Shares correspond generally, but not necessarily be identical, to the performance of the Dow Jones-UBS Roll Select Commodity Index Total Return, or the Index, which represents the return on a fully collateralized investment in the DJ-UBS Roll Select CI, before payment of the Trusts expenses and liabilities.
The Index Futures initially held by the Trust are listed for trading by the Chicago Mercantile Exchange, Inc., or the CME, which is owned and operated by the CME Group, Inc., or the CME Group. These initial Index Futures will have serial month expirations for the four closest months. Subsequent Index Futures held by the Trust may have longer or shorter expirations, different terms, and may be listed on other futures exchanges, referred to as Exchanges. In order to collateralize its Index Future positions and to reflect the U.S. Treasury component of the Index, the Trust will also hold Collateral Assets, from which it will post margin to its clearing futures commission merchant, or its Clearing FCM, which will initially be UBS Securities LLC, or UBS Securities, in an amount equal to the margin required by the CME, and transfer to its Clearing FCM any additional amounts that may be separately required by the Clearing FCM. Any Collateral Assets not required to be posted as margin with the Clearing FCM will be held in the Trusts accounts established at its Trust Administrator, which will initially be State Street Bank and Trust Company.
The term of the Trust is perpetual, unless it is earlier dissolved under the circumstances described under Description of the Shares and the Trust AgreementAmendment and Dissolution. The principal offices of the Trust are located at 400 Howard Street, San Francisco, CA 94105, and the Trusts telephone number is (415) 670-2000.
The Trust is a commodity pool as defined in the Commodity Exchange Act, as amended, or the CEA, and the regulations of the Commodity Futures Trading Commission, or the CFTC. The Trust is operated by the Sponsor, which is a commodity pool operator registered with the CFTC and is an indirect subsidiary of BlackRock, Inc. BlackRock Institutional Trust Company, N.A., an affiliate of the Sponsor, is the Trustee of the Trust. BlackRock Fund Advisors, or BFA, an indirect subsidiary of BlackRock, Inc., serves as the commodity trading advisor, or the Advisor, of the Trust and is registered with the CFTC. The Trust is not an investment company registered under the Investment Company Act of 1940, as amended, or the Investment Company Act, and is not required to register under the Investment Company Act.
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The Trust expects to qualify as an emerging growth company subject to reduced public company reporting requirements under U.S. federal securities laws. The Trust has not elected to make use of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the Jumpstart Our Business Startups Act of 2012, as amended, or the JOBS Act. This election is irrevocable. However, under the JOBS Act, emerging growth companies like the Trust are subject to reduced public company reporting requirements, as more fully described in Risk FactorsRisk Factors Relating to the TrustThe Trust expects to qualify as an emerging growth company subject to reduced public company reporting requirements. The Trust expects to remain an emerging growth company until the earliest of (i) the last day of the fiscal year on which the fifth anniversary of its initial public offering of Shares occurs, (ii) the last day of the fiscal year on which the Trust has annual gross revenues of $1 billion or more and (iii) the Trust becoming a large accelerated filer within the meaning of the United States Securities Exchange Act of 1934, as amended, or the Exchange Act. Other conditions that may trigger a loss of emerging growth company status, such as certain issuances of nonconvertible debt, are not expected to apply to the Trust due to the limited nature of its operations.
The material terms of the agreements governing the Trust are discussed in greater detail under Description of the Shares and the Trust Agreement.
Creations and Redemptions
The Trust issues Shares only in one or more blocks of 50,000 Shares, called Baskets, in exchange for Index Futures and cash (or, in the discretion of the Sponsor, other Collateral Assets) in the Basket Amount. The Basket Amount is the amount of Index Futures and cash (or, in the discretion of the Sponsor, other Collateral Assets), that an Authorized Participant must deliver in exchange for one Basket, or that an Authorized Participant is entitled to receive in exchange for each Basket surrendered for redemption. The Trust will redeem Shares only in Baskets in exchange for Index Futures and cash (or, in the discretion of the Sponsor, other Collateral Assets) in the Basket Amount. The Trust will not redeem individual Shares. The specific assets constituting the Basket Amount must have a value equal to the aggregate NAV, or net asset value per Share, of the Shares constituting a Basket, and such assets are determined by the Sponsor on each Business Day in accordance with the terms of the Trust Agreement.
The value of the assets to be included in the Basket Amounts for creations and redemptions will be determined at the end of each Business Day based on the daily settlement value of the Index Futures and the value of the Collateral Assets, as calculated for purposes of determining NAV. The value of such assets must equal the NAV of the Shares constituting a Basket as determined for such Business Day, but any changes to NAV that may result from creation and redemption activity are not reflected in the NAV calculations for the Business Day on which they occur. Creation and redemption orders received prior to the order cut-off time (currently 2:40 p.m. New York time) will be deemed to have been received on such Business Day, while orders received after the order cut-off time will be deemed to have been received on the next Business Day. Subject to the approval of the Trustee, Baskets may be created for cash equal to the NAV of the Shares constituting a Basket as determined on the date the related creation order was received, plus the costs incurred by the Trust in establishing the corresponding Index Future positions and acquiring the related Collateral Assets. Creation orders for Baskets paid for solely in cash that are received after 10:00 a.m. New York time will be deemed received as of the following Business Day. In each case, subject to the Trustees right to suspend or reject orders, creations and redemptions are deemed to occur on the Business Day on which they are received and are expected to settle the following Business Day by 11:00 a.m. New York time. Information relating to the Basket Amounts and the assets constituting such Basket Amount will be published by the Trustee on each Business Day after it has calculated the net asset value of the Trust for such Business Day at 4:00 p.m. New York time.
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Breakeven Point Per Unit of Initial Investment
The amount of all fees and expenses which are anticipated to be incurred by a new investor during the first twelve months, estimated as of July 29, 2013, is 0.79% of the offering price of $50.00 per Share (or expressed as a dollar amount, $0.40 of the price of $50.00 per Share), assuming issuance of just the Initial Shares. Based on certain interest rate, expense and other assumptions, the twelve-month breakeven point, estimated as of July 29, 2013, is 0.76% of the offering price of $50.00 per Share (or expressed as a dollar amount, $0.38 of the price of $50.00 per Share), assuming issuance of just the Initial Shares.
THE FOREGOING INFORMATION REFLECTS ESTIMATES DETERMINED AS OF JULY 29, 2013. ACTUAL RESULTS MAY VARY SIGNIFICANTLY. See Breakeven Analysis on page 14.
The Sponsor
The Sponsor of the Trust is iShares® Delaware Trust Sponsor LLC. The sole member and manager of the Sponsor is BlackRock Asset Management International Inc., a Delaware corporation. The Sponsors primary business function in connection with the Trust is to direct the actions of the Trustee in the management of the Trust and to act as commodity pool operator of the Trust.
The Sponsor has been registered under the CEA as a commodity pool operator and has been a member of the National Futures Association, or the NFA, since June 2009. The Sponsor may also act, currently or in the future, as the sponsor for certain other investment vehicles.
The Sponsor arranged for the creation of the Trust, the registration of the Shares for their public offering and the listing of the Shares on NYSE Arca. The Sponsor has agreed under the Trust Agreement to pay the following administrative, operational and marketing expenses: (1) the fees of the Trustee, the Delaware Trustee, the Advisor and their respective agents, (2) NYSE Arca listing fees, (3) printing and mailing costs, (4) audit fees, (5) fees for registration of the Shares with the SEC, (6) tax reporting costs, (7) license fees and (8) legal expenses relating to the Trust of up to $100,000 annually. In recognition of its paying these expenses, the Sponsor is entitled to an allocation that accrues daily at an annualized rate of up to 0.75% of the Adjusted Net Asset Value of the Trust, or its net asset value as calculated before deducting fees and expenses based on the value of the Trusts assets, and is payable by the Trust monthly in arrears. That allocation to the Sponsor is referred to in this prospectus as the Sponsors Fee, and is subject to adjustment from time to time, except that the Sponsors Fee may not be adjusted to above 0.75% of the Adjusted Net Asset Value absent an amendment to the Trust Agreement and thirty days prior notice to registered holders of the Shares. For a description of how the net asset value of the Trust is calculated, see Business of the TrustValuation of Index Futures; Computation of the Trusts Net Asset Value.
The Sponsor will be responsible for oversight and overall management of the Trust but has delegated day-to-day administration of the Trust to the Trustee under the Trust Agreement. The Sponsor may remove the Trustee and appoint a successor Trustee, if the Trustee ceases to meet certain objective requirements or if, having received written notice of a material breach of its obligations under the Trust Agreement, the Trustee has not cured the breach within thirty days. The Sponsor may also replace the Trustee during the 90 days following any merger, consolidation or conversion in which the Trustee is not the surviving entity or, in its discretion, at any time following the first anniversary of the creation of the Trust.
The principal office of the Sponsor is located at 400 Howard Street, San Francisco, CA 94105, and its telephone number is (415) 670-2000.
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The Advisor
The Advisor is BlackRock Fund Advisors, a California corporation. The Advisor is the commodity trading advisor for the Trust and has discretionary authority to make all determinations with respect to the Trusts assets, subject to specified limitations. The Advisor will not engage in any activities designed to obtain a profit from, or to ameliorate losses caused by, changes in the level of the Index or the DJ-UBS Roll Select CI or the value of the Collateral Assets. The Advisor has been registered as a commodity trading advisor under the CEA since April 5, 1993 and has been a member of the NFA since 1993. The Advisor may also act, currently or in the future, as the advisor for certain other investment vehicles.
The Advisor and the Trust may each terminate the Advisory Agreement at any time upon thirty days prior written notice. The Sponsor may terminate the Advisory Agreement in its discretion.
The Trustee
The Trustee is BlackRock Institutional Trust Company, N.A., a national banking association affiliated with the Sponsor. Subject to the Sponsors oversight, the Trustee is generally responsible for the day-to-day administration of the Trust. Day-to-day administration includes (1) processing orders for the creation and redemption of Baskets, (2) coordinating with the Sponsor with respect to the receipt and delivery of consideration transferred to, or by, the Trust in connection with each issuance and redemption of Baskets, and (3) calculating the net asset value of the Trust on each Business Day. The Trustee has delegated processing creation and redemption orders of Baskets to SEI Investments Distribution Co., or any other agent appointed from time to time by the Trustee, as Processing Agent, certain tax-related services to PricewaterhouseCoopers LLP, as Tax Administrator, and the remainder of the day-to-day responsibilities to the Trust Administrator. The Processing Agent, the Trust Administrator and the Tax Administrator are not affiliated with the Sponsor or the Trustee.
The Shares are not deposits or other obligations of BlackRock Institutional Trust Company, N.A. or any of its subsidiaries or affiliates or any other bank, are not guaranteed by BlackRock Institutional Trust Company, N.A. or any of its subsidiaries or affiliates or any other bank and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency. An investment in the Shares is speculative and involves a high degree of risk. For a more detailed description of the role and responsibilities of the Trustee and the Trust Administrator, see Description of the Shares and the Trust Agreement and The Trustee.
The Trust Administrator
State Street Bank and Trust Company serves as the Trust Administrator, and has been delegated certain day-to-day administrative functions of the Trustee, including calculating the value of certain of the Trusts assets, maintaining custody of Collateral Assets not posted as margin, transferring Collateral Assets in satisfaction of applicable margin requirements, and maintaining certain records and accounts. The Trust Administrators services are governed under a Master Services Agreement, dated as of April 21, 2011, as supplemented by related service modules, each between the Trust Administrator and the Trust. The Trust Administrator is exculpated and indemnified by the Trust under the terms of the Trust Agreement and the Master Services Agreement.
Under the applicable service modules, the Trust Administrator has agreed to provide its services for an initial term ending on May 15, 2014, subject to automatic extensions for up to six months following the end of such initial term if the Trust takes no action to renew the term. Following the initial six-month extension, the term of the applicable service modules shall automatically extend for additional two year terms unless either the Trust or the Trust Administrator elects not to renew. In addition, the Trust Administrator may terminate its services for certain material breaches of the Master Services Agreement or for failure to pay fees within a specified grace period. The Trust may terminate the Master Services Agreement for cause, certain enduring force majeure events, terminations as may be required or occasioned by law, and for certain corporate events affecting the Trust Administrator.
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The Clearing FCM
UBS Securities is the Clearing FCM through which the Trust will transact in Index Futures. The Trusts Index Future positions, together with related margin, will be held at its accounts established at the Clearing FCM. The Trusts relationship with its Clearing FCM is governed by an Institutional Futures Customer Agreement, or FCM Agreement, dated as of August 1, 2013, between the Trust and the Clearing FCM. The Clearing FCM is exculpated and indemnified by the Trust under the terms of the FCM Agreement.
The Delaware Trustee
Wilmington Trust, National Association, a national banking association, serves as the Delaware Trustee of the Trust. The Delaware Trustee is not entitled to exercise any of the powers, or have any of the duties or responsibilities, of the Trustee. The Delaware Trustee is a trustee of the Trust for the sole and limited purpose of fulfilling the requirements of the Delaware Statutory Trust Act.
Investment Objective
The investment objective of the Trust is to seek investment results that correspond generally, but are not necessarily identical, to the performance of the Index, which reflects the returns on a fully collateralized investment in the DJ-UBS Roll Select CI, before the payment of expenses and liabilities of the Trust. The Trust will hold long positions in Index Futures whose settlement value at expiration is based on the value of the DJ-UBS Roll Select CI at that time. The Trust will also earn interest on its Collateral Assets.
The DJ-UBS Roll Select CI incorporates the economic effect of rolling the contracts included in the applicable index. Rolling a futures contract means closing out a position in an expiring futures contract and establishing an equivalent position in a replacement futures contract on the same commodity. Markets for futures contracts can be in backwardation, which means that futures contracts with distant delivery months are priced lower than those with nearer delivery months, or can exhibit contango, which means that futures contracts with distant delivery months are priced higher than those with nearer delivery months. The DJ-UBS Roll Select CI employs a rolling methodology that seeks to minimize the effect of contango and maximize the effect of backwardation by selecting replacement futures contracts that exhibit the most backwardation or least contango among those eligible futures contracts with delivery months of up to 273 calendar days until expiration.
The Index, in turn, reflects the return of the DJ-UBS Roll Select CI, together with the return on specified U.S. Treasury securities that are deemed to have been held to collateralize a hypothetical long position in the futures contracts comprising the DJ-UBS Roll Select CI.
The Index and the DJ-UBS Roll Select CI are calculated based on the same commodities, though not always the same futures contracts, that are included in the Dow Jones-UBS Commodity Index, or the DJ-UBS CI, which is a liquidity- and production-weighted index of the prices of a diversified group of futures contracts on physical commodities. The DJ-UBS CI, the DJ-UBS Roll Select CI and the Index are administered, calculated and published by UBS Securities and DJI Opco, LLC, or DJI Opco. UBS Securities and DJI Opco are also referred to in this prospectus as the Index Co-Sponsors of the DJ-UBS CI, the DJ-UBS Roll Select CI and the Index. Certain intellectual property rights relating to the DJ-UBS CI and related indices are owned by UBS AG and Dow Jones Trademark Holdings, LLC or Dow Jones. UBS AG, Dow Jones and the Index Co-Sponsors are collectively referred to as the Index Providers.
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If the Index Co-Sponsors cease to maintain the Index, the DJ-UBS CI or the DJ-UBS Roll Select CI, the Trust may seek investment results that correspond generally, but are not necessarily identical, to the performance of a fully-collateralized investment in a successor index or any other index that, in the opinion of the Sponsor, is reasonably similar to the Index.
When establishing positions in Index Futures, the Trust will be required to deposit initial margin with a value of approximately 3% to 10% of the value of each Index Future position at the time it is established. These margin requirements are subject to change from time to time by the Exchange or the Clearing FCM. Margin requirements established by the Clearing FCM may exceed minimum levels established by the Exchange. On a daily basis, the Trust will be obligated to pay, or entitled to receive, variation margin in an amount equal to the change in the daily settlement level of its Index Future positions. If the daily settlement level causes the value of the Trusts Index Future positions to decrease, the Trust will be required to post variation margin with the Clearing FCM. Conversely, if the daily settlement level causes the value of the Trusts Index Future positions to increase, the Trusts account with the Clearing FCM will receive variation margin in an amount equal to the increase.
Whenever Index Futures of different types or expirations are available for investment, the Sponsor will determine, pursuant to the terms of the Trust Agreement, which Index Futures are to be transferred in connection with either the creation or redemption of Baskets. The Trust will not engage in any activities designed to obtain a profit from, or to ameliorate losses caused by, changes in the level of the Index or the DJ-UBS Roll Select CI or the value of the Collateral Assets.
The profit or loss on the Trusts Index Future positions should correlate with increases and decreases in the value of the DJ-UBS Roll Select CI, although this correlation is not expected to be exact. The return on the Index Futures, together with interest on the Collateral Assets, is expected to result in a total return that corresponds generally, but is not identical, to the Index. Differences between the returns on the Shares and the performance of the Index may be based on, among other factors, differences between the return on the Collateral Assets and the U.S. Treasury rate used to calculate the U.S. Treasury return component of the Index, timing differences, differences between the portion of the Trusts assets invested in Index Futures versus the portion of the return of the Index contributed by the DJ-UBS Roll Select CI, differences between the settlement price of Index Futures and the closing level of the DJ-UBS Roll Select CI and the payment of expenses and liabilities by the Trust.
The Advisor acts as the commodity trading advisor for the Trust. The Advisor, on behalf of the Trust, is authorized to invest all of the Trusts assets in long positions in Index Futures and in Collateral Assets in order to satisfy applicable margin requirements on those Index Future positions. Any cash that the Trust accepts in connection with the creation of Shares will be used to purchase additional Index Futures, in an amount that the Advisor determines will enable the Trust to achieve investment results that correspond with the Index before the payment of the Trusts expenses and liabilities. The Advisor will not engage in any activities designed to obtain a profit from, or to ameliorate losses caused by, changes in the level of the Index or the DJ-UBS Roll Select CI or the value of the Collateral Assets.
The Shares are intended to constitute an alternative means for investors to achieve investment exposure to the performance of the Index. Although the Shares are not the exact equivalent of an investment in the underlying futures contracts and Treasury securities represented by the Index, the Shares are intended to provide investors with an alternative method of participating in the commodities market.
In addition, retail investors can gain exposure to the commodities underlying the DJ-UBS Roll Select CI by purchasing individual or small lots of Shares through traditional brokerage accounts, without being subject to the significantly higher minimum contract sizes required for directly establishing a position in the underlying commodities or futures contracts. The Shares will be eligible for margin accounts.
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Risk Factors
An investment in the Shares is speculative and includes, among others, the following risks. See Risk Factors starting on page 16 of this prospectus:
| The Trust has no operating history. |
| The market price for the Shares could differ from the NAV. |
| Past performance history of the Index is limited, and all historical results of the Index presented here are hypothetical and not necessarily indicative of its future results or the performance of the Shares. |
| The price of the Shares is expected to fluctuate based on the value of the Index and the prices of the futures contracts and commodities underlying the Index; commodities markets have historically been volatile. |
| The return on the Shares will not correlate precisely with the performance of the Index. |
| The Trust is subject to fees and expenses that are payable regardless of profitability. |
| There may be conflicts of interest between you, on the one hand, and the Sponsor and its affiliates, the Index Providers and their affiliates, the Clearing FCM and any other parties that transact in the Index Futures or its underlying futures contracts and commodities, on the other hand. See Conflicts of Interest below and starting on page 79, and Risk FactorsRisk Factors Relating to Conflicts of Interest starting on page 31. |
| The classes of assets in which the Trust invests, and accordingly, the nature of an investment in the Shares, may change from time to time. |
| There are income tax risks associated with the offering. |
| Investors in the Shares will annually receive an IRS Schedule K-1, which reports their allocable share of the Trusts items of income, gain, loss and deduction. Tax information reporting on Schedule K-1 may be somewhat more complex than comparable reporting on IRS Form 1099. |
Conflicts of Interest
There may be conflicts of interest between the Shareholders and the Sponsor and its affiliates. These conflicts may arise, because the Sponsor is affiliated with the Trustee and the Advisor. Because of these affiliations, the Sponsor has an incentive not to remove the Trustee or the Advisor. Conflicts may also result from the Sponsors substantial control over the business and activities of the Trust, such as the Sponsors authority to determine whether to make distributions to Shareholders, its oversight over NAV calculations and its rights relating to amending the Trust Agreement or the dissolving the Trust. In addition, conflicts may arise in connection with trading activities relating to the Index Futures, index components or related instruments for the Sponsors or its affiliates proprietary accounts, customer accounts or other accounts under management, as well as in connection with research reports published by the Sponsor or its affiliates with respect to commodities markets. Additional conflicts of interest may exist between Shareholders, on the one hand, and the Clearing FCM and the Index Providers, on the other. For more information regarding these potential conflicts of interest, see Conflicts of Interest starting on page 79, and Risk FactorsRisk Factors Relating to Conflicts of Interest starting on page 31.
Certain U.S. Tax Consequences
The Trust will not be treated as an association taxable as a corporation for U.S. federal income tax purposes. Accordingly, the Trust will not be a taxable entity for U.S. federal income tax purposes and will not incur U.S. federal income tax liability. Instead, you will be taxed as a partner in a partnership, which means that you generally will be required to take into account your allocable share of the Trusts items of income, gain, loss, deduction, expense and credit in computing your U.S. federal income tax liability, without regard to the amount of cash, if any, distributed to you. This may result in your recognizing phantom income (i.e., taxable income without corresponding cash from the Trust to satisfy your tax liability).
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The Offering
Offering |
The Shares represent units of fractional undivided beneficial interests in the net assets of the Trust. |
Shares Registered Under Registration Statement |
19,900,000 Shares. |
Use of Proceeds |
Proceeds received by the Trust from the issuance and sale of Baskets will consist of Index Futures and cash (or, in the discretion of the Sponsor, other Collateral Assets). These proceeds will be held by the Trust and retained, invested in Collateral Assets or liquidated in order to rebalance or establish new positions in Index Futures or Collateral Assets until (1) withdrawn in connection with redemptions of Baskets or (2) liquidated to pay expenses and liabilities of the Trust (including applicable fees and margin payments) not assumed by the Sponsor. |
Collateral Assets with a value equal to approximately 3% to 10% of the value of each Index Future position are deposited with the Clearing FCM as initial margin at the time such Index Future position is established, and the remainder (and any variation margin received) are retained in the accounts of the Trust until transferred in connection with making variation margin payments, a Basket redemption or the liquidation of an Index Future position. |
Any remaining assets of the Trust that are not required to meet current margin requirements may be (1) held in cash in interest-bearing bank accounts to remain available to pay the expenses of the Trust and to serve as reserves, in the amounts deemed necessary by the Advisor, or (2) deposited with the Trust Administrator and invested in U.S. Treasury securities and other Collateral Assets. All interest income earned on the Trusts investments will be retained for the benefit of the Trust. The Advisor expects that all entities that will hold or trade the Trusts assets will be based in the U.S. and subject to U.S. regulations. |
NYSE Arca Symbol |
CMDT |
CUSIP |
45032K102 |
Creation and Redemption |
The Trust intends to issue and redeem Baskets on a continuous basis but is not required to do so. See Suspension of Issuance, Transfers and Redemptions below. Baskets will be issued and redeemed only in block transactions of 50,000 Shares, in exchange for long positions in Index Futures and cash (or, in the discretion of the Sponsor, other Collateral Assets) in the Basket Amount. Baskets may be created and redeemed only by Authorized Participants, who will pay the Trustee a transaction fee. The Trust may include Index Futures of different types and expirations in the creation and redemption of Baskets. The value of the assets to be included in the Basket Amounts for creations and redemptions will be determined at the end of each Business Day |
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based on the daily settlement value of the Index Futures and the value of the Collateral Assets, as calculated for purposes of determining NAV. The value of such assets must equal the NAV of the Shares constituting a Basket as determined for such Business Day, but any changes to NAV that may result from creation and redemption activity are not reflected in the NAV calculations for the Business Day on which they occur. |
Creation and redemption orders received after 2:40 p.m. New York time will not be deemed to be received and the related creation or redemption will not be deemed to occur until the following Business Day. Subject to the approval of the Trustee, Baskets may be created or redeemed solely for cash, but the related creation or redemption orders will be deemed received as of the following Business Day unless received by 10:00 a.m. New York time. Orders are expected to settle by 11:00 a.m. New York time on the Business Day following the Business Day on which such orders are deemed to be received, through block or exchange for related positions, or EFRP, transactions that are not executed through the Exchanges central order book. |
The transaction fee for Index Futures, as of July 29, 2013, was equal to $2.00 for EFRP transactions and $3.00 for cash orders, multiplied by the number of Index Futures in the Basket Amount, which may vary from time to time. The transaction fee is subject to change from time to time. With the approval of the Trustee, Baskets may be created and redeemed solely for cash, in which case the Authorized Participant will be required to pay any additional issuance or redemption costs, including the costs to the Trust of establishing or liquidating the corresponding Index Future position. See Description of the Shares and the Trust Agreement. |
Authorized Participants |
Baskets may be created and redeemed only by Authorized Participants. Each Authorized Participant must (1) be a registered broker-dealer and, if required in connection with its activities, a registered futures commission merchant, (2) be a Depository Trust Company or DTC Participant, (3) have entered into an Authorized Participant Agreement with the Trust, and (4) be in a position to transfer Index Futures and the required cash or other Collateral Assets to, and take delivery of these assets from, the Trustee through one or more accounts. |
Suspension of Issuance, Transfers and Redemptions |
The Trustee may suspend the delivery of Shares, registration of transfers of Shares and surrenders of Shares for the purpose of withdrawing the Trust property generally, or may refuse a particular deposit, transfer or withdrawal at any time, if the Trustee or the Sponsor determines that it is advisable to do so for any reason. See Description of the Shares and the Trust AgreementRequirements for Trustee Actions. |
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The Index |
The Dow Jones-UBS Roll Select Commodity Index Total Return. The Index reflects the value of the DJ-UBS Roll Select CI together with the return on specified U.S. Treasury securities that are deemed to have been held to collateralize a hypothetical long position in the futures contracts comprising the DJ-UBS Roll Select CI. See The Index, the DJ-UBS CI and the DJ-UBS Roll Select CI. |
The DJ-UBS Roll Select CI |
The Dow Jones-UBS Roll Select Commodity Index. The DJ-UBS Roll Select CI is a version of the DJ-UBS CI designed to mitigate the effects of contango associated with rolling futures contracts. For more information regarding the DJ-UBS Roll Select CI, see The Index, the DJ-UBS CI and the DJ-UBS Roll Select CI. |
The DJ-UBS CI |
The Dow Jones-UBS Commodity Index. The DJ-UBS CI is designed to reflect the positive or negative return over time resulting from an uncollateralized long position in its underlying futures contracts. The DJ-UBS CI is comprised of futures contracts on physical commodities, with each commodity having a weighting determined by reference to both the trading volume of specified futures contracts on such commodity as well as by reference to world production statistics for such commodity. For more information regarding the DJ-UBS CI, see The Index, the DJ-UBS CI and the DJ-UBS Roll Select CI. |
Index Futures |
The Trust seeks to achieve the portion of the return on the Shares corresponding to the DJ-UBS Roll Select CI through investments in Index Futures, which are exchange-traded futures contracts on the DJ-UBS Roll Select CI. |
Index Futures are exchange-traded index future contracts that provide for payment at their expiration based on the settlement value of the DJ-UBS Roll Select CI at that time. The Trust will transact in Index Futures through the Clearing FCM, initially UBS Securities, who will execute the Trusts Index Future transactions on an Exchange, initially the CME. |
When establishing positions in Index Futures, the Trust is required to deposit initial margin with a value of approximately 3% to 10% of the value of each Index Future position at the time it is established. These margin requirements are subject to change from time to time by the Exchange or the Clearing FCM. Margin requirements established by the Clearing FCM may exceed minimum levels established by the Exchange. On a daily basis, the Trust will be obligated to pay, or entitled to receive, variation margin in an amount equal to the change in the daily settlement level of its Index Future positions. If the daily settlement level causes the value of the Trusts Index Future positions to decrease, the Trust will be required to post variation margin with the Clearing FCM. Conversely, if the daily settlement level causes the value of the Trusts Index Future positions to increase, the Trusts account with the Clearing FCM will receive variation margin in an amount equal to the increase. The Trusts obligation to make margin |
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payments will be satisfied from the cash or other Collateral Assets obtained by the Trust in connection with creations of Baskets. |
For more information regarding the Index Futures, see Futures Contracts on the DJ-UBS Roll Select CI. |
Collateral Assets |
The Trust seeks to achieve the portion of the return on the Shares corresponding to the U.S. Treasury return of the Index through investments in Collateral Assets. |
In connection with the creation of Shares, the Trust expects to receive cash (or, in the discretion of the Sponsor, other Collateral Assets). |
Cash proceeds will be invested in Collateral Assets, generally U.S. Treasury securities, and used to satisfy margin requirements applicable to the Trusts Index Future positions. Any Collateral Assets not held at the Clearing FCM to satisfy margin requirements will be held by the Trust Administrator. The interest paid on these Collateral Assets, together with the performance of the Index Futures, is expected to produce a total return for the Shares that corresponds generally, but is not necessarily identical, to the performance of the Index, before the payment of expenses and liabilities of the Trust. Differences between the returns on the Shares and the performance of the Index may be based on, among other factors, differences between the return on the Collateral Assets and the U.S. Treasury rate used to calculate the U.S. Treasury return component of the Index, timing differences, differences between the portion of the Trusts assets invested in Index Futures versus the portion of the return of the Index contributed by the DJ-UBS Roll Select CI, differences between the settlement price of Index Futures and the closing level of the DJ-UBS Roll Select CI and the payment of expenses and liabilities by the Trust. See Futures Contracts on the DJ-UBS Roll Select CI. |
Net Asset Value |
The Sponsor has the exclusive authority to determine the net asset value of the Trust and the NAV, which it has delegated to the Trustee under the Trust Agreement. The Trustee will determine the net asset value of the Trust and the NAV as of 4:00 p.m. New York time, on each Business Day on which NYSE Arca is open for regular trading. The Trustee will make the required calculations as soon as practicable after the close of trading on NYSE Arca. |
The Trustee will determine the NAV per Share by dividing the net asset value of the Trust on a given day by the number of Shares outstanding at the time the calculation is made (taking into account orders for the creation or redemption of Shares received prior to the cut-off time on that day).
The net asset value of the Trust on any given day is obtained by subtracting the Trusts accrued expenses and other liabilities on that day from the value of (1) the Trusts Index Future positions and Collateral Assets on that day, (2) the interest earned on those assets by the Trust and (3) any other assets of the Trust.
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The Trustee will value the Trusts assets as of any given day on the basis of that days settlement prices for each Index Future as announced by the Exchange, and the then-current market value of any other assets held by the Trust. If there is no announced settlement price for a particular Index Future on a Business Day, the Trustee will use the most recently announced settlement price unless the Trustee, in consultation with the Sponsor, determines that such price is inappropriate as a basis for valuation. The value of the Trusts positions in any particular Index Future will equal the product of (a) the number of such Index Futures owned by the Trust, (b) the settlement price of such Index Future on the date of calculation and (c) the multiplier of such Index Futures. The Trustee has employed the Trust Administrator to make those determinations on its behalf.
The NAV for each Business Day on which NYSE Arca is open for regular trading is expected to be distributed through major market data vendors and will be published online at http://www.ishares.com, or any successor thereto. The Trust will update the NAV as soon as practicable after each subsequent NAV is calculated. See Business of the TrustValuation of Index Futures; Computation of the Trusts Net Asset Value.
Voting Rights |
The Shares do not have voting rights. Shareholders will only have the limited rights described in Description of the Shares and the Trust AgreementVoting Rights. |
Distributions |
Interest and distributions received by the Trust on its assets may be used to acquire additional Index Futures or Collateral Assets or, in the discretion of the Sponsor, distributed to Shareholders. The Trust is under no obligation to make periodic distributions to Shareholders. |
Limitation of Liabilities |
You cannot lose more than the value of your investment in the Shares. Under Delaware law, Shareholders liability will be limited to the same extent as the liability of stockholders of a for-profit Delaware business corporation. |
Amendments |
The Sponsor and the Trustee may amend the Trust Agreement without the consent of any Shareholder, including to expand, limit or change the categories of assets by means of which the Trust seeks to achieve its investment objective, so long as the Sponsor provides thirty days notice to registered owners of Shares before the effectiveness of any amendment that imposes or increases fees or charges (other than the Sponsors Fee, to the extent it does not exceed 0.75% of the Adjusted Net Asset Value, and other than taxes and other governmental charges) or prejudices a substantial existing right of the Shareholders or similarly materially adversely affects any Shareholder. |
Dissolution Events |
The Trustee will dissolve the Trust if: |
| the Trustee is notified that the Shares are delisted from NYSE Arca and are not approved for listing on another national securities exchange within five Business Days of their delisting; |
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| registered holders of at least 75% of the outstanding Shares notify the Trustee that they have elected to dissolve the Trust; |
| sixty days have elapsed since the Trustee notified the Sponsor of the Trustees election to resign, and a successor trustee has not been appointed and accepted its appointment; |
| the SEC (or its staff) or a court of competent jurisdiction determines that the Trust is an investment company under the Investment Company Act, and the Trustee has actual knowledge of that determination; |
| the Sponsor determines to liquidate the Trust in accordance with the terms of the Trust Agreement, which provides that the Sponsor may liquidate the Trust at any time the Sponsor determines that liquidating the Trust is advisable. The Sponsor may, for example (but will not be obligated to), liquidate the Trust if, among other reasons, (1) legal, regulatory or market changes occur that would result, in the opinion of the Sponsor, in a decrease of investment opportunities available to meet the Trusts investment objective, (2) the Index Co-Sponsors cease to maintain the Index and, in the opinion of the Sponsor, no successor or reasonably similar index is available, or (3) the value of the Trust is at a level at which continued operation of the Trust is not cost-efficient; |
| the Trust is treated as an association taxable as a corporation for United States federal income tax purposes, and the Trustee receives notice from the Sponsor that the Sponsor has determined that the dissolution of the Trust is advisable; or |
| DTC is unable or unwilling to continue to perform its functions, and a comparable replacement is unavailable. |
After dissolution of the Trust, the Trustee will deliver the Trust property, or the proceeds thereof, upon surrender and cancellation of the Shares and, ninety days after dissolution, may dispose of any remaining Trust property in a private or public sale, and hold the proceeds, uninvested and in a non-interest bearing account, for the pro rata benefit of the Shareholders who have not surrendered their Shares for cancellation. See Description of the Shares and the Trust AgreementAmendment and Dissolution. |
Clearance and Settlement |
The Shares will be issued only in book-entry form. Transactions in Shares will clear through the facilities of DTC. Investors may hold their Shares through DTC, if they are DTC Participants, or indirectly through entities that are DTC Participants. See The Securities Depository; Book-Entry-Only System; Global Security. |
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Breakeven Analysis
The following table indicates the approximate percentage and dollar returns required for the value of an initial $50.00 investment in a Share to equal the amount originally invested twelve months after issuance.
The table, as presented, is only an approximation, based on the assumed issuance of only the Initial Shares. The capitalization of the Trust may directly affect the amounts of one or more of these charges. The Sponsors Fee is calculated as a percentage of the Adjusted Net Asset Value of the Trust. Interest income and brokerage commissions and fees are expected to scale with the Trusts holdings. As a result, these amounts may increase or decrease as the Trusts net asset value increases or decreases. The table does not reflect the additional transaction fees and costs required for the creation and redemption of Baskets.
THE INFORMATION CONTAINED IN THIS BREAKEVEN ANALYSIS REFLECTS ESTIMATES DETERMINED AS OF JULY 29, 2013. ACTUAL RESULTS MAY VARY SIGNIFICANTLY.
Expense(1) |
$ | % | ||||||
Sponsors Fee(2) |
$ | 0.38 | 0.75% | |||||
Organization and Offering Expenses(3) |
$ | 0.00 | 0.00% | |||||
Trust Operating Expenses(4) |
$ | 0.00 | 0.00% | |||||
Brokerage Commissions and Fees(5) |
$ | 0.02 | 0.04% | |||||
Interest Income(6) |
$ | (0.02) | (0.03)% | |||||
|
|
|
|
|||||
12-Month Break Even(7) |
$ | 0.38 | 0.76% | |||||
|
|
|
|
(1) | The foregoing breakeven analysis assumes that the Shares have a constant month-end net asset value. Calculations are based on $50.00 as the NAV. Dollar amounts are rounded to the nearest cent and percentages are rounded to two decimal places. |
(2) | The Trust pays the Sponsor the Sponsors Fee, which accrues daily at an annualized rate of up to 0.75% of the Adjusted Net Asset Value of the Trust, payable by the Trust monthly in arrears. The Sponsors Fee is paid in consideration of the services provided by the Sponsor, including procuring the services of the Trusts other service providers and its payment of certain related fees and expenses that would otherwise have been payable by the Trust. |
(3) | The Sponsor is responsible for paying Organization and Offering Expenses, which consist of the costs and expenses incurred in connection with organizing the Trust and the initial issuance and distribution of the Shares. Organization and Offering Expenses include SEC registration fees, printing and mailing costs, listing and licensing fees, legal fees and expenses, accounting fees and expenses and the fees and expenses of certain other service providers to the Trust incurred in connection with the initial issuance and distribution of the Shares. The Trust does not separately bear the costs of Organization and Offering Expenses, although these costs are taken into consideration when calculating the Sponsors Fee. Additional information relating to Organization and Offering Expenses may be found under The Business of the TrustTrust Expenses. |
(4) | The Sponsor is responsible for paying Trust Operating Expenses, which consist of the following administrative, operational and marketing expenses: (1) the fees of the Trustee, the Delaware Trustee, the Advisor and their respective agents, (2) NYSE Arca listing fees, (3) printing and mailing costs, (4) audit fees, (5) fees for registration of the Shares with the SEC, (6) tax reporting costs, (7) license fees and (8) legal expenses relating to the Trust of up to $100,000 annually. The Trust does not separately bear the costs of Trust Operating Expenses, although these costs are taken into consideration when calculating the Sponsors Fee. Additional information relating to Trust Operating Expenses may be found under The Business of the TrustTrust Expenses. |
(5) | The Trust is responsible for paying any applicable brokerage commissions and similar transaction fees out of its assets in connection with the roll of Index Futures held by the Trust. As of July 29, 2013, the Sponsor estimates that these brokerage commissions and transaction fees will equal approximately 0.04% of the net asset value of the Trust per year. |
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(6) | Interest income is currently estimated to be earned at an annual rate of 0.03%, which is based on the 13 week (3 month) U.S. Treasury discount rate as of July 26, 2013. |
(7) | You may pay customary brokerage commissions in connection with purchases of Shares. Because such brokerage commission rates will vary from investor to investor, such brokerage commissions have not been included in the breakeven table. Investors are encouraged to review the terms of their brokerage accounts for details on applicable charges. This breakeven analysis does not include fees charged in connection with the creation/redemption process, currently totaling $2.00 per Index Future multiplied by the number of Index Futures included in the Basket Amount for EFRP transactions, and $3.00 per Index Future multiplied by the number of Index Futures in the Basket Amount for cash orders, as such fees are only payable by Authorized Participants in creation and redemption transactions. |
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The Shares are speculative and involve a high degree of risk. You could lose all or a substantial portion of your investment in the Shares. Before making an investment decision, you should carefully consider the risks described below, as well as the other information included in this prospectus.
Risk Factors Relating to Commodities Markets
The value of the Shares depends on the value of Index Futures, which will fluctuate based on the prices of commodity futures contracts reflected in the DJ-UBS Roll Select CI. These prices may be volatile, thereby creating the potential for losses regardless of the length of time you intend to hold your Shares.
Because the price of the Shares will depend on the value of the Index Futures held by the Trust, the value of the Shares will fluctuate based on the prices of commodity futures contracts reflected in the DJ-UBS Roll Select CI. Although the DJ-UBS Roll Select CI only has a limited performance history, the value of the DJ-UBS CI, which is composed of the same underlying commodities as the DJ-UBS Roll Select CI, has been volatile at times during the past several years. Commodity prices are generally affected by, among other factors, the cost of producing, transporting and storing commodities, changes in consumer or commercial demand for commodities, the hedging and trading strategies of producers and consumers of commodities, speculative trading in commodities by commodity pools and other market participants, disruptions in commodity supply, weather, political and other global events, global economic factors and government intervention in or regulation of the commodity or commodity futures markets. These factors cannot be controlled by the Trust. Accordingly, the price of the Shares could change substantially and in a rapid and unpredictable manner. This exposes you to a potential loss on your investment in the Shares, regardless of the length of time you intend to hold your Shares.
