Company Quick10K Filing
Quick10K
Morgan Stanley Smith Barney Spectrum Select
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-08-23 Officers
8-K 2019-03-06 Officers
8-K 2019-02-01 Enter Agreement, Exhibits
8-K 2018-09-15 Officers
8-K 2017-12-31 Leave Agreement
CBDS Cannabis Sativa 37
CRMZ Creditriskmonitor Com 24
NGTF NightFood 23
GRMM Grom Social Enterprises 17
PAYD Paid 5
PTEO Proteo 1
UBI Universal Biosensors 0
GPIL Graphic Packaging International 0
GNLN Greenlane Holdings 0
SQFL SQL Technologies 0
DWSF 2019-06-30
Part I. Financial Information
Item 1. Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II. Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities. - None.
Item 4. Mine Safety Disclosures. - Not Applicable.
Item 5. Other Information. - None.
Item 6. Exhibits.
EX-31.1 d769247dex311.htm
EX-31.2 d769247dex312.htm
EX-32.1 d769247dex321.htm
EX-32.2 d769247dex322.htm

Morgan Stanley Smith Barney Spectrum Select Earnings 2019-06-30

DWSF 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 d769247d10q.htm 10-Q 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

Commission File Number 000-19511

MORGAN STANLEY SMITH BARNEY SPECTRUM SELECT L.P.

 

(Exact name of registrant as specified in its charter)

 

Delaware   13-3619290
(State or other jurisdiction of
incorporation or organization)
 

(I.R.S. Employer

Identification No.)

c/o Ceres Managed Futures LLC

522 Fifth Avenue

New York, New York 10036

 

(Address of principal executive offices) (Zip Code)

(855) 672-4468

 

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class    Trading Symbol(s)    Name of each exchange on which registered

N/A

   N/A    N/A

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

Yes X    No     

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

Yes X    No     

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

 

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

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

Yes    No X

As of July 31, 2019, 1,347,327.817 Limited Partnership Units were outstanding.


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Morgan Stanley Smith Barney Spectrum Select L.P.

Statements of Financial Condition

 

     June 30,
2019
(Unaudited)
     December 31,
2018
 

Assets:

     

Equity in trading account:

     

Unrestricted cash

    $ 23,732,035       $ 26,651,080  

Restricted cash

     6,134,635        5,568,405  

Net unrealized appreciation on open futures contracts

     1,582,446        334,203  
  

 

 

    

 

 

 

Total equity in trading account

     31,449,116        32,553,688  
  

 

 

    

 

 

 

Interest receivable

     37,510        43,388  
  

 

 

    

 

 

 

Total assets

    $         31,486,626       $         32,597,076  
  

 

 

    

 

 

 

Liabilities and Partners’ Capital:

     

Liabilities:

     

Net unrealized depreciation on open forward contracts

    $ 221,799       $ 9,070  

Accrued expenses:

     

Ongoing placement agent fees

     50,867        55,831  

General Partner fees

     50,867        55,831  

Management fees

     30,330        40,159  

Redemptions payable to General Partner

     18,000        —    

Redemptions payable to Limited Partners

     490,178        438,118  
  

 

 

    

 

 

 

Total liabilities

     862,041        599,009  
  

 

 

    

 

 

 

Partners’ Capital:

     

General Partner, 14,657.688 and 20,066.995 Units outstanding at June 30, 2019 and December 31, 2018

     321,687        410,340  

Limited Partners, 1,380,744.569 and 1,544,696.436 Units outstanding at June 30, 2019 and December 31, 2018, respectively

     30,302,898        31,587,727  
  

 

 

    

 

 

 

Total partners’ capital (net asset value)

     30,624,585        31,998,067  
  

 

 

    

 

 

 

Total liabilities and partners’ capital

    $ 31,486,626       $ 32,597,076  
  

 

 

    

 

 

 

Net asset value per Unit

    $ 21.95       $ 20.45  
  

 

 

    

 

 

 

See accompanying notes to financial statements.

 

1


Morgan Stanley Smith Barney Spectrum Select L.P.

Condensed Schedule of Investments

June 30, 2019

(Unaudited)

 

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

Futures Contracts Purchased

        

Commodity

     65          $ 200,304          0.65  

Equity

     301          106,621          0.35    

Currencies

     81          5,719          0.02    

Interest rates

     1,521          1,491,340          4.87    
     

 

 

    

 

 

 

Total futures contracts purchased

        1,803,984          5.89    
     

 

 

    

 

 

 

Futures Contracts Sold

        

Commodity

     342          (86,619)         (0.28)   

Equity

     40          (49,713)         (0.16)   

Currencies

     132          (84,648)         (0.28)   

Interest rates

     14          (558)         (0.00) 
     

 

 

    

 

 

 

Total futures contracts sold

        (221,538)         (0.72)   
     

 

 

    

 

 

 

Net unrealized appreciation on open futures contracts

        $         1,582,446          5.17  
     

 

 

    

 

 

 

Unrealized Appreciation on Open Forward Contracts

        

Commodity

     113          $ 224,472          0.73  

Currencies

     $ 17,597,636          48,792          0.16    
     

 

 

    

 

 

 

Total unrealized appreciation on open forward contracts

        273,264          0.89    
     

 

 

    

 

 

 

Unrealized Depreciation on Open Forward Contracts

        

Commodity

     83          (188,008)         (0.61)   

Currencies

     $ 37,638,724          (307,055)         (1.00)   
     

 

 

    

 

 

 

Total unrealized depreciation on open forward contracts

        (495,063)         (1.61)   
     

 

 

    

 

 

 

Net unrealized depreciation on open forward contracts

        $ (221,799)         (0.72) 
     

 

 

    

 

 

 

See accompanying notes to financial statements.

 

2


Morgan Stanley Smith Barney Spectrum Select L.P.