The following events, among others, would generally result in a decline in the price of the Shares:
| A significant increase in hedging activity by producers of the underlying commodities. Should producers of the commodities underlying the DJ-UBS Roll Select CI increase their hedging of their future production through forward sales or other short positions, this increased selling pressure could depress the price of one or more of the underlying commodities, which could adversely affect the price of the Shares. |
| A significant change in the attitude of speculators and investors toward the futures contracts or commodities underlying the DJ-UBS Roll Select CI. Should the speculative community take a negative view towards one or more of the underlying futures contracts or commodities, it could cause a decline in the price of the Index Futures, which may reduce the price of the Shares. |
| Significant reductions in the size of positions permitted to be owned by the Trust or others in Index Futures or in the futures contracts and/or commodities comprising the DJ-UBS Roll Select CI, for example, as a result of more restrictive position limits or position limit exemptions or more expansive position aggregation requirements, could reduce liquidity and depress the price of the DJ-UBS Roll Select CI and/or the futures contracts or commodities underlying the DJ-UBS Roll Select CI, adversely affecting the value of your Shares. |
Conversely, several factors could trigger a temporary increase in the price of the futures contracts or commodities underlying the DJ-UBS Roll Select CI and, consequently, the Index Futures. In that case, you could buy Shares at prices affected by the temporarily high commodity prices, and you could subsequently incur losses when the causes for the temporary increase disappear.
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Historical performance of the Index, the DJ-UBS Roll Select CI and the DJ-UBS CI is no guide to their future performance or to the performance of the Shares.
Past performance of the Index, the DJ-UBS Roll Select CI and the DJ-UBS CI is not necessarily indicative of their future performance or of the performance of the Shares. There can be no guarantee that the level of the Index, the DJ-UBS Roll Select CI or the DJ-UBS CI will increase. The DJ-UBS Roll Select CI and the Index have limited performance histories. See Risk Factors Relating to Index Futures and the DJ-UBS Roll Select CIThe Index and the DJ-UBS Roll Select CI have Limited History and May Perform in Unexpected Ways.
Although the DJ-UBS CI, which is based on the same underlying commodities as the DJ-UBS Roll Select CI and the Index, has a longer performance history, there are differences in the way that the DJ-UBS CI and the DJ-UBS Roll Select CI address the rolling of contracts that could cause the DJ-UBS CI to perform differently from the DJ-UBS Roll Select CI and the Index. See The Index, the DJ-UBS CI and the DJ-UBS Roll Select CI and Risk Factors Relating to Index Futures and the DJ-UBS Roll Select CIThe roll selection methodology of the DJ-UBS Roll Select CI may not provide any benefits relative to the roll selection methodologies used by other commodities indices, including the DJ-UBS CI, and the DJ-UBS Roll Select CI may not outperform, or may underperform, the DJ-UBS CI. You may lose some or all of your investment in the Shares.
Commodity futures trading may be illiquid. In addition, suspensions or disruptions of market trading in the commodities markets and related futures markets may adversely affect the value of your Shares.
The commodity futures markets are subject to temporary distortions or other disruptions due to various factors, including the lack of liquidity, congestion, disorderly markets, limitations on deliverable supplies, the participation of speculators, government regulation and intervention, technical and operational or system failures, nuclear accidents, terrorism, riots and acts of God. In addition, U.S. futures exchanges and some foreign exchanges have regulations that limit the amount of fluctuation in futures contract prices that may occur during a single business day. These limits are generally referred to as daily price fluctuation limits, and the maximum or minimum price of a contract on any given day as a result of these limits is referred to as a limit price. Once the limit price has been reached in a particular contract, it is possible that no trades may be made at a different price. It is not certain how long any such price limits would remain in effect. Limit prices may have the effect of precluding trading in a particular contract or forcing the liquidation of contracts at disadvantageous times or prices, consequently affecting the value of the DJ-UBS Roll Select CI. Further, the Clearing FCM or its account holders may represent, directly or indirectly, a substantial portion of the short-side interest in the Index Futures market. The existence of a limited number of market participants could cause or exacerbate temporary distortions, especially those distortions that result from illiquidity.
Any of these circumstances could adversely affect the value of the Index Futures held by the Trust and, therefore, the value of your Shares. In addition, these circumstances could also limit trading in the Index Futures, which could affect the NAV and the trading price of the Shares. Accordingly, these limits may result in a NAV that differs, and may differ significantly, from the NAV that would prevail in the absence of such limits. If Baskets are created or redeemed at a time when these price limits are in effect, the creation or redemption price will reflect the price limits as well.
Additionally, if UBS Securities determines that a market disruption exists during a roll period or during the DJ-UBS Roll Select CIs annual rebalancing, this will affect the way in which the roll is conducted or how the DJ-UBS Roll Select CI is rebalanced, generally by making the calculations and determinations that would otherwise have been made on such date on an alternative date on which no such market disruption exists. Market disruptions may include, among others: (1) the termination or suspension of, or material limitation or disruption in, the trading of an underlying futures contract, (2) the settlement price of an underlying futures contract reflecting the maximum permitted price change from the previous days settlement price for such contract, (3) the failure of an exchange to publish the official settlement price of an underlying futures contract, or (4) for contracts traded on the London Metals Exchange, any day on which the London Metals Exchange is not open for
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business. Market disruptions will only affect the timing of calculations for the affected commodity in connection with roll periods, but will affect the timing of calculations for all commodities if it occurs in connection with a rebalancing. Market disruptions may adversely affect the value of the Index Futures and the value of your Shares.
During a period when commodity prices are fairly stationary, an absence of backwardation in the prices of the commodities included in the DJ-UBS Roll Select CI may cause the price of your Shares to decrease.
The futures contracts that underlie the DJ-UBS Roll Select CI are replaced from time to time with new futures contracts on the same commodities. This process is referred to as rolling. Although the rolling methodology employed by the DJ-UBS Roll Select CI, which selects for replacement contracts exhibiting the least contango or the greatest backwardation, may on occasion cause futures contracts to be replaced by new futures contracts with earlier, rather than later, delivery months, it is expected that the DJ-UBS Roll Select CI will still tend to roll into futures contracts with later delivery months than the contracts being replaced.
Historically, the prices of some futures contracts (generally those relating to commodities that are typically consumed immediately rather than stored) have frequently been higher for contracts with shorter-term expirations than for contracts with longer-term expirations, which is referred to as backwardation. In these circumstances, absent other factors, the sale of the earlier contract would take place at a price that is higher than the price at which the later contract is purchased, thereby allowing the contract holder to purchase a greater quantity of the later contract. While some of the contracts included in the DJ-UBS Roll Select CI have historically exhibited periods of backwardation, backwardation will likely not exist at all times. Moreover, some of the commodities reflected in the DJ-UBS Roll Select CI have historically exhibited characteristics typical of contango markets rather than backwardation. Contango markets are those in which the prices of contracts are higher in the distant delivery months than in the nearer delivery months due to the costs of long-term storage of a physical commodity prior to delivery or other factors. The forward price of a commodity futures contract may also fluctuate between backwardation and contango.
Although the DJ-UBS Roll Select CI attempts to mitigate some of the losses that may arise from the absence of backwardation or the existence of contango through its rolling process, the absence of backwardation or the existence of contango in the commodity markets could nevertheless result in losses, which could adversely affect the value of the DJ-UBS Roll Select CI and, accordingly, decrease the value of your Shares. Moreover, because the Trust must pay certain ongoing fees and expenses, the value of the Shares may decrease even in periods where commodity prices are otherwise stationary.
Regulatory developments with respect to the futures and over-the-counter derivatives markets, and in particular, with respect to speculative trading in futures contracts and over-the-counter derivatives involving commodities and commodity indices, could adversely affect the value of your Shares.
In recent years, many bills have been introduced in the U.S. Congress targeting excessive speculation in commodities and commodity indices, including by institutional index funds, on regulated futures markets and in the over-the-counter or OTC derivatives markets. Many of these legislative proposals have not been enacted but could be in the future.
In 2010, Congress adopted some anti-speculative proposals in the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act. These provisions of the Dodd-Frank Act have been interpreted by the CFTC to require the CFTC to expand its speculative position limits, as appropriate, to a wider range of listed futures and options on physical commodities (including certain energy, metals and agricultural products) as well as to economically equivalent swaps while significantly narrowing the bona fide hedging exemptions to a narrower category of commercial market participants and physical hedging strategies.
Pursuant to the provisions of the Dodd-Frank Act described above, the CFTC adopted regulations in October 2011, referred to in this prospectus as the Position Limits Rules, that impose new federal position
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limits on futures and options on a subset of reference contracts consisting of contracts on energy, metal, and agricultural commodities and economically equivalent swaps. The Position Limits Rules, which were scheduled to phase in beginning October 12, 2012, were vacated by the U.S. District Court for the District of Columbia in a decision dated September 28, 2012, and remanded to the CFTC for determination on whether the CFTC should impose position limits without a finding of necessity and appropriateness, in the context of the statutory provisions of the CEA. On November 15, 2012, the CFTC filed a notice of appeal of the district court decision, and the appeal is ongoing.
The referenced contracts subject to the vacated Position Limits Rules represented a number of the futures contracts included in the DJ-UBS Roll Select CI and a substantial portion of the weight of the DJ-UBS Roll Select CI. Consequently, to the extent similar rules are adopted in the future, the maximum positions that market participants can hold in the referenced contracts that underlie the DJ-UBS Roll Select CI may be limited, which could reduce the liquidity of such referenced contracts and adversely affect the performance of the DJ-UBS Roll Select CI and the value of your Shares. Moreover, because the relative weights of the commodities in the DJ-UBS Roll Select CI are largely determined based on the trading volume of the futures contracts designated for such commodities, a reduction in the trading volume of such futures contracts could significantly alter the weights of the futures contracts underlying the DJ-UBS Roll Select CI, which could have further adverse effects on the level of the DJ-UBS Roll Select CI and the value of your Shares.
The vacated Position Limits Rules also expanded the circumstances requiring persons to aggregate referenced contracts that are owned or controlled by such persons. Specifically, the Position Limits Rules required a person holding positions in multiple commodity pools with identical trading strategies to aggregate the pools positions in referenced contracts with other positions in referenced contracts held or controlled by such person. Although Index Futures were not among the referenced contracts identified in the vacated Position Limits Rules, if similar aggregation requirements are adopted in the future, it could nonetheless impair the abilities of some participants in the market for Index Futures to hedge their exposure, which could reduce liquidity in such Index Futures and the futures contracts and commodities underlying the DJ-UBS Roll Select CI and adversely affect the value of the Shares.
The vacated Position Limits Rules also narrowed the existing bona fide hedge exemption for referenced contracts. A similar measure, if adopted, may affect the hedging and investing activities of participants in the markets for the Index Futures and the futures contracts and commodities underlying the DJ-UBS Roll Select CI, which in turn could reduce the liquidity and adversely affect the pricing of the Index Futures and such futures contracts and commodities. Any of these effects could increase volatility in and otherwise adversely affect the price of the Shares.
The CFTC may lower the applicable position limits, apply position limits to a broader range of contracts (including commodity index contracts such as the Index Futures) or further restrict position limit exemptions. If any of these actions is taken, such measures could further reduce the size of positions that the Trust and other investors could hold directly in Index Futures and the underlying futures contracts and commodities, with potential reductions in liquidity and adverse effects on the pricing of Index Futures. See also The value of the Shares depends on the value of Index Futures, which will fluctuate based on the prices of commodity futures contracts reflected in the DJ-UBS Roll Select CI. These prices may be volatile, thereby creating the potential for losses, regardless of the length of time you intend to hold your Shares.
Certain other rules proposed pursuant to the Dodd-Frank Act also may have an impact on the Trust and the value and continued availability of the Shares. On December 22, 2010, the CFTC proposed rules, referred to in this prospectus as the DCM Proposed Rules, that would require that at least 85% of the total volume of any contract listed on a designated contract market, or DCM, including the Index Futures, be executed through the central order book, rather than as a block transaction or other non-competitively executed transaction. Contracts that do not meet the 85% threshold would be required to be delisted by the DCM and transferred to a swap execution facility or liquidated.
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Generally, the Trusts transactions in Index Futures are expected to be executed through block or exchange for related positions or EFRP transactions that are not executed through the Exchanges central order book. While subject to revision by the CFTC in response to public comment, this provision of the DCM Proposed Rules could, if adopted as proposed, significantly and adversely affect the availability, liquidity and price of Index Futures, as well as futures contracts currently included or which may in the future be included in the DJ-UBS Roll Select CI, and could inhibit the Trusts ability to redeem and offer Shares, which in turn could adversely affect the value and continued availability of the Shares.
The CFTC has adopted rules regarding the risk management practices of clearing members, referred to in this prospectus as the FCM Rules, most of which became effective on June 1, 2013. The FCM Rules require the Clearing FCM to establish, and periodically reevaluate, risk-based limits on position and order size, amongst other measures. The FCM Rules may lead the Clearing FCM to reduce its internal limits on the size of the Index Future positions it will execute or clear for the Trust, reducing the Trusts and other market participants ability to transact in Index Futures, and potentially adversely affecting the price of Shares. In the event that the Clearing FCM does reduce its internal limits on the size of Index Future positions, the Trust may deem it feasible to use additional clearing FCMs. If this happens, it could substantially increase the costs of clearing for the Trust.
Other regulatory measures under the Dodd-Frank Act could increase the costs of the Trust, result in significant direct limitations on the maximum permitted size of the Trusts futures positions, or affect liquidity in the market for the Index Futures or the underlying futures contracts, as well as the correlation between the price of the Shares and the net asset value of the Trust. Any such measures could adversely affect the value of your Shares.
Risk Factors Relating to Index Futures and the DJ-UBS Roll Select CI
The trading of various Index Futures presents risks unrelated to the DJ-UBS Roll Select CI that could adversely affect the value of your Shares.
Although Index Futures are based on the DJ-UBS Roll Select CI, the value of the Index Futures could be affected by factors that do not directly affect the DJ-UBS Roll Select CI and accordingly, the value of the Index Futures and the level of the DJ-UBS Roll Select CI may vary from each other. The activities of market participants in trading Index Futures, or in trading other instruments related to the DJ-UBS Roll Select CI, could affect the value of the Index Futures independent of any change in the DJ-UBS Roll Select CI and adversely affect the correlation between the value of the Index Futures and the level of the DJ-UBS Roll Select CI.
The prices of the various Index Futures are expected to reflect supply and demand in the market for such Index Futures, which in turn may reflect market expectations at any given time about prospective changes in the level of the DJ-UBS Roll Select CI and other market conditions. In this way, trading in the market for an Index Future might cause a divergence between the price of such Index Future and the level of the DJ-UBS Roll Select CI. Similarly, actions by the applicable Exchange with respect to Index Futures, such as the imposition of trading or price limits, could adversely affect this correlation. In these circumstances, it is possible that changes in the NAV, which is calculated based on the value of the Index Futures, will not adequately reflect changes in the level of the DJ-UBS Roll Select CI. In the event of market disruptions with respect to the Index Futures, such as a suspension of trading by the Exchange as a result of market activity, systems or communications failures or other causes, the value of the Index Futures and the level of the DJ-UBS Roll Select CI could diverge, which could adversely affect the value of the Shares.
Although arbitrage activity by market participants is expected to have the effect of reducing or mitigating divergence between the value of the Index Futures and the level of the DJ-UBS Roll Select CI, such arbitrage activity may not fully offset any divergence at all times during which the Shares are outstanding. During any period the Trust is trading Index Futures of more than one type, differences in the settlement values of such Index Futures, to the extent not offset by arbitrage activity between such Index Futures may limit the expected benefits
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of, or otherwise adversely affect, arbitrage activity between the Shares and the Index Futures. In the event that any such divergence between the value of the Index Futures and the level of the DJ-UBS Roll Select CI exists from time to time, changes in the NAV, which is calculated based on the value of the Index Futures, may not adequately reflect changes in the level of the DJ-UBS Roll Select CI, which could adversely affect the value of the Shares. The impact of certain of these considerations may be heightened in cases where the Trusts positions are concentrated in a particular Index Future or in cases where the Trust represents a substantial portion of the open interest in a particular Index Future.
In addition, other actions taken by an Exchange, including rule changes relating to clearing fees, margin requirements, or the minimum price fluctuations applicable to an Index Future, may result in economic, tax or other consequences to market participants that trade or hold Index Futures. Such actions may result in consequences that adversely affect Shareholders without necessarily affecting the correlation between the settlement price of the Index Futures and the level of the DJ-UBS Roll Select CI.
The Index and the DJ-UBS Roll Select CI have limited history and may perform in unexpected ways.
The Index and the DJ-UBS Roll Select CI began publishing on July 18, 2011, and therefore have limited histories. Hypothetical historical performance data is provided under The Index, the DJ-UBS CI and the DJ-UBS Roll Select CI to illustrate how each of the Index and the DJ-UBS Roll Select CI may have performed had it been created in the past, but those calculations are subject to many limitations. Unlike actual historical performance, such calculations do not reflect actual trading, liquidity constraints, fees and other costs. In addition, the models used to calculate these hypothetical returns are based on certain data, assumptions and estimates. Different models or models using different data assumptions and estimates might result in materially different hypothetical performance.
The roll selection methodology of the DJ-UBS Roll Select CI may not provide any benefits relative to the roll selection methodologies used by other commodities indices, including the DJ-UBS CI, and the DJ-UBS Roll Select CI may not outperform, or may underperform, the DJ-UBS CI.
As described further under The Index, the DJ-UBS CI and the DJ-UBS Roll Select CI, the process through which the DJ-UBS Roll Select CI rolls contracts of one delivery month into contracts of a new delivery month differs from the process used by the DJ-UBS CI. Unlike the DJ-UBS CI, which rolls into contracts of a predetermined delivery month, the DJ-UBS Roll Select CI rolls into contracts that demonstrate the least contango or, if applicable, the most backwardation, in each case relative to the contracts of the immediately preceding delivery month. This determination is made on the contract selection date, which is generally the fourth business day of every month.
The price at which a futures contract of a specified delivery date is trading on a contract selection date is expected to reflect the markets outlook with respect to the performance of a contract with the specified delivery date. In certain circumstances, the market outlook with respect to the underlying commodities may cause futures contracts of a particular delivery date to trade at higher or lower prices relative to futures contracts for the same underlying commodity with a different delivery date based upon expectations regarding the price on such delivery date. These expectations may be based on factors that do not affect futures contracts of different delivery dates in the same way, such as seasonal fluctuations based on supply and demand. Accordingly, the price at which a futures contract trades relative to a futures contract with an immediately preceding delivery date may not necessarily be reflective of the effect of backwardation or contango that will be realized from rolling such futures contract. It is possible that, for a given time period, the futures contracts selected for inclusion in the DJ-UBS Roll Select CI may not outperform, and may underperform, the futures contracts selected for inclusion in the DJ-UBS CI.
The DJ-UBS Roll Select CI may in the future include contracts that are not traded on regulated futures exchanges and that offer different or diminished protections to investors.
Currently, the DJ-UBS Roll Select CI is comprised exclusively of futures contracts traded on DCMs, or regulated futures exchanges. The DJ-UBS Roll Select CI may in the future include contracts (such as swaps and
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forward contracts) traded in the over-the-counter market or on trading facilities that are subject to lesser degrees of regulation or, in some cases, no substantive regulation. As a result, trading in such contracts, and the manner in which prices and volumes are reported by the relevant trading facilities, may not be subject to the same provisions of, and the protections afforded by, the CEA or other applicable statutes and related regulations that govern trading on regulated futures exchanges. In addition, many electronic trading facilities have only recently initiated trading and do not have significant trading histories. As a result, the trading of contracts on such facilities and the inclusion of such contracts in the DJ-UBS Roll Select CI may be subject to risks not presented by most exchange-traded futures contracts, including risks related to the liquidity and price histories of the relevant contracts.
Changes in the composition and valuation of the DJ-UBS Roll Select CI may adversely affect your Shares.
The composition of the DJ-UBS Roll Select CI may change over time as additional commodities satisfy the eligibility criteria or commodities currently included in the DJ-UBS Roll Select CI fail to satisfy those criteria. The weighting factors applied to each commodity included in the DJ-UBS Roll Select CI change annually, based on changes in commodity production statistics and changes in the trading volume of the related futures contracts. In addition, the Index Co-Sponsors may modify the method for determining the composition and weighting of the DJ-UBS Roll Select CI and for calculating its value. Such changes could adversely affect the value of your Shares. For more information about the methodology for determining the composition and weighting of the DJ-UBS Roll Select CI, see The Index, the DJ-UBS CI and the DJ-UBS Roll Select CI.
A cessation of publication of the DJ-UBS Roll Select CI could materially and adversely affect the activities of the Trust.
The DJ-UBS Roll Select CI is administered, calculated and published by the Index Co-Sponsors, who may cease publication of the DJ-UBS Roll Select CI at any time. If the DJ-UBS Roll Select CI ceases being published, the Sponsor may determine that no suitable replacement index exists, and the Trust may be liquidated.
Futures contracts (including the Index Futures) are not assets with intrinsic value.
Trading in futures transfers the risk of future price movements from one market participant to another. This means that for every gain, there is an equal and offsetting loss. Futures contracts themselves (including Index Futures) are not assets with intrinsic value, and simply reflect, in the case of cash-settled contracts, certain rights to payment or obligations to make payments to the other party to the contract, and in the case of physically-settled contracts, such as the futures contracts underlying the Index, an agreement to make or take delivery of a particular asset at a specified price. Accordingly, market participants taking the opposite side of the Trusts Index Future trades may believe that the price of such Index Future will move against the Trust, and the Trust may be at an informational or other disadvantage relative to such market participants.
The Trusts trading activity in Index Futures could expose it to additional risk.
In order for the Trust to achieve its investment objective on an ongoing basis, it is anticipated that existing positions in Index Futures will need to be closed out and new positions in Index Futures will need to be established from time to time. The Trust may further close out of existing positions and establish new positions in Index Futures from time to time, including new positions in earlier expiring Index Futures, which may allow it to reduce its concentration in any particular Index Future or to benefit from more liquid markets or otherwise beneficial market activity in Index Futures listed with different expirations or on different Exchanges. This activity is expected to cause the Trust to incur transaction costs, such as brokerage fees and commissions, and may cause the Shares to under-perform the Index. In particular, the prices obtained in connection with rolling Index Future positions may be adversely affected by market conditions (including the possibility of market disruptions) and by the trading activities of other market participants, which may reflect market awareness of the Trusts position in its Index Futures. For example, if other market participants are able to anticipate the timing of
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the Trusts transactions, they may be able to execute transactions in advance of the Trust, which would allow these market participants to benefit from the transactions executed by the Trust but adversely affect the prices obtained by the Trust. In addition, if the Trusts Index Future positions represents a significant part of the open long interest in such Index Future, other market participants may take this into account, with a potential adverse impact on the prices at which the Trust is able to execute such transactions. There can be no assurance that the Trust will be able to effect its transactions in a manner that will allow it to avoid these risks. The CME or another Exchange may cease to list other Index Futures that the Trust will be able to roll its positions into, and any Index Futures listed by an Exchange in the future may have terms that differ from those initially held by the Trust.
The liquidation of Index Futures could expose the Trust to the effects of temporary aberrations or distortions in the market, which could adversely affect the prices at which the Trusts Index Future positions are liquidated.
If the Trust liquidates positions in Index Futures in order to satisfy redemption requests or to pay expenses and liabilities, it will do so by entering sell orders with its Clearing FCM for execution on the Exchange. The resulting sales will serve to offset a portion of the Trusts long positions in Index Futures. However, in entering sell orders, the Trust will be subject to the risk that temporary aberrations or distortions will occur in the market at the time these sales are effected and that the prices received by the Trust on its sales could be adversely affected, thereby adversely affecting the value of the Shares. Such aberrations or distortions could occur as a result of trading activities by other market participants or actions taken by the Clearing FCM, an Exchange, other self-regulatory organizations or regulatory authorities, including the liquidation of the Trusts Index Futures to satisfy applicable margin requirements. If the Trusts Index Futures are liquidated at inopportune times or in a manner that causes a temporary market distortion, this may adversely affect the NAV and the value of your Shares.
The Trusts Clearing FCM or an Exchanges clearing house could fail.
In the event of the bankruptcy of the Clearing FCM or an Exchanges clearing house, the Trust could be exposed to a risk of loss with respect to its assets that are posted as margin. If such a bankruptcy were to occur, the Trust would be afforded the protections granted to customers of a futures commission merchant, or FCM, and participants to transactions cleared through a clearing house, under the United States Bankruptcy Code and applicable CFTC regulations. Such provisions generally provide for a pro rata distribution to customers of customer property held by the bankrupt FCM or an Exchanges clearing house if the customer property held by the FCM or the Exchanges clearing house is insufficient to satisfy all customer claims. In any case, there can be no assurance that these protections will be effective in allowing the Trust to recover all, or even any, of the amounts it has deposited as margin.
Bankruptcy of the Clearing FCM can be caused by, among other things, the default of one of the Clearing FCMs customers. In this event, the Exchanges clearing house is permitted to use the entire amount of margin posted by the Trust (as well as margin posted by other customers of the Clearing FCM) to cover the amounts owed by the bankrupt Clearing FCM. Consequently, the Trust could be unable to recover amounts due to it on its Index Future positions, including assets posted as margin, and could sustain substantial losses, even if the level of the DJ-UBS Roll Select CI increases.
On November 14, 2012, the CFTC proposed regulations relating to enhanced customer protections, risk management programs, internal monitoring and controls, capital and liquidity standards, customer disclosures and auditing and examination programs for FCMs. There can be no assurance that the adoption or implementation of any such regulations would prevent losses to, or not materially adversely affect, the Trust or the Shareholders.
Recourse to the Index Providers may be limited.
The Dow Jones-UBS Commodity IndexesSM are a joint product of DJI Opco, a subsidiary of S&P Dow Jones Indices LLC, and UBS Securities, and have been licensed for use. Dow Jones® and DJ® are trademarks of
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Dow Jones; UBS is a registered trademark of UBS AG; S&P® is a registered trademark of Standard & Poors Financial Services LLC; and these trademarks have been licensed for use by DJI Opco and sublicensed for certain purposes by the Trust.
The Shares are not sponsored, endorsed, sold or promoted by the Index Providers in their capacities as such. None of the Index Providers, in their capacities as such, makes any representation or warranty, express or implied, to the owners of or counterparts to the Shares or any member of the public regarding the advisability of investing in securities or commodities generally or in the Shares particularly. The only relationship of the Index Providers, in their capacities as such, to the Trust is the licensing of certain trademarks, trade names and service marks and of the Index and the DJ-UBS Roll Select CI, which is determined, composed and calculated by DJI Opco in conjunction with UBS Securities without regard to the Trust or the Shares. The Index Providers do not take the needs of the Trust or the Shareholders into consideration in determining, composing or calculating the Index or the DJ-UBS Roll Select CI. None of the Index Providers is directly responsible for or has participated in the determination of the timing of, prices at, or quantities of the Shares to be issued or in the determination or calculation of the equation by which the Shares are to be converted into cash, surrendered or redeemed, as the case may be. The Index Providers, in their capacities as such, are not responsible for the administration, marketing or trading of the Shares. Notwithstanding the foregoing, UBS AG, UBS Securities, CME Group Inc., an affiliate of S&P Dow Jones Indices LLC, and their respective subsidiaries and affiliates may independently issue and/or sponsor financial products unrelated to the Shares currently being issued by the Trust, but which may be similar to and competitive with the Shares. In addition, UBS AG, UBS Securities, CME Group Inc. and their subsidiaries and affiliates actively trade commodities, commodity indexes and commodity futures (including the Index and the DJ-UBS Roll Select CI), as well as swaps, options and derivatives which are linked to the performance of such commodities, commodity indexes and commodity futures. It is possible that this trading activity will affect the value of the Index, the DJ-UBS Roll Select CI and Shares.
Risk Factors Relating to the Trust
The Trust has no operating history, and, as a result, investors will not be able to analyze the Trusts performance history in evaluating an investment in the Trust.
The Trust has no performance history upon which to evaluate an investors investment in the Trust. Although the Trust will be investing in collateralized Index Future positions on the DJ-UBS Roll Select CI, such that it is expected that its performance will generally correlate with the Index, the absence of past performance history precludes any evaluation of how well the Trusts performance correlates with that of the Index, or whether the Trust has outperformed or underperformed the Index in the past. Although past performance is not necessarily indicative of future results, if the Trust had any performance history, such performance history could provide investors with more information with which to evaluate an investment in the Trust. Likewise, certain benchmarks, such as the DJ-UBS Roll Select CI and the Index themselves have a limited history. A longer history for such benchmarks could provide investors with more information on which to evaluate an investment in the Trust. See Risk Factors Relating to Index Futures and the DJ-UBS Roll Select CIThe Index and the DJ-UBS Roll Select CI have Limited History and May Perform in Unexpected Ways.
The Trust expects to qualify as an emerging growth company subject to reduced public company reporting requirements.
The Trust expects to qualify as an emerging growth company as defined in the JOBS Act. The Trust has not elected to make use of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, which election is irrevocable. However, for so long as the Trust remains an emerging growth company, it will be subject to reduced public company reporting requirements. Among other things, emerging growth companies are exempt from the auditor attestation requirements under Section 404(b) of the Sarbanes-Oxley Act, are exempt from certain say on pay provisions of the Dodd-Frank Act, and are subject to reduced disclosure requirements relating to executive compensation and audited financial
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statements. Although the Trust will remain subject to the disclosure requirements applicable to publicly traded commodity pools, and the Sponsor intends to have the Trusts financial statements and disclosures prepared in a manner comparable to that of other iShares® exchange-traded funds, the Trust may take advantage of the exemptions and scaled requirements applicable to emerging growth companies.
The returns on the Shares will not precisely correlate with the performance of the Index.
The value of and returns on the Shares are expected to reflect the value of and returns on the Trusts underlying investments in Index Futures and the cash or other Collateral Assets used to collateralize the Index Future positions. The returns on the Shares will not precisely correlate with the performance of the Index due to, among other factors, differences between the return on the Collateral Assets and the U.S. Treasury rate used to calculate the U.S. Treasury return component of the Index, timing differences, differences between the portion of the Trusts assets invested in Index Futures versus the portion of the return of the Index contributed by the DJ-UBS Roll Select CI, differences between the settlement price of Index Futures and the closing level of the DJ-UBS Roll Select CI and the payment of expenses and liabilities by the Trust.
Because the Trust is a passive investment vehicle, the value of the Shares may be adversely affected by losses that, if these vehicles had been actively managed, might have been possible to avoid.
The Advisor will manage the Trusts assets in a manner that seeks to obtain returns that correspond generally, but are not necessarily identical, to the performance of the Index, before the payment of expenses and liabilities of the Trust. This means that the net asset value of the Trust and, consequently, the NAV are intended to generally track the Index when it is flat or declining, as well as when it is rising, and therefore, it is highly likely that the value of the Shares will be adversely affected by a decline in commodity futures prices reflected in the Index. The Advisor will not engage in any activities designed to obtain a profit from, or to ameliorate losses caused by, changes in the level of the Index or the DJ-UBS Roll Select CI or the value of the Collateral Assets, including making use of any of the hedging techniques available to professional commodity futures traders to attempt to reduce the risks of losses resulting from commodity price decreases.
Fees and expenses payable by the Trust are charged regardless of profitability and may result in a depletion of its assets.
The Trust is subject to the fees and expenses described in this prospectus, which are payable irrespective of profitability. These fees and expenses include an allocation to the Sponsor that accrues daily at an annualized rate of up to 0.75% of the Adjusted Net Asset Value of the Trust, and is payable by the Trust monthly in arrears. The Sponsors Fee may be adjusted by the Sponsor in its discretion from time to time to any amount up to 0.75% of the Adjusted Net Asset Value of the Trust. The Sponsors Fee may not be adjusted to above 0.75% of the Adjusted Net Asset Value of the Trust absent an amendment to the Trust Agreement in accordance with its terms, and such an adjustment may only become effective thirty days after the Trustee has notified the registered holders of the amendment.
Interest earned on the assets posted as collateral is paid to the Trust and is used to pay the fixed fee to the Sponsor. A prolonged decline in interest rates could materially affect the amount of interest paid to the Trust. In the case of either an extraordinary expense and/or insufficient interest income to cover ordinary expenses, the Trust could be forced to liquidate its Index Future positions to pay such expenses.
The Trusts ability to operate is dependent on the Sponsor, the Trustee and certain other key service providers and other parties.
The Trusts ability to operate and achieve its investment objective is dependent on a number of parties, including:
| the Sponsor, who exercises general oversight and authority over the Trust; |
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| the Trustee, who is responsible for the day-to-day administration of the Trust; |
| the Trust Administrator, who provides certain administrative and custodial services to the Trust; |
| the Advisor, who exercises general oversight over the Trusts investment activities; |
| the Clearing FCM, through which the Trusts transacts in Index Futures and maintains its Index Future positions; |
| the Exchange, through which the Trusts Index Future transactions clear and settle; |
| the Index Providers, who own the intellectual property rights to the Index on which the Trusts investment objective is based; |
| the Index Co-Sponsors, who maintain the Index; |
| the Authorized Participants, whose creation and redemption activities allow Index Futures and Collateral Assets to be converted to Shares and vice versa, to help maintain the relationship between the Index and the Shares; |
| the Processing Agent, who performs certain functions in connection with processing creation and redemption orders; and |
| the Tax Administrator, who provides tax reporting and tax administrative services. |
Disruptions in the business of any of the foregoing parties or the termination of the Trusts relationship with any of the foregoing parties could adversely affect the Trusts operations. Shared ownership of a number of the foregoing parties may heighten this risk. The Sponsor, the Advisor and the Trustee are commonly controlled subsidiaries of BlackRock, Inc. The CME, the Exchange on which the initial Index Futures are expected to trade, is a shareholder of DJI Opco, one of the Index Co-Sponsors. UBS Securities, the other Index Co-Sponsor, also acts as the Trusts Clearing FCM, as Initial Purchaser and as an Authorized Participant. A number of the foregoing parties are publicly traded companies or subsidiaries of publicly traded companies, and a portion of their shares may be owned by one or more of the other foregoing parties.
The Trust is exposed to various operational risks.
The Trust is exposed to various operational risks, including human error, information technology failures and failure to comply with formal procedures intended to mitigate these risks, and is particularly dependent on electronic means of communicating, record-keeping and otherwise conducting business. In addition, the Trust generally exculpates, and in some cases indemnifies, its counterparties with respect to losses arising from unforeseen circumstances and events, which may include the interruption, suspension or restriction of trading on or the closure of NYSE Arca, an Exchange, or an exchange on which the futures contracts underlying the Index trade, power or other mechanical or technological failures or interruptions, computer viruses, communications disruptions, work stoppages, natural disasters, fire, war, terrorism, riots, rebellions or other circumstances beyond its or its counterparties control. Accordingly, the Trust generally bears the risk of loss with respect to these unforeseen circumstances and events to the extent relating to the Trust or the Shares, which may limit or prevent the Trust from generating returns corresponding to those of the Index or otherwise expose it to loss.
Although it is generally expected that the Trusts direct counterparties will generally have disaster recovery or similar programs or safeguards in place to mitigate the effect of such unforeseen circumstances and events, there can be no assurance that these safeguards are in place for all parties whose activities may affect the performance of the Trust, or that these safeguards, even if implemented, will be successful in preventing losses associated with such unforeseen circumstances and events. Nor can there be any assurance that the systems and applications on which the Trust relies will continue to operate as intended. In addition to potentially causing performance failures at, or direct losses to, the Trust, any such unforeseen circumstances and events or operational failures may further distract the counterparties or personnel on which the Trust relies, reducing their
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ability to conduct the activities on which the Trust is dependent. These risks cannot be fully mitigated or prevented, and further efforts or expenditures to do so may not be cost-effective, whether due to reduced benefits from implementing additional or redundant safeguards or due to increases in associated maintenance requirements and other expenses that may make it more costly for the Trust to operate in more typical circumstances.
The price you receive upon the sale of your Shares may be less than their NAV.
Shares may trade at, above or below their NAV. The NAV will fluctuate with changes in the market value of the Trusts assets. The trading price of Shares will fluctuate in accordance with changes in the NAV, intraday changes in the value of the Index Futures and market supply and demand. The amount of the discount or premium in the trading price of the Shares relative to their NAV may be influenced by non-concurrent trading hours between NYSE Arca, the exchange on which the Shares trade, the Exchanges on which Index Futures trade and the principal commodities markets on which the futures contracts in the DJ-UBS Roll Select CI trade. While the Shares are expected to trade on NYSE Arca until 4:00 p.m. (New York time), liquidity in the markets for the Index Futures and the futures contracts underlying the DJ-UBS Roll Select CI is expected to be reduced whenever the principal markets for those contracts are closed. As a result, trading spreads, and the resulting premium or discount on Shares, may widen during these gaps in market trading hours.
The Trust is not obligated to pay periodic distributions or dividends to Shareholders.
Interest or other income received with respect to the Trusts assets may be used to acquire additional Index Futures or Collateral Assets or, in the discretion of the Sponsor, distributed to the Shareholders. The Trust will not be obligated, however, to make any distributions to Shareholders at any time prior to the dissolution of the Trust.
The Trust could be liquidated at a time when the disposition of its interests will result in losses to investors in Shares.
If, at any time, any of the events described under Description of the Shares and the Trust AgreementAmendment and Dissolution occurs, the Sponsor, the Trustee or, if applicable, the Shareholders may prompt the Trusts dissolution. Upon dissolution of the Trust, the Trust will sell the Index Futures and securities held by it in the amount necessary to cover all expenses of liquidation and to pay any outstanding liabilities of the Trust. The remaining assets will be distributed among investors surrendering Shares. In the event the Trustee cannot distribute such assets proportionately among the Shareholders entitled thereto or if the Trustee determines that such distribution is not lawful or feasible, the Trustee may use any other method of distribution that it deems to be lawful, equitable, and feasible, including the public or private sale of Trust assets and the distribution of the proceeds thereof. Any property remaining in the possession of the Trustee after ninety days may be sold by the Trustee, and the proceeds of the sale will be held by the Trustee until claimed by any remaining Shareholders.
In connection with any such liquidation, Trust property may be sold for prices that are less than the portion of the NAV attributable to such Trust property. Accordingly, the liquidation of Trust property may result in losses, or adversely affect your gains, on your investment in Shares.
The Sponsor has broad discretion to liquidate the Trust at any time.
The Trust Agreement provides the Sponsor with broad discretion to liquidate the Trust at any time the Sponsor determines that liquidation of the Trust is advisable. It cannot be predicted when or under what circumstances, if any, the Sponsor would use this discretion to liquidate the Trust. Any such liquidation may occur at a time when you are suffering a loss on your investment in the Shares and may upset the overall maturity and timing of your investment portfolio.
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Shareholders with large holdings may choose to dissolve the Trust and thereby adversely affect your investment in the Shares.
Owners of 75% or more of the Shares have the power to dissolve the Trust. This power may be exercised by a relatively small number of holders. If it is so exercised, investors who wished to continue to invest in the performance of the Index through the vehicle of the Trust will have to find another vehicle, and may not be able to find another vehicle that offers the same features as the Trust. Moreover, such a dissolution may occur at a time when you are suffering a loss on your investment in the Shares and may upset the overall maturity and timing of your investment portfolio.
The Shares may not provide anticipated benefits of diversification from other asset classes.
Historically, the performance of physical commodity futures prices generally has not been correlated to the performance of financial asset classes, such as stocks and bonds. Non-correlation means that there is no statistically significant relationship, positive or negative, between the past performance of futures contracts on physical commodities, on the one hand, and stocks or bonds, on the other hand. Despite this lack of correlation, Shares cannot be expected to be automatically profitable during unfavorable periods for the stock or bond markets, or automatically unprofitable during favorable periods for the stock or bond markets. The commodity futures markets are fundamentally different from the securities markets in that for every gain in commodity futures trading, there is an equal and offsetting loss. The performance of the Shares may reflect positive or negative correlation to one or more financial asset classes, in which case any investment strategy relying on the absence of any such correlation may not be successful.
The liquidity of the Shares may be affected by the withdrawal from participation of Authorized Participants or by the suspension of issuance, transfers or redemptions of Shares by the Trustee.
If one or more Authorized Participants withdraw from participation, it may become more difficult to create or redeem Baskets, which may reduce the liquidity of the Shares. If it becomes more difficult to create or redeem Baskets, the correlation between the price of the Shares and the NAV may be affected, which may affect the trading market for the Shares. Having fewer participants in the market for the Shares could also adversely affect the ability to arbitrage any price difference between the Index Futures and the Shares, which may affect the trading market and liquidity of the Shares.
In addition, the Trustee has the power to suspend the delivery of Shares, registration of transfers of Shares and surrenders of Shares for the purpose of withdrawing Trust property generally, or to refuse a particular deposit, transfer or withdrawal at any time, if the Trustee or the Sponsor determines that it is advisable to do so for any reason. The liquidity of the Shares and the correlation between the value of the Shares and the level of the Index may be adversely affected in the event of any such suspension of issuance, transfer or redemption.
The lack of an active trading market for the Shares may result in losses on your investment at the time of disposition of your Shares.
Although the Shares are listed on NYSE Arca, there can be no guarantee that an active trading market for the Shares will develop or be maintained. If you need to sell your Shares at a time when no active market for them exists, the price you receive for your Shares, assuming that you are able to sell them, will likely be lower than that you would receive if an active market did exist.
You may be adversely affected by redemption orders that are subject to postponement, suspension or rejection under certain circumstances.