Condensed Schedule of Investments

December 31, 2018

 

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

Futures Contracts Purchased

        

Commodity

     70        $ (206,109)         (0.64) 

Equity

     39          (207,467)         (0.65)   

Currencies

     84          (29,347)         (0.09)   

Interest rates

     664          446,508          1.39    
     

 

 

    

 

 

 

Total futures contracts purchased

        3,585          0.01    
     

 

 

    

 

 

 

Futures Contracts Sold

        

Commodity

     582          325,616          1.02    

Equity

     109          226,345          0.71    

Currencies

     264          193,033          0.60    

Interest rates

     429          (414,376)         (1.30)   
     

 

 

    

 

 

 

Total futures contracts sold

        330,618          1.03    
     

 

 

    

 

 

 

Net unrealized appreciation on open futures contracts

        $ 334,203          1.04  
     

 

 

    

 

 

 

Unrealized Appreciation on Open Forward Contracts

        

Commodity

     160          $ 374,564          1.17  

Currencies

     $ 15,499,028          248,474          0.78    
     

 

 

    

 

 

 

Total unrealized appreciation on open forward contracts

        623,038          1.95    
     

 

 

    

 

 

 

Unrealized Depreciation on Open Forward Contracts

        

Commodity

     64          (230,751)         (0.72)   

Currencies

     $ 26,081,246          (401,357)         (1.26)   
     

 

 

    

 

 

 

Total unrealized depreciation on open forward contracts

        (632,108)         (1.98)   
     

 

 

    

 

 

 

Net unrealized depreciation on open forward contracts

        $ (9,070)         (0.03) 
     

 

 

    

 

 

 

* Due to rounding.

See accompanying notes to financial statements.

 

3


Morgan Stanley Smith Barney Spectrum Select L.P.

Statements of Income and Expenses

(Unaudited)

 

         Three Months Ended    
June 30,
         Six Months Ended    
June 30,
 
     2019      2018      2019      2018  

Investment Income:

           

Interest income

     $ 123,955          $ 129,661          $ 252,674          $ 256,213    
  

 

 

    

 

 

    

 

 

    

 

 

 

Expenses:

           

General Partner fees

     155,023          207,091          307,405          438,945    

Ongoing placement agent fees

     155,023          207,091          307,405          438,945    

Management fees

     92,748          150,150          190,017          319,074    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     402,794          564,332          804,827          1,196,964    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net investment loss

     (278,839)         (434,671)         (552,153)         (940,751)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Trading Results:

           

Net gains (losses) on trading of commodity interests:

           

Net realized gains (losses) on closed contracts

     2,689,590          (1,181,190)         1,672,146          (110,897)   

Net change in unrealized gains (losses) on open contracts

     (788,683)         281,412          1,039,564          (1,716,529)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total trading results

     1,900,907          (899,778)         2,711,710          (1,827,426)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

     $ 1,622,068          $ (1,334,449)         $ 2,159,557          $ (2,768,177)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) per Unit*

     $ 1.11          $ (0.75)         $ 1.50          $ (1.55)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of Units outstanding

     1,450,347.558          1,808,104.554          1,491,618.345          1,860,496.874    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

*

Represents the change in net asset value per Unit during the period.

See accompanying notes to financial statements.

 

4


Morgan Stanley Smith Barney Spectrum Select L.P.

Statements of Changes in Partners’ Capital

For the Three and Six Months Ended June 30, 2019 and 2018

(Unaudited)

 

     Units of
  Partnership  
        Interest        
     Limited
         Partners         
     General
          Partner          
                 Total              

Partners’ Capital, December 31, 2017

     1,951,695.614          $ 45,880,815          $ 617,398          $ 46,498,213    

Redemptions - General Partner

     (5,847.953)         -              (149,883)         (149,883)   

Redemptions - Limited Partners

     (221,961.479)         (5,181,172)         -              (5,181,172)   

Net income (loss)

     -              (2,747,634)         (20,543)         (2,768,177)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Partners’ Capital, June 30, 2018

     1,723,886.182          $ 37,952,009          $ 446,972          $ 38,398,981    
  

 

 

    

 

 

    

 

 

    

 

 

 

Partners’ Capital, March 31, 2018

     1,859,403.409          $ 42,347,546          $ 461,992          $ 42,809,538    

Redemptions - Limited Partners

     (135,517.227)         (3,076,108)         -              (3,076,108)   

Net income (loss)

     -              (1,319,429)         (15,020)         (1,334,449)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Partners’ Capital, June 30, 2018

     1,723,886.182          $ 37,952,009          $ 446,972          $ 38,398,981    
  

 

 

    

 

 

    

 

 

    

 

 

 
     Units of
Partnership
        Interest        
     Limited
        Partners        
     General
        Partner        
                 Total              

Partners’ Capital, December 31, 2018

     1,564,763.431          $ 31,587,727          $ 410,340          $ 31,998,067    

Redemptions - General Partner

     (5,409.307)         -              (118,000)         (118,000)   

Redemptions - Limited Partners

     (163,951.867)         (3,415,039)         -              (3,415,039)   

Net income (loss)

     -              2,130,210          29,347          2,159,557    
  

 

 

    

 

 

    

 

 

    

 

 

 

Partners’ Capital, June 30, 2019

     1,395,402.257          $ 30,302,898          $ 321,687          $ 30,624,585    
  

 

 

    

 

 

    

 

 

    

 

 

 

Partners’ Capital, March 31, 2019

     1,483,683.173          $ 30,503,488          $ 418,206          $ 30,921,694    

Redemptions - General Partner

     (5,409.307)         -              (118,000)         (118,000)   

Redemptions - Limited Partners

     (82,871.609)         (1,801,177)         -              (1,801,177)   

Net income (loss)

     -              1,600,587          21,481          1,622,068    
  

 

 

    

 

 

    

 

 

    

 

 

 

Partners’ Capital, June 30, 2019

             1,395,402.257          $ 30,302,898          $ 321,687          $ 30,624,585    
  

 

 

    

 

 

    

 

 

    

 

 

 

See accompanying notes to financial statements.

 

5


Morgan Stanley Smith Barney Spectrum Select L.P.

Notes to Financial Statements

(Unaudited)

 

1.

Organization:

Morgan Stanley Smith Barney Spectrum Select L.P. (the “Partnership”) is a Delaware limited partnership organized in 1991 to engage primarily in the speculative trading of futures contracts, options on futures and forward contracts, and forward contracts on physical commodities and other commodity interests, including, but not limited to, foreign currencies, financial instruments, metals, energy and agricultural products (collectively, “Futures Interests”) (refer to Note 4, “Financial Instruments”). The General Partner (as defined below) may also determine to invest up to all of the Partnership’s assets in United States (“U.S.”) Treasury bills and/or money market mutual funds, including money market mutual funds managed by Morgan Stanley or its affiliates. The Partnership commenced trading operations on August 1, 1991. Prior to December 31, 2018, the Partnership was one of the Morgan Stanley Spectrum series of funds, comprised of the Partnership, Morgan Stanley Smith Barney Spectrum Strategic L.P. (prior to its termination on December 31, 2018), and prior to December 31, 2017, Ceres Tactical Global L.P. (formerly Ceres Tactical Currency L.P.) and Morgan Stanley Smith Barney Spectrum Technical L.P.

Ceres Managed Futures LLC, a Delaware limited liability company, acts as the general partner (“Ceres” or the “General Partner”) and commodity pool operator of the Partnership. Ceres is a wholly-owned subsidiary of Morgan Stanley Domestic Holdings, Inc. (“MSD Holdings”). MSD Holdings is ultimately owned by Morgan Stanley. Morgan Stanley is a publicly held company whose shares are listed on the New York Stock Exchange. Morgan Stanley is engaged in various financial services and other businesses.

As of June 30, 2019, all trading decisions were made for the Partnership by EMC Capital Management, Inc. (“EMC”) and Graham Capital Management, L.P. (“Graham”) (each, a “Trading Advisor” and, collectively, the “Trading Advisors”).

During the reporting periods ended June 30, 2019 and 2018, the Partnership’s commodity broker was Morgan Stanley & Co. LLC (“MS&Co.”), a registered futures commission merchant. MS&Co. also acts as the counterparty on all trading of foreign currency forward contracts. Morgan Stanley Smith Barney LLC, doing business as Morgan Stanley Wealth Management (“Morgan Stanley Wealth Management”) is a principal subsidiary of MSD Holdings. MS&Co. and its affiliates act as the custodians of the Partnership’s assets available for trading in Futures Interests. MS&Co. is a wholly-owned subsidiary of Morgan Stanley. During prior periods included in this report, the Partnership deposited a portion of its cash in a non-trading account at JPMorgan Chase Bank N.A.

In July 2015, the General Partner delegated certain administrative functions to SS&C Technologies, Inc., a Delaware corporation, currently doing business as SS&C GlobeOp (the “Administrator”). Pursuant to a master services agreement, the Administrator furnishes certain administrative, accounting, regulatory reporting, tax and other services as agreed from time to time. In addition, the Administrator maintains certain books and records of the Partnership. The General Partner pays or reimburses the Partnership, from the General Partner fee it receives from the Partnership, the ordinary administrative expenses of the Partnership. This includes the expenses related to the engagement of the Administrator.

 

2.

Basis of Presentation and Summary of Significant Accounting Policies:

The financial statements and accompanying notes are unaudited but, in the opinion of the General Partner, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Partnership’s financial condition at June 30, 2019, the results of its operations for the three and six months ended June 30, 2019 and 2018 and the changes in partners’ capital for the three and six months ended June 30, 2019 and 2018. These financial statements present the results of interim periods and do not include all disclosures normally provided in annual financial statements. These financial statements should be read together with the financial statements and notes included in the Partnership’s Annual Report on Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) for the year ended December 31, 2018. The December 31, 2018 information has been derived from the audited financial statements as of and for the year ended December 31, 2018.

 

6


Morgan Stanley Smith Barney Spectrum Select L.P.

Notes to Financial Statements

(Unaudited)

 

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

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

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

Statement of Cash Flows. The Partnership has not provided a Statement of Cash Flows, as permitted by Accounting Standards Codification (“ASC”) 230, “Statement of Cash Flows.” The Statements of Changes in Partners’ Capital is included herein, and as of and for the periods ended June 30, 2019 and 2018, the Partnership carried no debt and all the Partnership’s investments were carried at fair value and classified as Level 1 and Level 2 measurements.

Partnership’s Investments. All Futures Interests of the Partnership, including derivative financial instruments and derivative commodity instruments, are held for trading purposes. The Futures Interests are recorded on trade date and open contracts are recorded at fair value (as described in Note 6, “Fair Value Measurements”) at the measurement date. Investments in Futures Interests denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing at the measurement date. Gains or losses are realized when contracts are liquidated and are determined using the first-in, first-out method. Unrealized gains or losses on open contracts are included as a component of equity in trading account in the Statements of Financial Condition. Net realized gains or losses and net change in unrealized gains or losses are included in the Statements of Income and Expenses. The Partnership does not isolate the portion of the results of operations arising from the effect of changes in foreign exchange rates on investments from fluctuations due to changes in market prices of investments held. Such fluctuations are included in total trading results in the Statements of Income and Expenses.

Partnership’s Cash. The Partnership’s restricted cash is equal to the cash portion of assets on deposit to meet margin requirements, as determined by the exchange or counterparty, and required by MS&Co. At June 30, 2019 and December 31, 2018, the amount of cash held for margin requirements was $6,134,635 and $5,568,405, respectively. Restricted and unrestricted cash includes cash denominated in foreign currencies of $736,032 (cost of $726,556) and $196,753 (cost of $191,327) as of June 30, 2019 and December 31, 2018, respectively.

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

Income Taxes. Income taxes have not been recorded as each partner is individually liable for the taxes, if any, on its share of the Partnership’s income and expenses. The Partnership follows the guidance of ASC 740, “Income Taxes,” which prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of tax positions taken or expected to be taken in the course of preparing the Partnership’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained “when challenged” or “when examined” by the applicable tax authority. Tax positions determined not to meet the more-likely-than-not threshold would be recorded as a tax benefit or liability in the Partnership’s Statements of Financial Condition for the current year. If a tax position does not meet the minimum statutory threshold to avoid the incurring of penalties, an expense for the amount of the statutory penalty and interest, if applicable, shall be recognized in the Statements of Income and Expenses in the period in which the position is claimed or expected to be claimed. The General Partner has concluded that there are no significant uncertain tax positions that would require recognition in the financial statements. The Partnership files U.S. federal and various state and local tax returns. No income tax returns are currently under examination. The 2015 through 2018 tax years remain subject to examination by U.S. federal and most state tax authorities.