The Trustee may suspend the right of redemption or postpone the redemption settlement date for such periods as it or the Sponsor deems to be necessary for any reason. In addition, the Trustee has the right to reject any redemption order for any reason, including, among others, (1) the related order not being in proper form as
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described in the Authorized Participant Agreement, (2) market conditions or other circumstances that make transactions in or delivery of the Shares or the Index Futures impossible or impractical, (3) a determination by the Trustee that the acceptance of the related order would have adverse tax or other consequences to the Trust or the Shareholders or (4) circumstances that would cause the acceptance of the related order to result in a violation of law in the opinion of counsel to the Trustee, the Sponsor, the Trust Administrator or the Processing Agent. Any such postponement, suspension or rejection could adversely affect a redeeming Authorized Participant. For example, the resulting delay may adversely affect the value of the redemption proceeds if the NAV declines during the period of the delay. Under the Authorized Participant Agreement, the Trustee disclaims any liability that may result from any such suspension, postponement or rejection.
Competition from other commodities-related investments could limit the market for, and reduce the liquidity of, the Shares.
Demand for the Shares is expected to be affected by the attractiveness of an investment in the Shares relative to other investment vehicles, including other commodity pools, hedge funds, traditional debt and equity securities issued by companies in the commodities industry, other securities backed by or linked to commodities, and direct investments in commodities or commodity futures contracts. Market, financial and other conditions or factors may make it more attractive to invest in other investment vehicles or to invest in such commodities directly, which could limit the market for, and reduce the liquidity of, the Shares.
The price of the Shares could decrease if unanticipated operational or trading problems arise.
If the processes of creation and redemption of Shares encounter any unanticipated difficulties, potential market participants who would otherwise be willing to purchase or redeem Baskets to take advantage of any arbitrage opportunity arising from discrepancies between the price of the Shares and the price of the underlying Index Futures may choose not to do so. If this is the case, the price of the Shares may vary from the price of an equivalent position in Index Futures and may trade at a discount to their NAV. In addition, in some circumstances, such as the failure of the registration statement covering the Shares to be effective, the Trust may be unable to create or redeem Shares, which may have similar consequences.
Exchange position limits and other rules may restrict the creation of Baskets and the operation of the Trust.
Legislative or regulatory action, actions by an Exchange or actions by the Clearing FCM may impose limitations on the size of positions that the Trust may take in Index Futures and/or impose limitations on the size of positions that may be carried by the Trusts Clearing FCM or other market participants, adversely affecting the liquidity and price of Index Futures and the underlying futures. Such events could force the Trust or other market participants to sell Index Futures, or encourage market participants to sell or redeem their Shares. Any such reduction could affect the liquidity of Index Futures and adversely impact the price of the Shares as well as the correlation between the price of the Shares and the net asset value of the Trust. See also Risk Factors Relating to Commodities MarketsRegulatory developments with respect to the futures and over-the-counter derivatives markets, and in particular, with respect to speculative trading in futures contracts and over-the-counter derivatives involving commodities and commodity indices, could adversely affect the value of your Shares.
Exchanges may also take steps, such as requiring liquidation of open positions, in the case of disorderly markets, market congestion and other market disruptions. These actions could require the Trust to liquidate all or part of its Index Future positions or require holders of positions in the futures contracts underlying the DJ-UBS Roll Select CI to liquidate their positions. This could affect the level of the Index and the NAV. See also Risk Factors Relating to Commodities MarketsRegulatory developments with respect to the futures and over-the-counter derivatives markets, and in particular, with respect to speculative trading in futures contracts and over-the-counter derivatives involving commodities and commodity indices, could adversely affect the value of your Shares.
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Shareholders will not have the rights normally associated with ownership of common shares; the Sponsor and the Trustee will exercise substantial control over the Trust.
Shareholders are not entitled to the same rights as owners of shares issued by a corporation. By acquiring Shares, you are not acquiring the right to elect directors, to receive dividends, to vote on certain matters regarding the Trust or to take other actions normally associated with the ownership of common shares.
Additionally, as described under Business of the Trust and Description of the Shares and the Trust Agreement, the Sponsor and the Trustee will exercise substantial control over the Trusts activities. Among other things, the Trust Agreement authorizes the Sponsor to determine whether to make distributions to Shareholders, gives the Sponsor oversight over NAV calculations and the creation and redemption process and permits the Sponsor to dissolve the Trust if it deems such dissolution advisable. Similarly, the Trustee will retain the right to reject any order for the creation or redemption of Baskets. The Sponsor and the Trustee may amend the provisions of the Trust Agreement, including in a manner adverse to Shareholders, without Shareholder consent, including to change the assets through which the Trust seeks to achieve its investment objective, which may alter the nature of an investment in, and the performance of, the Shares.
The Trust Agreement provides that in the case of a conflict of interest between the Trustee, the Sponsor and their affiliates, on the one hand, and the holders of Shares, on the other, the Trustee and the Sponsor will resolve such conflict considering the relevant interests of each party (including their own interests) and related benefits and burdens, any customary or accepted industry practices, and any applicable generally accepted accounting practices or principles. The Trust Agreement further provides that in the absence of bad faith by the Trustee or the Sponsor, such a resolution will not constitute a breach of the Trust Agreement or any duty or obligation of the Trustee or the Sponsor.
Shareholders will not have the protections normally associated with the ownership of shares in an investment company registered under the Investment Company Act.
The Trust is not registered as an investment company for purposes of United States federal securities laws, and is not subject to regulation by the SEC as an investment company. Consequently, Shareholders will not have the regulatory protections provided to investors in investment companies registered under the Investment Company Act. For example, the provisions of the Investment Company Act that limit transactions with affiliates, prohibit the suspension of redemptions (except under limited circumstances) and limit sales loads will not apply to the Trust. iShares® Delaware Trust Sponsor LLC, as the Sponsor, is registered with the CFTC as a commodity pool operator, and BlackRock Fund Advisors, as the Advisor, is registered with the CFTC as a commodity trading advisor. The CFTC therefore has jurisdiction over these entities and regulatory authority over certain activities of the Trust. The nature and degree of this regulation differs from the regulatory scheme imposed under the Investment Company Act.
Competing claims over ownership of relevant intellectual property rights could adversely affect the Trust or an investment in the Shares.
While the Sponsor believes that it has all of the intellectual property rights needed to operate the Trust in the manner described in this prospectus, third parties may allege or assert ownership of intellectual property rights that may be related to the design, structure and operation of the Trust or the Index. To the extent any claims of such ownership are brought or any proceedings are instituted to assert such claims, the negotiation, litigation or settlement of such claims, the issuance of any restraining orders or injunctions, or the ultimate disposition of such claims in a court of law, may adversely affect the Trust and the value of the Shares. For example, such actions could result in expenses or damages payable by the Trust or the suspension of activities or dissolution of the Trust.
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The value of the Shares will be adversely affected if the Trust is required to indemnify the Sponsor, the Advisor or the Trustee or their respective agents.
Under the Trust Agreement, the Sponsor, the Trustee and their respective agents have the right to be indemnified by the Trust for any liability or expense it incurs without negligence, bad faith or willful misconduct on their part. That means the Sponsor and the Trustee may require the assets of the Trust to be sold in order to cover losses or liabilities suffered by it, which would reduce the net asset value of the Trust and the value of the Shares.
Likewise, under the Advisory Agreement, the Advisor and its agents have the right to be indemnified by the Trust for any liability or expense they incur without negligence, bad faith or willful misconduct on their part. That means the Advisor may require the assets of the Trust to be sold in order to cover losses or liabilities suffered by it, which would reduce the net asset value of the Trust and the value of the Shares.
Regulatory changes or actions may affect the Shares.
The futures markets are subject to comprehensive regulation. In addition, the CFTC and the exchanges are authorized to take extraordinary actions in the event of a market emergency, including, for example, implementing retroactively speculative position limits or higher margin requirements, establishing daily price limits and suspending trading. The regulation of futures transactions in the United States is subject to modification by government, exchange and judicial action. The effect of any future regulatory change on the Trust could be substantial and adverse.
See also Exchange position limits and other rules may restrict the creation of Baskets and the operation of the Trust above and Risk Factors Relating to Commodities MarketsRegulatory developments with respect to the futures and over-the-counter derivatives markets, and in particular, with respect to speculative trading in futures contracts and over-the-counter derivatives involving commodities and commodity indices, could adversely affect the value of your Shares.
NYSE Arca may halt trading in the Shares, which would adversely impact your ability to sell your Shares.
The Shares are listed for trading on NYSE Arca under the symbol CMDT. Trading in the Shares may be halted due to market conditions or, in light of NYSE Arca rules and procedures, for reasons that, in the view of NYSE Arca, make trading in the Shares inadvisable, or in the event certain information about the Index, the value of the Shares and the NAV is not made available as required by such rules and procedures. In addition, trading generally on NYSE Arca is subject to trading halts caused by extraordinary market volatility pursuant to circuit breaker rules that require trading to be halted for a specified period based on a specified market decline. There can be no assurance that the requirements necessary to maintain the listing of the Shares will continue to be met or will remain unchanged. The Trust will be dissolved if the Shares are delisted from NYSE Arca and are not approved for listing on another national securities exchange within five business days of their delisting.
Risk Factors Relating to Conflicts of Interest
The Sponsors relationship with the Trustee and the Advisor and the proprietary and managed trading activities of the Sponsor and its affiliates could conflict with your interests as a Shareholder.
The Sponsor is an affiliate of the Trustee and therefore may have a conflict of interest with respect to its oversight of the Trustee. In particular, the Sponsor, which has authority to remove the Trustee in its discretion, has an incentive not to exercise this authority, even when it is in the best interests of the Shareholders to do so, because of the affiliation between the entities. The Trustee is authorized to appoint an unaffiliated Trust Administrator or agent to carry out all or some of its duties under the Trust Agreement, but is not required to delegate any of its duties to an unaffiliated third party.
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The Sponsor is an affiliate of the Advisor and therefore may have a similar conflict of interest with respect to its oversight of the Advisor. For example, although the Sponsor has the authority to terminate the Trusts Advisory Agreement with the Advisor, it has an incentive not to exercise this authority, even when it is in the best interests of the Shareholders to do so, because of the affiliation between the entities.
As described elsewhere in this prospectus, in return for paying certain amounts that would otherwise be considered ordinary operating expenses of the Trust, the Sponsor receives an allocation from the Trust that accrues daily at an annualized rate of up to 0.75% of the Adjusted Net Asset Value of the Trust, is payable monthly in arrears, and is subject to adjustment from time to time, except that the Sponsors Fee may not be adjusted to above 0.75% of the Adjusted Net Asset Value absent an amendment to the Trust Agreement and thirty days prior notice to registered holders of the Shares. The allocation received by the Sponsor from the Trust may be higher than the amount the Trust would negotiate with an unaffiliated third party manager on an arms-length basis.
In addition, the Sponsor and its affiliates (including the Trustee and the Advisor) will collectively exercise substantial control over the Trust. To the extent the interests of the Sponsor and its affiliates conflict with those of the Trust and the Shareholders, the risks associated with such conflicts may be greater than they would otherwise be for a party that cannot exercise such control over the Trust. The Trust Agreement provides that in the case of a conflict of interest between the Trustee, the Sponsor and their affiliates, on the one hand, and the holders of Shares, on the other, the Trustee and the Sponsor will resolve such conflict considering the relevant interests of each party (including their own interests) and related benefits and burdens, any customary or accepted industry practices, and any applicable generally accepted accounting practices or principles. The Trust Agreement further provides that in the absence of bad faith by the Trustee or the Sponsor, such a resolution will not constitute a breach of the Trust Agreement or any duty or obligation of the Trustee or the Sponsor.
The Sponsor and its affiliates may also engage in trading activities relating to the Index Futures, the components of the Index or the DJ-UBS Roll Select CI or other derivative instruments related to those indices that are not for the account of, or on behalf of, the Trust or the Shareholders and that may compete with trading activity in the Shares. These activities may present a conflict between the Shareholders interest in the Shares and the interest of the Sponsor and its affiliates in their proprietary accounts, in facilitating transactions, including derivatives transactions, for their customers accounts and in accounts under their management. These trading activities could be adverse to the interests of the Shareholders. Moreover, the Sponsor and its affiliates have published and in the future expect to publish research reports with respect to commodities markets. This research may express opinions or provide recommendations that are inconsistent with purchasing or holding Shares. The research should not be viewed as a recommendation or endorsement of the Shares in any way, and investors must make their own independent investigation of the merits of this investment. Any of these activities by the Sponsor and its affiliates may affect the level of the DJ-UBS Roll Select CI or its components and, therefore, the value of the Index Futures and the price of the Shares.
Proprietary trading and other activities by UBS Securities and its affiliates could conflict with your interests as a Shareholder.
Activities conducted by UBS Securities and its affiliates may conflict with your interests as a Shareholder. For example, the Advisor may execute a substantial amount, and potentially all, of the purchases and sales of Index Futures through UBS Securities, as the Trusts Clearing FCM. In addition, it is expected that UBS Securities or its accountholders will represent, directly or indirectly, a substantial portion of the short-side market for the Index Futures. Further, UBS Securities and its affiliates actively trade futures contracts and options on futures contracts on the commodities that underlie the Index, over-the-counter contracts on these commodities, the underlying commodities included in the Index and other instruments and derivative products based on the Index, the DJ-UBS Roll Select CI and the DJ-UBS CI. Any of these activities of UBS Securities or its affiliates could adversely affect the level of the Index or Index Futures, directly or indirectly, by affecting the price of the underlying commodities and, therefore, the value of the Index, the Index Futures and the price of the Shares.
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In addition, UBS Securities is one of the Index Co-Sponsors and two-thirds of the Supervisory Committee responsible for oversight of the DJ-UBS CI consist of representatives appointed by UBS Securities. Accordingly, UBS Securities will exercise substantial control over the Index, the DJ-UBS CI and the DJ-UBS Roll Select CI. To the extent UBS Securities interests conflict with those of the Trust and the Shareholders, the risks associated with such conflicts may be greater than they would otherwise be for a party that cannot exercise such control over the Index, the DJ-UBS CI and the DJ-UBS Roll Select CI. According to UBS Securities, UBS Securities has implemented a firewall with respect to its personnel regarding access to information concerning the composition and/or changes to the Index. See Proprietary trading and other activities by the Index Providers and their respective affiliates could conflict with your interests as a Shareholder.
UBS Securities and its affiliates may also issue or underwrite other securities or financial or derivative instruments with returns indexed to the Index, the DJ-UBS CI or the DJ-UBS Roll Select CI, which would compete with the Shares. By introducing competing products into the marketplace, UBS Securities and its affiliates could adversely affect the price of the Shares. To the extent that UBS Securities or its affiliates serve as issuer, agent or underwriter of those securities or other similar instruments, their interests with respect to those products may be adverse to your interests as a Shareholder. In addition, UBS Securities will be the Initial Purchaser and an Authorized Participant while, as noted above, it is expected to represent, directly or indirectly, a substantial portion of the short-side market for the Index Futures and could therefore benefit from the adverse performance of the Index Futures which would be adverse to the price of the Shares.
Proprietary trading and other activities by the Index Providers and their respective affiliates could conflict with your interests as a Shareholder.
Activities conducted by the Index Providers and their respective affiliates may conflict with your interests as a Shareholder. For example, one or more of the Index Providers or their respective affiliates may also engage in trading in the Index, the DJ-UBS CI, the DJ-UBS Roll Select CI, related indices and sub-indices, and other investments relating to such indices or their underlying components on a regular basis as part of its general business, for proprietary accounts, for other accounts under management, to facilitate transactions for customers or to hedge obligations under products linked to such indices. One or more of the Index Providers or their respective affiliates may also issue or underwrite securities or financial or derivative instruments with returns linked or related to changes in the performance of any of the foregoing. Any of these activities could adversely affect the market price of the commodities or futures contracts underlying such indices or the value of the indices themselves, which may adversely affect the value of the Shares. According to UBS Securities, UBS Securities has implemented a firewall with respect to its personnel regarding access to information concerning the composition and/or changes to the Index. It is possible that one or more of the Index Providers or their respective affiliates could receive substantial returns from these hedging activities while the market value of the underlying commodities or futures contracts, the value of the indices, or the price or the NAV of the Shares decline. Some or all of these risks may be further exacerbated as a result of various other roles of the Index Providers or their affiliates relating to the Trust, the Shares or the Index Futures.
Risk Factors Relating to Taxes
Please refer to United States Federal Income Tax Consequences for information on the potential U.S. federal income tax consequences of the purchase, ownership and disposition of the Shares.
Your tax liability could exceed cash distributions on your Shares.
You will be required to pay U.S. federal income taxes on your allocable share of the Trusts income, without regard to the receipt of cash distributions on the Shares. There is no obligation to make distributions on the Shares. Accordingly, it is anticipated that you will not receive cash distributions sufficient to cover your allocable share of such taxable income or even the tax liability resulting from that income.
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The IRS could adjust or reallocate items of income, gain, deduction, loss and credit with respect to the Shares if the IRS does not accept the assumptions or conventions utilized by the Trust.
The U.S. tax rules that apply to partnerships are complex and their application is not always clear. Moreover, the rules generally were not written for, and in some respects are difficult to apply to, publicly traded interests in partnerships. In addition, the Trust will report tax information to you on Internal Revenue Service or IRS Schedule K-1 with respect to the Shares. The Trustee shall deliver or cause to be delivered to each Shareholder an IRS Schedule K-1 as soon as practicable following each fiscal year but generally not later than March 15. Reporting on IRS Schedule K-1 may be somewhat more complex than comparable reporting on IRS Form 1099. Each Shareholder, by its acquisition of Shares, will be deemed to agree to allow brokers and nominees to provide to the Trust its name and address and the other information and forms as may be reasonably requested by the Trust for purposes of complying with their tax reporting and withholding obligations (and to waive any confidentiality rights with respect to the information and forms for this purpose) and to provide information or forms upon request. Given the lack of authority addressing structures similar to that of the Trust, it is not certain that the IRS will agree with the manner in which tax reporting by the Trust will be undertaken. Therefore, Shareholders should be aware that future IRS interpretations or revisions to Treasury regulations could alter the manner in which tax reporting by the Trust and any nominee will be undertaken.
Investors in the Shares should consult their tax advisors in determining how to use the information reported on IRS Schedule K-1 to complete their income tax returns. The Trust will apply certain assumptions and conventions intended to comply with the intent of the rules and to report income, gain, deduction, loss and credit to investors in a manner that reflects the investors economic gains and losses, but these assumptions and conventions may not comply with all aspects of the applicable Treasury regulations. It is possible therefore that the IRS will successfully assert that these assumptions or conventions do not satisfy the technical requirements of the United States Internal Revenue Code of 1986, as amended, or the Code, or the Treasury regulations and will require that items of income, gain, deduction, loss and credit be adjusted or reallocated in a manner that could be adverse to you.
If the Trust were to fail to qualify as a partnership for U.S. federal income tax purposes, the Trusts income and items of deduction would not pass through to the Shareholders, the Trust would be required to pay tax at corporate rates on any portion of the Trusts net income that does not constitute tax-exempt income, and distributions by the Trust to the Trusts Shareholders would be taxable dividends to the extent of the Trusts earnings and profits.
It is expected that the Trust will operate and be classified as a partnership for U.S. federal income tax purposes. So long as the Trust qualifies as a partnership, it will be able to pass through its income, including the Trusts federally tax-exempt income, if any, and deductions to the Shareholders. The Trusts qualification as a partnership for U.S. federal income tax purposes involves the application of numerous technical provisions under which there is a lack of direct authority. In general, if a partnership is publicly traded, as defined in the Code, it will be treated as a corporation for U.S. federal income tax purposes. It is expected that the Trust will be treated as a publicly traded partnership. A publicly traded partnership will, however, be taxed as a partnership, and not as a corporation for U.S. federal income tax purposes, so long as 90% or more of its gross income for each taxable year constitutes qualifying income within the meaning of Section 7704(d) of the Code and the partnership is not required to register under the Investment Company Act. This exception is referred to as the qualifying income exception. Qualifying income generally includes interest (other than certain contingent interest and interest derived in the conduct of a financial or insurance business), dividends, real property rents, and income from certain commodities transactions.
If less than 90% of the Trusts gross income for any tax year constitutes qualifying income, for any reason, other than a failure that is determined to be inadvertent and that is cured within a reasonable time after discovery, or if the Trust is required to register under the Investment Company Act, the Trusts items of income and deduction would not pass through to the Trusts Shareholders and the Trusts Shareholders would be treated for
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U.S. federal income tax purposes as stockholders in a corporation. The Trust would be required to pay income tax at corporate rates on its net taxable income. Distributions by the Trust to its Shareholders would constitute dividend income taxable to such holders to the extent of the Trusts earnings and profits and the payment of these distributions would not be deductible by the Trust. These consequences could have a material adverse effect on the Trust, its Shareholders and the value of the Shares.
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This prospectus includes statements that relate to future events or future performance. In some cases, you can identify these forward-looking statements by words such as may, should, expect, plan, anticipate, believe, estimate, predict, potential or the negative of these terms or other comparable phrases. All statements, other than statements of historical fact, included in this prospectus that address activities, events or developments that may occur in the future, including matters such as changes in commodity prices and market conditions (for the Trusts assets and the Shares), the Trusts operations, the Sponsors plans and references to the Trusts future success and other similar matters, are forward-looking statements. These statements are only predictions. Actual events or results may differ materially. These statements are based upon assumptions and analyses made by the Sponsor on the basis of its perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. Whether actual results and developments will conform to the Sponsors expectations and predictions, however, is subject to a number of risks and uncertainties, including the special considerations discussed in this prospectus, including under Risk Factors, general economic, market and business conditions, changes in laws or regulations, including those concerning taxes, made by governmental authorities or regulatory bodies and other world economic and political developments. Consequently, the forward-looking statements made in this prospectus are qualified by these cautionary statements, and there can be no assurance that the actual results or developments the Sponsor anticipates will be realized or, even if substantially realized, will result in the expected consequences to, or have the expected effects on, the Trusts operations or the value of the Shares. Moreover, none of the Sponsor, the Trustee, the Delaware Trustee, the Advisor or their respective affiliates assumes responsibility for the accuracy or completeness of any forward-looking statements. Except as required under Item 512 of Regulation S-K or other applicable disclosure laws, none of the Trust, the Sponsor, the Trustee, the Delaware Trustee, the Advisor or their respective affiliates is under any duty to update any forward-looking statements to conform the statements to actual results or to a change in the expectations or predictions of these persons.
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Proceeds received by the Trust from the issuance and sale of Baskets will consist of Index Futures and cash (or, in the discretion of the Sponsor, other Collateral Assets). These proceeds will be held by the Trust and retained, invested in Collateral Assets or liquidated in order to rebalance or establish new positions in Index Futures or Collateral Assets until (1) withdrawn in connection with redemptions of Baskets or (2) liquidated to pay expenses and liabilities of the Trust (including applicable fees and margin payments) not assumed by the Sponsor.
Collateral Assets with a value equal to approximately 3% to 10% of the value of each Index Future position are deposited with the Clearing FCM as initial margin at the time such Index Future position is established and are expected to be maintained in accordance with CFTC rules, and the remainder (and any variation margin received) are retained in the accounts of the Trust until transferred in connection with making variation margin payments, a Basket redemption or the liquidation of an Index Future position.
Any remaining assets of the Trust that are not required to meet current margin requirements may be (1) held in cash in interest-bearing bank accounts to remain available to pay the expenses of the Trust and to serve as reserves, in the amounts deemed necessary by the Advisor, or (2) deposited with the Trust Administrator and invested in U.S. Treasury securities and other Collateral Assets. All interest income earned on the Trusts investments will be retained for the benefit of the Trust. The Advisor expects that all entities that will hold or trade the Trusts assets will be based in the U.S. and subject to U.S. regulations.
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FUTURES CONTRACTS ON THE DJ-UBS ROLL SELECT CI
The assets of the Trust will consist of Index Futures and cash or other Collateral Assets used to satisfy applicable margin requirements for those Index Future positions. Index Futures are exchange-traded index future contracts on the DJ-UBS Roll Select CI, and are expected to include contracts of different terms and expirations. The Trust is expected to roll out of existing positions in Index Futures and establish new positions in Index Futures on an ongoing basis. Index Futures subsequently acquired by the Trust may have terms that differ from those of the Index Futures it holds initially, including transaction fees associated with the purchase and sale of these Index Futures. The fees charged for the initial Index Futures expected to be held by the Trust, as of July 29, 2013, were not more than $3.00 per contract, consisting of a $1.50 clearing fee per contract charged by the CME, plus $0.50 per contract in associated Clearing FCM charges, plus $1.00 per contract for cash orders executed through a broker.
Creation and redemption of interests in the Trust generally will be effected through EFRPs. EFRPs involve contemporaneous transactions in futures contracts and the underlying cash commodity or a closely related commodity. In a typical EFRP, the participant taking the long position on the futures contract transfers the underlying commodity or other related position to the participant taking the short position on the futures contract. The CME permits the execution of EFRPs consisting of simultaneous transfers of Index Futures and Shares. This mechanism generally is expected to be used by the Trust in connection with the creation and redemption of Baskets.
Specifically, it is anticipated that an Authorized Participant requesting the creation of additional Baskets typically will transfer Index Futures and cash (or, in the discretion of the Sponsor, other Collateral Assets) to the Trust in return for Shares. If an EFRP is executed in connection with the redemption of one or more Baskets, an Authorized Participant will transfer to the Trust the interests being redeemed and the Trust will transfer to the Authorized Participant Index Futures and cash or other Collateral Assets. The Trust may include Index Futures with different terms and expirations in the creation and redemption of Baskets, and the Index Futures included in creation Baskets may differ from those included in redemption Baskets.
With the approval of the Sponsor, Baskets may also be created or redeemed for cash, in which case the Authorized Participant will be responsible for the costs of the Trust acquiring or liquidating the related Index Future positions and Collateral Assets.
Due to the limited trading history of the Index Futures on the DJ-UBS Roll Select CI as of the date of this prospectus, there is insufficient data available to determine whether the market for such Index Futures have themselves generally exhibited contango or backwardation. However, the term structure of the futures contracts for individual commodities that comprise the DJ-UBS Roll Select CI and DJ-UBS CI, along with their estimated annualized roll yields based on the front month and second month futures contracts, as provided by the Index Co-Sponsors, are set forth below.
Commodity |
Current Index Weight | Historical Annualized Roll Yield (as of May 2012) |
Historical Annualized Roll Yield (as of May 2013) |
Current Curve Shape | ||||
Aluminum |
4.91% | (7.75)% | (2.42)% | Contango | ||||
Coffee |
2.44% | (8.74)% | (9.75)% | Contango | ||||
Copper |
7.28% | (2.69)% | (4.84)% | Contango | ||||
Corn |
7.05% | 33.91% | 55.35% | Backwardation | ||||
Cotton |
1.77% | (3.80)% | (12.23)% | Contango | ||||
WTI Crude Oil |
9.21% | (4.43)% | (2.32)% | Contango | ||||
Brent Crude Oil |
5.79% | 4.41% | 1.95% | Backwardation | ||||
Gold |
10.82% | (1.79)% | (0.39)% | Contango | ||||
Heating Oil |
3.52% | (1.84)% | (0.50)% | Contango | ||||
Live Cattle |
3.28% | (7.34)% | 6.26% | Backwardation |
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Commodity |
Current Index Weight | Historical Annualized Roll Yield (as of May 2012) |
Historical Annualized Roll Yield (as of May 2013) |
Current Curve Shape | ||||
Lean Hogs |
1.90% | (10.79)% | 22.85% | Backwardation | ||||
Natural Gas |
10.42% | (26.67)% | (5.50)% | Contango | ||||
Nickel |
2.24% | (2.09)% | (2.21)% | Contango | ||||
Silver |
3.90% | (2.30)% | (2.24)% | Contango | ||||
Soybeans |
5.49% | 15.57% | 51.02% | Backwardation | ||||
Soybean Meal |
2.61% | 35.62% | 51.44% | Backwardation | ||||
Soybean Oil |
2.74% | (5.05)% | 0.23% | Backwardation | ||||
Sugar |
3.88% | (7.13)% | (6.53)% | Contango | ||||
RBOB Gasoline |
3.46% | 37.12% | 2.41% | Backwardation | ||||
CBOT Wheat |
3.43% | (6.20)% | (7.67)% | Contango | ||||
KCBT Wheat |
1.32% | (13.23)% | (7.18)% | Contango | ||||
Zinc |
2.52% | 1.03% | (8.62)% | Contango |
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THE INDEX, THE DJ-UBS CI AND THE DJ-UBS ROLL SELECT CI
This section contains a description of the Index, the DJ-UBS CI, and the DJ-UBS Roll Select CI. All information regarding the Index, the DJ-UBS CI and the DJ-UBS Roll Select CI contained in this prospectus, including their respective compositions, methods of calculation, changes in their constituent components and historical performance, has been derived from information published or provided by the Index Co-Sponsors, but has not been independently verified.
The Dow Jones-UBS Commodity IndexesSM are a joint product of DJI Opco, a subsidiary of S&P Dow Jones Indices LLC, and UBS Securities, and have been licensed for use. Dow Jones® and DJ® are trademarks of Dow Jones; UBS is a registered trademark of UBS AG; S&P® is a registered trademark of Standard & Poors Financial Services LLC; and these trademarks have been licensed for use by DJI Opco and sublicensed for certain purposes by the Trust.
The Index Providers
The Shares are not sponsored, endorsed, sold or promoted by the Index Providers in their capacities as such. None of the Index Providers, in their capacities as such, makes any representation or warranty, express or implied, to the owners of or counterparts to the Shares or any member of the public regarding the advisability of investing in securities or commodities generally or in the Shares particularly. The only relationship of the Index Providers, in their capacities as such, to the Trust is the licensing of certain trademarks, trade names and service marks and of the Index and the DJ-UBS Roll Select CI, which is determined, composed and calculated by DJI Opco in conjunction with UBS Securities without regard to the Trust or the Shares. The Index Providers do not take the needs of the Trust or the Shareholders into consideration in determining, composing or calculating the Index or the DJ-UBS Roll Select CI. None of the Index Providers is directly responsible for or has participated in the determination of the timing of, prices at, or quantities of the Shares to be issued or in the determination or calculation of the equation by which the Shares are to be converted into cash, surrendered or redeemed, as the case may be. The Index Providers, in their capacities as such, are not responsible for the administration, marketing or trading of the Shares. Notwithstanding the foregoing, UBS AG, UBS Securities, CME Group Inc., an affiliate of S&P Dow Jones Indices LLC, and their respective subsidiaries and affiliates may independently issue and/or sponsor financial products unrelated to the Shares currently being issued by the Trust, but which may be similar to and competitive with the Shares. In addition, UBS AG, UBS Securities, CME Group Inc. and their subsidiaries and affiliates actively trade commodities, commodity indexes and commodity futures (including the Index and the DJ-UBS Roll Select CI), as well as swaps, options and derivatives which are linked to the performance of such commodities, commodity indexes and commodity futures. It is possible that this trading activity will affect the value of the Index, the DJ-UBS Roll Select CI and Shares.
Purchasers of the Shares should not conclude that the inclusion of a futures contract in the Index is any form of investment recommendation of the futures contract or the underlying exchange-traded physical commodity by Dow Jones, UBS AG, UBS Securities, DJI Opco or any of their subsidiaries or affiliates. None of Dow Jones, UBS AG, UBS Securities, DJI Opco or any of their subsidiaries or affiliates has made any due diligence inquiries with respect to the futures contracts or physical commodities underlying the Index in connection with the Shares being offered hereby. None of Dow Jones, UBS AG, UBS Securities, DJI Opco or any of their subsidiaries or affiliates makes any representation that any information relating to the futures contracts or commodities underlying the Index contained in this prospectus or any other publicly available information relating to such futures contracts or commodities, including, without limitation, a description of the factors that affect the prices of such futures contracts or commodities, are accurate or complete.
NONE OF DOW JONES, UBS AG, UBS SECURITIES, DJI OPCO OR ANY OF THEIR SUBSIDIARIES OR AFFILIATES GUARANTEES THE ACCURACY AND/OR THE COMPLETENESS OF THE INDEX OR ANY DATA RELATED THERETO AND NONE OF DOW JONES, UBS AG, UBS SECURITIES, DJI OPCO OR ANY OF THEIR SUBSIDIARIES OR AFFILIATES SHALL HAVE ANY LIABILITY FOR ANY
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ERRORS, OMISSIONS OR INTERRUPTIONS THEREIN. NONE OF DOW JONES, UBS AG, UBS SECURITIES, DJI OPCO OR ANY OF THEIR SUBSIDIARIES OR AFFILIATES MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY TRUST, OWNERS OF THE SHARES OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDEX OR ANY DATA RELATED THERETO. NONE OF DOW JONES, UBS AG, UBS SECURITIES, DJI OPCO OR ANY OF THEIR SUBSIDIARIES OR AFFILIATES MAKES ANY EXPRESS OR IMPLIED WARRANTIES AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE INDEX OR ANY DATA RELATED THERETO. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL DOW JONES, UBS AG, UBS SECURITIES, DJI OPCO OR ANY OF THEIR SUBSIDIARIES OR AFFILIATES HAVE ANY LIABILITY FOR ANY LOST PROFITS OR INDIRECT, PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES OR LOSSES, EVEN IF NOTIFIED OF THE POSSIBILITY THEREOF. THERE ARE NO THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS AMONG UBS SECURITIES, DJI OPCO AND THE TRUST, OTHER THAN UBS AG AND THE LICENSORS OF DJI OPCO.
The following summary with respect to the Index, the DJ-UBS CI and the DJ-UBS Roll Select CI has been prepared based on the Dow Jones-UBS Commodity IndexSM Methodology, dated as of April 2013, or the Index Methodology, and fact sheets, methodologies and other materials available publicly or otherwise provided by the Index Co-Sponsors as of May 10, 2013, and is subject to change. Dow Jones and UBS AG own certain intellectual property rights and the Index Co-Sponsors together own the other rights to the Index, the DJ-UBS CI and the DJ-UBS Roll Select CI. The Index Providers have no obligation to consider your interests as a holder of Shares in the Trust and have no obligation to continue to publish, and may discontinue the publication of, the Index, the DJ-UBS CI or the DJ-UBS Roll Select CI. The consequences of any discontinuation of the DJ-UBS Roll Select CI are described under Risk FactorsRisk Factors Relating to Index Futures and the DJ-UBS Roll Select CIA cessation of publication of the DJ-UBS Roll Select CI could materially and adversely affect the activities of the Trust.
Current information regarding the market values of the Index, the DJ-UBS CI and the DJ-UBS Roll Select CI is currently distributed by Thomson Reuters® and by other major market data vendors, and is available from numerous sources. None of the Sponsor, the Advisor, the Trustee or the Trust makes any representation that such information about the Index, the DJ-UBS CI or the DJ-UBS Roll Select CI is accurate or complete. In addition, none of the Sponsor, the Advisor, the Trustee or the Trust accepts any responsibility for the calculation, maintenance or publication of, or for any error, omission or disruption in, the Index, the DJ-UBS CI or the DJ-UBS Roll Select CI.
Overview
The Index is the total return version of the DJ-UBS Roll Select CI, and reflects the returns of the DJ-UBS Roll Select CI together with the returns from specified U.S. Treasury securities intended to reflect the returns of assets held to fully collateralize the futures contracts reflected in the DJ-UBS Roll Select CI. The DJ-UBS Roll Select CI itself is a version of the DJ-UBS CI that incorporates the economic effect of an alternative rolling methodology, as described in more detail below. The DJ-UBS CI itself forms the base commodities index from which the DJ-UBS Roll Select CI and the Index are derived. Set forth below is a description of the how the DJ-UBS CI is determined and calculated, a description of how the DJ-UBS Roll Select CI is derived from the DJ-UBS CI, and finally, a description of how the Index is derived from the DJ-UBS Roll Select CI.
The DJ-UBS CI
The DJ-UBS CI, from which the DJ-UBS Roll Select CI is based, was created by AIG International Inc. in 1998 and acquired by UBS Securities in May 2009, at which time UBS Securities and Dow Jones entered into a joint marketing agreement to market the DJ-UBS CI and related indices. Dow Jones subsequently assigned its interest in the joint marketing agreement to CME Group Index Services LLC, which in turn assigned its interest
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in the joint marketing agreement to DJI Opco. DJI Opco, in conjunction with UBS Securities, calculates the DJ-UBS CI and related indices and sub-indices, including the Index and the DJ-UBS Roll Select CI.
The DJ-UBS CI is a benchmark index composed of futures contracts on physical commodities, the selection and weighting of which are currently determined based on the five-year average of the trading volume, adjusted by the historic U.S. dollar value of the futures contract being considered for inclusion in the index, and the five-year average of production figures, adjusted by the historic U.S. dollar value of the related futures contracts, for the underlying commodities. The 24 commodities currently eligible for inclusion in the DJ-UBS CI are:
Aluminum |
Heating Oil | Soybeans | ||
Cocoa |
Lead | Soybean Meal | ||
Coffee |
Lean Hogs | Soybean Oil | ||
Copper |
Live Cattle | Sugar | ||
Corn |
Natural Gas | Tin | ||
Cotton |
Nickel | RBOB Gasoline | ||
Crude Oil |
Platinum | Wheat | ||
Gold |
Silver | Zinc |
There are 20 commodities currently represented in the DJ-UBS CI. Cocoa, lead, platinum and tin are the four eligible commodities which are not currently represented in the DJ-UBS CI. For each of the 20 included commodities, specified futures contracts with specified delivery dates are designated for inclusion in the DJ-UBS CI. The DJ-UBS CI is reweighted and rebalanced annually, on a price-percentage basis, to reflect changes in trading volume and production figures. The selection and weighting of the DJ-UBS CIs constituents and its index methodology is intended to reflect the following four main principles:
| Economic Significance. In order to achieve a fair representation of the relative importance of a diversified group of commodities to the world economy, the DJ-UBS CI uses both liquidity data and U.S. dollar-weighted production data in determining the relative quantities of included commodities that are reflected in the calculation of the DJ-UBS CI. Liquidity data reflects the amount of trading volume in the futures contracts on a commodity as a measure of the economic significance of that commodity, which is particularly relevant for commodities such as gold or silver, the production figures for which do not reflect their significant role in the world economy. |
| Diversification. In order to avoid disproportionate weighting of any particular commodity or sector, the DJ-UBS CI tries to provide diversified exposure to commodities as an asset class by applying both minimum and maximum weights to component commodities and sectors, as described under Determination of DJ-UBS CI Index Constituents. |
| Continuity. In order to be responsive to the changing nature of commodity markets without completely reshaping the character of the DJ-UBS CI from year to year, the DJ-UBS CI seeks a balanced approach to provide a stable benchmark over time, through a combination of annual re-balancing, five-year averaging of liquidity and production data, diversification rules for constituent commodities and other index features. |
| Liquidity. In order to provide a more liquid index, the DJ-UBS CI explicitly includes the liquidity of the underlying commodities futures contracts as a weighting factor. |
For additional detail regarding the DJ-UBS CIs current method of selecting constituents and calculation of the DJ-UBS CI itself, see Determination of DJ-UBS CI Index Constituents and Calculation of the DJ-UBS CI.
The DJ-UBS CI reflects the increased or decreased return associated with rolling futures contracts. Because futures contracts have scheduled expirations, or delivery months, as one contract nears expiration it becomes necessary to close out the position in that delivery month and establish a position in a later available
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delivery month. This process is referred to as rolling the position forward. Rolls are traditionally accomplished by selling the position in the closest delivery month and purchasing a position of equivalent value in a later applicable delivery month. Markets for futures contracts can be in backwardation, which means that futures contracts with distant delivery months are priced lower than those with nearer delivery months, or can exhibit contango, which means that futures contracts with distant delivery months are priced higher than those with nearer delivery months.
The DJ-UBS CI reflects the economic impact of the roll process by reducing the weights applied to expiring futures contracts while correspondingly increasing the weights applied to the futures contracts that are replacing such expiring futures contracts. This roll simulation is generally conducted at the beginning of each month over the course of five business days, lasting from the sixth business day until the tenth business day of each month. The DJ-UBS CI conducts its roll simulations each month by rolling out of the designated futures contracts expiring in that month and rolling into those designated futures contracts with the next closest designated delivery month. Currently, the designated contracts and related designated delivery months for each of the eligible constituent commodities of the DJ-UBS CI or its sub-indices are as follows:
Commodity |
Designated Contract | Exchange | Designated Delivery Months | |||
Aluminum |
High Grade Primary Aluminum | LME | January, March, May, July, September, November | |||
Cocoa(1) |
Cocoa | NYBOT | March, May, July, September, December | |||
Coffee |
Coffee C | NYBOT | March, May, July, September, December | |||
Copper |
Copper | COMEX | March, May, July, September, December | |||
Corn |
Corn | CBOT | March, May, July, September, December | |||
Cotton |
Cotton | NYBOT | March, May, July, December | |||
Crude Oil |
WTI Crude Oil Brent Crude Oil |
NYMEX ICE |
January, March, May, July, September, November January, March, May, July, September, November | |||
Feeder Cattle(2) |
Feeder Cattle | CME | January, March, May, August, October | |||
Gas Oil(2) |
Gas Oil | ICE | January, March, May, July, September, November | |||
Gold |
Gold | COMEX | February, April, June, August, December | |||
Heating Oil |
Heating Oil | NYMEX | January, March, May, July, September, November | |||
Lead(1) |
Refined Standard Lead | LME | January, March, May, July, September, November | |||
Live Cattle |
Live Cattle | CME | February, April, June, August, October, December | |||
Lean Hogs |
Lean Hogs | CME | February, April, June, July, August, October, December | |||
Natural Gas |
Henry Hub Natural Gas | NYMEX | January, March, May, July, September, November | |||
Nickel |
Primary Nickel | LME | January, March, May, July, September, November | |||
Orange Juice(2) |
Frozen Concentrated OJ | NYBOT | January, March, May, July, September, November | |||
Platinum(1) |
Platinum | NYMEX | January, April, July, October | |||
Silver |
Silver | COMEX | March, May, July, September, December | |||
Soybeans |
Soybeans | CBOT | January, March, May, July, November | |||
Soybean Meal |
Soybean Meal | CBOT | January, March, May, July, December | |||
Soybean Oil |
Soybean Oil | CBOT | January, March, May, July, December | |||
Sugar |
World Sugar No. 11 | NYBOT | March, May, July, October | |||
Tin(1) |
Refined Tin | LME | January, March, May, July, September, November | |||
RBOB Gasoline |
Reformulated Blendstock for Oxygen Blending |
NYMEX | January, March, May, July, September, November | |||
Wheat |
Wheat KCBT Wheat | CBOT | March, May, July, September, December | |||
KCBT | March, May, July, September, December | |||||
Zinc |
Special High Grade Zinc | LME | January, March, May, July, September, November |
(1) | These commodities are not currently components of the DJ-UBS CI. |
(2) | These commodities are currently not eligible to be components of the DJ-UBS CI, but are used in various sub-indices. |
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The DJ-UBS Roll Select CI
The Index Futures in which the Trust is investing will be based on the DJ-UBS Roll Select CI. The DJ-UBS Roll Select CI is a version of the DJ-UBS CI that tries to mitigate the effects of contango arising from the rolling process. Rather than incorporating the economic effect of rolling into the front-month futures contracts, the DJ-UBS Roll Select CI incorporates the economic effect of rolling into applicable futures contracts that exhibit the least contango or, if applicable, the most backwardation, in each case relative to the contracts of the immediately preceding delivery month.