 

7


Morgan Stanley Smith Barney Spectrum Select L.P.

Notes to Financial Statements

(Unaudited)

 

Net Income (Loss) per Unit. Net income (loss) per unit of limited partnership interest (“Unit(s)”) is calculated in accordance with ASC 946, “Financial Services – Investment Companies.” See Note 3, “Financial Highlights.”

There have been no material changes with respect to the Partnership’s critical accounting policies as reported in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

3.

Financial Highlights:

Financial highlights for the limited partner class as a whole for the three and six months ended June 30, 2019 and 2018 were as follows:

 

         For the Three Months Ended  
June 30,
         For the Six Months Ended  
June 30,
 
      2019       2018       2019       2018  

Per Unit Performance (for a unit outstanding throughout the period): *

           

Net realized and unrealized gains (losses)

     $ 1.30          $ (0.51)         $ 1.87          $ (1.05)   

Net investment loss

     (0.19)         (0.24)         (0.37)         (0.50)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net increase (decrease) for the period

     1.11          (0.75)         1.50          (1.55)   

Net asset value per Unit, beginning of period

     20.84          23.02          20.45          23.82    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net asset value per Unit, end of period

     $ 21.95          $ 22.27          $ 21.95          $ 22.27    
  

 

 

    

 

 

    

 

 

    

 

 

 
         For the Three Months Ended  
June 30,
         For the Six Months Ended  
June 30,
 
      2019       2018       2019       2018  

Ratios to Average Limited Partners’ Capital: **

           

Net investment loss ***

     (3.6)%        (4.3)%        (3.6)%        (4.4)%  
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating expenses before incentive fees

     5.2%        5.6%        5.3%        5.6%  

Incentive fees

     -%        -%        -%        -%  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     5.2%        5.6%        5.3%        5.6%  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total return:

           

Total return before incentive fees

     5.3%        (3.3)%        7.3%        (6.5)%  

Incentive fees

     -%        -%        -%        -%  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total return after incentive fees

     5.3%        (3.3)%        7.3%        (6.5)%  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

*

Net investment loss per Unit is calculated by dividing the interest income less total expenses by the average number of Units outstanding during the period. The net realized and unrealized gains (losses) per Unit is a balancing amount necessary to reconcile the change in net asset value per Unit with the other per unit information.

 

**

Annualized (except for incentive fees, if applicable).

 

***

Interest income less total expenses.

The above ratios and total return may vary for individual investors based on the timing of capital transactions during the period. Additionally, these ratios are calculated for the limited partner class using the limited partners’ share of income, expenses and average partners’ capital.

 

8


Morgan Stanley Smith Barney Spectrum Select L.P.

Notes to Financial Statements

(Unaudited)

 

4.

Financial Instruments:

The Partnership trades Futures Interests. Futures and forwards represent contracts for delayed delivery of an instrument at a specified date and price. Futures Interests are open commitments until the settlement date, at which time they are realized. They are valued at fair value, generally on a daily basis, and the unrealized gains and losses on open contracts (the difference between contract trade price and market price) are reported in the Statements of Financial Condition as a net unrealized gain or loss on open futures or forward contracts. The resulting net change in unrealized gains and losses is reflected in the “Net change in unrealized gains (losses) on open contracts” in the Statements of Income and Expenses. The Partnership’s contracts are accounted for on a trade-date basis. Gains or losses are realized when contracts are liquidated and are determined using the first-in, first-out method. Risk arises from changes in the value of these contracts and the potential inability of counterparties to perform under the terms of the contracts. There are numerous factors which may significantly influence the fair value of these contracts, including interest rate volatility.

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

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

The Partnership also has credit risk because MS&Co. acts as the commodity futures broker, or the counterparty, with respect to most of the Partnership’s assets. Exchange-traded futures and exchange-traded forward contracts are fair valued on a daily basis, with variations in value settled on a daily basis. With respect to the Partnership’s non-exchange-traded forward currency contracts, there are no daily settlements of variation in value, nor is there any requirement that an amount equal to the net unrealized gains (losses) on such contracts be segregated. However, the Partnership is required to meet margin requirements with the counterparty, which is accomplished by daily maintenance of the cash balance in custody accounts and U.S. Treasury bills held at MS&Co., for the benefit of MS&Co. With respect to those non-exchange-traded forward currency contracts, the Partnership is at risk to the ability of MS&Co., the sole counterparty on all such contracts, to perform. The Partnership has a netting agreement with MS&Co. The primary terms are based on industry standard master netting agreements. These agreements, which seek to reduce both the Partnership’s and MS&Co.’s exposure on non-exchange-traded forward currency contracts, including options on such contracts, should materially decrease the Partnership’s credit risk in the event of MS&Co.’s bankruptcy or insolvency.

The General Partner monitors and attempts to mitigate the Partnership’s risk exposure on a daily basis through financial, credit and risk management monitoring systems, and accordingly, believes that it has effective procedures for evaluating and limiting the credit and market risks to which the Partnership may be subject. These monitoring systems generally allow the General Partner to statistically analyze actual trading results with risk adjusted performance indicators and correlation statistics. In addition, online monitoring systems provide account analysis of futures, forward and option positions by sector, margin requirements, gain and loss transactions and collateral positions.

The futures and forwards traded by the Partnership, along with the U.S. Treasury bills held by the Partnership, involve varying degrees of related market risk. Market risk is often dependent upon changes in the level or volatility of interest rates, exchange rates, and prices of financial instruments and commodities, factors that result in frequent changes in the fair value of the Partnership’s open positions, and consequently in its earnings, whether realized or unrealized, and cash flow.

Gains and losses on open positions of exchange-traded futures and exchange-traded forward contracts are settled daily through variation margin. Gains and losses on non-exchange-traded forward currency contracts are settled upon termination of the contract.

 

9


Morgan Stanley Smith Barney Spectrum Select L.P.