The DJ-UBS Roll Select CI implements its rolling methodology by selecting from the eligible contracts for each commodity on its applicable contract selection date, the contract that exhibits the greatest amount of backwardation or least amount of contango, on an annualized basis, relative to the contract with the immediately preceding delivery date on the same commodity. This is accomplished by first dividing the price of each eligible contract from the price of the contract immediately preceding such eligible contract, to determine the percentage difference between the two prices. Because this price difference may be affected by the relative time between the eligible contract and its immediately preceding contract, this price difference is multiplied by 365 and divided by the number of actual days between the delivery dates of the two contracts, to arrive at a measure of the relative annualized contango/backwardation, referred to as the annualized spread, exhibited between the eligible contract and the contract immediately preceding it. Based on a comparison of these annualized spreads, the eligible contract that has the highest annualized spread relative to its immediately preceding contract is the one selected as the contract for the DJ-UBS Roll Select CI to establish new positions in. This roll selection process generally occurs every month on the fourth business day of the month, subject to changes or adjustments to this process implemented by the Index Co-Sponsors.
Some historical examples of the rolling process employed by the DJ-UBS Roll Select CI, provided by the Index Co-Sponsors, are set forth below:
Example 1. An example of selecting the roll futures contract for WTI Crude Oil by calculating its annualized spread as of October 4, 2012, and selecting the eligible futures contract that exhibit the most backwardation (highlighted):
WTI Crude Oil | ||||||||||||||
Contract Symbol |
Eligible Roll Contract Code |
Eligible Roll Contract Expiration |
Eligible Roll Contract Price |
Preceding Contract Code |
Preceding Contract Expiration |
Preceding Contract Price |
Annualized Spread | |||||||
CL |
F3 | 12/19/12 | 92.48 | Z2 | 11/16/12 | 92.07 | 4.904% | |||||||
CL |
H3 | 2/20/13 | 93.25 | G3 | 1/22/13 | 92.90 | 4.724% | |||||||
CL |
K3 | 4/22/13 | 93.62 | J3 | 3/20/13 | 93.48 | 1.654% | |||||||
CL |
N3 | 6/20/13 | 93.58 | M3 | 5/21/13 | 93.64 | -0.780% |
Example 2. An example of selecting the roll futures contract for Coffee C by calculating its annualized spread as of October 4, 2012, and selecting the eligible futures contract that exhibit the least contango (highlighted):
Coffee C | ||||||||||||||
Contract Symbol |
Eligible Roll Contract Code |
Eligible Roll Contract Expiration |
Eligible Roll Contract Price |
Preceding Contract Code |
Preceding Contract Expiration |
Preceding Contract Price |
Annualized Spread | |||||||
KC |
H3 | 3/18/13 | 179.05 | Z2 | 12/18/12 | 175.05 | 9.060% | |||||||
KC |
K3 | 5/20/13 | 181.65 | H3 | 3/18/13 | 179.05 | 8.293% |
Because the DJ-UBS Roll Select CI utilizes a different designated contract selection process than the DJ-UBS CI, the futures contracts comprising the DJ-UBS Roll Select CI at any particular time may have different
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delivery months than those comprising the DJ-UBS CI, and the levels of the DJ-UBS Roll Select CI and the DJ-UBS CI may correspondingly differ. In addition, as a result of this difference in rolling processes, both the performance of the DJ-UBS Roll Select CI and the DJ-UBS CI and the dollar-value weights of their respective underlying futures contracts are expected to differ over time.
Although the DJ-UBS Roll Select CIs roll process is designed to mitigate the effects of contango and to take advantage of the effects of backwardation, there can be no assurance that the futures contracts selected for inclusion in the DJ-UBS Roll Select CI will outperform the futures contracts selected for inclusion in the DJ-UBS CI. For example, it is possible that the contracts included in the DJ-UBS Roll Select CI could experience less appreciation or greater depreciation than the contracts included in the DJ-UBS CI, particularly when the price of a contract included in either index is influenced by changing expectations of future supply and demand for the related commodity for such contracts specific delivery month. Because the DJ-UBS Roll Select CI tends to roll into futures contracts that demonstrate less contango or more backwardation relative to the futures contracts with delivery dates immediately preceding such futures contracts, the DJ-UBS Roll Select CI may exhibit a tendency to roll into contracts exhibiting relatively lower pricing due to seasonal dips in the delivery month of the selected contract, seasonal upswings in the delivery month of the immediately preceding contract or short-term supply or demand shocks affecting either delivery month, without regard to whether the selected contract would be expected to appreciate relative to the contract expiring immediately before it. Additionally, the frequency with which the DJ-UBS Roll Select CI rolls its futures contracts is expected to differ from that of DJ-UBS CI. Due to these differences in the roll methodology, the DJ-UBS Roll Select CI and the Index may not have the same individual component weights as the DJ-UBS CI. For further discussion of the risks associated with the DJ-UBS Roll Select CI, see Risk FactorsRisk Factors Relating to Index Futures and the DJ-UBS Roll Select CI.
The Index
The Index is designed to reflect the returns on a fully collateralized investment in the DJ-UBS Roll Select CI, by combining the returns of the DJ-UBS Roll Select CI with the returns on cash collateral invested in three-month U.S. Treasury bills.
DJ-UBS CI Index Composition and Methodology
The following is a summary of the composition of and the methodology used to calculate the DJ-UBS CI as of the date of this prospectus. The methodology for determining the composition and weighting of the DJ-UBS CI and for calculating its value is subject to modification by the Supervisory Committee, as described in The Supervisory Committee and the Advisory Committee below. The Index Co-Sponsors jointly make the official calculations of the value of the DJ-UBS CI. At present, this calculation is performed every fifteen seconds.
The Supervisory Committee and the Advisory Committee
The Index Co-Sponsors have established a two-tier oversight structure for the DJ-UBS CI comprised of the Supervisory Committee and the Advisory Committee. The Supervisory Committee is comprised of three members, two of whom are appointed by UBS Securities and one of whom is appointed by DJI Opco, and makes all final decisions relating to the DJ-UBS CI, taking into consideration any advice and recommendations of the Advisory Committee. The Advisory Committee consists of six to twelve members drawn from the financial and academic communities. Both the Supervisory and Advisory Committees meet annually to consider any changes to be made to the DJ-UBS CI for the coming year. These committees may also meet at such other times as may be necessary for the purposes of their respective responsibilities in connection with the oversight of the DJ-UBS CI.
The Supervisory Committee has a significant degree of discretion in exercising its supervisory duties with respect to the DJ-UBS CI and related indices and sub-indices, including the Index and the DJ-UBS Roll Select
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CI. This discretion would permit, among other things, changes to the composition of such indices or changes to the manner or timing of the publication of the values of such indices at any time during the year if the Supervisory Committee deems the changes necessary in light of factors that include, but are not limited to (i) changes in liquidity of the underlying futures contracts that are included in such indices or (ii) changes in legal, regulatory, sourcing or licensing matters relating to publication or replication of such indices. In particular and without limitation, the Index Co-Sponsors access and rights to use data in connection with calculating, publishing and licensing the DJ-UBS CI and related indices and sub-indices remain subject to the ongoing consent of the sources of such data, which consent could be revoked at any time. Further, the sources of such data have reserved the right to revise the terms and conditions of access and use of their data upon notice to the Index Co-Sponsors. The Supervisory Committee reserves the right to modify the composition of the DJ-UBS CI and related indices and sub-indices, including the Index and the DJ-UBS Roll Select CI, on an as-needed basis to minimize the impact of any loss of access to, or revised terms of use with respect to, such source data on such indices.
The Supervisory Committee has no obligation to take the interests of any parties to any transactions involving the Index, the DJ-UBS CI or the DJ-UBS Roll Select CI or any related indices or sub-indices into consideration when reweighting or making any other changes to such indices. In addition, the members of the Supervisory Committee are appointed by the Index Co-Sponsors, each of whom may engage in transactions that may adversely affect the value of the Index, the DJ-UBS CI or the DJ-UBS Roll Select CI or any related indices or sub-indices, the value of the futures contracts or commodities underlying such indices, or the value of your Shares.
Determination of DJ-UBS CI Index Constituents
The composition of the DJ-UBS CI is determined by UBS Securities each year under the supervision of, and in accordance with the procedures adopted by, the Supervisory Committee. The final composition of the DJ-UBS CI for each calendar year is subject to the approval of the Supervisory Committee in consultation with the Advisory Committee, and once this approval has been obtained, the new composition of the DJ-UBS CI is publicly announced, and takes effect in the month of January of the relevant calendar year.
The relative weight of a commodity eligible for inclusion in the DJ-UBS CI, called its CIP, or its commodity index percentage, is initially determined based on (i) the relative production percentages of the commodities eligible for inclusion in the DJ-UBS CI and (ii) the relative liquidity of the futures contracts that UBS Securities has designated as the eligible reference contracts for those commodities. This initial CIP calculation is then adjusted to give effect to caps and floors on such CIPs and to adjust the weights for gold and silver, the relative production numbers of which are assumed to understate their economic significance.
The initial commodity production percentage of a commodity, or its CPP, is determined for each commodity by taking the five-year average of production figures for the related commodity, adjusted by the historic U.S. dollar value of the related designated contract, and dividing the result by the sum of such products for all eligible commodities. In cases where there is more than one designated contract for a particular commodity, this measurement is initially taken only for one designated contract. There will typically be some time lag with respect to the production numbers that are reflected in the DJ-UBS CI, because production data can often only be obtained on a delayed basis for many commodities. For example, the historic five-year period used to calculate the CPPs for the DJ-UBS CI in 2013 was the period from 2005 through and including 2009.
This initial CPP calculation is then allocated to the designated contract or contracts corresponding to each commodity. In order to avoid double-counting commodities in the same commodity sector (e.g., a primary commodity and the commodity or commodities that are derived from such primary commodity), and to avoid double-counting in any commodity with more than one designated contract, the final CPPs of designated contracts within the same commodity sector are calculated by allocating among such designated contracts the initial CPP calculated for the primary commodity in such sector, based on the commodity liquidity percentages
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(as calculated below) for each designated contract for the commodities within that sector. As of the date of the Index Methodology, there were two commodity sectors represented in the DJ-UBS CI the first consisting of Crude Oil as the primary commodity, with Heating Oil and RBOB Gasoline as its derivatives, and the second consisting of Soybeans as the primary commodity, with Soybean Oil and Soybean Meal as its derivatives. In addition, two commodities were represented by more than one designated contract as of the date of the Index Methodology, with crude oil represented by the contract for Light, Sweet Crude Oil (WTI) traded on NYMEX and the contract for Brent Crude Oil traded on ICE, and wheat represented by the contract for Soft Wheat (Chicago) traded on CBOT and Hard Red Winter Wheat (Kansas) traded on KCBT.
The commodity liquidity percentage, or CLP, for each designated contract is determined by taking a five-year average of the product of annual trading volume (adjusting for the number of applicable units of the commodity, e.g., barrels or metric tons, per contract) of such designated contract and the related historic U.S. dollar value for such contract, and dividing the result by the sum of such products for all designated contracts. As of the date of the Index Methodology, the five-year average trading volume used to calculate CLP for each designated contract was the period from 2007 through and including 2011. In some cases, such as copper, the related CLP may be calculated using the trading volume for a contract other than the designated contract. In addition, as in the case of crude oil and wheat, more than one reference contract may be designated for a particular commodity.
The initial CIP for each designated contract is equal to 1/3×CPP + 2/3×CLP for that designated contract. In order to calculate the final CIPs, the following further adjustments are made:
| First, any designated contract with a CIP of less than 0.5% is reduced to zero; |
| Second, if any commodity sector (as described above) consists of designated contracts with CIPs totaling more than 25%, the CIPs of such designated contracts are reduced such that the total of such CIPs equal 25%; |
| Third, if the CIP (or combined CIPs, in the case of a commodity with more than one designated contract) of the designated contract(s) for any particular commodity is greater than 15%, such CIP (or the total of the combined CIPs) is reduced to 15%; |
| Fourth, if any commodity group (as described below) consists of designated contracts with CIPs totaling more than 33%, the CIPs of such designated contracts are reduced such that the total of such CIPs equals 33%; |
| Fifth, the CIPs for the designated contracts for each of gold and silver are set to equal the lesser of its CLP and 15%; |
| Sixth, any designated contract with a CIP of less than 2% is increased to 2%; and |
| Seventh, if any designated contract has a ratio of CIP (after giving effect to the first six steps above) to CLP greater than 3.5, its CIP is reduced so that it equals the CIP that would cause the CIP to CLP ratio to equal 3.5, which beginning in 2013, may reduce the CIP of a designated contract to below 2%. |
For each of the first six steps above, in order to keep the sum of the CIPs for each of the commodities equal to 100% after each step is completed, any adjustment to the CIPs of affected designated contracts is accompanied by a corresponding increase or reduction, as applicable, that is allocated pro rata to the CIPs of the other designated contracts in the DJ-UBS CI, other than those which were eliminated as part of the first step, reduced in accordance with the caps set forth in steps two through four or adjusted to equal their respective CLPs in step five. For the seventh and final step, the aggregate reduction in CIP resulting from this step is accompanied by a corresponding increase, allocated equally to the CIPs of the designated contracts still in the DJ-UBS CI with CIP to CLP ratios below 2.0 (excluding any such designated contracts that were reduced in accordance with the caps set forth in steps two through four).
Any CIP reduction to a commodity with more than one designated contract is allocated equally among such commoditys designated contracts. Any aggregate reduction to a commodity sector or commodity group under
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steps two or four is allocated to the designated contracts within such commodity sector or commodity group to preserve the relative weights of the CIPs as calculated immediately prior to making any adjustments under such step. For the purposes of step four, the current commodity groups for commodities eligible for inclusion in the DJ-UBS CI are as follows:
Commodity Group: |
Commodities: | |
Energy |
Crude Oil (WTI and Brent) Heating Oil Natural Gas RBOB Gasoline | |
Precious Metals |
Gold Platinum Silver | |
Industrial Metals | Aluminum Copper Lead Nickel Tin Zinc | |
Livestock | Live Cattle Lean Hogs | |
Grains | Corn Soybeans Soybean Oil Soybean Meal Wheat (Chicago and Kansas) | |
Softs | Cocoa Coffee Cotton Sugar |
The commodities and related designated contracts currently included in the DJ-UBS CI and their respective final CIPs (rounded to the nearest thousandth of a percentage) for 2013 are as follows:
Commodity |
Designated Contract |
Exchange | Units | Price Quote | CIP(1) | |||||||
Aluminum |
High Grade Primary Aluminum | LME | 25 metric tons | USD/metric ton | 4.91 | % | ||||||
Coffee |
Coffee C | NYBOT | 37,500 lbs | U.S. cents/pound | 2.44 | % | ||||||
Copper |
Copper | COMEX | 25,000 lbs | U.S. cents/pound | 7.28 | % | ||||||
Corn |
Corn | CBOT | 5,000 bushels | U.S. cents/bushel | 7.05 | % | ||||||
Cotton |
Cotton | NYBOT | 50,000 lbs | U.S. cents/pound | 1.77 | % | ||||||
WTI Crude Oil | NYMEX | 1,000 barrels | USD/barrel | 9.21 | % | |||||||
Crude Oil |
Brent Crude Oil | ICE | 1,000 barrels | USD/barrel | 5.79 | % | ||||||
Gold |
Gold | COMEX | 100 troy oz. | USD/troy oz. | 10.82 | % | ||||||
Heating Oil |
Heating Oil | NYMEX | 42,000 gallons | U.S. cents/gallon | 3.52 | % | ||||||
Live Cattle |
Live Cattle | CME | 40,000 lbs | U.S. cents/pound | 3.28 | % | ||||||
Lean Hogs |
Lean Hogs | CME | 40,000 lbs | U.S. cents/pound | 1.90 | % | ||||||
Natural Gas |
Henry Hub Natural Gas | NYMEX | 10,000 mmbtu | USD/mmbtu | 10.42 | % | ||||||
Nickel |
Primary Nickel | LME | 6 metric tons | USD/metric ton | 2.24 | % |
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Commodity |
Designated Contract |
Exchange | Units | Price Quote | CIP(1) | |||||||
Silver |
Silver | COMEX | 5000 troy oz. | USD/troy oz. | 3.90 | % | ||||||
Soybeans |
Soybeans | CBOT | 5,000 bushels | U.S. cents/bushel | 5.49 | % | ||||||
Soybean Meal |
Soybean Meal | CBOT | 100 short tons | USD/short ton | 2.61 | % | ||||||
Soybean Oil |
Soybean Oil | CBOT | 60,000 lbs | U.S. cents/pound | 2.74 | % | ||||||
Sugar |
World Sugar No. 11 | NYBOT | 112,000 lbs | U.S. cents/pound | 3.88 | % | ||||||
RBOB Gasoline |
Reformulated Blendstock for Oxygen Blending | NYMEX | 42,000 gallons | U.S. cents/gallon | 3.46 | % | ||||||
Wheat |
Wheat | CBOT | 5,000 bushels | U.S. cents/bushel | 3.43 | % | ||||||
KCBT Wheat | KCBT | 5,000 bushels | U.S. cents/bushel | 1.32 | % | |||||||
Zinc |
Special High Grade Zinc | LME | 25 metric tons | USD/metric ton | 2.52 | % |
(1) | May not total 100% due to rounding. |
Calculation of the DJ-UBS CI
The level of the DJ-UBS CI was set to be equal to 100 as of December 31, 1990. Subsequent levels of the DJ-UBS CI are determined by multiplying the level of the DJ-UBS CI as of the previous day by a fraction equal to (i) the weighted average value, or WAV, of the DJ-UBS CI as of the current day divided by (ii) the WAV of the DJ-UBS CI as of the previous day, subject to adjustment for roll periods as described below. The WAV of the DJ-UBS CI on any given day is calculated by summing the products of the settlement prices of the designated contracts for each commodity multiplied by the commodity index multiplier, or CIM, of such designated contract.
The CIMs of the designated contracts in the DJ-UBS CI are determined annually on the CIM Determination Date, generally the fourth business day of each year. On the CIM Determination Date, initial CIMs or ICIMs are calculated for each designated contract by multiplying such contracts CIP by 1,000, then dividing such product by the contracts settlement price as of the CIM Determination Date. To determine the final CIM for each designated contract for the new year, each ICIM is multiplied by an adjustment factor, which is a fraction equal to (i) the WAV of the DJ-UBS CI as of the CIM Determination Date, as calculated using the CIMs from the prior year, divided by (ii) 1,000. This adjustment factor is intended to preserve WAV continuity from one year to the next.
During roll periods, which generally occur during the sixth through tenth business days of each month, the level of the DJ-UBS CI is calculated using a blended WAV formula that reflects the fact that the DJ-UBS CI is rolling out of expiring contracts and into replacement contracts. The WAV associated with the existing index components, or the Old WAV, begins weighted at 100% as of the business day preceding the roll period and decreases by 20% on each subsequent business day until reduced to zero; it has no further effect on the level of the DJ-UBS CI by the fifth business day of such roll period. The WAV associated with the new index components, or the New WAV, begins weighted at 0% as of the business day preceding the roll period and increases by 20% on each subsequent business day such that by the fifth business day of such roll period, the level of the DJ-UBS CI is determined based entirely on the New WAV.
Accordingly, during a roll period, the level of the DJ-UBS CI on any given day can be calculated as the product of the level of the DJ-UBS CI as of the previous day, multiplied by a fraction equal to: (i) Old WAV× (1-0.2n) + New WAV × (0.2n), using the Old WAV and New WAV values as of such day, divided by (ii) Old WAV × (1-0.2n) + New WAV × (0.2n), using the Old WAV and New WAV values as of the previous day. The variable n in this equation represents the number of business days that have elapsed for such roll period through and including the relevant date of determination.
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An example of calculating the level of the DJ-UBS CI during a roll period from January 1997, provided by the Index Co-Sponsors, is set forth below:
A: |
B: | C: | D: | E: | F: | G: | H: | |||||||||||
Date |
Business Day |
Old WAV | Roll Weight for Old WAV |
New WAV |
Roll Weight for New WAV |
(C x D) + (E x F) (Current)(1) |
(C x D) + (E x F) (Previous)(2) |
(G / H) WAV Fraction |
DJ-UBS CI Level(3) | |||||||||
1/2/1997 |
1 | 1196.764 | 1 | 1195.469 | 0 | 122.574 | ||||||||||||
1/3/1997 |
2 | 1196.121 | 1 | 1195.107 | 0 | 1196.121 | 1196.764 | 0.999 | 122.508 | |||||||||
1/6/1997 |
3 | 1214.668 | 1 | 1213.927 | 0 | 1214.668 | 1196.121 | 1.016 | 124.408 | |||||||||
1/7/1997 |
4 | 1214.314 | 1 | 1214.285 | 0 | 1214.314 | 1214.668 | 1.000 | 124.371 | |||||||||
1/8/1997 |
5 | 1220.453 | 1 | 1220.608 | 0 | 1220.453 | 1214.314 | 1.005 | 125.000 | |||||||||
1/9/1997 |
6 | 1218.382 | 0.8 | 1219.878 | 0.2 | 1218.681 | 1220.484 | 0.999 | 124.816 | |||||||||
1/10/1997 |
7 | 1216.373 | 0.6 | 1220.351 | 0.4 | 1217.964 | 1218.980 | 0.999 | 124.712 | |||||||||
1/13/1997 |
8 | 1207.510 | 0.4 | 1214.110 | 0.6 | 1211.470 | 1218.760 | 0.994 | 123.966 | |||||||||
1/14/1997 |
9 | 1209.179 | 0.2 | 1214.664 | 0.8 | 1213.567 | 1212.790 | 1.001 | 124.045 | |||||||||
1/15/1997 |
10 | 1226.924 | 0 | 1230.740 | 1 | 1230.740 | 1214.664 | 1.013 | 125.687 | |||||||||
1/16/1997 |
11 | 1212.804 | 0 | 1218.939 | 1 | 1218.939 | 1230.740 | 0.990 | 124.482 | |||||||||
1/17/1997 |
12 | 1206.098 | 0 | 1213.536 | 1 | 1213.536 | 1218.939 | 0.996 | 123.930 | |||||||||
1/21/1997 |
13 | 1194.815 | 0 | 1203.879 | 1 | 1203.879 | 1213.536 | 0.992 | 122.944 | |||||||||
1/22/1997 |
14 | 1197.584 | 0 | 1206.081 | 1 | 1206.081 | 1203.879 | 1.002 | 123.169 | |||||||||
1/23/1997 |
15 | 1197.393 | 0 | 1206.424 | 1 | 1206.424 | 1206.081 | 1.000 | 123.204 |
(1) | Using Old WAV and New WAV values for current day. |
(2) | Using Old WAV and New WAV values for previous day. |
(3) | Previous day DJ-UBS CI level multiplied by the WAV fraction. |
Calculation of the DJ-UBS Roll Select CI
The DJ-UBS Roll Select CI will be calculated using the same general methodology as the DJ-UBS CI and using the same CIPs and CIMs used in connection with calculating the DJ-UBS CI. However, because the roll process for the DJ-UBS Roll Select CI is different from that of the DJ-UBS CI, its constituent futures contracts may differ from those included in the DJ-UBS CI. This difference is expected to cause the dollar-value weights and the weighted average value of the futures contracts included in each index to differ over time, and, as a result, cause the performance of the two indices to diverge.
Calculation of the Index
The Index combines the returns of the DJ-UBS Roll Select CI with assumed returns on U.S. Treasury securities equal to the most recent weekly auction high rate for 13 week (3 Month) U.S. Treasury bills, as reported on the website http://www.treasurydirect.gov/RI/OFBills under the column headed Discount Rate % published by the Bureau of the Public Debt of the U.S. Treasury, or any successor source. The level of the Index, which was set at a hypothetical level of 100 as of December 31, 1990, can be calculated on any given day as the product of the level of the Index as of the previous day, multiplied by the sum of (i) 1.00 plus (ii) the positive or negative percentage return on the DJ-UBS Roll Select CI on such day plus (iii) the daily return based on the auction high rate for 13 week (3 month) U.S. Treasury bills described above.
Historical Performance of the Index
The graph below depicts the historical performance of the Index from July 18, 2011 through June 6, 2013. Relative performance data is additionally provided for the Dow Jones-UBS Commodity Index Total Return, the
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total return version of the DJ-UBS CI, over the same time period. For the purposes of the graph, the levels of the Index and the Dow Jones-UBS Commodity Index Total Return have been normalized to equal 1.00 as of July 18, 2011. A table showing relative annualized return information for the Index and the Dow Jones-UBS Commodity Index Total Return for the same time period and individual years in such time period is included below the graph. The information reflected in the chart and table below have been provided by the Index Co-Sponsors.
The historical data provided below should not be taken as any indication of future performance.
Annualized Return Information
Time Period |
Dow Jones-UBS Commodity Index Total Return |
Dow Jones-UBS Roll Select Commodity Index Total Return | ||
July 18, 2011 to Dec. 30, 2011 |
(31.49)% | (28.54)% | ||
Dec. 30, 2011 to Dec. 31, 2012 |
(1.05)% | (0.37)% | ||
Dec. 31, 2012 to June 6, 2013 |
(12.17)% | (12.72)% | ||
July 18, 2011 to June 6, 2013 |
(10.37)% | (9.52)% |
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The activities of the Trust are generally limited to (1) issuing Baskets in exchange for Index Futures and cash (or, in the discretion of the Sponsor, other Collateral Assets), (2) consistent with its investment objective, establishing, maintaining and closing out positions in Index Futures and acquiring, holding and disposing of corresponding Collateral Assets, (3) paying out of its assets any expenses and liabilities of the Trust not assumed by the Sponsor, and (4) delivering proceeds consisting of Index Futures, cash and other Collateral Assets in exchange for Baskets surrendered for redemption.
The Trust is a passive investor in Index Futures and the Collateral Assets held to satisfy applicable margin requirements on those Index Future positions. The Advisor acts as the commodity trading advisor for the Trust, and is authorized to transact in Index Futures and acquire and dispose of the related Collateral Assets on the Trusts behalf. The Trust will not engage in any activities designed to obtain a profit from, or to ameliorate losses caused by, changes in the level of the Index or the DJ-UBS Roll Select CI or the value of the Collateral Assets. To the extent that the Trust accepts cash proceeds in connection with the creation of Shares, the Trust will use that cash to purchase additional Index Futures and Collateral Assets, in an amount that the Advisor determines will enable the Trust to achieve investment results that correspond with the Index. At any time when Index Futures of more than one expiration are listed on the Exchange, the Sponsor will determine, pursuant to the terms of the Trust Agreement, which Index Futures will be transferred in connection with either the creation or redemption of Baskets.
The Trust establishes long positions in Index Futures either by receiving transfers of such positions from Authorized Participants in connection with the creation of Shares or by placing orders for purchases of Index Futures with its Clearing FCM. The Trusts Index Future transactions will be executed through GLOBEX, the CMEs electronic trading system, through the competitive execution market maintained by the CME and subject to the rules of the CME. All Index Future positions held by the Trust, regardless of whether they are transferred to the Trust by Authorized Participants in connection with the creation of Shares or created through purchases of Index Futures by the Trust on the Exchange, will be maintained in the Trusts account with its Clearing FCM. In order to satisfy redemption requests, the Trust will either transfer Index Futures to the relevant Authorized Participants or liquidate Index Futures to generate cash to be transferred to such Authorized Participants. Liquidation of Index Future positions will be effected by entering orders with an FCM, for execution on the Exchange, to sell Index Futures, which will serve to offset the Trusts existing long positions.
The Trust is required to deposit initial margin on its Index Future positions in an amount equal to approximately 3% to 10% of the value of each Index Future position at the time it is established. These margin requirements are subject to change from time to time by the Exchange or the Clearing FCM. Margin requirements established by the Clearing FCM may exceed minimum levels established by the Exchange. These requirements apply to Index Futures transferred by Authorized Participants or established through transactions executed on behalf of the Trust by the Clearing FCM. The Trust also pays or receives variation margin on its Index Future positions. The Trust satisfies these margin requirements by transferring to or receiving from its account with the Clearing FCM Collateral Assets in the required amount when it establishes its Index Future positions and, with respect to variation margin, after the daily settlement of such positions in accordance with the rules of the applicable Exchange. See Futures Contracts on the DJ-UBS Roll Select CI.
Any Collateral Assets held in the Trusts account with the Clearing FCM are pledged to the Clearing FCM as security for the Trusts obligations to the Clearing FCM.
The Index Futures listed and made available for trading by Exchanges from time to time may have terms that differ from the Index Futures initially held by the Trust, including transaction fees associated with the purchase and sale of those Index Futures. As an Index Future nears expiration, it is anticipated, but there can be no assurance that an Index Future with a later expiration date but similar terms will be listed by an Exchange. It will be necessary for the Trust, in order to maintain a long position in Index Futures, to roll its position from an Index Future that is about to expire into an Index Future with a later expiration date. The Trust may further close
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out of existing positions and establish new positions in Index Futures from time to time, including new positions in earlier expiring Index Futures, which may allow it to reduce its concentration in any particular Index Future or to benefit from more liquid markets or otherwise beneficial market activity in Index Futures listed with different expirations or on different Exchanges. Each roll will be effected in a manner that, in the judgment of the Advisor, based on the circumstances prevailing at that time, is most beneficial to the Trust and will reduce the risks to which the Trust is exposed as a result of the roll. A roll could be effected by liquidating all or a portion of the Trusts existing Index Future positions and establishing new Index Future positions. A roll could also be effected over a period of time by the creation and redemption of Baskets in the ordinary course, with different Index Futures included in the applicable Basket Amounts.
The rolling of the Trusts positions in Index Futures will necessarily affect the relationship between the value of the Shares and the number of Index Futures represented by each Share. When the new Index Futures to be acquired by the Trust are cheaper than the Index Futures they are replacing, the roll will result in the Trust owning a larger number of contracts in the new Index Futures than it owned in the Index Futures that were just replaced. Conversely, if the new Index Futures are more expensive than the ones being replaced, the roll will result in the Trust owning fewer contracts in the new Index Futures relative to those that were replaced. The differential in the number of Index Futures will result in the Trust participating to a greater or lesser extent in subsequent changes in the price of the Index Futures. Whether any price differential exists between the Index Futures involved in a roll, however, will depend on the prices of these Index Futures at the time the roll occurs. The likelihood and extent of discounts or premiums resulting from the rolling process or of how the Shares will be affected as a result thereof may vary and cannot readily be determined.
The Trusts ability to operate and achieve its investment objective is dependent on a number of parties, including:
| the Sponsor, who exercises general oversight and authority over the Trust; |
| the Trustee, who is responsible for the day-to-day administration of the Trust; |
| the Trust Administrator, who provides certain administrative and custodial services to the Trust; |
| the Advisor, who exercises general oversight over the Trusts investment activities; |
| the Clearing FCM, through which the Trusts transacts in Index Futures and maintains its Index Future positions; |
| the Exchange, through which the Trusts Index Future transactions clear and settle; |
| the Index Providers, who own the intellectual property rights to the Index on which the Trusts investment objective is based; |
| the Index Co-Sponsors, who maintain the Index; |
| the Authorized Participants, whose creation and redemption activities allow Index Futures and Collateral Assets to be converted to Shares and vice versa, to help maintain the relationship between the Index and the Shares; |
| the Processing Agent, who performs certain functions in connection with processing creation and redemption orders; and |
| the Tax Administrator, who provides tax reporting and tax administrative services. |
Of the foregoing parties, the Sponsor, the Advisor and the Trustee are commonly controlled subsidiaries of BlackRock, Inc. The CME, the Exchange on which the initial Index Futures are expected to trade, is a shareholder of DJI Opco, one of the Index Co-Sponsors. UBS Securities, the other Index Co-Sponsor, also acts as the Trusts Clearing FCM, as Initial Purchaser, and as an Authorized Participant. A number of the foregoing parties are publicly traded companies or subsidiaries of publicly traded companies, and a portion of their shares may be owned by one or more of the other foregoing parties.
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Investment Objective of the Trust
The investment objective of the Trust is to seek investment results that correspond generally, but are not necessarily identical, to the performance of the Index, before the payment of expenses and liabilities of the Trust. The Index reflects the value of the DJ-UBS Roll Select CI together with the return on specified U.S. Treasury securities that are deemed to have been held to collateralize a hypothetical long position in the futures contracts comprising the DJ-UBS Roll Select CI. The DJ-UBS Roll Select CI is a version of the DJ-UBS CI, a liquidity- and production-weighted index of the prices of a diversified group of futures contracts on physical commodities, that seeks to minimize the effect of contango and maximize the effect of backwardation by selecting replacement futures contracts that exhibit the most backwardation or least contango among those eligible futures contracts with delivery months of up to 273 calendar days until expiration.
The Trust seeks to achieve its investment objective by holding long positions in Index Futures whose settlement value at expiration is based on the value of the DJ-UBS Roll Select CI at that time, and earning interest on its Collateral Assets used to satisfy applicable margin requirements on those Index Future positions.
When establishing positions in Index Futures, the Trust will be required to deposit initial margin with a value of approximately 3% to 10% of the value of each Index Future position at the time it is established. These margin requirements are subject to change from time to time by the Exchange or the Clearing FCM. Margin requirements established by the Clearing FCM may exceed minimum levels established by the Exchange. On a daily basis, the Trust will be obligated to pay, or entitled to receive, variation margin in an amount equal to the change in the daily settlement level of its Index Future positions. If the daily settlement level causes the value of the Trusts Index Future positions to decrease, the Trust will be required to post variation margin with the Clearing FCM. Conversely, if the daily settlement level causes the value of the Trusts Index Future positions to increase, the Trusts account with the Clearing FCM will receive variation margin in an amount equal to the increase.
Whenever Index Futures of different types or expirations are available for investment, the Sponsor will determine, pursuant to the terms of the Trust Agreement, which Index Futures are to be transferred in connection with either the creation or redemption of Baskets. On any given Business Day, the Index Futures to be delivered in connection with the creation of a Basket may differ from the Index Futures to be delivered in connection with the redemption of a Basket. For example, expiring Index Futures may be delivered in connection with the redemption of a Basket while more recently listed Index Futures may be delivered in connection with the creation of a Basket. The Trust will not engage in any activities designed to obtain a profit from, or to ameliorate losses caused by, changes in the level of the Index or the DJ-UBS Roll Select CI or the value of the Collateral Assets.
The profit or loss on the Trusts Index Future positions should correlate with increases and decreases in the value of the DJ-UBS Roll Select CI, although this correlation is not expected to be exact. The return on the Index Futures, together with interest on the Collateral Assets, is expected to result in a total return that corresponds generally, but is not identical, to the Index. Differences between the returns on the Shares and the performance of the Index may be based on, among other factors, differences between the return on the Collateral Assets and the U.S. Treasury rate used to calculate the U.S. Treasury return component of the Index, timing differences, differences between the portion of the Trusts assets invested in Index Futures versus the portion of the return of the Index contributed by the DJ-UBS Roll Select CI, differences between the settlement price of Index Futures and the closing level of the DJ-UBS Roll Select CI and the payment of expenses and liabilities by the Trust.
The Advisor acts as the commodity trading advisor for the Trust. The Advisor, on behalf of the Trust, is authorized to invest all of the Trusts assets in long positions in Index Futures and in Collateral Assets in order to satisfy applicable margin requirements on those Index Future positions. Any cash that the Trust accepts in connection with the creation of Shares will be used to purchase additional Index Futures and Collateral Assets, in an amount that the Advisor determines will enable the Trust to achieve investment results that correspond with
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the Index before the payment of the Trusts expenses and liabilities. The Advisor will not engage in any activities designed to obtain a profit from, or to ameliorate losses caused by, changes in the level of the Index or the DJ-UBS Roll Select CI or the value of the Collateral Assets.
The Shares are intended to constitute an alternative means for investors to achieve investment exposure to the performance of the Index. Although the Shares are not the exact equivalent of an investment in the underlying futures contracts and Treasury securities represented by the Index, the Shares are intended to provide investors with an alternative method of participating in the commodities market.
In addition, retail investors can gain exposure to the commodities underlying the DJ-UBS Roll Select CI by purchasing individual or small lots of Shares through traditional brokerage accounts, without being subject to the significantly higher minimum contract sizes required for directly establishing a position in the underlying commodities or futures contracts. The Shares will be eligible for margin accounts.
Secondary Market Trading
While the Trust anticipates that the price of the Shares will fluctuate in a manner that reflects changes in the Trusts net asset value over time, at any given time the Shares may trade at, above or below their NAV. The NAV will fluctuate primarily with changes in the market value of Index Futures. The NAV may also be affected as a result of fluctuations in the value of Collateral Assets, but this fluctuation is not expected to be significant because the Collateral Assets are expected to consist of cash and U.S. Treasury securities. The trading price of the Shares will fluctuate in accordance with changes in their NAV, intraday changes in the value of the Index Futures and market supply and demand. The amount of the discount or premium in the trading price relative to the NAV may be influenced by non-concurrent trading hours between NYSE Arca, the exchange on which the Shares trade, the Exchanges on which Index Futures trade and the principal commodities markets on which the futures contracts in the DJ-UBS Roll Select CI trade. While the Shares are expected to trade on NYSE Arca until 4:00 p.m. (New York time), liquidity in the markets for the Index Futures and the futures contracts underlying the DJ-UBS Roll Select CI is expected to be reduced whenever the principal markets for these contracts are closed. As a result, trading spreads, and the resulting premium or discount on the Shares, may widen during these gaps in market trading hours.
Valuation of Index Futures; Computation of the Trusts Net Asset Value
The Sponsor has the exclusive authority to determine the net asset value of the Trust and the NAV, which it has delegated to the Trustee under the Trust Agreement. The Trustee determines the net asset value of the Trust and the NAV as of 4:00 p.m. (New York time), on each Business Day on which NYSE Arca is open for regular trading, as soon as practicable after that time. A Business Day is a day (1) on which none of the following occurs: (a) NYSE Arca is closed for regular trading, (b) an Exchange is closed for regular trading or (c) the Federal Reserve wire transfer system is closed for cash wire transfers, or (2) that the Trustee determines that it is able to conduct business.
The Trustee values the Trusts long positions in Index Futures on the basis of that days settlement prices for the Index Futures held by the Trust, as announced by the applicable Exchange. The value of the Trusts positions in any particular Index Future will equal the product of (a) the number of such Index Futures of such expiration owned by the Trust, (b) the settlement price of such Index Future on the date of calculation and (c) the multiplier of such Index Futures. If there is no announced settlement price for a particular Index Future on a Business Day, the Trustee will use the most recently announced settlement price unless the Trustee, in consultation with the Sponsor, determines that such price is inappropriate as a basis for valuation. The daily settlement prices for the Index Futures initially held by the Trust will be established by the CME shortly after the close of trading for such Index Future, which is generally 2:40 p.m. (New York time).
The Trustee values all other holdings of the Trust at (a) its current market value, if quotations for such property are readily available, or (b) its fair value, as reasonably determined by the Trustee, if the current market value cannot be determined.
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Once the value of the Index Futures and interest earned on the Trusts Collateral Assets has been determined, the Trustee subtracts all accrued expenses and liabilities of the Trust as of the time of calculation in order to calculate the net asset value of the Trust.
Once the net asset value of the Trust has been calculated, the Trustee determines the NAV by dividing the net asset value of the Trust by the number of Shares outstanding at the time the calculation is made. Any changes to NAV that may result from creation and redemption activity occurring on any Business Day is not reflected in NAV until the following Business Day.
The NAV for each Business Day on which NYSE Arca is open for regular trading is expected to be distributed through major market data vendors and will be published online at http://www.ishares.com, or any successor thereto. The Trust will update the NAV as soon as practicable after each subsequent NAV is calculated.
Trust Expenses
The Sponsor has agreed under the Trust Agreement to pay the following administrative, operational and marketing expenses: (1) the fees of the Trustee, the Delaware Trustee, the Advisor and their respective agents, (2) NYSE Arca listing fees, (3) printing and mailing costs, (4) audit fees, (5) fees for registration of the Shares with the SEC, (6) tax reporting costs, (7) license fees and (8) legal expenses relating to the Trust of up to $100,000 annually. As of July 29, 2013, the Sponsor estimates that these annual administrative, operational and marketing expenses will be approximately $1,000,000 per year. The Trust is not expected to have other ordinary recurring administrative, operational or marketing expenses other than brokerage commissions and similar transaction fees, as described below. The Sponsor pays the costs of the issuance and distribution of the Shares being offered under this prospectus, including applicable SEC registration fees of $136,400. As of July 29, 2013, the Sponsor estimates that the aggregate cost of the initial issuance and distribution of the Shares will be approximately $1,864,400.
In return for paying the expenses described above, the Sponsor receives the Sponsors Fee, which accrues daily at an annualized rate of up to 0.75% of the Adjusted Net Asset Value of the Trust, is payable by the Trust monthly in arrears, and is subject to adjustment from time to time, except that the Sponsors Fee may not be adjusted to above 0.75% of the Adjusted Net Asset Value absent an amendment to the Trust Agreement and thirty days prior notice to registered holders of the Shares. For a description of how the net asset value of the Trust is calculated, see Valuation of Index Futures; Computation of the Trusts Net Asset Value above.
The Sponsor and the Trustee may amend or terminate the Sponsors obligation to pay certain expenses of the Trust in compliance with the requirements described under Description of the Shares and the Trust AgreementAmendment and Dissolution.
The Trust is responsible for paying any applicable brokerage commissions and similar transaction fees out of its assets. As of July 29, 2013, the Sponsor estimates that these brokerage commissions and transaction fees will equal approximately 0.04% of the net asset value of the Trust per year.
The following expenses will also be paid out of the assets of the Trust:
| any expenses of the Trust (including the Sponsors Fee) that are not assumed by the Sponsor; |
| any taxes and other governmental charges that may fall on the Trust or its property; |
| any expenses of any extraordinary services performed by the Sponsor or the Trustee on behalf of the Trust or expense of any action taken by the Sponsor or the Trustee to protect the Trust and the rights and interests of holders of the Shares; and |
| any indemnification of the Sponsor, the Advisor or other agents, service providers or counterparties of the Trust. |
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The Trustee is also entitled to charge the Trust for all expenses and disbursements incurred by the Trustee in connection with the actions described in the second and third bullet points above, including fees and disbursements of its legal counsel; provided that the Trustee is not entitled to charge the Trust for (1) expenses and disbursements that were incurred by it before the Shares were publicly traded and (2) fees of agents for performing services that the Trustee is required under the Trust Agreement to perform.
The Trustee, at the direction of the Sponsor, may liquidate the Trusts property from time to time as necessary to permit payment of the fees and expenses that the Trust is required to pay. The Trustee is not responsible for any depreciation or loss incurred by reason of the liquidation of Trust property made in compliance with the Trust Agreement.
Tax Administrator
The Trustee has retained PricewaterhouseCoopers LLP as Tax Administrator to provide tax reporting and tax administrative services. The Trustee may terminate the Tax Administrator at any time.
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DESCRIPTION OF THE SHARES AND THE TRUST AGREEMENT
The Trust is a statutory trust organized under the laws of the State of Delaware on December 7, 2011. The Trust intends to continuously offer Shares to the public, but is not required to do so. The required consideration for the Trusts issuance of Shares consists of Index Futures and cash (or, in the discretion of the Sponsor, other Collateral Assets). The Trust is governed by the First Amended and Restated Trust Agreement dated as of July 29, 2013, among the Sponsor, the Trustee and the Delaware Trustee. The Trust Agreement sets out the rights of the registered holders of the Shares and the rights and obligations of the Sponsor, the Trustee and the Delaware Trustee. Delaware law governs the Trust Agreement, the Trust and the Shares. In connection with the establishment of the Trust and the preparation of the Trusts initial financial statements, the Sponsor has made initial contributions in the aggregate amount of $50. This initial contribution will be redeemed and distributed to the Sponsor in connection with the issuance and sale of the Initial Shares to the Initial Purchaser.
Each Share represents a unit of fractional undivided beneficial interest in the net assets of the Trust. The assets of the Trust will consist of its positions in Index Futures and Collateral Assets held to satisfy applicable margin requirements on those Index Future positions. The Trust may also hold a limited amount of cash necessary to cover any expenses of the Trust not assumed by the Sponsor. In addition, there may be other situations where the Trust may hold cash. For example, a claim may arise against an Authorized Participant, or any other third party, which is settled in cash. Any cash held by the Trust is held in an interest-bearing account. The Trust is not an investment company registered under the Investment Company Act and is not required to register under that Act.
The following is a summary of material provisions of the Trust Agreement. It is qualified by reference to the entire Trust Agreement, which is filed as an exhibit to the registration statement of which this prospectus is a part.
Creations of Baskets
The Trust intends to offer Shares on a continuous basis on each Business Day, but issuances of new Shares may be suspended at any time. Shares may be offered only in Baskets of 50,000 Shares. Baskets will be typically issued only in exchange for an amount of Index Futures and cash (or, in the discretion of the Sponsor, other Collateral Assets) equal to the Basket Amount for the Business Day on which the creation order was received by the Trustee. The Basket Amount for a Business Day will have a per Share value equal to the NAV as of such day, and the assets included in the Basket Amount will be valued in the same manner and on the same basis as the Trusts NAV calculations for its assets generally, as more fully described in Business of the TrustValuation of Index Futures; Computation of the Trusts Net Asset Value. Creation orders received after 2:40 p.m. New York time will not be deemed received until the following Business Day. Subject to the approval of the Trustee, Baskets may be created for cash equal to the NAV of the Shares constituting a Basket as determined on the date the related creation order was received, plus the costs incurred by the Trust in establishing the corresponding Index Future positions and acquiring the related Collateral Assets. Creation orders for Baskets paid for solely in cash that are received after 10:00 a.m. New York time will be deemed received as of the following Business Day. The Trustee will notify the Authorized Participants of the Basket Amount on each Business Day.
Before the Trust will issue any Baskets to an Authorized Participant, that Authorized Participant must deliver to the Trustee a creation order indicating the number of Baskets it intends to purchase and providing other details with respect to the procedures by which the Baskets are to be transferred. The Trustee expects to acknowledge the creation order unless it or the Sponsor decides to refuse the order as described below under Requirements for Trustee Actions.
Upon the transfer of (1) the required consideration of Index Futures in the amounts and of the type specified by the Trustee, cash (or, in the discretion of the Sponsor, other Collateral Assets) in the amounts specified to the Trustee, in each case to the accounts specified by the Trustee, and (2) any and all transaction fees associated with creations (including but
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not limited to fees charged by the Exchange and the Clearing FCM) per Basket, the Trustee will deliver the appropriate number of Baskets to the DTC account of the Authorized Participant. The total transaction fees charged per Basket created may change from time to time. See Fees for Creations and Redemptions.
Only Authorized Participants can transfer the required consideration and receive Baskets in exchange. Authorized Participants may act for their own accounts or as agents for broker-dealers, custodians and other securities market participants that wish to create or redeem Baskets. An Authorized Participant is under no obligation to the Trust to create or redeem Baskets for itself or on behalf of other persons. An order for one or more Baskets may be placed by an Authorized Participant on behalf of multiple clients. The Sponsor and the Trustee will maintain a current list of Authorized Participants.
No Shares will be issued unless and until the Trustee receives confirmation that the required consideration has been received in the account or accounts specified by the Trustee. It is expected that delivery of the Shares will be made against transfer of consideration on the next Business Day following the Business Day on which the creation order is received by the Trustee, which is referred to as a T+1 settlement cycle. If the Trustee has not received the required consideration for the Shares to be delivered on the delivery date, by 11:00 a.m. (New York time), the Trustee may cancel the creation order.
The Trustee has the right to reject any creation order for any reason. The reasons for the rejection may include, among others, (1) the related order not being in proper form as described in the Authorized Participant Agreement, (2) market conditions or other circumstances that make transactions in or delivery of the Shares or the Index Futures impossible or impractical, (3) a determination by the Trustee that the acceptance of the related order would have adverse tax or other consequences to the Trust or the Shareholders or (4) circumstances that would cause the acceptance of the related order to result in a violation of law in the opinion of counsel to the Trustee, the Sponsor, the Trust Administrator or the Processing Agent. Each Authorized Participant Agreement provides that neither the Trustee nor any agents acting on its behalf will be liable to any person for rejecting a creation order.
Redemptions of Baskets
Authorized Participants may typically surrender Baskets in exchange only for an amount of Index Futures and cash (or, in the discretion of the Sponsor, other Collateral Assets) equal to the Basket Amount on the Business Day the redemption request is received by the Trustee. Redemption orders received after 2:40 p.m. New York time will not be deemed to be received until the following Business Day. Holders of Baskets who are not Authorized Participants will not be able to redeem their Baskets except through an Authorized Participant. It is expected that Authorized Participants may redeem Baskets for their own accounts or on behalf of Shareholders who are not Authorized Participants, but no Authorized Participant is under any obligation to the Trust to do so.
Before surrendering Baskets for redemption, an Authorized Participant must deliver to the Trustee a request indicating the number of Baskets it intends to redeem and providing other details with respect to the procedures by which the assets representing the required Basket Amount are to be transferred. The Trustee expects to acknowledge the redemption order unless it or the Sponsor decides to refuse the redemption order as described below under Requirements for Trustee Actions.
After the delivery by the Authorized Participant to the Trustees DTC account of the total number of Shares to be redeemed by an Authorized Participant, the Trustee will deliver to the order of the redeeming Authorized Participant redemption proceeds consisting of Index Futures and cash (or, in the discretion of the Sponsor, other Collateral Assets). The assets included in the redemption proceeds will be valued in the same manner and on the same basis as the Trusts NAV calculations for its assets generally, as more fully described in Business of the TrustValuation of Index Futures; Computation of the Trusts Net Asset Value. In connection with a redemption order, the redeeming Authorized Participant authorizes the Trustee to deduct from the proceeds of redemption any and all transaction fees associated with redemptions. See Fees for Creations and Redemptions. Shares can be surrendered for redemption only in Baskets.
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It is expected that delivery of the Index Futures and cash or other Collateral Assets to the redeeming Shareholder will be made against transfer of the Baskets on the next Business Day following the Business Day on which the redemption request is received by the Trustee, which is referred to as a T+1 settlement cycle. If the Trustees DTC account has not been credited with the total number of Shares to be redeemed pursuant to the redemption order by 11:00 a.m. (New York time), on the delivery date, the Trustee may cancel the redemption order.
The Trustee has the right to reject any redemption order for any reason. The reasons for the rejection may include, among others, (1) the related order not being in proper form as described in the Authorized Participant Agreement, (2) market conditions or other circumstances that make transactions in or delivery of the Shares or the Index Futures impossible or impractical, (3) a determination by the Trustee that the acceptance of the related order would have adverse tax or other consequences to the Trust or the Shareholders or (4) circumstances that would cause the acceptance of the related order to result in a violation of law in the opinion of counsel to the Trustee, the Sponsor, the Trust Administrator or the Processing Agent. Each Authorized Participant Agreement provides that neither the Trustee nor any agents acting on its behalf will be liable to any person for rejecting a redemption order.
Certificates Evidencing the Shares
The Shares are evidenced by certificates executed and delivered by the Trustee on behalf of the Trust. The Shares settle through DTCs book-entry settlement system. So long as the Shares are eligible for DTC settlement, there is expected to be only one certificate evidencing Shares, registered in the name of a nominee of DTC. Investors are expected to be able to own Shares only in the form of book-entry security entitlements with DTC or direct or indirect participants in DTC. Investors will generally not be entitled to receive separate certificates evidencing Shares. Because Shares can be held only in the form of book entries through DTC and its participants, investors must rely on DTC, a DTC participant and any other financial intermediary through which they hold Shares to receive the benefits and exercise the rights described in this section. Investors should consult with their broker or financial institution to find out about the procedures and requirements for securities held in DTC book-entry form. See also The Securities Depository; Book-Entry-Only System; Global Security.
Limitation of Liabilities
You cannot lose more than the value of your investment in the Shares. Under Delaware law, Shareholders liability will be limited to the same extent as the liability of stockholders of a for profit Delaware business corporation. Under the Trust Agreement, registered holders of Shares may be liable for applicable transfer taxes and other governmental charges payable by the Trustee in connection with the transfer or redemption of Shares.
Cash and Other Distributions
The Trust has no obligation to make periodic distributions to Shareholders. The Sponsor has the exclusive authority to determine when a cash distribution should be made, which it in turn has delegated to the Trustee. If the Sponsor determines that there is excess cash being held in the Trust beyond what is expected to be needed to achieve its investment objective and pay the Trusts anticipated expenses, the Sponsor may cause the excess cash to be distributed to the registered holders of the shares or cause it to be invested in additional Index Futures or Collateral Assets.
If the Trust receives any non-cash proceeds in respect of Trust property (other than proceeds subject to creation and redemption orders), the Trustee, at the direction of the Sponsor, will distribute the non-cash proceeds to the Shareholders by any means lawful, equitable and feasible. If the Trustee cannot distribute the non-cash proceeds proportionately among the Shareholders, the Trustee, at the direction of the Sponsor, will adopt any other method that it deems to be lawful, equitable and feasible, including public or private sale.
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Registered holders of Shares will receive these distributions in proportion to the number of Shares owned. Before making a distribution, the Trustee will deduct any applicable withholding taxes and any fees and expenses of the Trust that have not been paid. It will distribute only whole United States dollars and cents and will round fractional cents down to the nearest whole cent. The Trust Agreement provides that the Trust shall not be required to make any distributions in violation of applicable law.
Share Splits
If requested by the Sponsor, the Trustee will declare a split or a reverse split in the number of Shares outstanding and make a corresponding change in the number of Shares constituting a Basket. The Trustee is not required to distribute any fraction of a Share in connection with a split or reverse split of the Shares. The Trustee may sell the aggregated fractions of Shares that would otherwise be distributed in a split or reverse split of the Shares or the amount of Trust property that would be represented by those Shares and distribute the net proceeds of those Shares or that Trust property to the Shareholders entitled to them.
Voting Rights
Shares do not have any voting rights. However, registered holders of at least 25% of the Shares have the right to require the Trustee to cure any material breach by it of the Trust Agreement, and registered holders of at least 75% of the Shares have the right to require the Trustee to terminate the Trust as described under Amendment and Dissolution.
Fees for Creations and Redemptions
Each order for the creation of Baskets must be accompanied by a payment to the Trustee of a transaction fee per Basket, initially equal to the sum of $2.00 (for EFRP transactions) or $3.00 (for cash orders), multiplied by the number of Index Futures in the Basket Amount. In connection with a redemption order, the redeeming Authorized Participant authorizes the Trustee to deduct from the proceeds of redemption a transaction fee per Basket, initially equal to the sum of $2.00 (for EFRP transactions) or $3.00 (for cash orders), multiplied by the number of Index Futures in the Basket Amount. The transaction fees associated with the creation and redemption of Baskets is subject to change from time to time. Under the terms of the Trust Agreement, Authorized Participants creating or redeeming Baskets will also be obligated to pay any taxes, governmental charges or stock transfer or similar fees in connection with such creation or redemption. With the approval of the Trustee, Baskets may be created or redeemed for cash, in which case the Authorized Participant is required to pay any additional costs relating to such a creation or redemption, including the costs to the Trust of establishing or liquidating the corresponding Index Future position and acquiring or disposing of the related Collateral Assets.
Trust Expenses
The following expenses will be paid out of the assets of the Trust:
| any expenses of the Trust (including the Sponsors Fee) that are not assumed by the Sponsor; |
| any taxes and other governmental charges that may fall on the Trust or its property; |
| any expenses of any extraordinary services performed by the Sponsor or the Trustee on behalf of the Trust or expenses of any action taken by the Sponsor or the Trustee to protect the Trust and the rights and interests of holders of the Shares; and |
| any indemnification of the Sponsor, the Advisor or other agents, service providers or counterparties of the Trust. |
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The Trustee is also entitled to charge the Trust for all expenses and disbursements incurred by the Trustee in connection with the actions described in the second and third bullet points above, including fees and disbursements of its legal counsel; provided that the Trustee is not entitled to charge the Trust for (1) expenses and disbursements that were incurred by it before the Shares were publicly traded and (2) fees of agents for performing services that the Trustee is required under the Trust Agreement to perform.
The Trustee, at the direction of the Sponsor, may liquidate the Trusts property from time to time as necessary to permit payment of the fees and expenses that the Trust is required to pay. If it is necessary for the Trust to liquidate Trust property or apply income from its investments to meet extraordinary expenses, the NAV is expected to decrease.
The Trustee is not responsible for any depreciation or loss incurred by reason of the liquidation of the Trusts property made in compliance with the Trust Agreement.
Payment of Taxes
The Trustee may deduct the amount of any taxes owed from any distributions it makes. It may also sell the Trusts assets, by public or private sale, to pay any taxes owed. Registered holders of Shares will remain liable if the proceeds of the sale are not enough to pay the taxes.
Valuation of the Trust Assets
See Business of the TrustValuation of Index Futures; Computation of the Trusts Net Asset Value.
Limitations on Obligations and Liability
The Trust Agreement expressly limits the obligations and liabilities of the Sponsor and the Trustee. The Sponsor and the Trustee:
| are obligated to take only the actions specifically set forth in the Trust Agreement without negligence or bad faith; |
| are not liable if either of them is prevented or delayed by law or circumstances beyond their control from performing their respective obligations under the Trust Agreement; |
| are not liable if they exercise or fail to exercise discretion permitted under the Trust Agreement; |
| have no obligation to prosecute a lawsuit or other proceeding related to the Shares or the Trusts property on behalf of any holders of Shares or on behalf of any other person; and |
| may rely upon any advice or information from other persons they believe in good faith to be competent to provide such advice or information. |
In addition, under the Trust Agreement, the Trust is obligated to indemnify the Sponsor and its shareholders, directors, officers, employees, affiliates and subsidiaries for any liability or expense incurred by any such person that arises out of or in connection with the performance of obligations under the Trust Agreement or any actions taken in accordance with the provisions of the Trust Agreement, absent such persons negligence, bad faith, willful misconduct or reckless disregard of such persons duties and obligations.
Amendment and Dissolution
The Sponsor and the Trustee may agree to amend the Trust Agreement without the consent of the Shareholders. If an amendment imposes or increases fees or charges (other than the Sponsors Fee, to the extent it does not exceed 0.75% of the Adjusted Net Asset Value, and other than taxes and other governmental charges)
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or prejudices a substantial existing right of the Shareholders or similarly materially adversely affects any Shareholder, it will not become effective until thirty days after the Trustee notifies the registered holders of the amendment. No adjustment of the Sponsors Fee to above 0.75% of the Adjusted Net Asset Value will be effective until the passage of the foregoing thirty-day period.
An amendment to the Trust Agreement may substantially alter the nature of an investment in the Shares, including, for example, amendments that change the assets through which the Trust seeks to achieve its investment objective or that cause the Trust to seek investment returns corresponding to the performance of another index. At the time an amendment becomes effective, by continuing to hold Shares, investors are deemed to agree to the amendment and to be bound by the Trust Agreement as amended. In no event may any amendment impair the right of a Shareholder to surrender Baskets and receive therefor the amount of Trust property represented thereby, except in order to comply with mandatory provisions of applicable law. In addition, no amendment to the Trust Agreement may be made if, as a result of such amendment, it would cause the Trust to be taxable as an association taxable as a corporation for United States federal income tax purposes.
The Trustee will dissolve the Trust if:
| the Trustee is notified that the Shares are delisted from NYSE Arca and are not approved for listing on another national securities exchange within five Business Days of their delisting; |
| registered holders of at least 75% of the outstanding Shares notify the Trustee that they have elected to dissolve the Trust; |
| sixty days have elapsed since the Trustee notified the Sponsor of the Trustees election to resign, and a successor trustee has not been appointed and accepted its appointment; |
| the SEC (or its staff) or a court of competent jurisdiction determines that the Trust is an investment company under the Investment Company Act, and the Trustee has actual knowledge of that determination; |
| the Sponsor determines to liquidate the Trust in accordance with the terms of the Trust Agreement, which provides that the Sponsor may liquidate the Trust at any time the Sponsor determines that liquidating the Trust is advisable. The Sponsor may, for example (but will not be obligated to), liquidate the Trust if, among other reasons, (1) legal, regulatory or market changes occur that would result, in the opinion of the Sponsor, in a decrease of investment opportunities available to meet the Trusts investment objective, (2) the Index Co-Sponsors cease to maintain the Index and, in the opinion of the Sponsor, no successor or reasonably similar index is available, or (3) the value of the Trust is at a level at which continued operation of the Trust is not cost-efficient; |
| the Trust is treated as an association taxable as a corporation for United States federal income tax purposes, and the Trustee receives notice from the Sponsor that the Sponsor has determined that the dissolution of the Trust is advisable; or |
| DTC is unable or unwilling to continue to perform its functions, and a comparable replacement is unavailable. |
The Trustee will notify DTC at least thirty days before the date for dissolution of the Trust. After termination, the Trustee and its agents will do the following under the Trust Agreement but nothing else: (1) collect distributions pertaining to Trust property, (2) pay the Trusts expenses and sell assets as necessary to meet those expenses and (3) deliver Trust property upon surrender and cancellation of Shares. Ninety days or more after dissolution, the Trustee may sell any remaining Trust property in a public or private sale. After that, the Trustee will hold the money it received on the sale and any other cash it is holding under the Trust Agreement for the pro rata benefit of the registered holders that have not surrendered their Shares. The Trustee will not invest the money and will have no liability for interest. The Trustees only obligations will be to account for the money and other cash, after deduction of applicable fees, trust expenses and taxes and governmental charges.
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Requirements for Trustee Actions
Before the Trustee will deliver or register a transfer of Shares, make a distribution on Shares, or permit the withdrawal of the Trusts property, the Trustee may require:
| payment of stock transfer or other taxes or other governmental charges and transfer or registration fees charged by third parties for the transfer of any Shares or property of the Trust; |
| satisfactory proof of the identity and genuineness of any signature or other information it deems necessary; and |
| compliance with regulations it may establish, from time to time, consistent with the Trust Agreement, including the presentation of transfer documents. |
The Trustee may suspend the delivery of Shares, registrations of transfer of Shares and surrenders of Shares for the purpose of withdrawing property of the Trust generally, or may refuse particular deposit, transfer or withdrawal requests at any time when the books of the Trustee are closed or at any time if the Trustee or the Sponsor determines that it is necessary or advisable to do so for any reason.
Delegation by the Trustee to the Trust Administrator, the Tax Administrator or Agent
The Trustee may delegate all or some of its duties under the Trust Agreement to an agent, including the Trust Administrator and the Tax Administrator, without the consent of the Sponsor, any Authorized Participant or any Shareholders. The Trustee is not required to appoint a new Trust Administrator, Tax Administrator or agent upon any termination of this delegation.
Custody of the Trust Assets
The Trusts Index Futures and the Collateral Assets posted as margin for these Index Future positions will be held in the Trusts account, established at its Clearing FCM. The Clearing FCM will further transfer some or all of the Collateral Assets posted as margin for the Trusts Index Future positions to the Exchange.
Substantially all of the Trusts remaining assets will be held in the Trusts accounts at the Trust Administrator, and will consist of Collateral Assets and cash held in interest bearing accounts.
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THE SECURITIES DEPOSITORY; BOOK-ENTRY-ONLY SYSTEM; GLOBAL SECURITY
DTC acts as securities depository for the Shares. DTC is a limited-purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a clearing corporation within the meaning of the New York Uniform Commercial Code, and a clearing agency registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities of its participants and to facilitate the clearance and settlement of transactions in those securities among DTC Participants through electronic book-entry changes. This eliminates the need for physical movement of securities certificates. DTC Participants include securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations, some of whom (and/or their representatives) own DTC. Access to the DTC system is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a DTC Participant, either directly or indirectly. DTC agrees with and represents to its participants that it will administer its book-entry system in accordance with its rules and by-laws and requirements of law.
Individual certificates will not be issued for the Shares. Instead, a global certificate will be signed by the Trustee on behalf of the Trust, registered in the name of Cede & Co., as nominee for DTC, and deposited with the Trustee on behalf of DTC. The global certificate will represent all of the Shares outstanding at any time.
Upon the settlement date of any creation, transfer or redemption of Shares, DTC will credit or debit, on its book-entry registration and transfer system, the number of Shares so created, transferred or redeemed to the accounts of the appropriate DTC Participants. The Trustee and the DTC Participants will designate the accounts to be credited and charged in the case of creation or redemption of Shares.
Beneficial ownership of the Shares will be limited to DTC Participants, Indirect Participants and persons holding interests through DTC Participants and Indirect Participants. Owners of beneficial interests in the Shares will be shown on, and the transfer of ownership will be effected only through, records maintained by DTC, with respect to DTC Participants, the records of DTC Participants, with respect to Indirect Participants, and the records of Indirect Participants with respect to beneficial owners that are not DTC Participants or Indirect Participants. Beneficial owners are expected to receive from or through a DTC Participant a written confirmation relating to their purchase of the Shares.
Investors may transfer Shares through DTC by instructing the DTC Participant or Indirect Participant through which they hold their Shares to transfer the Shares. Transfers will be made in accordance with standard securities industry practice.
DTC may decide to discontinue providing its service for the Shares by giving notice to the Trustee and the Sponsor. Under these circumstances, the Trustee and the Sponsor will either find a replacement for DTC to perform its functions at a comparable cost or, if a replacement is unavailable, the Trust will be dissolved.
The rights of the Shareholders generally must be exercised by DTC Participants acting on their behalf in accordance with the rules and procedures of DTC.
The Trust Agreement provides that, as long as the Shares are represented by a global certificate registered in the name of DTC or its nominee, the Trustee will be entitled to treat DTC as the holder of the Shares.
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The Sponsor
The Sponsor is iShares® Delaware Trust Sponsor LLC, a Delaware limited liability company and an indirect subsidiary of BlackRock, Inc. The Sponsor operates as the commodity pool operator for the Trust.
The Sponsor has been registered under the CEA as a commodity pool operator and has been a member of the NFA since June 22, 2009. Since November 2012, the Sponsor has also served as sponsor of the iShares® Gold Trust and the iShares® Silver Trust, each of which is a trust that publicly offers shares registered with the SEC. Neither the iShares® Gold Trust nor the iShares® Silver Trust is a commodity pool regulated by the CFTC or the NFA.
The Sponsors principal office is located at 400 Howard Street, San Francisco, CA 94105.
The Sponsor was formed as a Delaware limited liability company on June 16, 2009. The sole member and manager of the Sponsor is BlackRock Asset Management International Inc., a Delaware corporation, and an indirect subsidiary of BlackRock, Inc.
BlackRock Asset Management International Inc., the sole member and manager of the Sponsor, was organized as a Delaware corporation on March 22, 1990. Since January 2004, BlackRock Asset Management International Inc. has held an equity interest in a securities lending platform. From January 2005 to November 2012, BlackRock Asset Management International Inc. served as sponsor of the iShares® Gold Trust. From April 2006 to November 2012, BlackRock Asset Management International Inc. served as sponsor of the iShares® Silver Trust. Since July 2006, BlackRock Asset Management International Inc. has served as sponsor and commodity pool operator of the iShares® S&P GSCI Commodity-Indexed Trust and manager and commodity pool operator of the iShares® S&P GSCI Commodity-Indexed Investing Pool. Since October 2007, BlackRock Asset Management International Inc. has served as sponsor of the iShares® Mexico Trust, a trust that issues Mexican exchange-traded equity funds. Since December 2008, BlackRock Asset Management International Inc. has served as sponsor of the following Brazilian exchange-traded equity funds: iShares® Ibovespa Fundo de Indice, iShares® BM&FBovespa Small Cap Fundo de Indice, and iShares® BM&FBovespa MidLarge Cap Fundo de Indice. BlackRock Asset Management International Inc. has been registered under the CEA as a commodity pool operator since October 13, 2005, and is a member of the NFA.
Certain performance data regarding the Sponsor and BlackRock Asset Management International Inc., its sole member and manager, may be found starting on page 82.
The Sponsor arranged for the creation of the Trust, the registration of the Shares for their public offering and the listing of the Shares on NYSE Arca. The Sponsor has agreed under the Trust Agreement to pay the following administrative, operational and marketing expenses: (1) the fees of the Trustee, the Delaware Trustee, the Advisor and their respective agents, (2) NYSE Arca listing fees, (3) printing and mailing costs, (4) audit fees, (5) fees for registration of the Shares with the SEC, (6) tax reporting costs, (7) license fees and (8) legal expenses relating to the Trust of up to $100,000 annually. In recognition of its paying these expenses, the Sponsor is entitled to receive the Sponsors Fee, which accrues daily at an annualized rate of up to 0.75% of the Adjusted Net Asset Value of the Trust, is payable by the Trust monthly in arrears, and is subject to adjustment from time to time, except that the Sponsors Fee may not be adjusted to above 0.75% of the Adjusted Net Asset Value absent an amendment to the Trust Agreement and thirty days prior notice to registered holders of the Shares. For a description of how the net asset value of the Trust is calculated, see Business of the TrustValuation of Index Futures; Computation of the Trusts Net Asset Value.
The Sponsor has the authority under the Trust Agreement to direct the Trustee in the operation of the Trust, although the Sponsor does not expect to exercise day-to-day oversight over the Trustee. The Sponsor may
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remove the Trustee and appoint a successor Trustee if the Trustee ceases to meet certain objective requirements, or if, having received written notice of a material breach of its obligations under the Trust Agreement, the Trustee has not cured the breach within thirty days. The Sponsor may also replace the Trustee during the 90 days following any merger, consolidation or conversion in which the Trustee is not the surviving entity or, in its discretion, at any time following the first anniversary of the creation of the Trust.
Other than the Sponsors limited investment in Shares in connection with its role as Tax Matters Partner of the Trust, neither the Sponsor nor any of its principals are expected to hold any beneficial interest in the Trust. The Sponsor and its principals will only be permitted to trade commodity interests for their own accounts in accordance with the Sponsors code of ethics. The Sponsor does not intend to permit Shareholders to review its records with respect to any such trading or any written policies related to such trading.
Principals and Key Personnel of the Sponsor
Patrick Dunne is the President, Chief Executive Officer and Director, Jack Gee is the Chief Financial Officer and Charles Park is Chief Compliance Officer of the Sponsor.
The Sponsor is managed by a Board of Directors composed of Philip Jensen, Peter F. Landini, Kimun Lee, Patrick Dunne and Manish Mehta.
Patrick Dunne, 44, became a principal of the Sponsor in September 2011 and has served as its President and Chief Executive Officer since September 2011. Mr. Dunne has served as Global Chief Operating Officer of the iShares® business from October 2010 to October 2011. Prior to that, Mr. Dunne has served as Global Head of Securities Lending and Cash Management business from December 2005 to April 2008. Prior to that, Mr. Dunne served as Head of Securities Lending, North America from August 2003 to December 2005; Chief Operating Officer of Barclays Global Investor Services Europe business from January 2002 to August 2003; Head of Strategy, Barclays Global Investor Services North America from August 2000 to December 2001; Head of Fixed Income Trading from February 1995 to August 1999; Senior Fixed Income Trader from February 1994 to March 1995; and Fixed Income Portfolio Manager from February 1992 to February 1994. Mr. Dunne became a registered associated person of BlackRock Fund Advisors, a commodity trading advisor registered with the CFTC, in May 1995. Mr. Dunne joined BlackRock Institutional Trust Company, N.A., a national banking association and a commodity trading advisor registered with the CFTC, in October 1991 as an Equity Portfolio Manager in the Portfolio Management Group and became a registered associated person of BlackRock Institutional Trust Company, N.A. in March 1998. Mr. Dunne served as a principal of Barclays Global Investors Ltd., a commodity trading advisor formerly registered with the CFTC, from May 2003 to December 2005 and as a registered associated person of Barclays Global Investors Ltd. from September 2003 to December 2005. Prior to joining BlackRock Institutional Trust Company, N.A., Mr. Dunne served as a Marketing Research Associate at Merrill Lynch & Co. from May 1991 to October 1991. Mr. Dunne earned a Bachelor of Arts degree in economics from the University of California at Berkeley in 1991 and a Master of Science degree in management from the Stanford Graduate School of Business in 2000.
Jack Gee, 53, became a principal of the Sponsor in September 2011 and serves as Chief Financial Officer. Mr. Gee became a principal of BlackRock Asset Management International Inc., a commodity pool operator registered with the CFTC, in December 2011 and serves as Chief Financial Officer, Chief Operating Officer and Director. Mr. Gee joined BlackRock Institutional Trust Company, N.A., a national banking association and a commodity trading advisor registered with the CFTC, as a Principal in September 2004 and served as Director of US Fund Administration of BlackRock Institutional Trust Company N.A. from September 2004 to January 2010. Since January 2010, Mr. Gee has served as Managing Director of BlackRock Institutional Trust Company, N.A. Prior to joining BlackRock Institutional Trust Company, N.A., Mr. Gee served as Chief Financial Officer of Parnassus Investments, an investment adviser registered with the SEC, from March 2004 to September 2004; Chief Financial Officer of Cazenave Partners, an investment adviser registered with the SEC, from October 2003 to March 2004; Controller of Paul Capital Partners, an investment firm focusing on the secondary private equity
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and healthcare market, from October 2002 to October 2003; Chief Financial Officer of Fremont Investment Advisors, Inc., an investment adviser formerly registered with the SEC, from October 1997 to September 2002. Mr. Gee earned a Bachelor of Science degree in accounting from the California State University in 1982.
Charles Park, 45, became a principal of the Sponsor and the Advisor in December 2012 and serves as Chief Compliance Officer for those entities. Mr. Park became a principal of BlackRock Asset Management International Inc., a commodity pool operator registered with the CFTC, in December 2012 and serves as its Chief Compliance Officer. Mr. Park joined BlackRock Institutional Trust Company, N.A., a national banking association and a commodity trading advisor registered with the CFTC, in August 2006 as Chief Compliance Officer. Prior to joining BlackRock Institutional Trust Company, N.A., Mr. Park served as Chief Compliance Officer of American Century Investment Management, Inc., a commodity pool operator and commodity trading advisor, from October 1995 to July 2006. Mr. Park earned a Bachelor of Arts degree in economics from the University of Michigan in 1989 and a Juris Doctor from the University of Michigan in 1992.
Manish Mehta, 42, became a principal of the Sponsor in March 2012 and serves as Director. Mr. Mehta joined BlackRock Institutional Trust Company, N.A., a national banking association and a commodity trading advisor registered with the CFTC, as a Managing Director in November 2011. Prior to that, Mr. Mehta served as Managing Partner of CHJ Capital Management, a financial services firm, from March 2011 to November 2011. From March 2005 to January 2011 Mr. Mehta served as Head of Strategy and Corporate Development at BlackRock Institutional Trust Company, N.A. Prior to joining BlackRock Institutional Trust Company, N.A. in March 2005, Mr. Mehta served as consultant and principal at Boston Consulting Group, a global management consulting firm, from September 2000 to March 2005. Mr. Mehta earned a Bachelor of Science degree in Electrical Engineering and Computer Sciences from the University of California, Berkeley in 1993 and an MBA from the Wharton School at the University of Pennsylvania in 2000.
Philip Jensen, 54, became a principal of the Sponsor in September 2009, and is Chairman of the Sponsors audit committee. Since June 2001, Mr. Jensen has served as Partner and Chief Financial Officer of Paul Capital Partners, an investment firm focusing on the secondary private equity and healthcare market. Mr. Jensen received his Bachelor of Science from San Francisco State University and is a certified public accountant.
Peter F. Landini, 62, became a principal of the Sponsor in September 2009 and is a member of the Sponsors audit committee. In January 2003, Mr. Landini joined RBP Investment Advisors, Inc., a financial planning consultancy firm, for which he presently serves as Partner and Wealth Manager. Mr. Landini received his Bachelor of Science degree in Accounting from Santa Clara University and an MBA in Finance from Golden Gate University. Mr. Landini is a certified financial planner and is a member of the Financial Planning Association.
Kimun Lee, 67, became a principal of the Sponsor in September 2009, and is a member of the Sponsors audit committee. Mr. Lee is a California-registered investment adviser and has conducted his consulting business under the name Resources Consolidated since January 1980. Since September 2010, Mr. Lee has served as a member of the Board of directors of Firsthand Technology Value Fund, Inc., a mutual fund company. Until January 2005 Mr. Lee also served as a member of the board of directors of Fremont Mutual Funds, Inc., a mutual fund company. Mr. Lee received his Bachelor of Arts from the University of the Pacific and an MBA from University of Nevada, Reno. He also completed the executive education program on corporate governance at Stanford Graduate School of Business.
Greg Savage, 41, became a principal and associated person of the Sponsor in July 2012, and a principal and associated person of BlackRock Asset Management International Inc. in March 2009. Mr. Savage has served as a Senior Portfolio Manager and Team Leader for BlackRock Fund Advisors, an investment advisor registered with the SEC and a commodity trading advisor registered with the CFTC, since September 2007 and became a principal and associated person of that entity in March 2009. Mr. Savage became a principal and associated person of iShares Delaware Trust Sponsor, LLC in July 2012. Mr. Savage also served as a Portfolio Manager for
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BFA from March 2001 to September 2007. Mr. Savage served as a Transition Services Manager for BTC, a national banking association and commodity trading adviser registered with the CFTC, from June 1999 to March 2001 and became an associated person of that entity in June 2007. Mr. Savage received his Bachelor of Science in Accounting from the University of Colorado at Boulder and is a CFA charterholder. He has the FINRA Series 7, 63 and 3 licenses.
Reza Estilaei, Ph.D., 51, became a principal of the Sponsor in June 2012. Dr. Estilaei joined BlackRock Institutional Trust Company, N.A., a national banking association and a commodity trading advisor registered with the CFTC, in May 2006 and serves as Portfolio Manager and Researcher. Prior to joining BlackRock Institutional Trust Company, N.A., Dr. Estilaei served as a Principal and Researcher at Mellon Capital Management, a commodity trading advisor registered with the CFTC, from May 2004 to April 2006. Prior to that, Dr. Estilaei attended the University of California, Berkeley from March 2002 to March 2004. Dr. Estilaei earned a Bachelor of Science degree in physics from the University of California, Riverside in 1990, a Ph.D. in physics from the University of British Columbia in 1998 and a Masters in financial engineering from the University of California, Berkeley in 2004.
Russ Koesterich, 46, became a principal of the Sponsor in June 2012. Mr. Koesterich joined BlackRock Institutional Trust Company, N.A., a national banking association and a commodity trading advisor registered with the CFTC, in March 2005. Since October 2010, Mr. Koesterich has served as Global Head of Strategy of the iShares® business. Mr. Koesterich served as a Senior Portfolio manager from March 2005 to March 2007, Head of U.S. Strategy for Active Equity from April 2007 to December 2008 and Head of Global Strategy for Active Equity from January 2009 to September 2010. Prior to joining BlackRock Institutional Trust Company, N.A., Mr. Koesterich served as Head of North American Strategy of State Street Bank and Trust, a national banking association, from June 2002 to March 2005. Mr. Koesterich earned a Bachelor of Arts degree in history from Brandeis University in 1987, a Juris Doctor degree from Boston College in 1990 and an MBA from Columbia University in 1995.
BlackRock Asset Management International Inc. became a principal of the Sponsor in June 2009. Daniel Waltcher became a principal of the Sponsor in February 2012.
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The Trustee is BTC, a national banking association and an indirect subsidiary of BlackRock, Inc. The Trustees principal office is located at 400 Howard Street, San Francisco, CA 94105. The Trustee has authority to delegate some of its responsibilities under the Trust Agreement to the Trust Administrator, the Tax Administrator or other agent. The Trustee will also maintain certain books and records of the Sponsor relating to communications with Shareholders at the offices of the Trustee.
State Street Bank and Trust Company, a trust company organized under the laws of Massachusetts, currently serves as the Trust Administrator. State Street Bank and Trust Companys principal office is located at One Lincoln Street, Boston, MA 02111. State Street Bank and Trust Company is subject to supervision by the Massachusetts Commissioner of Banks and the Board of Governors of the Federal Reserve System. Information regarding creation and redemption of Shares, the net asset value of the Trust and transaction fees may be obtained from State Street Bank and Trust Company. Basket composition and the names of the parties that have executed an Authorized Participant Agreement may be obtained from iShares by calling the following number: 1-800-474-2737. A copy of the Trust Agreement is available for inspection at the Trust Administrators office identified above. Books and records of the Sponsor with respect to the Trust will be maintained at this office of State Street Bank and Trust Company (other than records maintained by the Trustee, the Tax Administrator or the Processing Agent as described herein).