Notes to Financial Statements

(Unaudited)

 

In the ordinary course of business, the Partnership enters into contracts and agreements that contain various representations and warranties and which provide general indemnifications. The Partnership’s maximum exposure under these arrangements cannot be determined, as this could include future claims that have not yet been made against the Partnership. The Partnership considers the risk of any future obligation relating to these indemnifications to be remote.

 

5.

Trading Activities:

The Partnership’s objective is to profit from speculative trading in Futures Interests. Therefore, each Trading Advisor for the Partnership will take speculative positions in Futures Interests where it feels the best profit opportunities exist for its trading strategies. As such, the average number of contracts outstanding in absolute quantities (the total of the open long and open short positions) has been presented as a part of the volume disclosure, as position direction is not an indicative factor in such volume disclosures.

All of the Futures Interests owned by the Partnership are held for trading purposes. The monthly average number of futures contracts traded during the three months ended June 30, 2019 and 2018 were 3,078 and 2,967, respectively. The monthly average number of futures contracts traded during the six months ended June 30, 2019 and 2018 were 2,902, and 3,209. The monthly average number of metal forward contracts traded during the three months ended June 30, 2019 and 2018 were 354 and 415, respectively. The monthly average number of metal forward contracts traded during the six months ended June 30, 2019 and 2018 were 370 and 420, respectively. The monthly average notional value of currency forward contracts traded during the three months ended June 30, 2019 and 2018 were $87,358,805 and $89,299,031, respectively. The monthly average notional value of currency forward contracts traded during the six months ended June 30, 2019 and 2018 were $80,738,847 and $111,022,823, respectively.

The following tables summarize the gross and net amounts recognized relating to the assets and liabilities of the Partnership’s derivatives and their offsetting subject to master netting arrangements or similar agreements as of June 30, 2019 and December 31, 2018, respectively.

 

            Gross Amounts       Amounts     Gross Amounts Not Offset in the        
          Offset in the       Presented in the         Statements of Financial Condition          
          Statements of     Statements of             Cash Collateral          
      Gross Amounts       Financial     Financial     Financial     Received/        

June 30, 2019

  Recognized     Condition     Condition        Instruments        Pledged*         Net Amount      

Assets

           

Futures

    $ 2,035,075         $ (452,629)        $ 1,582,446         $ -           $ -             $ 1,582,446    

Forwards

    273,264         (273,264)        -             -           -             -        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    $ 2,308,339         $ (725,893)        $ 1,582,446         $ -           $ -             $ 1,582,446    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

           

Futures

    $ (452,629)        $ 452,629         $ -             $ -           $ -             $ -        

Forwards

    (495,063)        273,264         (221,799)        -           221,799         -        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    $ (947,692)        $ 725,893         $ (221,799)        $ -           $ 221,799         $ -        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net fair value

              $ 1,582,446  
           

 

 

 

 

10


Morgan Stanley Smith Barney Spectrum Select L.P.

Notes to Financial Statements

(Unaudited)

 

            Gross Amounts       Amounts     Gross Amounts Not Offset in the        
          Offset in the       Presented in the         Statements of Financial Condition          
          Statements of     Statements of             Cash Collateral          
      Gross Amounts       Financial     Financial     Financial     Received/        

December 31, 2018

  Recognized     Condition     Condition        Instruments        Pledged*         Net Amount      

Assets

           

Futures

    $ 1,456,716         $ (1,122,513)        $ 334,203         $ -             $ -             $ 334,203    

Forwards

    623,038         (623,038)        -             -             -             -        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    $ 2,079,754         $ (1,745,551)        $ 334,203         $ -             $ -             $ 334,203    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

           

Futures

    $ (1,122,513)        $ 1,122,513         $ -             $ -             $ -             $ -        

Forwards

    (632,108)        623,038         (9,070)        -             9,070         -        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    $ (1,754,621)        $ 1,745,551         $ (9,070)        $ -             $ 9,070         $ -        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net fair value

              $ 334,203  
           

 

 

 

 

*

In the event of default by the Partnership, MS&Co., the Partnership’s commodity futures broker and the sole counterparty to the Partnership’s non-exchange-traded contracts, as applicable, has the right to offset the Partnership’s obligation with the Partnership’s cash and/or U.S. Treasury bills held by MS&Co., thereby minimizing MS&Co.’s risk of loss. In certain instances, MS&Co. may not post collateral and as such, in the event of default by MS&Co., the Partnership is exposed to the amount shown on the Statements of Financial Condition. In the case of exchange-traded contracts, the Partnership’s exposure to counterparty risk may be reduced since the exchange’s clearinghouse interposes its credit between buyer and seller and the clearinghouse’s guarantee funds may be available in the event of a default.

 

11


Morgan Stanley Smith Barney Spectrum Select L.P.

Notes to Financial Statements

(Unaudited)

 

The following tables indicate the gross fair values of derivative instruments of futures and forward contracts as separate assets and liabilities as of June 30, 2019 and December 31, 2018, respectively.

 

            June 30, 2019         

Assets

  

Futures Contracts

  

Commodity

     $ 370,058    

Equity

     150,635    

Currencies

     17,097    

Interest rates

     1,497,285    
  

 

 

 

Total unrealized appreciation on open futures contracts

     2,035,075    
  

 

 

 

Liabilities

  

Futures Contracts

  

Commodity

     (256,373)   

Equity

     (93,727)   

Currencies

     (96,026)   

Interest rates

     (6,503)   
  

 

 

 

Total unrealized depreciation on open futures contracts

     (452,629)   
  

 

 

 

Net unrealized appreciation on open futures contracts

     $ 1,582,446  
  

 

 

 

Assets

  

Forward Contracts

  

Commodity

     $ 224,472    

Currencies

     48,792    
  

 

 

 

Total unrealized appreciation on open forward contracts

     273,264    
  

 

 

 

Liabilities

  

Forward Contracts

  

Commodity

     (188,008)   

Currencies

     (307,055)   
  

 

 

 

Total unrealized depreciation on open forward contracts

     (495,063)   
  

 

 

 

Net unrealized depreciation on open forward contracts

     $ (221,799)  ** 
  

 

 

 

 

*

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

**

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

 

12


Morgan Stanley Smith Barney Spectrum Select L.P.