The Trustee is responsible for the day-to-day administration of the Trust. Day-to-day administration includes (1) processing orders for the creation and redemption of Baskets, (2) coordinating with the Sponsor and the Advisor with respect to the receipt and delivery of consideration transferred to, or by, the Trust in connection with each creation and redemption of Baskets, (3) calculating the net asset value of the Trust on each Business Day, (4) calculating net income and realized capital gains or losses, and (5) paying the Trusts expenses. The Trustee has delegated processing creation and redemption orders of Baskets to the Processing Agent, certain tax-related services to the Tax Administrator and the remainder of the day-to-day responsibilities to the Trust Administrator. Certain books and records of the Sponsor relating to the creation and redemption of Baskets will be maintained at the offices of the Processing Agent at One Freedom Valley Drive, Oaks, PA 19456.
The Trustees fees will be paid by the Sponsor.
The Trustee and any of its affiliates may from time to time purchase or sell Shares for their own account, as agent for their customers and for accounts over which they exercise investment discretion.
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State Street Bank and Trust Company serves as the Trust Administrator. The Trust Administrator has been engaged to provide certain administrative services, including calculating the value of certain of the Trusts assets, maintaining custody of Collateral Assets not posted as margin, transferring Collateral Assets in satisfaction of applicable margin requirements, and maintaining certain records and accounts. The Trust Administrator has established and maintains one or more securities accounts and one or more cash accounts on behalf of the Trust in which the Collateral Assets are deposited and held. In general, the Sponsor exercises control over these accounts. The Sponsor has delegated the authority to supervise and direct the investments of the assets in the Trusts accounts to the Advisor, and has delegated the authority to make and receive applicable margin payments relating to the Trusts Index Future positions to the Trust Administrator.
The Trust Administrators services are governed under the Master Services Agreement between the Trust Administrator and the Trust. The Master Services Agreement consists of a master services agreement supplemented by related service modules and other documentation specifying the service levels provided by, and related fees payable to, the Trust Administrator in connection with its services. The fees of the Trust Administrator are paid by the Sponsor on behalf of the Trust. The Trust Administrator is exculpated and indemnified by the Trust under the terms of the Master Services Agreement.
Under the applicable service modules, the Trust Administrator has agreed to provide its services for an initial term ending on May 15, 2014, subject to automatic extensions for up to six months following the end of such initial term if the Trust takes no action to renew the term. Following the initial six-month extension, the term of the applicable service modules shall automatically extend for additional two year terms unless either the Trust or the Trust Administrator elects not to renew. In addition, the Trust Administrator may terminate its services for certain material breaches of the Master Services Agreement or for failure to pay fees within a specified grace period. The Trust may terminate the Master Services Agreement for cause, certain enduring force majeure events, terminations as may be required or occasioned by law, and for certain corporate events affecting the Trust Administrator.
Wilmington Trust, National Association, serves as the Delaware Trustee of the Trust. The Delaware Trustee is not entitled to exercise any of the powers, or have any of the duties or responsibilities, of the Trustee. The Delaware Trustee is a trustee of the Trust for the sole and limited purpose of fulfilling the requirements of the Delaware Statutory Trust Act.
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The Advisor is BFA, a California corporation and an indirect subsidiary of BlackRock, Inc. The Advisor serves as the commodity trading advisor for the Trust. The Advisor has been registered as a commodity trading advisor with the CFTC, and as a member of the NFA, since April 5, 1993. The Trust has entered into a commodity trading advisor agreement with the Advisor, which provides the Advisor with discretionary authority to make all determinations with respect to the Trusts assets, subject to specified limitations.
Except as described below, neither the Advisor nor any of its principals are expected to hold any beneficial interest in the Trust. The Advisor and its principals will only be permitted to trade commodity interests for their own accounts in accordance with the Advisors code of ethics. The Advisor does not intend to permit Shareholders to review its records with respect to any such trading or any written policies related to such trading.
Laurence Fink is the Chief Executive Officer, Michael Latham is Co-Chief Operating Officer, Ann Marie Petach is the Chief Financial Officer and Charles Park is the Chief Compliance Officer of the Advisor. Greg Savage, a principal and registered associated person of the Advisor will be principally responsible for the trading decisions with respect to the Trusts account.
The Advisor is managed by a Board of Directors, which is composed of Laurence Fink, Robert Kapito and Daniel Waltcher.
Certain performance data with respect to the Advisor can be found starting on page 82.
Laurence Fink, 60, became a principal of the Advisor in December 2009. Mr. Fink has served as Director, Chairman and Chief Executive Officer of the Advisor since December 2009. Mr. Fink has served as Chairman, Chief Executive Officer and Director of BlackRock, Inc., a global asset management firm, since January 1998; Chief Executive Officer since September 1994 of BlackRock Advisors, LLC, an investment management company registered with the CFTC as a commodity trading advisor, commodity pool operator and swap firm, and a principal of that entity since November 7, 2012; Chairman, Chief Executive Officer and Director of BlackRock Financial Management, Inc., an investment management company and a commodity trading adviser registered with the CFTC, since April 1988 and became a principal of that entity in May 1997; Chief Executive Officer of BlackRock Capital Management, Inc., an investment management company, since November 1999; Chief Executive Officer of Blackrock Institutional Management Corporation, an investment management company, since February 1998; Chief Executive Officer of BlackRock Investment Management, LLC, an investment management company, since September 2006 and became a principal of that entity in August 2008; Chairman, Chief Executive Officer and Director of State Street Research & Management Company, an investment management company, since February 2005; a principal of Enso Capital Management LLC, an investment management company, from May 2002 until his withdrawal as principal of that entity effective June 15, 2012 and a principal of Enso Capital Management II from July 2002 to November 2009. Mr. Fink received his MBA from the University of California Los Angeles in 1976 and his Bachelor of Science in Political Science from California State University Northridge in 1974.
Michael Latham, 47, became a principal and associated person of the Advisor in March 2010, and has served as its Co-Chief Operating Officer since March 2010. Mr. Latham became a principal of BlackRock Asset Management International Inc., a commodity pool operator registered with the CFTC in February 2006 and an associated person of that entity in January 2010. Mr. Latham has served as Chief Executive Officer and President of Blackrock Asset Management International Inc. since December 2009, as Director since October 2005, and as Chief Financial Officer from October 2005 to December 2009. Mr. Latham served as Director of the Sponsor from June 2009 to September 2011 and as its Chief Executive Officer and President from December 2009 to September 2011. Mr. Latham was a principal of the Sponsor from June 2009 to September 2011 and an associated person of the Sponsor from January 2010 to September 2011. Mr. Latham has served as Co-Chief Operating Officer of BFA since March 2010. Mr. Latham has served as the global head of the iShares® business
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since July 2010. Mr. Latham served as the head of the iShares® business for the United States and Canada from January 2006 to July 2010. Prior to that, Mr. Latham served as the Chief Operating Officer of the U.S. Individual Investor and the Exchange Traded Fund business of BTC, a national banking association and commodity trading advisor registered with the CFTC, from January 2000 to January 2006. Mr. Latham served as deputy head of operations and subsequently head of operations for BlackRock Advisors (UK) Limited, a U.K. asset manager from August 1997 to January 2000. From August 1994 to August 1997, Mr. Latham was a manager in the Portfolio Accounting Group at BTC. Prior to joining BTC, Mr. Latham was an auditor at Ernst & Young from September 1989 to August 1994. Mr. Latham received his Bachelor of Science in Business Administration from the San Francisco State University and is a certified public accountant.
Ann Marie Petach, 53, became a principal of the Advisor and the Trustee in December 2009. Ms. Petach has served as Director of the Trustee and Chief Financial Officer of the Advisor since December 2009. Ms. Petach has also served as Managing Director of BlackRock, Inc., a global asset management firm, since June 2007 and as Chief Financial Officer of that entity since June 2008; Managing Director since June 2007 of BlackRock Advisors, LLC, an investment management company registered with the CFTC as a commodity trading advisor, commodity pool operator and swap firm, and as Chief Financial Officer of that entity since June 2008 and principal of that entity since November 2012; Managing Director of BlackRock Capital Management, Inc., an investment management company, since June 2007 and as Chief Financial Officer of that entity since June 2008; Managing Director of BlackRock Financial Management, Inc., an investment management company, since June 2007, Chief Financial Officer of that entity since June 2008 and principal of that entity since September 2008; Managing Director of BlackRock Institutional Management Corporation, an investment management company, since June 2007 and as Chief Financial Officer of that entity since June 2008; Managing Director of BlackRock Investment Management, LLC, an investment management company, since June 2007, Chief Financial Officer since June 2008 and became a principal of that entity in September 2008; Managing Director of State Street Research & Management Company, an investment management company, since June 2007 and as Chief Financial Officer of that entity since June 2008. Ms. Petach served as Assistant Treasurer of Ford Motor Company, a multinational automotive manufacturer, from January 1998 to November 2004 and Vice President and Treasurer of that entity from November 2004 to June 2007. Ms. Petach received a Bachelor of Arts in Business and Spanish from Muhlenberg College in 1982 and an MBA from Carnegie Mellon University in 1984.
Charles Park, 45, became a principal of the Sponsor and the Advisor in December 2012 and serves as Chief Compliance Officer for those entities. Mr. Park became a principal of BlackRock Asset Management International Inc., a commodity pool operator registered with the CFTC, in December 2012 and serves as its Chief Compliance Officer. Mr. Park joined BlackRock Institutional Trust Company, N.A., a national banking association and a commodity trading advisor registered with the CFTC, in August 2006 as Chief Compliance Officer. Prior to joining BlackRock Institutional Trust Company, N.A., Mr. Park served as Chief Compliance Officer of American Century Investment Management, Inc., a commodity pool operator and commodity trading advisor, from October 1995 to July 2006. Mr. Park earned a Bachelor of Arts degree in economics from the University of Michigan in 1989 and a Juris Doctor from the University of Michigan in 1992.
Robert Kapito, 56, became a principal of the Advisor in December 2009 and has served as its Director and President since December 2009. Mr. Kapito served as Director and Vice Chairman of BlackRock, Inc., a global asset management firm, from January 1998 to September 2007 and has served as President of that entity since September 2007. From February 1998 to September 2007, Mr. Kapito served as Director and Vice Chairman of BlackRock Advisors, LLC, an investment management company registered with the CFTC as a commodity trading advisor, commodity pool operator and swap firm, and has served as President of that entity since September 2007 and principal of that entity since November 2012. Mr. Kapito also served as Director and Vice Chairman of BlackRock Capital Management, Inc., an investment management company and a commodity trading adviser registered with the CFTC, from November 1999 to September 2007 and has served as President of that entity since September 2007. Mr. Kapito served as Director and Vice Chairman of BlackRock Financial Management, Inc., an investment management company, from April 1988 to September 2007, became an associated person in October 1997, a principal in May 1997 and has served as President of that entity since
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September 2007. Mr. Kapito served as Director and Vice Chairman of BlackRock Institutional Management Corporation, an investment management company, from February 1998 to September 2007, and has served as President of that entity since September 2007. Mr. Kapito served as Director and Vice Chairman of BlackRock Investment Management, LLC, an investment management company, from September 2006 to September 2007, and has served as President of that entity since September 2007. Mr. Kapito became a principal of BlackRock Investment Management, LLC in November 2008. Mr. Kapito served as Director and Vice Chairman of State Street Research & Management Company, an investment management company, from February 2005 to September 2007, and has served as President of that entity since September 2007. Mr. Kapito received his Bachelor of Science in Economics from the Wharton School of the University of Pennsylvania in 1979 and his MBA from the Harvard Graduate School of Business in 1983.
Daniel Waltcher, 49, joined the Advisor in December 2009 and has been a principal of the Advisor since January 2010. Mr. Waltcher has served as a Director of the Advisor since December 2009, and as its Secretary since February 2012. Since November 2012, Mr. Waltcher has been a principal of BlackRock Advisors, LLC, an investment management company registered with the CFTC as a commodity trading advisor, commodity pool operator and swap firm. Mr. Waltcher has served as Deputy General Counsel and Managing Director of BlackRock, Inc., a global asset management firm, since January 2005. From October 1998 to December 2001, Mr. Waltcher served as Director and Senior Counsel at BlackRock, Inc. and from January 2002 to December 2004, he served as Managing Director and Senior Counsel at that entity. Mr. Waltcher became a principal and serves as Managing Director of BlackRock Asset Management International Inc., a commodity pool operator registered with the CFTC, BlackRock Financial Management Inc., an investment management company and a commodity trading adviser registered with the CFTC, BlackRock Institutional Trust Company, N.A., a national banking association and a commodity trading advisor registered with the CFTC and BlackRock Investment Management LLC, an investment management company since February 2012. Mr. Waltcher became a principal and serves as Secretary and Managing Director of the Sponsor since February 2012. Previously, Mr. Waltcher was Senior Counsel of Chancellor Capital Management, Inc., a money management firm, from July 1995 to September 1998 and an associate at Simpson Thacher & Bartlett, a law firm, from October 1989 to June 1995. Mr. Waltcher received his Bachelor of Arts from Cornell University in 1984 and his JD from Cornell Law School in 1989.
Greg Savage, 41, became a principal and associated person of BFA, an investment adviser registered with the SEC and commodity trading advisor registered with the CFTC, in March 2009. Mr. Savage became a principal and associated person of BlackRock Asset Management International Inc., a commodity pool operator, in March 2009. Mr. Savage has served as a Senior Portfolio Manager and Team Leader for BFA since September 2007. Mr. Savage also served as a Portfolio Manager for BFA from March 2001 to September 2007. Mr. Savage became a principal and associated person of the Sponsor in July 2012. Mr. Savage served as a Transition Services Manager for BTC, a national banking association and commodity trading adviser registered with the CFTC, from June 1999 to March 2001 and became an associated person of that entity in June 2007. Mr. Savage received his Bachelor of Science in Accounting from the University of Colorado at Boulder and is a CFA charterholder. He has the FINRA Series 7, 63 and 3 licenses.
BlackRock Delaware Holdings, Inc., a Delaware Corporation and an indirect subsidiary of BlackRock, Inc., became a principal of the Advisor in July 2012. BlackRock Delaware Holdings, Inc. owns 100% of the equity of the Advisor.
Ryan Braniff became a principal of the Advisor in October 2008. Reza Estilaei and Russ Koesterich became principals of the Advisor in July 2012.
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The Trust has entered into a FCM agreement with the Clearing FCM that provides for the execution and clearing of transactions in futures, payment of commissions, custody of assets and other standard provisions. UBS Securities will be the initial Clearing FCM of the Trust. The Trust may employ other futures commission merchants or foreign brokers for the execution of futures transactions.
The Clearing FCM is a registered securities broker-dealer and futures commission merchant. The information below concerning judicial, regulatory and arbitration proceedings involving the Clearing FCM is being provided in accordance with the disclosure requirements of CFTC Rule 4.24 and the National Futures Association. The information below concerning the Clearing FCM has been provided by the Clearing FCM. None of the Trust, the Sponsor, the Advisor, the Trustee or the Delaware Trustee take any responsibility for the accuracy or completeness of any information herein concerning the Clearing FCM.
UBS Securities principal business address is 677 Washington Boulevard, Stamford, CT 06901. UBS Securities is registered in the U.S. with FINRA as a broker-dealer and with the CFTC as a futures commission merchant. UBS Securities is a member of various U.S. futures and securities exchanges.
UBS Securities is and has been a defendant in numerous legal proceedings, including actions brought by regulatory organizations and government agencies, relating to its securities and commodities business that allege various violations of federal and state securities laws. UBS AG, the ultimate parent company to UBS Securities LLC, files periodic and other reports with the SEC on forms 20-F and 6-K. Certain actions with respect to UBS Securities futures commission merchant business are publicly available on the website of the NFA (http://www.nfa.futures.org/).
In the summer of 2008, the Massachusetts Securities Division, Texas State Securities Board, and the New York Attorney General all brought actions against UBS and UBS Financial Services, Inc. (UBS Financial), alleging violations of various state law anti-fraud provisions in connection with the marketing and sale of auction rate securities.
On August 8, 2008, UBS Securities and UBS Financial Services reached agreements with the SEC, the New York Attorney General (the NYAG), the Massachusetts Securities Division and other state regulatory agencies represented by the North American Securities Administrators Association (NASAA) to restore liquidity to all remaining clients holdings of auction rate securities by June 30, 2012. On October 2, 2008, UBS Securities and UBS Financial entered into a final consent agreement with the Massachusetts Securities Division settling all allegations in the Massachusetts Securities Divisions administrative proceeding against UBS Securities and UBS Financial with regards to the auction rate securities matter. On December 11, 2008, UBS Securities and UBS Financial executed an Assurance of Discontinuance in the auction rate securities settlement with the NYAG. On the same day, UBS Securities and UBS Financial finalized settlements with the SEC. UBS paid penalties of $75M to NYAG and an additional $75M to be apportioned among the participating NASAA states. In March 2010, UBS and NASAA agreed on final settlement terms, pursuant to which, UBS agreed to provide client liquidity up to an additional $200 million.
On August 14, 2008 the New Hampshire Bureau of Securities Regulation filed an administrative action against UBS Securities relating to a student loan issuer, the New Hampshire Higher Education Loan Corp. (NHHELCO). The complaint alleges fraudulent and unethical conduct in violation of New Hampshire state statutes. On April 14, 2010, UBS entered into a Consent Order resolving all of the Bureaus claims. UBS paid $750,000 to the Bureau for all costs associated with the Bureaus investigation. UBS entered a separate civil settlement with NHHELCO and provided a total financial benefit of $20M to NHHELCO.
On April 29, 2010, the CFTC issued an order with respect to UBS Securities LLC and levied a fine of $200,000. The Order stated that on February 6, 2009, UBS Securities employee broker aided and abetted UBS Securities customers concealment of material facts from the New York Mercantile Exchange (NYMEX) in
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violation of Section 9(a)(4) of the CEA, 7 U.S.C. § 13(a)(4) (2006). Pursuant to NYMEX Rules, a block trade must be reported to NYMEX within five minutes of the time of execution consistent with the requirements of NYMEX Rule 6.21C(A)(6). Although the block trade in question was executed earlier in the day, UBS Securities employee broker aided and abetted its customers concealment of facts when, in response to the customers request to delay reporting the trade until after the close of trading, UBS Securities employee did not report the trade until after the close. Because the employee broker undertook his actions within the scope of his employment, pursuant to Section 2(a)(1)(B) of the CEA, 7 U.S.C. § 2(a)(1)(B) (2006), and Commission Regulation 1.2, 17 C.F.R. § 1.2 (2009), UBS Securities is liable for the employee brokers aiding and abetting of its customers violation of Section 9(a)(4) of the CEA. The fine has been paid and the matter is now closed.
In October 2011, FINRA censured and imposed a $12 million fine against UBS Securities, alleging that the firm violated certain provisions of SEC Regulation SHO, FINRAs supervisory rules, various trade reporting rules, and SEC and FINRA books and records provisions. Reg SHO obligated a firm to, among other things, comply with a locate requirement, which requires that, prior to accepting or effecting a short sale in an equity security, a firm obtain and document its grounds for reasonably believing that the security can be borrowed so that it can be delivered in time for settlement. The rule also requires a firm to maintain independent aggregation units and to accurately mark sell orders long or short. FINRAs investigation and the resulting settlement agreement primarily focused on UBSs failure to comply with Reg SHOs locate requirement due mainly to system issues, failure to maintain its aggregation units or mark orders correctly. The settlement agreement also asserted that UBSs supervisory system, procedures, and practices were not reasonably designed to achieve compliance with applicable FINRA and SEC rules.
In 2011, UBS AG announced a $140.3 million settlement with the SEC, the Antitrust Division of the U.S. Department of Justice, the IRS and a group of state Attorneys General relating to the investment of proceeds of municipal bond issuances and associated derivative transactions. The settlement resolves the investigations by those regulators which had commenced in November 2006. Several related putative class actions, which were filed in Federal District Courts against UBS Securities and affiliates, among numerous other firms, remain pending. Approximately $63 million of the regulatory settlement was made available to potential claimants through a settlement fund, the majority of which has been claimed, thereby reducing the total monetary amount at issue in the class actions for UBS Securities.
UBS AG and UBS Securities are responding to a number of governmental inquiries and investigations and is involved in a number of litigations, arbitrations and disputes related to the financial crisis of 2007 to 2009 and, in particular, mortgage-related securities and other structured transactions and derivatives. In particular, the SEC is investigating UBS Securities structuring and underwriting of certain collateralized debt obligations (CDO) during the first and second quarters of 2007. UBS AG and UBS Securities have provided documents and testimony to the SEC and are continuing to cooperate with the SEC in its investigation. In February 2013, the SEC advised that it is terminating its investigation of UBS AGs and UBS Securities valuation of super senior tranches of CDOs during the third quarter of 2007 without recommending any enforcement action. UBS AG and UBS Securities have also communicated with and have responded to other inquiries by various governmental and regulatory authorities concerning various matters related to the financial crisis. These matters concern, among other things, UBS AGs and UBS Securities (i) disclosures and writedowns, (ii) interactions with rating agencies, (iii) risk control, valuation, structuring and marketing of mortgage-related instruments, and (iv) role as underwriter in securities offerings for other issuers.
UBS Securities (along with certain affiliates) is a defendant in several lawsuits filed by institutional purchasers of CDOs structured by UBS Securities in which plaintiffs allege, under various legal theories, that UBS Securities misrepresented the quality of the collateral underlying the CDOs. Plaintiffs in these suits collectively seek to recover several hundred million dollars in claimed losses, including one case in which plaintiffs claim losses of at least $331 million. These cases include a lawsuit filed in the Superior Court of the State of Connecticut in 2008 by Pursuit Partners, LLC and Pursuit Investment Management, LLC asserting misrepresentation and fraud claims against UBS AG, UBS Securities and an employee of UBS Securities,
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relating to alleged creation, marketing, and sale in 2007 of notes in certain CDOs, including but not limited to CDO notes issued by an affiliate. On November 6, 2012 the court granted UBS Securities motion to dismiss. Plaintiffs have filed a motion seeking reconsideration of the courts ruling.
From 2002 through 2007, prior to the crisis in the U.S. residential loan market, UBS Securities was a substantial underwriter of U.S. residential mortgage-backed securities (RMBS). UBS Securities has been named as a defendant relating to its role as underwriter of RMBS in a large number of lawsuits relating to approximately $44 billion in original face amount of RMBS underwritten by UBS Securities. Some of the lawsuits are in their early stages, and have not advanced beyond the motion to dismiss phase; others are in varying stages of discovery. Of the original face amount of RMBS at issue in these cases, approximately $11 billion was issued in offerings for which UBS Securities acted as underwriter and for which a UBS-related entity transferred underlying loans (the majority of which were purchased from third-party originators) into a securitization trust (UBS-sponsored RMBS). The remaining $33 billion of RMBS to which these cases relate was issued by third parties in securitizations in which UBS Securities acted as underwriter (third-party RMBS). In connection with certain of these lawsuits, UBS Securities has indemnification rights against surviving third-parties for losses or liabilities incurred by UBS Securities, but UBS Securities cannot predict the extent to which it will succeed in enforcing those rights.
These lawsuits include actions brought by the Federal Housing Finance Authority (FHFA), as conservator for the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation (collectively, the GSEs) in connection with the GSEs investments in $4.5 billion in original face amount of UBS-sponsored RMBS and $1.8 billion in original face amount of third-party RMBS. These suits assert claims for damages and rescission under federal and state securities laws and state common law and alleges losses of approximately $1.2 billion. The court denied UBS Securitiess motion to dismiss in May 2012, but UBS Securities is awaiting a decision from the U.S. Court of Appeals for the Second Circuit on an appeal with respect to two legal issues that were the subject of UBS Securities motion to dismiss. The FHFA also filed suits in 2011 against UBS Securities and other financial institutions relating to their role as underwriter of third-party RMBS purchased by the GSEs asserting claims under various legal theories, including violations of the federal and state securities laws and state common law.
In July 2012, a federal court in New Jersey dismissed with prejudice on statute of limitation grounds a putative class action lawsuit that asserted violations of the federal securities laws against various UBS entities, including UBS Securities, among others, in connection with $2.6 billion in original face amount of UBS-sponsored RMBS. The plaintiff filed a notice of appeal in August 2012.
A putative consolidated class action has been filed in the U.S. District Court for the Southern District of New York against UBS AG, a number of current and former directors and senior officers and certain broker-dealers, including UBS Securities that underwrote UBS AGs May 2008 Rights Offering alleging violation of the U.S. securities laws in connection with UBS AGs disclosures relating to UBS AGs positions and losses in mortgage-related securities, UBS AGs positions and losses in auction rate securities, and UBS AGs U.S. cross-border business. In 2011, the court dismissed all claims based on purchases or sales of UBS ordinary shares made outside the U.S., and, in September 2012, the court dismissed with prejudice the remaining claims based on purchases or sales of UBS ordinary shares made in the U.S. for failure to state a claim. Plaintiffs have appealed the courts decision.
HSH Nordbank AG (HSH) has filed an action against UBS AG and UBS Securities in New York State court relating to $500 million of notes acquired by HSH in a synthetic CDO transaction known as North Street Referenced Linked Notes, 2002-4 Limited (NS4). The notes were linked through a credit default swap between the NS4 issuer and UBS AG to a reference pool of corporate bonds and asset-backed securities. HSH alleges that UBS AG and UBS Securities knowingly misrepresented the risk in the transaction, sold HSH notes with embedded losses, and improperly profited at HSHs expense by misusing its right to substitute assets in the reference pool within specified parameters. HSH is seeking $500 million in compensatory damages plus pre-judgment interest. The case was initially filed in 2008. In March 2012, a New York state appellate court
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dismissed HSHs fraud claim and affirmed the trial courts dismissal of its negligent misrepresentation claim and punitive damages demand. As a result, the claims remaining in the case were for breach of contract and breach of the implied covenant of good faith and fair dealing. HSH has sought permission to appeal the appellate courts decision to the New York Court of Appeals.
Since 2011, multiple putative class action complaints have been filed and consolidated in federal court in Manhattan, against SinoTech Energy Limited (SinoTech), its officers and directors, its auditor at the time of its initial public offering, and its underwriters, including UBS AG and UBS Securities. The second amended complaint filed in July 2012 alleges, with respect to the underwriters, that the registration statement and prospectus filed in connection with SinoTechs $168 million initial public offering of American Depositary Shares, of which UBS AG and UBS Securities underwrote 70%, contained materially misleading statements and omissions, including allegations regarding the authenticity and accuracy of certain asset purchase contracts purportedly entered into between SinoTech and its vendors. Plaintiff asserts violations of the U.S. federal securities laws and seeks unspecified compensatory damages, among other relief. UBS AG, UBS Securities and several other defendants have reached an agreement to settle the lawsuit, which is subject to court approval.
In June 2010, UBS Securities was named as a defendant in a putative class action complaint brought in federal court in Oklahoma relating to its role as underwriter and seller in a bond offering of $182 million in zero coupon bonds originally issued in 1984 by Greater Southwestern Funding Corporation (GSF). The complaint alleges that GSF breached its contractual obligation to make payments on the bonds and is liable for the principal and interest due on the bonds, and that UBS Securities is liable for GSFs contract indebtedness under equitable theories, including a corporate veil-piercing claim. A class was certified in December 2011. UBS Securitiess motion for summary judgment seeking dismissal of all claims against it is pending.
UBS Securities will act as the Clearing FCM for the Trust and as such will be paid commissions for executing and clearing Index Future trades on behalf of the Trust. UBS Securities has not passed upon the adequacy or accuracy of this prospectus other than with respect to the information contained herein relating to UBS Securities and UBS AG. UBS Securities neither will act in any supervisory capacity with respect to the Advisor or the Trust nor participate in the management of the Advisor or the Trust.
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Conflicts Relating to the Sponsor, the Advisor, the Trustee and their Affiliates
General
Prospective investors should be aware that the Sponsor, the Advisor and the Trustee intend to assert that Shareholders have, by purchasing Shares, consented to the following conflicts of interest in the event of any proceeding alleging that such conflicts violated any duty owed by the Sponsor, the Advisor or the Trustee to the Shareholders.
The Sponsor, the Advisor and the Trustee want you to know that there are certain entities with which the Sponsor, the Advisor or the Trustee may have relationships that may give rise to conflicts of interest, or the appearance of conflicts of interest. These entities include the following: affiliates of the Sponsor, the Advisor and the Trustee (including BlackRock, Inc., and The PNC Financial Services Group, Inc., and each of their affiliates, directors, partners, trustees, managing members, officers and employees, collectively, the Affiliates).
The activities of the Sponsor, the Advisor, the Trustee and the Affiliates in the management of, or their interest in, their own accounts and other accounts they manage, may present conflicts of interest that could disadvantage the Trust and its shareholders. One or more of the Sponsor, the Advisor, the Trustee or the Affiliates provide investment management services to other funds and discretionary managed accounts that may follow an investment program similar to that of the Trust. The Sponsor, the Advisor, the Trustee and the Affiliates collectively are involved worldwide with a broad spectrum of financial services and asset management activities and may engage in the ordinary course of business in activities in which their interests or the interests of their clients may conflict with those of the Trust and its shareholders. One or more of the Sponsor, the Advisor, the Trustee or the Affiliates act or may act as an investor, investment banker, research provider, investment manager, financier, underwriter, advisor, market maker, trader, prime broker, lender, agent and principal, and have other direct and indirect interests, in assets in which the Trust directly and indirectly invest.
Thus, it is likely that the Trust will have multiple business relationships with and will engage in transactions with or obtain services from entities for which the Sponsor, the Advisor, the Trustee or an Affiliate performs or seeks to perform investment banking or other services.
One or more of the Sponsor, the Advisor, the Trustee or an Affiliate are currently involved in transactions with, and would stand to benefit from the positive performance by, entities that are or may be direct competitors of the Trust, including in capacities such as the sponsor, commodity pool operator, commodity trading advisor, trustee or administrator of competing or potentially competing funds. One or more of the Sponsor, the Advisor, the Trustee, and one or more Affiliates may additionally engage in proprietary trading and advise accounts and funds that have investment objectives similar to those of the Trust and/or that engage in and compete for transactions in the same types of assets as the Trust. Those trading activities are carried out without reference to positions held directly or indirectly by the Trust and may result in one or more of the Sponsor, the Advisor, the Trustee or an Affiliate having positions that are adverse to those of the Trust.
No Affiliate is under any obligation to share any investment opportunity, idea or strategy with the Trust. As a result, an Affiliate may compete with the Trust for appropriate investment opportunities. As a result of this and several other factors, the results of the Trusts investment activities may differ from those of an Affiliate and of other accounts managed by an Affiliate, and it is possible that the Trust and its shareholders could sustain losses during periods in which one or more Affiliates and other accounts achieve profits on their trading for proprietary or other accounts. The opposite result is also possible.
The Trust may, from time to time, enter into transactions in which other clients of the Sponsor, the Advisor, the Trustee or an Affiliate have an adverse interest. Furthermore, transactions undertaken by Affiliate-advised clients may adversely impact the Trust. Transactions by one or more Affiliate-advised clients or the Sponsor, the Advisor, the Trustee or an Affiliate may have the effect of diluting or otherwise disadvantaging the values, prices or investment strategies of the Trust.
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An Affiliate may maintain securities indices as part of its product offerings. Index-based funds seek to track the performance of securities indices and may use the name of the index in the fund name. Index providers, including the Affiliates, may be paid licensing fees for use of their indices or index names. Affiliates will not be obligated to license their indices to BlackRock, Inc., and BlackRock, Inc. cannot be assured that the terms of any index licensing agreement with the Affiliates will be as favorable as those terms offered to other index licensees.
The Trusts activities may be limited because of regulatory restrictions applicable to one or more Affiliates, and/or their internal policies designed to comply with such restrictions. An Affiliate may have business relationships with and purchase or distribute or sell services or products from or to distributors, consultants or others who recommend the Trust or who engage in transactions with or for the Trust and may receive compensation for such services. The Trust may also make brokerage and other payments to Affiliates in connection with the Trusts transactions.
The activities of the Sponsor, the Advisor, the Trustee or the Affiliates may give rise to other conflicts of interest that could disadvantage the Trust and its shareholders. The Sponsor, the Advisor and the Trustee have adopted policies and procedures designed to address these potential conflicts of interest.
The Sponsor
The Sponsor is an affiliate of the Advisor and the Trustee and therefore may have a conflict of interest with respect to its oversight of the Advisor or the Trustee, as the case may be. In particular, the Sponsor, which has authority to remove the Trustee or terminate the Advisory Agreement in its discretion, has an incentive not to exercise this authority, even when it is in the best interests of the Shareholders to do so, because of its affiliation with the Trustee or the Advisor, as the case may be. The Trustee is authorized to appoint an unaffiliated Trust Administrator, Tax Administrator or agent to carry out all or some of its duties under the Trust Agreement, but is not required to delegate any of its duties to an unaffiliated third party.
In addition, the Sponsor and its affiliates may engage in trading activities relating to the Index Futures, the components of the Index or the DJ-UBS Roll Select CI or other derivative instruments related to those indices that are not for the account of, or on behalf of, the Trust or the Shareholders. These activities may present a conflict between the Shareholders interest in the Shares and the interest of the Sponsor and its affiliates in their proprietary accounts, in facilitating transactions, including derivatives transactions, for their customers accounts and in accounts under their management. These trading activities, if they influence the value of the Trusts Index Futures, could be adverse to the interests of the Shareholders. Moreover, the Sponsor and its affiliates have published and in the future expect to publish research reports with respect to commodities markets. This research may express opinions or provide recommendations that are inconsistent with purchasing or holding Shares. The research should not be viewed as a recommendation or endorsement of the Shares in any way, and investors must make their own independent investigation of the merits of this investment. Any of these activities by the Sponsor and its affiliates may affect the level of the DJ-UBS Roll Select CI or its components, the value of the Index Futures and the price of the Shares.
No Distributions
The Sponsor has discretionary authority over all distributions made by the Trust. If the Sponsor determines that there is excess cash being held in the Trust beyond what is expected to be needed to achieve its investment objective and pay the Trusts near-term expenses, the Sponsor at its discretion can either distribute the extra cash to the Shareholders or cause it to be invested in additional Index Futures or Collateral Assets. The Trust has no obligation to make periodic distributions to Shareholders. The Sponsor will receive the Sponsors Fee in recognition for paying certain amounts that would otherwise be considered ordinary operating expenses of the Trust, which accrues daily at an annualized rate equal of up to 0.75% of the Adjusted Net Asset Value of the Trust, is payable monthly in arrears, and is subject to adjustment from time to time, , except that the Sponsors Fee may not be adjusted to above 0.75% of the Adjusted Net Asset Value absent an amendment to the Trust Agreement and thirty days prior notice to registered holders of the Shares. The amount of the Sponsors Fee will increase as the Trusts net assets increase.
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Resolution of Certain Conflicts
The Trust Agreement provides that in the case of a conflict of interest between the Trustee, the Sponsor and their affiliates, on the one hand, and the holders of Shares, on the other, the Trustee and the Sponsor will resolve such conflict considering the relevant interests of each party (including their own interests) and related benefits and burdens, any customary or accepted industry practices, and any applicable generally accepted accounting practices or principles. The Trust Agreement provides that in the absence of bad faith by the Trustee or the Sponsor, such a resolution will not constitute a breach of the Trust Agreement or any duty or obligation of the Trustee or the Sponsor.
Conflicts Relating to UBS Securities, the Index Providers and their Affiliates
UBS Securities
Activities conducted by UBS Securities and its affiliates may conflict with your interests as a Shareholder. For example, the Advisor may execute a substantial amount, and potentially all, of the purchases and sales of Index Futures through UBS Securities, as the Trusts Clearing FCM. In addition, it is expected that UBS Securities or its accountholders will represent, directly or indirectly, a substantial portion of the short-side market for the Index Futures. Further, UBS Securities and its affiliates actively trade futures contracts and options on futures contracts on the commodities that underlie the Index, over-the-counter contracts on these commodities, the underlying commodities included in the Index and other instruments and derivative products based on the Index, the DJ-UBS Roll Select CI and the DJ-UBS CI. Any of these activities of UBS Securities or its affiliates could adversely affect the level of the Index or Index Futures, directly or indirectly, by affecting the price of the underlying commodities and, therefore, the value of the Index, the Index Futures and the price of the Shares.
In addition, UBS Securities is one of the Index Co-Sponsors and two-thirds of the Supervisory Committee responsible for oversight of the DJ-UBS CI consist of representatives appointed by UBS Securities. Accordingly, UBS Securities will exercise substantial control over the Index, the DJ-UBS CI and the DJ-UBS Roll Select CI. To the extent UBS Securities interests conflict with those of the Trust and the Shareholders, the risks associated with such conflicts may be greater than they would otherwise be for a party that cannot exercise such control over the Index, the DJ-UBS CI and the DJ-UBS Roll Select CI. According to UBS Securities, UBS Securities has implemented a firewall with respect to its personnel regarding access to information concerning the composition and/or changes to the Index.
UBS Securities and its affiliates may also issue or underwrite other securities or financial or derivative instruments with returns indexed to the Index, the DJ-UBS CI or the DJ-UBS Roll Select CI, which would compete with the Shares. By introducing competing products into the marketplace, UBS Securities and its affiliates could adversely affect the price of the Shares. To the extent that UBS Securities or its affiliates serve as issuer, agent or underwriter of those securities or other similar instruments, their interests with respect to those products may be adverse to your interests as a Shareholder. In addition, UBS Securities will be the Initial Purchaser and an Authorized Participant while, as noted above, it is expected to represent, directly or indirectly, a substantial portion of the short-side market for the Index Futures and could therefore benefit from the adverse performance of the Index Futures which would be adverse to the price of the Shares.
The Index Providers
Activities conducted by the Index Providers and their respective affiliates may conflict with your interests as a Shareholder. For example, one or more of the Index Providers or their respective affiliates may also engage in trading in the Index, the DJ-UBS CI, the DJ-UBS Roll Select CI, related indices and sub-indices, and other investments relating to such indices or their underlying components on a regular basis as part of its general business, for proprietary accounts, for other accounts under management, to facilitate transactions for customers or to hedge obligations under products linked to such indices. One or more of the Index Providers or their respective affiliates may also issue or underwrite securities or financial or derivative instruments with returns
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linked or related to changes in the performance of any of the foregoing. Any of these activities could adversely affect the market price of the commodities or futures contracts underlying such indices or the value of the indices themselves, which may adversely affect the value of the Shares. According to UBS Securities, UBS Securities has implemented a firewall with respect to its personnel regarding access to information concerning the composition and/or changes to the Index. It is possible that one or more of the Index Providers or their respective affiliates could receive substantial returns from these hedging activities while the market value of the underlying commodities or futures contracts, the value of the indices, or the price or the NAV of the Shares decline. Some or all of these risks may be further exacerbated as a result of various other roles of the Index Providers or their affiliates relating to the Trust, the Shares or the Index Futures.
iShares® Dow Jones-UBS Roll Select Commodity Index Trust
THIS POOL HAS NOT COMMENCED TRADING AND DOES NOT HAVE ANY PERFORMANCE HISTORY.
iShares® Diversified Alternatives Trust
The following information, given as of May 31, 2013, pertains to the iShares® Diversified Alternatives Trust, which was operated by iShares® Delaware Trust Sponsor LLC, the Trusts commodity pool operator, and advised by BlackRock Fund Advisors, the Trusts Advisor. The iShares® Diversified Alternatives Trust was liquidated in June of 2013. When examining the information that follows, prospective investors in the Shares should keep in mind that the performance of the iShares® Diversified Alternatives Trust is not an indication of the returns, if any, that the Advisor may be able to generate for the Trust. The investment approach of the iShares® Diversified Alternatives Trust involved investments in a variety of futures contracts and foreign-currency forward contracts in a manner not intended to replicate the performance of any particular index or other benchmark, whereas the Trusts objective is to cause the performance of the Shares to correspond generally, but not necessarily be identical, to the performance of the Index, before the payment of expenses and liabilities.
Name of Pool: |
iShares® Diversified Alternatives Trust | |
Type of Pool: |
Public, Exchange-Listed Commodity Pool | |
Date of Inception of Trading: |
November 16, 2009 | |
Aggregate Gross Capital Subscriptions(1) as of |
$160,621,846 | |
Net Asset Value as of May 31, 2013: |
$42,678,239 | |
Net Asset Value per Share as of May 31, 2013(2): |
$53.35 | |
Worst Monthly Drawdown(3): |
(3.03)% (August 2011) | |
Worst Peak-to-Valley Drawdown(4): |
(7.43)% (April 2011 June 2012) |
(1) | Aggregate Gross Capital Subscriptions is the aggregate of all amounts ever contributed to the pool, including those of investors who subsequently redeemed their investments. |
(2) | Net Asset Value per Share is the net asset value of the pool divided by the total number of Shares outstanding as of May 31, 2013. |
(3) | Worst Monthly Drawdown is the largest single month loss sustained since inception of trading. Drawdown as used in this section of the prospectus means losses experienced by the pool over the specified period and is calculated on a rate of return basis, i.e., dividing net performance by beginning equity. Drawdown is measured on the basis of monthly returns only, and does not reflect intra-month figures. |
(4) | Worst Peak-to-Valley Drawdown is the greatest cumulative percentage decline in month-end Net Asset Value per Share due to losses sustained by the pool during any period in which the initial month-end Net Asset Value per Share is not equaled or exceeded by a subsequent month-end Net Asset Value per Share. |
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PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
Rate of Return:
Month |
2013 |
2012 |
2011 |
2010 |
2009 |
|||||||||||||||
January |
0.43% | 0.18% | 1.57% | 0.16% | n/a | |||||||||||||||
February |
0.65% | (0.47)% | 0.84% | (0.77)% | n/a | |||||||||||||||
March |
0.31% | 0.18% | (1.36)% | 0.57% | n/a | |||||||||||||||
April |
0.62% | (0.06)% | 3.08% | 1.01% | n/a | |||||||||||||||
May |
2.87% | 0.74% | (1.39)% | 0.84% | n/a | |||||||||||||||
June |
(1.00)% | (0.12)% | (1.41)% | n/a | ||||||||||||||||
July |
4.28% | (1.02)% | 0.48% | n/a | ||||||||||||||||
August |
(0.10)% | (3.03)% | (0.60)% | n/a | ||||||||||||||||
September |
(1.76)% | (1.43)% | 1.59% | n/a | ||||||||||||||||
October |
0.22% | 1.23% | 0.95% | n/a | ||||||||||||||||
November |
0.26% | (1.27)% | (0.27)% | (0.67)% | ||||||||||||||||
December |
1.66% | (0.16)% | (0.69)% | (1.16)% | ||||||||||||||||
Year |
4.96% | 4.10% | (3.17)% | 1.84% | (1.82)% | |||||||||||||||
|
(through May 2013 |
) |
|
(January December 2012 |
) |
|
(January December 2011) |
|
|
(January December 2010 |
) |
|
(November December 2009 |
) |
iShares® S&P GSCI Commodity-Indexed Trust
The following information, given as of July 31, 2013, pertains to the iShares® S&P GSCI Commodity-Indexed Trust, operated by BlackRock Asset Management International Inc., the sole member of the Trusts commodity pool operator. The summary below also substantially reflects the performance of the iShares® S&P GSCI Commodity-Indexed Investing Pool LLC, which is advised by BlackRock Fund Advisors, the Trusts Advisor. When examining the information that follows, prospective investors in the Shares should keep in mind that the performance of the iShares® S&P GSCI Commodity-Indexed Trust is not an indication of the returns, if any, that the Advisor may be able to generate for the Trust. The objective of the iShares® S&P GSCI Commodity-Indexed Trust is to seek investment results that correspond generally, but not necessarily be identical, to the performance of the S&P GSCI Total Return Index, before the payment of expenses and liabilities, whereas the Trusts objective is to cause the performance of the Shares to correspond generally, but not necessarily be identical, to the performance of the Dow Jones-UBS Roll Select Commodity Index Total Return, before the payment of expenses and liabilities.
Name of Pool: |
iShares® S&P GSCI Commodity-Indexed | |
Type of Pool: |
Public, Exchange-Listed Commodity Pool | |
Date of Inception of Trading: |
July 10, 2006 | |
Aggregate Gross Capital Subscriptions(1) as of July 31, 2013: |
$2,812,815,829 | |
Net Asset Value as of July 31, 2013: |
$1,136,207,706 | |
Net Asset Value per Share as of July 31, 2013(2): |
$32.42 | |
Worst Monthly Drawdown(3): |
(27.77%) (October 2008) | |
Worst Peak-to-Valley Drawdown(4): |
(67.43%) (June 2008 February 2009) |
(1) | Aggregate Gross Capital Subscriptions is the aggregate of all amounts ever contributed to the pool, including those of investors who subsequently redeemed their investments. |
(2) | Net Asset Value per Share is the net asset value of the pool divided by the total number of Shares outstanding as of July 31, 2013. |
(3) | Worst Monthly Drawdown is the largest single month loss sustained since inception of trading. Drawdown as used in this section of the prospectus means losses experienced by the pool over the specified period and is calculated on a rate of return basis, i.e., dividing net performance by beginning equity. Drawdown is measured on the basis of monthly returns only, and does not reflect intra-month figures. |
(4) | Worst Peak-to-Valley Drawdown is the greatest cumulative percentage decline in month-end Net Asset Value per Share due to losses sustained by the pool during any period in which the initial month-end Net Asset Value per Share is not equaled or exceeded by a subsequent month-end Net Asset Value per Share. |
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PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
Rate of Return:
Month |
2013 |
2012 |
2011 |
2010 |
2009 |
2008 |
||||||||||||||||||
January |
4.29% | 2.15% | 2.58% | (7.74)% | (6.76)% | 0.19% | ||||||||||||||||||
February |
(4.64)% | 6.07% | 4.11% | 5.51% | (6.51)% | 10.29% | ||||||||||||||||||
March |
0.83% | (2.23)% | 3.10% | 1.56% | 4.67% | (0.76)% | ||||||||||||||||||
April |
(4.86)% | (0.54)% | 3.99% | 1.98% | (1.00)% | 8.25% | ||||||||||||||||||
May |
(1.40)% | (13.13)% | (7.60)% | (13.15)% | 19.52% | 9.23% | ||||||||||||||||||
June |
0.19% | 1.09% | (5.70)% | 0.83% | 0.75% | 8.42% | ||||||||||||||||||
July |
4.75% | 6.35% | 3.85% | 5.44% | 0.03% | (12.07)% | ||||||||||||||||||
August |
6.37% | (2.69)% | (6.11)% | (1.74)% | (7.40)% | |||||||||||||||||||
September |
(1.56)% | (11.85)% | 8.74% | (0.14)% | (11.99)% | |||||||||||||||||||
October |
(4.17)% | 10.21% | 2.43% | 6.20% | (27.77)% | |||||||||||||||||||
November |
1.41% | 0.42% | 0.94% | 0.67% | (16.40)% | |||||||||||||||||||
December |
(0.73)% | (1.64)% | 9.74% | 0.86% | (13.65)% | |||||||||||||||||||
Year |
(1.28)% | (0.61)% | (3.25)% | 7.83% | 15.12% | (47.47)% | ||||||||||||||||||
|
(through July 2013) |
|
|
(January December 2012) |
|
|
(January December 2011) |
|
|
(January December 2010) |
|
|
(January December 2009) |
|
|
(January December 2008) |
|
84
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of U.S. federal income tax consequences material to the purchase, ownership and disposition of the Shares. Unless otherwise specifically indicated herein, this summary addresses the tax consequences only to a beneficial owner of Shares that is (i) an individual citizen or resident of the United States, (ii) a corporation organized in or under the laws of the United States or any state thereof or the District of Columbia or (iii) otherwise subject to U.S. federal income taxation on a net income basis in respect of the Shares (a U.S. Holder). This summary does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a decision to purchase the Shares by any particular investor, including tax considerations that arise from rules of general application to all taxpayers or to certain classes of taxpayers or that are generally assumed to be known by investors. This summary also does not address the tax consequences to (1) persons that may be subject to special treatment under U.S. federal income tax law, such as banks, insurance companies, thrift institutions, regulated investment companies, real estate investment trusts, traders in securities that elect to mark to market and dealers in securities or currencies, (2) persons that will hold Shares as part of a position in a straddle or as part of a hedging, conversion or other integrated investment transaction for federal income tax purposes, (3) persons whose functional currency is not the U.S. dollar, or (4) persons that do not hold Shares as capital assets.
This summary is based on the Code, Treasury regulations, IRS rulings and judicial decisions in effect as of the date of this prospectus, all of which are subject to change at any time (possibly with retroactive effect) or different interpretations. As the law is technical and complex, the discussion below necessarily represents only a general summary. Moreover, the effect of any applicable state, local or foreign tax laws is not discussed.
There can be no assurance that the IRS will not challenge one or more of the tax consequences described herein. The Sponsor has not obtained, nor does it intend to obtain, a ruling from the IRS with respect to the U.S. federal tax consequences of acquiring, owning or disposing of the Shares. Prospective investors in the Shares should consult their tax advisors in determining the tax consequences of an investment in the Shares, including the application of state, local or other tax laws and the possible effects of changes in federal or other tax laws.
Classification of the Trust
Under current law and assuming full compliance with the terms, without modification, of the Trust Agreement and such other documents as are relevant, in the opinion of Skadden, Arps, Slate, Meagher & Flom LLP, the Trust will not be treated as an association taxable as a corporation for U.S. federal income tax purposes. Accordingly, the Trust will not be a taxable entity for U.S. federal income tax purposes and will not incur U.S. federal income tax liability.
The opinion of Skadden, Arps, Slate, Meagher & Flom LLP is based on various assumptions relating to the Trusts organization, operation, assets and activities, including assumptions that the Trust will not invest in any assets except those specifically provided for currently in this prospectus, and that neither the Trust Agreement nor any other relevant document will be otherwise amended. The opinion of Skadden, Arps, Slate, Meagher & Flom LLP further assumes that all factual representations and statements set forth in all relevant documents, records and instruments are true and correct, all actions described in this prospectus are completed in a timely fashion and that the Trust will at all times operate in accordance with the method of operation described in the Trust Agreement and this prospectus, and is conditioned upon factual representations and covenants made by the Trust and the Sponsor regarding the Trusts organization, operation, assets, activities and conduct of the Trusts operations, and assumes that such representations and covenants are accurate and complete.
The Trust files partnership tax returns. See Information Reporting with Respect to Shares. Accordingly, you will be taxed as a beneficial owner of an interest in a partnership, which means that you generally will be required to take into account your allocable share of the Trusts items of income, gain, loss, deduction, expense and credit in computing your U.S. federal income tax liability.
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Classification of the Index Futures
The Sponsor expects that the Index Futures will constitute Section 1256 contracts within the meaning of Section 1256 of the Code (Section 1256 Contracts). The Code generally applies a mark-to-market system of taxing unrealized gains and losses to such contracts and otherwise provides for special rules of taxation. A Section 1256 Contract includes certain regulated futures contracts and foreign currency contracts. Under these rules, Section 1256 Contracts held by the Trust at the end of each taxable year of the Trust are treated for U.S. federal income tax purposes as if they were sold by the Trust for their fair market value on the last business day of such taxable year. The net gain or loss, if any, resulting from such deemed sales (known as marking to market), together with any gain or loss resulting from actual sales or other dispositions of Section 1256 Contracts, must be taken into account by the Trust in computing its taxable income for such year. If a Section 1256 Contract held by the Trust at the end of a taxable year is sold in the following year, the amount of any gain or loss realized on such sale will be adjusted to reflect the gain or loss previously taken into account under the mark-to-market rules.
With certain exceptions, capital gains and losses from such Section 1256 Contracts generally are characterized as short-term capital gains or losses to the extent of 40% thereof and as long-term capital gains or losses to the extent of 60% thereof. Under certain circumstances, long-term capital gains recognized by individuals may qualify for reduced rates of tax.
In General
The Trust will be treated, for U.S. federal income tax purposes, as owning the Index Futures and the Collateral Assets. It is expected that the Trusts items of income or loss, as the case may be, will consist primarily of (1) capital gain or loss, as the case may be, in respect of the Index Futures, computed annually under the mark-to-market rules applicable to Section 1256 Contracts described above, (2) adjustments to such capital gain or loss, as the case may be, in respect of the Index Futures upon their expiration or upon disposition of an Index Future by the Trust and (3) interest income on Collateral Assets, and if applicable, gain or loss on the disposition of such Collateral Assets.
Gain or loss on an Index Future or on securities held as collateral generally will be equal to the difference between the amount realized on the sale or other disposition thereof and the adjusted tax basis of the Index Future or securities, respectively. In the case of Index Futures, with certain exceptions, such gain or loss will be characterized as short-term capital gains or losses to the extent of 40% thereof and as long-term capital gains or losses to the extent of 60% thereof. Gain or loss on the securities held by the Trust to collateralize its Index Future positions, which will generally consist of 13 week (3 month) U.S. Treasury securities, are expected to be characterized as short-term capital gains or losses, but gain or loss on any such securities that are held by the Trust for more than one year will be characterized as long-term capital gain or loss. Interest or dividends accrued or paid on the securities held by the Trust to collateralize its Index Future positions will be taxable to you as ordinary income. If any of the securities are treated as issued with original issue discount, you generally will be required to include the original issue discount in income.
Under certain circumstances, loss deductions are disallowed where they result from wash sales of stock or securities. A wash sale occurs if stock or securities are sold at a loss and the seller acquires substantially identical stock or securities within a certain time period before or after the sale. The Trust should not be subject to the wash sale rules in connection with the sale or disposition of Index Futures, because the Index Futures do not constitute securities for purposes of these rules.
Because you will be treated as a beneficial owner of an interest in a partnership, you will be required to include in income the Trusts items of income, gain, loss, deduction, expense and credit that are allocated to you for the Trusts taxable year ending with or within your taxable year, regardless of whether any distributions are made to you. Accordingly, you may be required to include amounts in income without a corresponding current
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receipt of cash if the Trust earns taxable income but does not make corresponding cash distributions. For example, you may incur income tax liabilities in excess of cash distributions on Shares as a result of the mark-to-market rules applicable to Section 1256 Contracts, as a result of adjustments to the capital gain or loss computed for a Section 1256 Contract when it is closed out (by offset or otherwise), expires or from the disposition of such Section 1256 Contract in connection with the redemption by an Authorized Participant of a Basket, and as a result of interest earned by the Trust on the securities it holds to collateralize its Index Future positions or from amounts deposited with the Clearing FCM or the Trust Administrator.
Distributions on the Shares
Distributions on the Shares generally will not be taxable to you, except to the extent that the cash you receive exceeds your adjusted tax basis in the Shares. Cash distributions in excess of your adjusted tax basis in the Shares generally will be treated as gain from the sale or exchange of the Shares, taxable in accordance with the rules described under Sale, Exchange or Other Taxable Disposition of Shares.
Upon a liquidating distribution of cash by the Trust (a distribution to you that terminates your interest in the Trust), you generally will recognize gain or loss from the sale or exchange of the Shares, taxable in accordance with the rules described under Sale, Exchange or Other Taxable Disposition of Shares.
Sale, Exchange or Other Taxable Disposition of Shares
Upon the sale, exchange or other taxable disposition of Shares, you generally will recognize capital gain or loss equal to the difference between the amount realized upon the sale, exchange or other disposition and your adjusted tax basis in the Shares. Your adjusted tax basis in your Shares generally will be equal to the amount you paid for your Shares (1) increased by any income or gain of the Trust that is allocated to you, and by the amount of any contributions you make to the capital of the Trust as part of the creation of a Basket, and (2) decreased, but not below zero, by any loss or expense of the Trust that is allocated to you, and by the amount of any cash and the tax basis of any property distributed (or deemed distributed) to you. For a description of the allocation of income, gain, loss and expense to you, see Partnership Allocations and Adjustments.
Creation and Redemption of Baskets
If the Trust transfers or otherwise disposes of an Index Future in connection with the redemption of a Basket, the disposition will generally give rise to gain or loss that will be allocated in part to you. However, holders of Shares other than Authorized Participants (or holders for which an Authorized Participant is acting) generally are not expected to recognize gain or loss directly as a result of an Authorized Participants creation or redemption of a Basket. An Authorized Participants creation or redemption of a Basket also may affect the portion of the Trusts tax basis in the Trusts assets that is allocated to you, which could affect the amount of gain or loss allocated to you under the mark-to-market system applicable to Section 1256 Contracts, or on the closing out (whether by offset or otherwise), expiration or disposition of an Index Future by the Trust.
Distributions of Index Futures to Authorized Participants in connection with redemptions of Baskets may give rise to character and timing mismatches between gain or loss recognized by the Authorized Participant on the Index Futures and gain or loss recognized on any Shares retained by the Authorized Participant (or, if relevant, a holder of Shares for which an Authorized Participant is acting). In a nonliquidating distribution, the Authorized Participant generally will receive a carryover basis in the Index Futures distributed to it (assuming that such carryover basis does not exceed the holders outside basis in its Shares) and the holder will reduce its outside basis in the Shares it retains after the redemption by the sum of the basis it takes in the Index Futures and the amount of cash, if any, it receives. Thus, for example, an Authorized Participant that is a dealer in securities who receives a distribution of Index Futures generally will recognize capital gain or loss on such Index Futures in the year of the distribution under the special mark-to-market rules applicable to regulated futures contracts under Section 1256 of the Code but may recognize in the same year an offsetting amount of ordinary income or
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loss on any Shares it retains after the redemption under the regular mark-to-market rules that apply to dealers in securities. Similarly, an Authorized Participant (or other redeeming holder of Shares) that is not a dealer in securities who receives a distribution of Index Futures generally will recognize capital gain or loss on such Index Futures in the year of the distribution under the special mark-to-market rules applicable to regulated futures contracts but generally will not recognize gain or loss with respect to the Shares it retains after the redemption until it disposes of such Shares. Different rules would apply if a creation of Shares and a redemption of Shares were treated as a disguised sale under special rules applicable to certain contributions to and redemptions from a partnership. The Trust intends to take the position that the disguised sale rules generally do not apply. Authorized Participants (and other redeeming holders of Shares for which an Authorized Participant is acting) are urged to consult their own tax advisor with regard to the tax consequences to them of redemption of Shares, including whether the Authorized Participant (or other redeeming holder of Shares) is obligated to file a disguised sale disclosure statement with its tax return.
Limitations on Deductibility of Certain Losses and Expenses
The deductibility for U.S. federal income tax purposes of a U.S. Holders share of losses and expenses of the Trust is subject to certain limitations, including, but not limited to, rules providing that: (1) you may not deduct the Trusts losses that are allocated to you in excess of your adjusted tax basis in your Shares; (2) individuals and personal holding companies may not deduct the losses allocable to a particular activity in excess of the amount that they are considered to have at risk with respect to the activity; and (3) a noncorporate U.S. Holder may deduct its share of expenses of the Trust only to the extent that such share, together with such noncorporate U.S. Holders other miscellaneous itemized deductions, exceeds 2% of such noncorporate U.S. Holders adjusted gross income. The Trust will report the annual allocation from the Trust to the Sponsor as an expense of the kind subject to the limitation on miscellaneous itemized deductions. To the extent that a loss or expense that you cannot deduct currently is allocated to you, you may be required to report taxable income in excess of your economic income or cash distributions to you on the Shares. You are urged to consult your own tax advisor with regard to these and other limitations on your ability to deduct losses or expenses with respect to the Trust.
Partnership Allocations and Adjustments
For U.S. federal income tax purposes, your share of the Trusts income, gain, loss, deduction and other items will be determined by the Trust Agreement, unless an allocation under these agreements does not have substantial economic effect, in which case the allocations will be determined in accordance with the partners interests in the partnership. Subject to the discussion below under Monthly Allocation and Revaluation Conventions and Section 754 Election, the allocations pursuant to the Trust Agreement should be considered to have substantial economic effect.
If the allocations provided by the Trust Agreement were successfully challenged by the IRS, the amount of income or loss allocated to you for U.S. federal income tax purposes under the agreement could be increased or decreased, the timing of income or loss could be accelerated or deferred, or the character of the income or loss could be altered.
As described in more detail below, the U.S. tax rules that apply to partnerships are complex and their application is not always clear. Moreover, the rules generally were not written for, and in some respects are difficult to apply to, publicly traded interests in partnerships. The Trust will apply certain assumptions and conventions intended to comply with the intent of the rules and to report income, gain, deduction, loss and credit to investors in a manner that reflects the investors economic gains and losses, but these assumptions and conventions may not comply with all aspects of the applicable Treasury regulations. It is possible therefore that the IRS will successfully assert that these assumptions or conventions do not satisfy the technical requirements of the Code or the Treasury regulations and will require that items of income, gain, deduction, loss and credit be adjusted or reallocated in a manner that could be adverse to you. Holders with questions regarding partnership
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allocations and adjustments or other tax matters may obtain further information from BlackRock Asset Management International Inc., the sole member and manager of the Sponsor, at the following number: 1-800-iShares or 1-800-474-2737.
Monthly Allocation and Revaluation Conventions
In general, the Trusts taxable income and losses will be determined monthly and will be apportioned among the holders of Shares in proportion to the number of Shares treated as owned by each of them as of the close of the last trading day of the preceding month. By investing in the Shares, a U.S. Holder agrees that, in the absence of an administrative determination or judicial ruling to the contrary, it will report income and loss under the monthly allocation and revaluation conventions described below.
Under the monthly allocation convention, the person that was treated for U.S. federal income tax purposes as holding a Share as of the close of the last trading day of the preceding month will be treated as continuing to hold that Share until immediately before the close of the last trading day of the following month. As a result, a holder that is transferring its Shares or whose Shares are redeemed prior to the close of the last trading day of a month may be allocated income, gain, loss and deduction realized after the date of transfer.
The Code generally requires that items of partnership income and deductions be allocated between transferors and transferees of partnership interests on a daily basis. It is possible that transfers of Shares could be considered to occur for these purposes when the transfer is completed without regard to the Trusts monthly convention for allocating income and deductions. In that event, the Trusts allocation method might be viewed as violating that requirement.
In addition, for any month in which a creation or redemption of Shares takes place, the Trust generally will credit or debit, respectively, the book capital accounts of the holders of existing Shares with any unrealized gain or loss in the Trusts assets. This will result in the allocation of items of the Trusts income, gain, loss, deduction and credit to existing holders of Shares to account for the difference between the tax basis and fair market value of property owned by the Trust at the time new Shares are issued or old Shares are redeemed (reverse section 704(c) allocations). The intended effect of these allocations is to allocate any built-in gain or loss in the Trusts assets at the time of a creation or redemption of Shares to the investors that economically have earned such gain or loss.
As with the other allocations described above, the Trust generally will use a monthly convention for purposes of the reverse section 704(c) allocations. More specifically, the Trust generally will credit or debit, respectively, the book capital accounts of holders of existing Shares with any unrealized gain or loss in the Trusts assets based on the lowest fair market value of the assets and shares, respectively, during the month in which the creation or redemption transaction takes place, rather than the fair market value at the time of such creation or redemption (the monthly revaluation convention). As a result, it is possible that, for U.S. federal income tax purposes, (1) a purchaser of newly issued Shares will be allocated some or all of the unrealized gain in the Trusts assets at the time it acquires the Shares or (2) an existing holder of Shares will not be allocated its entire share in the unrealized loss in the Trusts assets at the time of such acquisition. Furthermore, the applicable Treasury regulations generally require that the book capital accounts will be adjusted based on the fair market value of partnership property on the date of adjustment and do not explicitly allow the adoption of a monthly revaluation convention.
The Code and applicable Treasury regulations generally require that items of partnership income and deductions be allocated between transferors and transferees of partnership interests on a daily basis, and that adjustments to book capital accounts be made based on the fair market value of partnership property on the date of adjustment. The Code and regulations do not contemplate monthly allocation or revaluation conventions. If the IRS does not accept the Trusts monthly allocation or monthly revaluation convention, the IRS may contend that taxable income or losses of the Trust must be reallocated among the holders of Shares. If such a
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contention were sustained, the holders respective tax liabilities would be adjusted to the possible detriment of certain holders. The Trustee is authorized to revise the Trusts allocation and revaluation methods in order to comply with applicable law or to allocate items of partnership income and deductions in a manner that reflects more accurately the holders interest in the Trust.
Under proposed Treasury regulations, if finalized in the form proposed, publicly traded partnerships like the Trust generally would be permitted to use monthly allocation conventions similar to those used by the Trust with respect to most transfers of partnership interests. It appears that existing publicly traded partnerships such as the Trust would not be subject to certain portions of the proposed regulations when finalized. The Trustee may amend the allocation conventions of the Trust to the extent required or permitted pursuant to these regulations when they are issued in final form.
Section 754 Election
The Trust intends to make the election permitted by Section 754 of the Code. Such an election is irrevocable without the consent of the IRS. These elections generally will require each purchaser of Shares to adjust its proportionate share of the tax basis in the Trusts assets (inside basis) to fair market value, as reflected in the purchase price for the purchasers Shares, as if the purchaser had acquired a direct interest in the Trusts assets. These adjustments are attributed solely to a purchaser of Shares and are not added to the tax basis of the Trusts assets associated with other holders of Shares. Generally the Section 754 election is intended to eliminate the disparity between a purchasers outside basis in its Shares and the Trusts corresponding inside basis in its assets such that the amount of gain or loss that will be allocated to the purchaser on the disposition by the Trust of its assets (for example, on the expiration or disposition of an Index Future) will correspond to the purchasers share in the appreciation or depreciation in the value of such assets since the purchaser acquired its Shares. Depending on the relationship between a holders purchase price for Shares and its interest in the unadjusted share of the Trusts inside basis at the time of the purchase, the Section 754 election may be either advantageous or disadvantageous to the holder as compared to the amount of gain or loss a holder would be allocated absent the Section 754 election.
The calculations under Section 754 are complex, and there is little legal authority concerning the mechanics of the calculations, particularly in the context of publicly traded interests in partnerships. To help reduce the complexity of those calculations and the resulting administrative costs to the Trust, the Trust will apply certain assumptions and conventions in determining and allocating the basis adjustments. It is possible that the IRS will successfully assert that the assumptions and conventions utilized by the Trust do not satisfy the technical requirements of the Code or the Treasury regulations and will require different basis adjustments to be made. If such different adjustments were required, some holders could be adversely affected.
In order to make the basis adjustments permitted by Section 754, the Trust will be required to obtain information regarding each holders secondary market transactions in Shares, as well as creations and redemptions of Shares. The Trust will seek such information from the record holders of Shares, and, by purchasing Shares, each beneficial owner of Shares will be deemed to have consented to the provision of such information by the record owner of such beneficial owners Shares. Notwithstanding the foregoing, however, there can be no guarantee that the Trust will be able to obtain such information from record owners or other sources, or that the basis adjustments that the Trust makes based on the information they are able to obtain will be effective in eliminating disparity between a holders outside basis in its Shares and its interest in the inside basis in the Trusts assets.
Constructive Termination
The Trust will experience a constructive termination for tax purposes if there is a sale or exchange of 50% or more of the total Shares within a 12-month period. Although the Trust would continue to exist as a Delaware statutory trust, a constructive termination would, among other things, result in the closing of the Trusts taxable
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year for all holders of Shares. A constructive termination occurring on a date other than December 31 would result in the Trust filing two tax returns, and each holder of Shares could receive two Schedules K-1, for one calendar year. However, pursuant to an IRS relief procedure for publicly traded partnerships that have constructively terminated, the IRS may allow the Trust to provide a single Schedule K-1 to each holder of Shares for the tax year in which the termination occurs. In the case of a holder of Shares reporting on a taxable year other than a fiscal year ending December 31, the closing of the Trusts taxable year may result in more than 12 months of its taxable income or loss being includable in its taxable income for the year of termination. The Trust would be required to make new tax elections after a termination, including a new election under Section 754. A termination could also result in penalties if the Trust were unable to determine that the termination had occurred.
Other Matters
Borrowing of Shares
If your Shares are borrowed (or rehypothecated) by your broker and sold to a third party, for example as part of a loan to a short seller to cover a short sale of Shares, you may be considered as having disposed of those Shares. If so, you would no longer be a beneficial owner of a pro rata portion of the Shares during the period of the loan and may recognize gain or loss from the disposition. In addition, during the period of the loan, (1) the Trusts income, gain, loss, deduction or other items with respect to those Shares would not be reported by you, and (2) any cash distributions received by you with respect to those Shares could be fully taxable, likely as ordinary income. Accordingly, if you desire to avoid the risk of income recognition from a loan of your Shares, you should modify any applicable brokerage account agreements to prohibit your broker from borrowing your Shares.
These rules should not affect the amount or timing of items of income, gain, deduction or loss reported by a taxpayer that is a dealer in securities that marks the Shares to market for U.S. federal income tax purposes, or a trader in securities that has elected to use the mark-to-market method of tax accounting with respect to the Shares.
Information Reporting with Respect to Shares
As described above under Classification of the Trust, as a result of statements by the IRS on the classification of trusts similar to the Trust, the Trust files a partnership return rather than a trust return.
Tax information will be reported to investors on an IRS Schedule K-1 for each calendar year as soon as practicable after the end of each such year but in no event later than March 15. Each Schedule K-1 provided to a holder of Shares will set forth the holders share of the Trusts items of income, gain, deduction, loss and credit for such year in a manner sufficient for a U.S. Holder to complete its tax return with respect to its investment in the Shares.
Each holder, by its acquisition of Shares, will be deemed to agree to allow brokers and nominees to provide to the Trust its name and address and such other information and forms as may be reasonably requested by the Trust for purposes of complying with their tax reporting and withholding obligations (and to waive any confidentiality rights with respect to such information and forms for such purpose) and to provide such information or forms upon request.
As described above under Partnership Allocations and AdjustmentsMonthly Allocation and Revaluation Conventions, the partnership tax rules generally require that items of partnership income and deductions be allocated between transferors and transferees of partnership interests on a daily basis, and that certain adjustments be made based on daily valuations. These regulations do not contemplate monthly allocation conventions of the kind that will be used by the Trust. If the IRS does not accept the monthly reporting convention, the IRS may contend that taxable income or losses of the Trust must be reallocated among investors. If such a contention were
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sustained, investors respective tax liabilities would be adjusted to the possible detriment of certain investors. The Trustee is authorized to revise the Trusts allocation method to comply with applicable law.
Reportable Transactions
Treasury regulations require U.S. taxpayers to report certain types of transactions to the IRS (Reportable Transactions). Under these regulations, a U.S. Holder who disposes of Shares and recognizes a loss with respect to such disposition in excess of certain thresholds would be required to report the loss on Form 8886 (Reportable Transaction Statement). The loss threshold is $10 million in any single taxable year or $20 million in any combination of taxable years for corporations, and $2 million in any single taxable year or $4 million in any combination of taxable years for most partnerships, individuals, S corporations or trusts. You should consult with your tax advisor regarding any tax filing and reporting obligation that may apply in connection with acquiring, owning and disposing of Shares.
Tax Audits
Under the Code, adjustments in tax liability with respect to the Trusts items generally will be made at the Trust level in a partnership proceeding rather than in separate proceedings with each Shareholder. The Sponsor will represent the Trust as the Trusts Tax Matters Partner during any audit and in any dispute with the IRS. Each Shareholder will be informed of the commencement of an audit of the Trust. In general, the Tax Matters Partner may enter into a settlement agreement with the IRS on behalf of, and that is binding upon, the Shareholders.
Adjustments resulting from an IRS audit may require each Shareholder to adjust a prior years liability, and possibly may result in an audit of such Shareholders return. Any audit of a Shareholders return could result in adjustments not related to the Trusts returns as well as those related to the Trusts returns.
The Tax Matters Partner will make some elections on the Trusts behalf and on behalf of the Trusts Shareholders. In addition, the Tax Matters Partner can extend the statute of limitations for assessment of tax deficiencies against Shareholders for items in the Trusts returns. The Tax Matters Partner may bind a Shareholder with less than a 1% profits interest in the Trust to a settlement with the IRS unless that Shareholder elects, by filing a statement with the IRS, not to give that authority to the Tax Matters Partner. The Tax Matters Partner may seek judicial review, by which all the Shareholders are bound, of a final partnership administrative adjustment and, if the Tax Matters Partner fails to seek judicial review, judicial review may be sought by any Shareholder having at least a 1% interest in profits or by any group of Shareholders having in the aggregate at least a 5% interest in profits. However, only one action for judicial review will go forward, and each Shareholder with an interest in the outcome may participate.
Tax-Exempt Organizations
An organization that is otherwise exempt from U.S. federal income tax generally is nonetheless subject to taxation with respect to its unrelated business taxable income (UBTI). Except as noted below with respect to certain categories of exempt income, UBTI generally includes income or gain derived (either directly or through a partnership) from a trade or business, the conduct of which is substantially unrelated to the exercise or performance of the organizations exempt purpose or function. UBTI generally does not include passive investment income, such as dividends, interest and capital gains, whether realized by the organization directly or indirectly through a partnership (such as the Trust) in which it is a partner. However, if a tax-exempt entitys acquisition of a partnership interest is debt-financed, or the partnership incurs acquisition indebtedness, all or a portion of the income or gain attributable to the debt-financed property would also be included in UBTI regardless of whether such income would otherwise be excluded as dividends, interest or capital gains. The income of the Trust will be passive investment income generally excluded from UBTI and the Trust will not incur acquisition indebtedness. Thus, if you are a tax-exempt entity and your acquisition of the Shares is not debt-financed, income with respect to the Shares will not be UBTI.
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Regulated Investment Companies
Regulated investment companies (RICs) such as mutual funds are subject to a 90% annual gross income test and must satisfy certain diversification requirements with respect to their assets (generally at the close of each quarter of the taxable year). Under the income test, at least 90% of a RICs gross income must be derived from dividends, interest, payments with respect to certain securities loans, gains from the sale or other disposition of stock or securities or foreign currencies or other income derived with respect to its business of investing in stock, securities or currencies (RIC Qualifying Income). In general, income and gains from investments in commodities and futures contracts do not qualify as RIC Qualifying Income. Very generally, under the diversification test, at the close of each quarter of a RICs taxable year, at least 50% of the value of its assets must be made up of cash, government securities and securities of other issuers and no more than 25% of the value of its assets may be invested in the securities of a single issuer.
Special rules apply to investments held by a RIC in a qualified publicly traded partnership (QPTP). A partnership that is publicly traded will qualify as a QPTP, unless 90% or more of its gross income consists of income that would, if realized by a RIC, count towards the 90% income requirement described above. If a RIC holds interests in a partnership that is a QPTP, qualifying income for purposes of the 90% gross income test includes net income derived from interests in the QPTP and the 25% asset limitation described above applies to the equity securities of the QPTP. If a RIC holds interests in a partnership that is not a QPTP, then the RIC is generally required to look through to its distributable share of the partnerships gross income for purposes of applying the income test. The IRS has ruled in certain circumstances that a RIC also should look through to the assets of a partnership that is not a QPTP for purposes of the diversification test.
As described above under Classification of the Trust, the Trust files a partnership tax return and takes the position that it is treated as a partnership for tax purposes. Consequently, the Trust would generally be treated as a publicly traded partnership. As such, the Trust would qualify as a QPTP if less than 90% of the Trusts annual gross income constitutes interest, gain from the disposition of securities or other RIC Qualifying Income. In that case, only the RICs share of the Trusts net income would be included in applying the qualified income test and the RIC would be subject to the 25% asset limitation described above with respect to its investment in the Shares.
The Trust would not qualify as a QPTP if 90% or more of the Trusts annual gross income constitutes interest, gains from the disposition of securities or other RIC Qualifying Income. In that case, the RIC would generally be required to look through to its distributable share of the Trusts gross income for purposes of applying the income test. Holders that are RICs should consult their tax advisors regarding the application of the diversification test to their investment in the Shares.
Consequently, whether the Shares qualify as interests in a QPTP depends on the type of income recognized by the Trust. Because the Trusts income depends on the type of investments the Trust makes and the frequency of the Trusts dispositions of investments and may change over time, no determination can be provided whether the Shares constitute interests in a QPTP. However, the Sponsor will provide information on its website, at www.ishares.com, on a monthly basis on the composition of the Trusts gross income and assets and will also provide an annual income and asset statement in order to enable a U.S. Holder that is a RIC to make an independent determination regarding the status of the Trust as a QPTP.
Taxation of Non-U.S. Holders of Shares
As used herein, the term Non-U.S. Holder means a beneficial owner of Shares that is not a U.S. Holder. The Trust will conduct its activities in such a manner that a Non-U.S. Holder of the Shares who is not otherwise carrying on a trade or business in the United States will not be considered to be engaged in a trade or business in the United States as a result of an investment in the Shares.
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Thus, if you are a Non-U.S. Holder, interest income allocable to you generally will be considered short-term interest not subject to U.S. withholding or income tax, or portfolio interest not subject to 30% U.S. federal income or withholding tax provided that
(i) | with respect to portfolio interest (1) you do not actually or constructively own 10% or more of the total combined voting power of all classes of stock entitled to vote of the Clearing FCM, in the case of interest income on amounts deposited with the Clearing FCM or, to the extent Collateral Assets consist of other corporate securities, 10% or more of the total combined voting power of all classes of stock entitled to vote of the issuer of such securities; (2) you are not a controlled foreign corporation for U.S. federal income tax purposes that is related to the Clearing FCM or such issuer, as applicable, through stock ownership; and (3) you certify on IRS Form W-8BEN (or successor form), under penalties of perjury, that you are not a U.S. person and provide your name and address and otherwise satisfy applicable documentation requirements; or |
(ii) | with respect to any interest paid after June 30, 2014 (other than interest on debt outstanding on July 1, 2014), you hold the Shares through a foreign financial institution or entity that has entered into an agreement with the U.S. government to collect and provide to the U.S. tax authorities information about its accountholders (including certain investors in such institution or entity) and, if required, you have provided the withholding agent with a certification identifying your direct and indirect U.S. owners. |
Subject to the discussion below, you generally will not be subject to U.S. federal income tax on gains on the sale of the Shares or on your share of the Trusts gains. However, in the case of an individual Non-U.S. Holder, such holder will be subject to U.S. federal income tax on gains on the sale of Shares or such holders share of the Trusts gains if such Non-U.S. Holder is present in the United States for 183 days or more during a taxable year and certain other conditions are met. Even if you are eligible for a lower treaty rate, you will be subject to a 30% withholding tax (rather than the lower treaty rate) on dividend payments to you, unless you have provided the withholding agent with an IRS Form W-8BEN or other documentary evidence establishing your entitlement to the lower treaty rate with respect to such payments.
If you are subject to withholding in respect of interest, dividends or gross proceeds paid with respect to your Shares, you may be able to obtain a refund of or credit for any amounts withheld in excess of the applicable rate. Holders are encouraged to consult with their own tax advisors regarding the possible implications of these withholding requirements on their investment in the Shares.
Each holder, by its acquisition of Shares, will be deemed to agree to allow brokers and nominees to provide to the Trust its name and address and such other information and forms as may be reasonably requested by the Trust for purposes of complying with their tax reporting and withholding obligations (and to waive any confidentiality rights with respect to such information and forms for such purpose) and to provide such information or forms upon request.
Foreign Account Tax Compliance
The Foreign Account Tax Compliance provisions of the Hiring Incentives to Restore Employment Act (HIRE), enacted in 2010, generally impose a new reporting regime and potentially a 30% withholding tax with respect to certain U.S. source income (including dividends and interest) and gross proceeds from the sale or other disposition of property that can produce U.S. source interest or dividends (Withholdable Payments). As a general matter, the new rules are designed to require U.S. persons direct and indirect ownership of Non-U.S. accounts and Non-U.S. entities to be reported to the IRS. The 30% withholding tax regime applies if there is a failure to provide required information regarding U.S. ownership.
The new rules will subject a Non-U.S. Holders share of Withholdable Payments and a portion of other payments from Non-U.S. entities (who have entered into FFI Agreements (as defined below)) (Passthru
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Payments) to 30% withholding tax unless such holder provides information, representations and waivers of Non-U.S. law as may be required to comply with the provisions of the new rules. A Non-U.S. Holder that is treated as a foreign financial institution will generally be subject to withholding unless it enters into an agreement (a FFI Agreement) with the IRS with respect to the foregoing, including reporting certain information to the IRS regarding its U.S. accountholders and those of its affiliates. The new withholding rules generally apply to U.S. source payments made after June 30, 2014 and to other Passthru Payments and the disposition proceeds of U.S. securities after December 31, 2016.
The application of the new withholding rules to a sale or other disposition of an interest in a partnership is unclear, but it is possible that the gross proceeds of the sale or other disposal of an interest in the Trust will be subject to tax under the new withholding rules if such proceeds are treated as an indirect disposal of the Non-U.S. Holders interest in assets that can produce U.S. source interest or dividends, unless the selling Non-U.S. Holder provides appropriate reporting information. Holders should consult their own advisors regarding the requirements under HIRE with respect to their own situation.
Backup Withholding
The Trust is required in certain circumstances to backup withhold on certain payments paid to non-corporate holders of Shares who do not furnish to the Trust their correct taxpayer identification number (in the case of individuals, their social security number) and certain certifications, or who are otherwise subject to backup withholding. Backup withholding is not an additional tax. Any amounts withheld from payments made to you may be refunded or credited against your U.S. federal income tax liability, if any, provided that the required information is timely furnished to the IRS.
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ERISA AND RELATED CONSIDERATIONS
ERISA and the Code impose certain restrictions on (a) employee benefit plans (as defined in Section 3(3) of ERISA) that are subject to the fiduciary responsibility provisions of ERISA, as set forth in Title I thereof, (b) plans described in Section 4975(e)(1) of the Code that are subject to Section 4975 of the Code, including individual retirement accounts and Keogh plans, (c) entities whose underlying assets include plan assets by reason of a plans investment in such entities (each of the foregoing, a Plan) and (d) persons who have certain specified relationships to such Plans (Parties in Interest under ERISA and Disqualified Persons under the Code). Moreover, based on the reasoning of the U.S. Supreme Court in John Hancock Life Insurance Co. v. Harris Trust & Savings Bank, 510 U.S. 86 (1993), an insurance companys general account may be deemed to include assets of the Plans investing in the general account (e.g., through the purchase of an annuity contract), and the insurance company might be treated as a Party in Interest or Disqualified Person with respect to a Plan by virtue of such investment. ERISA also imposes certain duties on persons who are fiduciaries of Plans subject to ERISA, and Section 406 of ERISA and Section 4975 of the Code prohibit certain transactions between a Plan and Parties in Interest or Disqualified Persons with respect to such Plans.