Notes to Financial Statements

(Unaudited)

 

         December 31, 2018      

Assets

  

Futures Contracts

  

Commodity

     $ 508,863    

Equity

     248,473    

Currencies

     241,791    

Interest rates

     457,589    
  

 

 

 

Total unrealized appreciation on open futures contracts

     1,456,716    
  

 

 

 

Liabilities

  

Futures Contracts

  

Commodity

     (389,356)   

Equity

     (229,595)   

Currencies

     (78,105)   

Interest rates

     (425,457)   
  

 

 

 

Total unrealized depreciation on open futures contracts

     (1,122,513)   
  

 

 

 

Net unrealized appreciation on open futures contracts

     $ 334,203  
  

 

 

 

Assets

  

Forward Contracts

  

Commodity

     $ 374,564    

Currencies

     248,474    
  

 

 

 

Total unrealized appreciation on open forward contracts

     623,038    
  

 

 

 

Liabilities

  

Forward Contracts

  

Commodity

     (230,751)   

Currencies

     (401,357)   
  

 

 

 

Total unrealized depreciation on open forward contracts

     (632,108)   
  

 

 

 

Net unrealized depreciation on open forward contracts

     $ (9,070)  ** 
  

 

 

 

 

*

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

**

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

 

13


Morgan Stanley Smith Barney Spectrum Select L.P.

Notes to Financial Statements

(Unaudited)

 

The following table indicates the Partnership’s trading gains and losses, by market sector, on derivative instruments for the three and six months ended June 30, 2019 and 2018.

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  

Sector

               2019                             2018                             2019                             2018              

Commodity

     $ (565,232)        $ (225,973)        $ (1,838,327)        $ (838,355)   

Equity

     120,114         (121,211)        702,465         (118,610)   

Currencies

     (465,769)        (682,457)        (886,590)        (681,655)   

Interest rates

     2,811,794         129,863         4,734,162         (188,806)   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     $ 1,900,907    ***      $ (899,778)   ***      $ 2,711,710    ***      $ (1,827,426)   *** 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

***

This amount is included in “Total trading results” in the Statements of Income and Expenses.

 

6.

Fair Value Measurements:

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

The fair value of exchange-traded futures, forward and option contracts is determined by the various exchanges, and reflects the settlement price for each contract as of the close of business on the last business day of the reporting period. The fair value of foreign currency forward contracts is extrapolated on a forward basis from the spot prices quoted as of approximately 3:00 P.M. (E.T.) on the last business day of the reporting period from various exchanges. The fair value of non-exchange-traded foreign currency option contracts is calculated by applying an industry standard model application for options valuation of foreign currency options, using as input the spot prices, interest rates and option implied volatilities quoted as of approximately 3:00 P.M. (E.T.) on the last business day of the reporting period. U.S. Treasury bills are valued at the last available bid price received from independent pricing services as of the close of the last business day of the reporting period.

The Partnership considers prices for commodity futures, swap and option contracts to be based on unadjusted quoted prices in active markets for identical assets and liabilities (Level 1). The values of U.S. Treasury bills, non-exchange-traded forward, swap and certain option contracts for which market quotations are not readily available are priced by pricing services that derive fair values for those assets and liabilities from observable inputs (Level 2). As of June 30, 2019 and December 31, 2018 and for the periods ended June 30, 2019 and 2018, the Partnership did not hold any derivative instruments that were priced at fair value using unobservable inputs through the application of the General Partner’s assumptions and internal valuation pricing models (Level 3).

 

14


Morgan Stanley Smith Barney Spectrum Select L.P.

Notes to Financial Statements

(Unaudited)

 

June 30, 2019

   Total      Level 1      Level 2      Level 3  

Assets

           

Futures

     $ 2,035,075          $ 2,035,075          $ -              $ -        

Forwards

     273,264          -              273,264          -        
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     $ 2,308,339          $ 2,035,075          $ 273,264          $ -        
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Futures

     $ 452,629          $ 452,629          $ -              $ -        

Forwards

     495,063          -              495,063          -        
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     $ 947,692          $ 452,629          $ 495,063          $ -        
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2018

   Total      Level 1      Level 2      Level 3  

Assets

           

Futures

     $ 1,456,716          $ 1,456,716          $ -              $ -        

Forwards

     623,038          -              623,038          -        
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     $         2,079,754          $         1,456,716          $             623,038          $                 -        
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Futures

     $ 1,122,513          $ 1,122,513          $ -              $ -        

Forwards

     632,108          -              632,108          -        
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     $ 1,754,621          $ 1,122,513          $ 632,108          $ -        
  

 

 

    

 

 

    

 

 

    

 

 

 

 

7.

Subsequent Events:

The General Partner evaluates events that occur after the balance sheet date but before and up until financial statements are issued. The General Partner has assessed the subsequent events through the date the financial statements were issued and has determined that there were no subsequent events requiring adjustment to or disclosure in the financial statements.

 

15


Item 2.

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

Liquidity and Capital Resources

The Partnership does not have, nor does it expect to have, any capital assets. The Partnership does not engage in sales of goods or services. Its assets are (i) its equity in trading account, consisting of unrestricted and restricted cash, net unrealized appreciation on open futures contracts, net unrealized appreciation on open forward contracts and investment in U.S. Treasury bills at fair value, if applicable and (ii) interest receivable. Because of the low margin deposits normally required in commodity futures trading, relatively small price movements may result in substantial losses to the Partnership. While substantial losses could lead to a material decrease in liquidity, no such illiquidity occurred in the second quarter of 2019.

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

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

Other than the risks inherent in Futures Interests trading and U.S. Treasury bills and money market mutual fund securities, the Partnership knows of no trends, demands, commitments, events or uncertainties at the present time that are reasonably likely to result in the Partnership’s liquidity increasing or decreasing in any material way.

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

For the six months ended June 30, 2019, the Partnership capital decreased 4.3% from $31,998,067 to $30,624,585. This decrease was attributable to redemptions of 163,951.867 limited partner Units totaling $3,415,039 and redemptions of 5,409.307 General Partner Units totaling $118,000, coupled with a net income of $2,159,557. Future redemptions can impact the amount of funds available for investment in subsequent periods.