Acquisition of Shares
The Sponsor, the Trustee, the Advisor and the Authorized Participants may be Parties in Interest or Disqualified Persons with respect to a number of Plans. Accordingly, the purchase of Shares by a Plan that has such a relationship could be deemed to constitute a transaction prohibited under Section 406 of ERISA or Section 4975 of the Code (e.g., the indirect transfer to or use by or for the benefit of a Party in Interest or Disqualified Person of assets of a Plan). Such transactions may be subject to one or more statutory or administrative exemptions, such as Section 408(b)(17) of ERISA and Section 4975(d)(20) of the Code, which exempt certain transactions with non-fiduciary service providers; Prohibited Transaction Class Exemption (PTCE) 90-1, which exempts certain transactions involving insurance company pooled separate accounts; PTCE 91-38, which exempts certain transactions involving bank collective investment funds; PTCE 84-14, which exempts certain transactions effected on behalf of a Plan by a qualified professional asset manager; PTCE 95-60, which exempts certain transactions involving insurance company general accounts; PTCE 96-23, which exempts certain transactions effected on behalf of a Plan by an in-house asset manager. Even if all of the conditions specified in one of the foregoing exemptions were satisfied, however, there can be no assurance that such exemption would apply to all of the prohibited transactions that could be deemed to arise in connection with a Plans purchase of Shares.
Because of the possibility that a prohibited transaction could occur as a result of the transfer of Index Futures between a Plan and an Authorized Participant, no such transfer shall occur unless such transfer will not constitute or result in a non-exempt prohibited transaction under Section 406 of ERISA or Section 4975 of the Code. Accordingly, each Plan and its fiduciary will be deemed to have represented, in connection with a transfer of Index Futures between the Plan and an Authorized Participant, that such transfer will not constitute or result in a non-exempt prohibited transaction by reason of one of the statutory or administrative exemptions described above or another applicable exemption.
Plan Asset Rules
Under Section 3(42) of ERISA and regulations issued by the U.S. Department of Labor (the DOL) at 29 C.F.R. Section 2510.3-101 (together with Section 3(42) of ERISA, the Plan Asset Rules), as a general rule, the underlying assets and properties of corporations, partnerships, trusts and certain other entities in which a Plan purchases an equity interest will be deemed for purposes of the fiduciary responsibility provisions of ERISA and Section 4975 of the Code to be assets of the investing Plan unless certain exceptions apply. The Plan Asset Rules define an equity interest as any interest in an entity other than an instrument that is treated as indebtedness under applicable local law and which has no substantial equity features. The Shares should be treated as equity interests for purposes of these rules.
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One exception provides that an investing Plans assets will not include any of the underlying assets of an entity if the equity interest acquired by the Plan is a publicly-offered security. A publicly-offered security is defined in the Plan Asset Rules as a security that (a) is freely transferable, (b) is part of a class of securities that is owned by 100 or more investors independent of the issuer and of one another, and (c) either (i) part of a class of securities registered under Section 12(b) or Section 12(g) of the Exchange Act or (ii) sold to the Plan as part of an offering of securities to the public pursuant to an effective registration statement under the Securities Act and the class of securities of which such security is a part is registered under the Exchange Act within 120 days (or such later time as may be allowed by the SEC) after the end of the fiscal year of the issuer during which the public offering occurred.
It is anticipated that the Shares will constitute publicly-offered securities under the Plan Asset Rules. Accordingly, Shares purchased by a Plan, but not the assets held in the Trust, should be treated as assets of the Plan for purposes of applying the fiduciary responsibility provisions of ERISA and Section 4975 of the Code.
General Investment Considerations
Any Plan fiduciary that proposes to cause a Plan to purchase Shares should consult with its counsel with respect to the potential applicability of ERISA and the Code to such investment and determine on its own whether any exceptions to or exemptions from the prohibited transaction provisions of ERISA and the Code are applicable and whether all conditions of any such exceptions or exemptions have been satisfied. Moreover, each Plan fiduciary should consider the fiduciary standards under ERISA in the context of the Plans particular circumstances before authorizing an investment of a portion of such Plans assets in the Shares. Accordingly, such fiduciary should consider (i) whether the investment satisfies the diversification requirements of Section 404(a)(1)(C) of ERISA, (ii) whether the investment is in accordance with the documents and instruments governing the Plan as required by Section 404(a)(1)(D) of ERISA, and (iii) whether the investment is prudent under ERISA.
Certain employee benefit plans, including non-U.S. pension plans, governmental plans established or maintained in the United States (as defined in Section 3(32) of ERISA) and church plans (as defined in Section 3(33) of ERISA) for which no election has been made under Section 410(d) of the Code, are not subject to the fiduciary responsibility provisions of ERISA or Section 4975 of the Code. However, any such plan that is qualified and exempt from taxation under Sections 401(a) and 501(a) of the Code may nonetheless be subject to the prohibited transaction rules set forth in Section 503 of the Code. Also, some non-U.S. plans and governmental plans may be subject to non-U.S. laws, or U.S. federal, state or local laws, that are, to a material extent, similar to the fiduciary responsibility provisions of ERISA or Section 4975 of the Code. Each fiduciary of a plan subject to such a similar law should make its own determination as to whether an investment in the Shares complies with all applicable requirements under such law.
The sale of Shares to a Plan is in no respect a representation by the Trust, the Sponsor, an Authorized Participant or any other person that such an investment meets all relevant legal requirements with respect to investments by Plans generally or any particular Plan or that such an investment is appropriate for Plans generally or any particular Plan.
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UBS Securities, as the Initial Purchaser, on August 8, 2013, agreed to purchase 100,000 Shares in exchange for Index Futures and Collateral Assets with a value equal to $50.00 per Share acquired, as calculated in a manner consistent with the calculation of NAV as of the close of business on August 8, 2013. The Initial Purchaser expects to offer these Shares to the public pursuant to this prospectus. In accordance with FINRA Conduct Rule 2310, the Initial Purchaser will not make any sales to any account over which it has discretionary authority without the prior written approval of a purchaser of Shares, and the total amount of underwriting compensation it receives, together with any other underwriting compensation received by Authorized Participants or underwriters in connection with the offering (if any), will not exceed 10% of the gross proceeds of the offering.
The Initial Purchaser intends to make a public offering of the Initial Shares at a price per Share that will vary depending, among other factors, on the net asset value per Share and the trading price of Shares on NYSE Arca at the time of the offer. Shares offered by the Initial Purchaser at different times may have different offering prices. The Initial Purchaser will not receive from the Trust, the Sponsor or any of their affiliates any fee or other compensation in connection with the sale of the Initial Shares. However, the Sponsor has agreed to reimburse to the Initial Purchaser $150,500 in fees and expenses incurred by the Initial Purchaser in connection with the offering of the Initial Shares. The Initial Purchaser will be acting as an underwriter with respect to the Initial Shares.
The Sponsor has agreed to indemnify the Initial Purchaser against certain liabilities, including liabilities under the Securities Act, and to contribute to payments that the Initial Purchaser may be required to make in respect thereof.
UBS Securities has also agreed to be an Authorized Participant and at any time and from time to time after the date hereof may, in such capacity, create or redeem Baskets.
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In addition to, and independent of the initial purchase by the Initial Purchaser, the Trust intends to issue Shares in Baskets to Authorized Participants in exchange for the requisite consideration on a continuous basis, although it may suspend issuances of Shares at any time. As of the date of this prospectus, the Authorized Participants are UBS Securities LLC, Credit Suisse Securities (USA) LLC and J.P. Morgan Securities LLC. Because new Shares can be created and issued on an ongoing basis, at any point during the life of the Trust, a distribution, as such term is used in the Securities Act, will be occurring. Authorized Participants, other broker-dealers and other persons are cautioned that some of their activities will result in their being deemed participants in a distribution in a manner that will render them statutory underwriters and subject them to the prospectus-delivery and liability provisions of the Securities Act. An Authorized Participant, other broker-dealer firm or any of their respective clients will be deemed a statutory underwriter if it purchases a Basket from the Trust, breaks the Basket down into the constituent Shares and sells the Shares to its customers; or if it chooses to couple the creation of a supply of new Shares with an active selling effort involving solicitation of secondary market demand for the Shares. A determination of whether a particular market participant is an underwriter must take into account all the facts and circumstances pertaining to the activities of the broker-dealer or its client in the particular case, and the examples mentioned above should not be considered a complete description of all the activities that would lead to designation as an underwriter and subject them to the prospectus-delivery and liability provisions of the Securities Act.
By executing an Authorized Participant Agreement, an Authorized Participant becomes part of the group of parties eligible to purchase Baskets from, and put Baskets for redemption to, the Trust. An Authorized Participant is under no obligation to create or redeem Baskets, and an Authorized Participant is under no obligation to offer to the public Shares of any Baskets it does create.
Authorized Participants that do offer to the public Shares from the Baskets they create will do so at a per-Share offering price that will vary depending upon, among other factors, the trading price of the Shares on NYSE Arca, the NAV and the supply of and demand for the Shares at the time of the offer. Shares initially comprising the same Basket but offered by Authorized Participants to the public at different times may have different offering prices. The excess, if any, of the price at which an Authorized Participant sells a Share in respect of which it is acting as a statutory underwriter over the price paid by that Authorized Participant in connection with the creation of that Share in a Basket may be deemed to be underwriting compensation. However, such underwriting compensation, together with any other underwriting compensation received in connection with the offering (including any underwriting compensation received by the Initial Purchaser), will not exceed 10% of the gross proceeds in accordance with FINRA Conduct Rule 2310.
The Trust will not pay a selling commission or any other compensation to any Authorized Participant in connection with the creation of Baskets. Investors that purchase Shares through a commission/fee-based brokerage account may, however, pay commissions/fees charged by the brokerage account. It is recommended that investors review the terms of their brokerage accounts for details on applicable charges.
Dealers that are not underwriters (including Authorized Participants that are not acting as underwriters) but are participating in a distribution (as contrasted to ordinary secondary trading transactions), and thus dealing with Shares that are part of an unsold allotment within the meaning of Section 4(a)(3)(C) of the Securities Act, would be unable to take advantage of the prospectus-delivery exemption provided by Section 4(a)(3) of the Securities Act.
The Sponsor intends that sales be made through broker-dealers who are members of FINRA. Investors intending to create or redeem Baskets through Authorized Participants in transactions not involving a broker-dealer registered in such investors state of domicile or residence should consult their legal advisor regarding applicable broker-dealer or securities regulatory requirements under the state securities laws prior to such creation or redemption.
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The distribution of this prospectus and the offer of Shares in certain jurisdictions outside the United States may be restricted by law and therefore persons into whose possession this document comes (including the Initial Purchaser and the Authorized Participants) should inform themselves about and observe any restrictions, including those set out in the paragraphs that follow. Any failure to comply with these restrictions may constitute a violation of the securities laws of any such jurisdiction.
| In relation to each Member State of the European Economic Area that has implemented the Prospectus Directive, each of which is referred to in this prospectus as a Relevant Member State, with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State, which is referred to in this prospectus as the Relevant Implementation Date, it has not made and will not make an offer of the Shares to the public in that Relevant Member State prior to the publication of a prospectus in relation to the Shares that has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive, except that it may, with effect from and including the Relevant Implementation Date, make an offer of Shares to the public in that Relevant Member State at any time: |
(1) | to any legal entity which is a qualified investor as defined in the Prospectus Directive; |
(2) | to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive, 150, natural or legal persons (other than qualified investors as defined in the Prospectus Directive); or |
(3) | in any other circumstances falling within Article 3(2) of the Prospectus Directive; |
provided, that no such offer of Shares shall result in a requirement to publish a prospectus pursuant to Article 3 of the Prospectus Directive or supplement a prospectus pursuant to Article 16 of the Prospectus Directive and each person who initially acquires any Shares or to whom any offer to acquire Shares is made will be deemed to have represented, acknowledged and agreed that it is a qualified investor within the meaning of Article 2(1)(e) of the Prospectus Directive.
For the purposes of this provision, an offer of Shares to the public in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the Shares to be offered so as to enable an investor to decide to purchase or subscribe for Shares, as the same may be varied in that Relevant Member State by any measure implementing the Prospectus Directive in that Relevant Member State. The expression Prospectus Directive means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State), and includes any relevant implementing measure in the Relevant Member State and the expression 2010 PD Amending Directive means Directive 2010/73/EU.
| It has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the FSMA) received by it in connection with the issue or sale of the Shares in circumstances in which Section 21(1) of the FSMA does not apply to the Trust; and it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the Shares in, from or otherwise involving the United Kingdom. |
| As the Trust may be a collective investment scheme as defined in the FSMA and the Trust has not been authorized, or otherwise recognized or approved, by the Financial Conduct Authority, it would be characterized as an unregulated collective investment scheme and accordingly cannot be promoted in the United Kingdom to the general public. In addition, this prospectus has not been approved by a person authorized by the Financial Conduct Authority in the United Kingdom (an Authorized Person) for the purposes of Section 21(2)(b) of the FSMA. The Trust will therefore be promoted in the United Kingdom only in accordance with applicable law and regulation, and this prospectus will only be issued and distributed to, in each case, persons who are qualified investors within the meaning of Article 2(1)(e) of EU Directive 2003/71/EC (as amended) (1) if such promotion is carried out through an |
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Authorized Person, (i) to persons who are investment professionals having professional experience in participating in unregulated schemes (only as defined in Article 14(5) of the FSMA (Promotion of Collective Investment Schemes) (Exemptions) Order 2001 (as amended) (the CIS Order)) or (ii) to persons who are within any of the categories of persons described in Article 22 of the CIS Order; (2) if such promotion is not carried out through an Authorized Person, (i) to persons who are investment professionals (as defined in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the Financial Promotion Order), or (ii) to persons who are within any of the categories of persons described in Article 49(2)(a) to (d) of the Financial Promotion Order. |
Any Authorized Participant may make a market in the Shares or the Index Futures. However, no Authorized Participant is obligated to do so, and any of them may stop doing so at any time without notice. No assurance can be given as to the liquidity of the trading market for the Shares or the Index Futures.
The Shares are listed on NYSE Arca under the symbol CMDT.
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The validity of the Shares has been passed upon for the Sponsor by Richards, Layton & Finger, P.A. Skadden, Arps, Slate, Meagher & Flom LLP, as special United States tax counsel to the Sponsor, has also provided an opinion regarding certain federal income tax matters relating to the Trust and the Shares.
The financial statement as of July 31, 2013 included in this Prospectus has been so included in reliance on the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
The Sponsor has filed on behalf of the Trust a registration statement on Form S-1 with the SEC under the Securities Act. This prospectus does not contain all of the information contained in the registration statement, including the exhibits to the registration statement, parts of which have been omitted in accordance with the rules and regulations of the SEC. For further information about the Trust and the Shares, please refer to the registration statement, which you may inspect without charge at the public reference facilities of the SEC at the below address or online at www.sec.gov, or obtain at prescribed rates from the public reference facilities of the SEC at the below address.
The current prospectus for the Trust, which may be updated from time to time pursuant to SEC and CFTC rules, will be available online at www.ishares.com as well as at the SEC website referred to above.
The Trust is subject to the informational requirements of the Exchange Act, and the Sponsor and the Trustee, on behalf of the Trust, file certain reports and other information with the SEC. The Sponsor will file an updated prospectus annually for the Trust pursuant to the Securities Act. These reports and other information can be inspected at the public reference facilities of the SEC located at 100 F Street, N.E., Washington, D.C. 20549 and online at www.sec.gov. You may also obtain copies of such material from the public reference facilities of the SEC at 100 F Street N.E., Washington, D.C. 20549, at prescribed rates. You may obtain more information concerning the operation of the public reference facilities of the SEC by calling the SEC at 1-800-SEC-0330 or visiting online at www.sec.gov.
The Trustee will furnish you with annual reports as required by the rules and regulations of the SEC, as well as with those reports required by the CFTC and the NFA, including, but not limited to, an annual audited financial statement certified by independent public accountants, and any other reports required by any other governmental authority that has jurisdiction over the activities of the Trust. The monthly Account Statements for the Trust that are required to be prepared under the CFTCs rules will be published online at www.ishares.com. You also will be provided with appropriate information to permit you, on a timely basis, to file your United States federal and state income tax returns with respect to your Shares. Additional reports may be posted online at www.ishares.com in the discretion of the Sponsor or Trustee or as required by regulatory authorities.
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INDEX TO THE AUDITED FINANCIAL STATEMENT
iShares® Dow Jones-UBS Roll Select Commodity Index Trust | ||
Page | ||
Report of Independent Registered Public Accounting Firm |
F-2 | |
Statement of Financial Condition |
F-3 | |
Notes to the Financial Statement |
F-4 |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Sponsor, Trustee and Shareholder of
iShares® Dow Jones-UBS Roll Select Commodity Index Trust:
In our opinion, the accompanying statement of financial condition presents fairly, in all material respects, the financial position of iShares® Dow Jones-UBS Roll Select Commodity Index Trust at July 31, 2013 in conformity with accounting principles generally accepted in the United States of America. The statement of financial condition is the responsibility of the Trusts management. Our responsibility is to express an opinion on the statement of financial condition based on our audit. We conducted our audit of this statement in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statement of financial condition is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statement of financial condition, assessing the accounting principles used and significant estimates made by management, and evaluating the overall statement of financial condition presentation. We believe that our audit of the statement of financial condition provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
August 1, 2013
F-2
iShares® Dow Jones-UBS Roll Select Commodity Index Trust
Statement of Financial Condition
July 31, 2013
Assets |
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Current Assets |
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Cash and cash equivalents |
$ | 50 | ||
|
|
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Total Assets |
$ | 50 | ||
|
|
|||
Liabilities and Shareholders Capital |
||||
Commitments and Contingent Liabilities (Note 7) |
$ | | ||
Shareholders Capital |
||||
Redeemable capital shares, no par value, unlimited amount authorized 1 issued and outstanding at July 31, 2013 |
50 | |||
|
|
|||
Total Shareholders Capital |
50 | |||
|
|
|||
Total Liabilities and Shareholders Capital |
$ | 50 | ||
|
|
See notes to the financial statement.
F-3
iShares® Dow Jones-UBS Roll Select Commodity Index Trust
Notes to the Financial Statement
July 31, 2013
1 - Organization
The iShares® Dow Jones-UBS Roll Select Commodity Index Trust (the Trust) is a Delaware statutory trust organized under the laws of the State of Delaware on December 7, 2011. iShares® Delaware Trust Sponsor LLC, a Delaware limited liability company, is the sponsor of the Trust (the Sponsor). The sole member and manager of the Sponsor is BlackRock Asset Management International Inc., a Delaware corporation. BlackRock Institutional Trust Company, N.A. is the Trustee of the Trust. The Trust is governed by the First Amended and Restated Trust Agreement, dated as of July 29, 2013 (the Trust Agreement), among the Sponsor, the Trustee and Wilmington Trust, National Association (the Delaware Trustee). The Trust issues units of beneficial interest (Shares) representing fractional undivided beneficial interests in its net assets.
The Trust has had no operations to date other than matters relating to its organization and the registration of Trust Shares under the Securities Act of 1933, as amended, and the sale and issuance of an initial interest in the Trust to the Sponsor, in exchange for a cash contribution of $50. Accordingly, statements of operations, statements of changes in shareholders capital and statements of cash flows have not been presented.
It is the objective of the Trust that its performance will correspond generally, but will not necessarily be identical, to the performance of the Dow Jones-UBS Roll Select Commodity Index Total Return, which reflects the return on a fully collateralized investment in the Dow Jones-UBS Roll Select Commodity Index, before payment of the Trusts expenses and liabilities.
The Trust is a commodity pool, as defined in the Commodity Exchange Act (the CEA) and the applicable regulations of the Commodity Futures Trading Commission (the CFTC), and is operated by the Sponsor, a commodity pool operator registered with the CFTC. The Sponsor is an indirect subsidiary of BlackRock, Inc. BlackRock Fund Advisors (the Advisor), an indirect subsidiary of BlackRock, Inc., serves as the commodity trading advisor of the Trust and is registered with the CFTC.
The Trust is not an investment company registered under the Investment Company Act of 1940, as amended.
2 - Summary of Significant Accounting Policies
A. | Basis of Accounting |
The following is a summary of significant accounting policies consistently followed by the Trust in the preparation of its financial statement in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). The preparation of the financial statement in conformity with U.S. GAAP requires management to make certain 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 statement and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates and these differences could be material.
B. | Cash and Cash Equivalents |
The Trust considers cash and cash equivalents to be highly liquid investments with original maturities of three months or less.
F-4
C. | Income Taxes |
The Trust is treated as a partnership for federal, state and local income tax purposes.
No provision for federal, state, and local income taxes has been made in the accompanying financial statement because the Trust is not subject to income taxes. Shareholders are individually responsible for their own tax payments on their proportionate share of income, gain, loss, deduction, expense and credit.
3 - Offering of the Shares
Shares are issued and redeemed continuously in one or more blocks of 50,000 Shares in exchange for Index Futures and cash (or, in the discretion of the Sponsor, other Collateral Assets in lieu of cash). Individual investors that are not Authorized Participants cannot purchase or redeem Shares in direct transactions with the Trust. The Trust transacts only with registered broker-dealers that have entered into a contractual arrangement with the Trust and the Sponsor governing, among other matters, the creation and redemption of Shares (such authorized broker-dealers are the Authorized Participants). Authorized Participants may redeem their Shares (as well as Shares on behalf of other investors) at any time on any business day in one or more blocks of 50,000 Shares. Redemptions of Shares in exchange for baskets of Index Futures and cash (or, in the discretion of the Sponsor, other Collateral Assets in lieu of cash) are treated as sales for financial statement purposes.
Redemptions of Trust interests in exchange for a consideration in cash are treated as sales for financial statement purposes.
4 - Trust Expenses
The Sponsor pays the amounts that would otherwise be considered the ordinary operating expenses, if any, of the Trust. In return, the Sponsor receives an allocation from the Trust that accrues daily at an annualized rate equal to 0.75% of the net asset value of the Trust, as calculated before deducting fees and expenses based on the value of the Trusts assets, upon commencement of operations.
The Sponsor has agreed under the Trust Agreement to pay the following administrative, operational and marketing expenses: (1) the fees of the Trustee, the Delaware Trustee, the Advisor and their respective agents, (2) NYSE Arca listing fees, (3) printing and mailing costs, (4) audit fees, (5) fees for registration of the Shares with the SEC, (6) tax reporting costs, (7) license fees and (8) legal expenses relating to the Trust of up to $100,000 annually.
5 - Related Parties
The Sponsor, the Trustee and the Advisor are considered to be related parties to the Trust. The Trustees and Advisors fees are paid by the Sponsor and are not a separate expense of the Trust.
6 - Indemnification
The Trust Agreement provides that the Sponsor and its shareholders, directors, officers, employees, affiliates (as such term is defined under the Securities Act of 1933, as amended) and subsidiaries shall be indemnified from the Trust and held harmless against any loss, liability or expense arising out of or in connection with the performance of their obligations under the Trust Agreement or any actions taken in accordance with the provisions of the Trust Agreement and incurred without their (1) negligence, bad faith or willful misconduct or (2) reckless disregard of their obligations and duties under the Trust Agreement.
The Investment Advisory Agreement between the Trust and the Advisor provides that the Advisor and its shareholders, directors, officers, employees, affiliates (as such term is defined in Rule 405 under the Securities
F-5
Act of 1933, as amended) and subsidiaries shall be indemnified from the Trust and held harmless against any loss, liability, cost, expense or judgment (including the reasonable fees and expenses of counsel) arising out of or in connection with the performance of its obligations under the Investment Advisory Agreement or any actions taken in accordance with the provisions of the Investment Advisory Agreement and incurred without their (1) negligence, bad faith or willful misconduct or (2) reckless disregard of their obligations and duties under the Investment Advisory Agreement.
7 - Commitments and Contingent Liabilities
In the normal course of business, the Trust may enter into contracts with service providers that contain general indemnification clauses. The Trusts maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred.
8 - Subsequent Events
Management has evaluated the impact of all subsequent events on the Trust through the date the financial statement was available to be issued and has determined that there were no subsequent events requiring adjustment or disclosure in the financial statement.
F-6
PART TWO
STATEMENT OF ADDITIONAL INFORMATION
iSHARES® DOW JONES-UBS ROLL SELECT
COMMODITY INDEX TRUST
THIS STATEMENT OF ADDITIONAL INFORMATION IS THE SECOND PART OF A TWO-PART DOCUMENT AND SHOULD BE READ IN CONJUNCTION WITH THE DISCLOSURE DOCUMENT DATED AUGUST 21, 2013. THE DISCLOSURE DOCUMENT AND THIS STATEMENT OF ADDITIONAL INFORMATION ARE BOUND TOGETHER, AND BOTH CONTAIN IMPORTANT INFORMATION.
August 21, 2013
TABLE OF CONTENTS
THE COMMODITY FUTURES MARKETS |
1 | |||
GLOSSARY |
2 |
THE COMMODITY FUTURES MARKETS
Futures contracts on physical commodities and commodity indices are traded on regulated futures exchanges, and physical commodities and other derivatives on physical commodities and commodity indices are traded in the over-the-counter market and on various types of physical and electronic trading facilities and markets. At present, all of the contracts included in the Index are exchange-traded futures contracts. An exchange-traded futures contract provides for the purchase and sale of a specified type and quantity of a commodity or financial instrument during a stated delivery month for a fixed price. A futures contract on an index of commodities provides for the payment and receipt of cash based on the level of the index at settlement or liquidation of the contract. A futures contract provides for a specified settlement month in which the cash settlement is made or in which the commodity or financial instrument is to be delivered by the seller (whose position is described as short) and acquired by the purchaser (whose position is described as long).
There is no purchase price paid or received on the purchase or sale of a futures contract. Instead, an amount of cash or cash equivalents must be deposited with the broker as initial margin. This amount varies based on the requirements imposed by the exchange clearing houses. This margin deposit provides collateral for the obligations of the parties to the futures contract.
By depositing margin, which may vary in form depending on the exchange, with the clearing house or broker involved, a market participant may be able to earn interest on its margin funds, thereby increasing the total return that it may realize from an investment in futures contracts. The market participant normally makes to, and receives from, the broker subsequent daily payments as the price of the futures contract fluctuates. These payments are called variation margin and are made as the existing positions in the futures contract become more or less valuable, a process known as marking to the market.
Futures contracts are traded on organized exchanges known as contract markets in the United States. At any time prior to the expiration of a futures contract, subject to the availability of a liquid secondary market, a trader may elect to close out its position by taking an opposite position on the exchange on which the trader obtained the position. This operates to terminate the position and fix the traders profit or loss. Futures contracts are cleared through the facilities of a centralized clearing house and a brokerage firm, referred to as a futures commission merchant, which is a member of the clearing house. The clearing house guarantees the performance of each clearing member that is a party to a futures contract by, in effect, taking the opposite side of the transaction. Clearing houses do not guarantee the performance by clearing members of their obligations to their customers.
Unlike equity securities, futures contracts, by their terms, have stated expirations and, at a specified point in time prior to expiration, trading in a futures contract for the current delivery month will cease. As a result, a market participant wishing to maintain its exposure to a futures contract on a particular commodity with the nearest expiration must close out its position in the expiring contract and establish a new position in the contract for the next delivery month, a process referred to as rolling. For example, a market participant with a long position in November crude oil futures that wishes to maintain a position in the nearest delivery month will, as the November contract nears expiration, sell November futures, which serves to close out the existing long position, and buy December futures. This will roll the November position into a December position, and, when the November contract expires, the market participant will still have a long position in the nearest delivery month.
Futures exchanges and clearing houses in the United States are subject to regulation by the CFTC. The Exchange may adopt rules and take other actions that affect trading, including imposing speculative position limits, maximum price fluctuations and trading halts and suspensions and requiring liquidation of contracts in certain circumstances. See Risk FactorsRisk Factors Relating to the TrustExchange position limits and other rules may restrict the creation of Baskets and the operation of the Trust.
Futures markets outside the United States are generally subject to regulation by comparable regulatory authorities. The structure and nature of trading on non-U.S. exchanges, however, may differ from this description.
1
GLOSSARY
In this prospectus, each of the following terms has the meaning set forth below:
2010 PD Amending Directive Directive 2010/73/EU.
Adjusted Net Asset Value The net asset value of the Trust, as calculated before deducting fees and expenses based on the value of the Trusts assets.
Advisor BlackRock Fund Advisors, a California corporation and an indirect subsidiary of BlackRock, Inc., when acting in its capacity as commodity trading advisor of the Trust. BlackRock Fund Advisors is registered with the CFTC as a commodity trading advisor.
Advisory Agreement The Investment Advisory Agreement between the Trust and the Advisor.
Advisory Committee The Advisory Committee for the DJ-UBS CI, which provides advice and recommendation to the Supervisory Committee in connection with decisions relating to the Index, the DJ-UBS CI and the DJ-UBS Roll Select CI.
Affiliates Affiliates of the Sponsor, the Advisor and the Trustee, and each of their affiliates, directors, partners, trustees, managing members, officers and employees.
Authorized Participant A person who, at the time of submitting to the Trustee, or any Trust Administrator appointed by the Trustee, an order to create or redeem one or more Baskets (1) is a registered broker-dealer and, if required in connection with its activities, a registered futures commission merchant, (2) is a DTC Participant, (3) has in effect a valid Authorized Participant Agreement and (4) is in a position to transfer Index Futures and the required cash or other Collateral Assets to, or take delivery of these assets from, the Trustee through one or more accounts.
Authorized Participant Agreement An agreement entered into by an Authorized Participant, the Trustee and the Sponsor that provides the procedures for the creation and redemption of Baskets.
Authorized Person A person authorized by the Financial Conduct Authority in the United Kingdom.
Basket A block of 50,000 Shares (as such number may be increased or decreased pursuant to the Trust Agreement).
Basket Amount The amount of Index Futures and cash (or, in the discretion of the Sponsor, other Collateral Assets), that an Authorized Participant must deliver in exchange for one Basket, or that an Authorized Participant is entitled to receive in exchange for each Basket surrendered for redemption. The value of the Basket Amount will equal the product of the NAV and the number of Shares constituting a Basket, in each case as of the time of determination.
BFA BlackRock Fund Advisors, a California corporation.
BTC BlackRock Institutional Trust Company, N.A., a national banking association.
Business Day Any day (1) on which none of the following occurs: (a) NYSE Arca is closed for regular trading, (b) an Exchange is closed for regular trading or (c) the Federal Reserve wire transfer system is closed for cash wire transfers, or (2) that the Trustee determines that it is able to conduct business.
2
CFTC Commodity Futures Trading Commission, an independent agency with the mandate to regulate commodity futures and option markets in the United States, or any successor governmental agency in the United States.
CIM The commodity index multiplier for a commodity in the DJ-UBS CI or the DJ-UBS Roll Select CI, as the case may be.
CIM Determination Date The date on which the CIMs of the commodities in the DJ-UBS CI and the DJ-UBS Roll Select CI, as the case may be, are determined, which is generally on the fourth business day of each year.
CIP The commodity index percentage of a commodity eligible for inclusion in the DJ-UBS CI, which determines the relative weight of such commodity in the Index, the DJ-UBS CI and the DJ-UBS Roll Select CI.
CIS Order Article 14(5) of the FSMA (Promotion of Collective Investment Schemes) (Exemptions) Order 2001, as amended.
Clearing FCM UBS Securities, or any other futures commission merchant appointed by the Sponsor as clearing futures commission merchant for the Trust.
CLP The commodity liquidity percentage of a commodity eligible for inclusion in the DJ-UBS CI, based on five-year average trading volume data for the related designated contract, used in connection with determining such commoditys CIP.
CME The Chicago Mercantile Exchange, Inc., or any successor DCM.
CME Group CME Group Inc. and its designated contract markets, including the CME, CBOT, NYMEX, COMEX and KCBT.
Code The United States Internal Revenue Code of 1986, as amended.
Collateral Assets Cash, U.S. Treasury securities or other short-term securities and similar securities that are eligible as margin deposits for Index Futures under the rules of the related Exchange.
Commodity Exchange Act or CEA The United States Commodity Exchange Act, as amended.
CPP The commodity production percentage of a commodity eligible for inclusion in the DJ-UBS CI, based on five-year average production measures, used in connection with determining such commoditys CIP.
DCM A designated contract market, as defined in the CEA.
DCM Proposed Rules The December 22, 2010 CFTC proposed rules that would require that at least 85% of the total volume of any contract listed on a DCM be executed through the central limit order book, rather than as a block transaction or other non-competitively executed transaction.
Delaware Trustee Wilmington Trust, National Association, a Delaware banking corporation.
DJ-UBS CI The Dow Jones-UBS Commodity Index. For an explanation of how the DJ-UBS CI is calculated, see The Index, the DJ-UBS CI and the DJ-UBS Roll Select CICalculation of the DJ-UBS CI.
DJ-UBS Roll Select CI The Dow Jones-UBS Roll Select Commodity Index. For an explanation of how the DJ-UBS Roll Select CI is calculated, see The Index, the DJ-UBS CI and the DJ-UBS Roll Select CICalculation of the DJ-UBS Roll Select CI.
3
DJI Opco DJI Opco, LLC, a subsidiary of S&P Dow Jones Indices LLC.
Dodd-Frank Act The Dodd-Frank Wall Street Reform and Consumer Protection Act, as amended.
Dow Jones Dow Jones Trademark Holdings, LLC, a Delaware limited liability company.
DTC The Depository Trust Company, or its successor.
DTC Participant An entity that has an account with DTC.
DOL The U.S. Department of Labor.
EFRP An exchange for related positions that involves contemporaneous transactions in futures contracts and the underlying cash commodity or a closely related commodity or OTC instrument.
ERISA The Employee Retirement Income Security Act of 1974, as amended.
Exchange The CME, one of the CME Group Inc.s DCMs, or any additional or successor DCM through which the Trust trades Index Futures.
Exchange Act The United States Securities Exchange Act of 1934, as amended.
FCM A futures commission merchant, as defined in the CEA.
FCM Agreement The Institutional Futures Customer Agreement, dated as of August 1, 2013, between the Trust and the Clearing FCM, as amended.
FCM Rules The CFTC rules adopted on April 9, 2012 and effective as of October 1, 2012, regarding the risk management practices of clearing members, which require futures commission merchants to establish risk-based limits on position and order size, amongst other measures.
FFI Agreement An agreement between the IRS and a Non-U.S. Holder that is treated as a foreign financial institution that meets the requirements of Section 1471(b)(1) of the Code.
Financial Promotion Order Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended.
FINRA Financial Industry Regulatory Authority, Inc.
FSMA The Financial Services and Markets Act 2000, as amended.
HIRE The Hiring Incentives to Restore Employment Act of 2010, as amended.
ICIM The initially calculated CIM for a commodity on a CIM Determination Date, which is used to calculated the final CIM for such commodity.
Index The Dow Jones-UBS Roll Select Commodity Index Total Return. For an explanation of how the Index is calculated, see The Index, the DJ-UBS CI and the DJ-UBS Roll Select CICalculation of the Index.
Index Co-Sponsors DJI Opco and UBS Securities, as co-sponsors of the Index, the DJ-UBS CI and the DJ-UBS Roll Select CI.
4
Index Futures Exchange-traded futures contracts on the DJ-UBS Roll Select CI of various expirations.
Index Methodology The Dow Jones-UBS Commodity IndexSM Methodology, dated as of April 2013, published by the Index Co-Sponsors.
Index Providers The Index Co-Sponsors, together with Dow Jones, as holder of certain intellectual property rights relating to the Index, the DJ-UBS CI and the DJ-UBS Roll Select CI.
Indirect Participant An entity that has access to the DTC clearing system by clearing securities through, or maintaining a custodial relationship with, a DTC Participant.
Initial Purchaser UBS Securities, in its capacity as the underwriter with respect to the Initial Shares.
Initial Shares Two Baskets of Shares comprising 100,000 Shares agreed to be purchased from the Trust by the Initial Purchaser.
Investment Company Act The Investment Company Act of 1940, as amended.
IRS The Internal Revenue Service.
Master Services Agreement The master services agreement, dated as of April 21, 2011, as supplemented by related service modules, each between the Trust and the Trust Administrator, as amended.
Monthly revaluation convention The convention pursuant to which the Trust generally will credit or debit, respectively, the book capital accounts of holders of existing Shares with any unrealized gain or loss in the Trusts assets based on the lowest fair market value of the assets and shares, respectively, during the month in which the creation or redemption transaction takes place, rather than the fair market value at the time of such creation or redemption.
NAV The net asset value per Share.
NFA National Futures Association.
Non-U.S. Holder A beneficial owner of Shares that is not a U.S. Holder.
OTC Over-the-counter.
Passthru Payments Passthru payments within the meaning of Section 1471(d)(7) of the Code.
Plan Any (a) employee benefit plan (as defined in Section 3(3) of ERISA) that is subject to the fiduciary responsibility provisions of ERISA, as set forth in Title I thereof, (b) plan described in Section 4975(e)(1) of the Code that is subject to Section 4975 of the Code, including individual retirement accounts and Keogh plans, (c) entity whose underlying assets include plan assets by reason of a plans investment in such entity.
Plan Asset Rules Section 3(42) of ERISA and the regulations issued by DOL at 29 C.F.R. Section 2510.3-101.
Position Limits Rules The CFTC regulations adopted in October 2011 that imposes new federal position limits on futures and options on a subset of energy, metal, and agricultural commodities and economically equivalent swaps.
5
Processing Agent SEI Investments Distribution Co., a Pennsylvania corporation, when acting in its capacity as an agent of the Trustee pursuant to the Trust Agreement, or any other agent appointed by the Trustee from time to time.
Prospectus Directive Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State), and includes any relevant implementing measure in the Relevant Member State.
PTCE Prohibited Transaction Class Exemption.
QPTP A qualified publicly traded partnership within the meaning of Section 851 of the Code.
Referenced contracts Futures and options on certain energy, metal, and agricultural commodities, that would be subject to federal position limits under the Position Limits Rules.
Relevant Member State Each member state of the European Economic Area that has implemented Directive 2003/71/EC.
Reportable Transaction A reportable transaction within the meaning of Section 6707A(c)(1) of the Code.
Reverse section 704(c) allocations Allocations of items of the Trusts income, gain, loss, deduction and credit to existing holders of Shares to account for the difference between the tax basis and fair market value of property owned by the Trust at the time new Shares are issued or old Shares are redeemed.
RIC A regulated investment company within the meaning of Section 851 of the Code.
RIC Qualifying Income Income derived from dividends, interest, payments with respect to certain securities loans, gains from the sale or other disposition of stock or securities or foreign currencies or other income derived with respect to its business of investing in stock, securities or currencies.
SEC The Securities and Exchange Commission of the United States, or any successor governmental agency in the United States.
Section 1256 Contracts Section 1256 contracts within the meaning of Section 1256 of the Code.
Securities Act The United States Securities Act of 1933, as amended.
Securities Prospectus Act The German Securities Prospectus Act (Wertpapierprospektgesetz), as amended.
Shareholders Owners of beneficial interests in the Shares.
Shares Units of fractional undivided beneficial interest in the net assets of the Trust that are issued by the Trust.
Sponsor iShares® Delaware Trust Sponsor LLC, a Delaware limited liability company, when acting in its capacity as Sponsor of the Trust. The Sponsor is registered with the CFTC as a commodity pool operator.
Sponsors Fee An allocation to be paid by the Trust to the Sponsor monthly in arrears, which will accrue daily at an annualized rate of up to 0.75% of the Adjusted Net Asset Value of the Trust, subject to adjustment in accordance with the terms of the Trust Agreement.
6
Supervisory Committee The Supervisory Committee for the DJ-UBS CI, which is responsible for making all final decisions relating to the Index, the DJ-UBS CI and the DJ-UBS Roll Select CI.
Tax Administrator PricewaterhouseCoopers LLP, a limited liability partnership formed under the laws of the state of Delaware.
Tax Matters Partner The Sponsor, in its capacity as tax matters partner of the Trust within the meaning of Section 6231(a)(7) of the Code.
Trust The Dow Jones-UBS Roll Select Commodity Index Trust, a Delaware statutory trust formed pursuant to the Trust Agreement.
Trust Administrator An administrator appointed by the Trustee pursuant to the Trust Agreement. The Trustee has appointed as Trust Administrator State Street Bank and Trust Company, a trust company organized under the laws of Massachusetts.
Trust Agreement The First Amended and Restated Trust Agreement of the Trust, among the Sponsor, the Trustee and the Delaware Trustee.
Trustee BlackRock Institutional Trust Company, N.A., a national banking association and an indirect subsidiary of BlackRock, Inc., when acting in its capacity as Trustee of the Trust.
UBTI Unrelated business taxable income within the meaning of Section 512 of the Code.
UBS Securities UBS Securities LLC, a Delaware limited liability company.
U.S. Holder A beneficial owner of Shares that is (i) an individual citizen or resident of the United States, (ii) a corporation organized in or under the laws of the United States or any state thereof or the District of Columbia or (iii) otherwise subject to U.S. federal income taxation on a net income basis in respect of the Shares.
WAV The weighted average value of the DJ-UBS CI or the DJ-UBS Roll Select CI, as the case may be. During roll periods, the WAV associated with the existing index components is referred to as the Old WAV, and the WAV associated with the replacement index components is referred to as the New WAV.
Withholdable Payments Withholdable payments within the meaning of Section 1473(1) of the Code.
7
iShares® Dow Jones-UBS Roll Select
Commodity Index Trust
19,900,000 iShares®
August 21, 2013
PROSPECTUS
IS-P-CMDT-0913
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