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

Off-Balance Sheet Arrangements and Contractual Obligations

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

Critical Accounting Policies

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

The Partnership records all investments at fair value in its financial statements, with changes in fair value reported as a component of net realized gains (losses) and net change in unrealized gains (losses) in the Statements of Income and Expenses. The General Partner estimates that, at any given time, approximately 17.3% to 50.0% of the Partnership’s contracts are traded over-the-counter.

 

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Results of Operations

General: The Partnership’s results depend on the Trading Advisors and the ability of each Trading Advisor’s trading program to take advantage of price movements in the Futures Interests markets.

Graham currently trades its allocated portion of the Partnership’s assets pursuant to Graham’s Global Diversified Program, as described below, at 150% Leverage. The Global Diversified Program features the first trend system that Graham developed, which began trading client accounts in 1995. It utilizes multiple computerized trading models and offers broad diversification in both financial and non-financial markets, trading in approximately 65 global markets. The Global Diversified Program’s trend system is primarily long-term in nature and is intended to generate significant returns over time with an acceptable degree of risk and volatility. The computer models analyze on a daily basis the recent price action, the relative strength and the risk characteristics of each market and compare statistically the quantitative results of this data to years of historical data on each market.

EMC currently trades its Classic Program for the Partnership. EMC’s investment strategies are technical rather than fundamental in nature. In other words, they are developed from analysis of patterns of actual monthly, weekly, and daily price movements and are not based on analysis of fundamental supply and demand factors, general economic factors, or anticipated world events. EMC relies on historical analysis of these price patterns to interpret current market behavior and to evaluate technical indicators for trade initiations and liquidations. EMC’s investment strategies used in its program are trend-following. This means that initiation and liquidation of positions in a particular market are generally in the direction of the price trend in that market, although at times counter-trend elements also may be employed. EMC employs an investment strategy which utilizes a blend of systems (or, stated another way, a number of systems simultaneously). The strategies are diversified in that its program follows a number of Futures Interests and often invests in more than ten different interests at one time.

The General Partner is not aware of any material changes to the trading programs discussed above for the fiscal quarter ended June 30, 2019.

The following chart sets forth the percentage and the amount of the Partnership’s net assets allocated to each Trading Advisor for the periods ended June 30, 2019 and March 31, 2019, respectively.

 

    Trading Advisor    

 

June 30, 2019

 

June 30, 2019
(percentage of
Partners’ Capital)

 

March 31, 2019

 

March 31, 2019
(percentage of
Partners’ Capital)

Graham               $                17,180,381                                   56.10  %   $                17,481,426                                   56.53   %
EMC               $                13,444,204                                   43.90  %   $                13,440,268                                   43.47   %

The following presents a summary of the Partnership’s operations for the three and six months ended June 30, 2019, and a general discussion of its trading activities during the period. It is important to note, however, that the Trading Advisors trade in various markets at different times and that prior activity in a particular market does not mean that such market will be actively traded by the Trading Advisors or will be profitable in the future. Consequently, the results of operations of the Partnership are difficult to discuss other than in the context of the Trading Advisors’ trading activities on behalf of the Partnership during the period in question. Past performance is no guarantee of future results.

The Partnership’s results of operations set forth in the financial statements are prepared in accordance with GAAP, which require the use of certain accounting policies that affect the amounts reported in these financial statements, including the following: the contracts the Partnership trades are accounted for on a trade-date basis and marked to market on a daily basis. The difference between their original contract value and market value is recorded in the Statements of Income and Expenses as “Net change in unrealized gains (losses) on open contracts,” and recorded as “Net realized gains (losses) on closed contracts” when open positions are closed out. The sum of these amounts constitutes the Partnership’s trading results. The market value of a futures contract is the settlement price on the exchange on which that futures contract is traded on a particular day. The value of a foreign currency forward contract is based on the spot rate as of approximately 3:00 P.M. (E.T.), the close of the business day. Interest income, as well as management fees, incentive fees, General Partner fees and ongoing placement agent fees of the Partnership are recorded on an accrual basis, as applicable.

 

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

During the Partnership’s second quarter of 2019, the net asset value per Unit increased 5.3% from $20.84 to $21.95 as compared to a decrease of 3.3% in the second quarter of 2018. The Partnership experienced a net trading gain before fees and expenses in the second quarter of 2019 of $1,900,907. Gains were primarily attributable to the Partnership’s trading of Futures Interests in equity and interest rates and were partially offset by losses in commodity and currencies. The Partnership experienced a net trading loss before fees and expenses in the second quarter of 2018 of $899,778. Losses were primarily attributable to the Partnership’s trading of Futures Interests in the commodity, equity and currencies and were partially offset by gains in the interest rates.

The most notable gains were recorded during May and June from long positions in non-U.S. and U.S. fixed income futures as prices rose amid safe-haven demand and increased speculation that the U.S. Federal Reserve will cut interest rates. Within the global stock indices, gains were recorded during April and June from long European equity index futures positions as prices increased on signs that major central banks are prepared to provide new stimulus to slowing economies. Smaller gains were experienced in the metals sector during April and May from short positions in aluminum and copper futures as prices moved lower. A portion of the Partnership’s gains for the quarter was offset by losses incurred within the energy sector primarily during May from long positions in Brent crude oil and refined oil products as prices reversed lower on an outlook for weakening fuel demand. Within the currency markets, losses were incurred during June from short positions in the Canadian dollar and euro versus the U.S. dollar following calls for the Fed to weaken the dollar to boost the U.S. economy. Further losses in the currencies were experienced during May from positions in the Japanese yen and Mexican peso. Within the agricultural complex, losses were incurred during May and June from short futures positions in the grain markets as prices rose after excessive rains in the U.S. Midwest reduced yield projections.

During the Partnership’s six months ended June 30, 2019, the net asset value per Unit increased 7.3% from $20.45 to $21.95 as compared to a decrease of 6.5% for the six months ended June 30, 2018. The Partnership experienced a net trading gain before fees and expenses for the six months ended June 30, 2019 of $2,711,710. Gains were primarily attributable to the Partnership’s trading of Futures Interests in equity and interest rate and were partially offset by losses in commodity and currencies. The Partnership experienced a net trading loss before fees and expenses for the six months ended June 30, 2018 of $1,827,426. Losses were primarily attributable to the Partnership’s trading of Futures Interests in the commodity, equity, currencies and interest rate sectors.

The most significant gains were achieve within the global interest rates during January, March, May, and June from long positions in non-U.S. and U.S. fixed income futures as prices rose as global economic concerns pushed central banks to looser monetary policy globally. Within the global stock index markets, gains were primarily recorded during February through April, as well as in June, from long positions in U.S., European, and Asian equity index futures as positive consumer sentiment and the promise of dovish monetary policy pushed stock prices higher. A portion of the Partnership’s gains for the first six months of the year was offset by trading losses within the energy sector during January and February from short positions in crude oil futures as global oil prices moved higher. Additional losses were incurred during May in the energy sector from futures positions in gas oil and gasoline. Within the currency markets, losses were incurred during June from short positions in the British pound versus the U.S. dollar following calls for the Fed to weaken the dollar to boost the U.S. economy. Further losses in the currencies were experienced during January from positions in the Canadian dollar. Within the metals sector, losses were incurred during January from short positions in copper futures as industrial metals prices rebounded on signs of a potential resolution to the U.S. versus China trade battles. Smaller losses were incurred in the metals during June from short futures positions in industrial metals as prices benefited from weakness in the U.S. dollar and optimism over a Trump-Xi trade meeting during the G-20 summit. Within the agricultural complex, losses were incurred during May and June from short futures positions in the grain markets as prices rose after excessive rains in the U.S. Midwest reduced yield projections.

Commodity markets are highly volatile. Broad price fluctuations and rapid inflation increase not only the risks involved in commodity trading, but also the possibility of profit. The profitability of the Partnership depends on the existence of major price trends and the ability of the Trading Advisors to correctly identify those price trends. Price trends are influenced by, among other things, changing supply and demand relationships, weather, governmental, agricultural, commercial and trade programs and policies, national and international political and economic events and changes in interest rates. To the extent that market trends exist and the Trading Advisors are able to identify them, the Partnership expect to increase capital through operations.

 

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The Partnership receives monthly interest on 100% of its average daily equity maintained in cash in the Partnership’s account during each month at a rate equal to 80% of the monthly average of the 4-week U.S Treasury bill discount rate. For the avoidance of doubt, the Partnership will not receive interest on amounts in the futures brokerage account that are committed to margin. Any interest earned on the Partnership’s cash account in excess of the amounts described above, if any, will be retained by MS&Co. and/or shared with the General Partner. All interest earned on U.S. Treasury bills and money market mutual fund securities will be retained by the Partnership, as applicable. Interest income for the three and six months ended June 30, 2019 decreased by $5,706 and $3,539, respectively, as compared to the corresponding periods in 2018. The decrease in interest income was primarily due to lower average daily equity during the three and six months ended June 30, 2019 as compared to the corresponding periods in 2018. Interest earned by the Partnership will increase the net asset value of the Partnership. The amount of interest income earned by the Partnership depends on (1) the average daily equity maintained in cash in the Partnership’s accounts, (2) the amount of U.S. Treasury bills and/or money market mutual fund securities held by the Partnership and (3) interest rates over which none of the Partnership or MS&Co. has control.

Ongoing placement agent fees are calculated as a percentage of the Partnership’s adjusted net asset value on the first day of each month and are affected by trading performance and redemptions. Accordingly, they must be compared in relation to the fluctuations in the monthly net asset values. Ongoing placement agent fees for the three and six months ended June 30, 2019 decreased by $52,068 and $131,540, respectively, as compared to the corresponding periods in 2018. The decrease was primarily due to a decrease in average net assets during the three and six months ended June 30, 2019 as compared to the corresponding periods in 2018.

General Partner fees are paid to the General Partner for administering the business and affairs of the Partnership. General Partner fees are calculated as a percentage of the Partnership’s adjusted net asset value as of the beginning of each month and are affected by trading performance and redemptions. Accordingly, they must be compared in relation to the fluctuations in the monthly net asset values. General Partner fees for the three and six months ended June 30, 2019 decreased by $52,068 and $131,540, respectively, as compared to the corresponding periods in 2018. The decrease was primarily due to a decrease in average net assets during the three and six months ended June 30, 2019 as compared to the corresponding periods in 2018.

Management fees are calculated as a percentage of the Partnership’s adjusted net asset value as of the beginning of each month and are affected by trading performance and redemptions. Accordingly, they must be compared in relation to the fluctuations in the monthly net asset values. Management fees for the three and six months ended June 30, 2019 decreased by $57,402 and $129,057, respectively, as compared to the corresponding periods in 2018. The decrease was primarily due to a decrease in average net assets during the three and six months ended June 30, 2019 as compared to the corresponding periods in 2018.

Incentive fees are based on the new trading profits generated by each Trading Advisor at the end of the month or year, as applicable, as defined in the respective management agreements between the Partnership, the General Partner and each Trading Advisor. Trading performance for the three and six months ended June 30, 2019 and 2018 did not result in incentive fees. To the extent a Trading Advisor incurs a loss for the Partnership, the Trading Advisor will not be paid incentive fees until such Trading Advisor recovers any net loss incurred by the Trading Advisor and earns additional new trading profits for the Partnership.

In allocating the assets of the Partnership among the Trading Advisors, the General Partner considers, among other factors, each Trading Advisor’s past performance, trading style, volatility of markets traded and fee requirements. The General Partner may modify or terminate the allocation of assets among the Trading Advisors and may allocate assets to additional advisors at any time.

 

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Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

The Partnership is a commodity pool engaged primarily in speculative trading of futures, forwards and options. The market sensitive instruments held by the Partnership are acquired for speculative trading purposes, and all or substantially all of the Partnership’s assets are subject to the risk of trading loss. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Partnership’s main line of business.

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

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

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

Quantifying the Partnership’s Trading Value at Risk

The following quantitative disclosures regarding the Partnership’s market risk exposures contain “forward-looking statements” within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). All quantitative disclosures in this section are deemed to be forward-looking statements for purposes of the safe harbor, except for statements of historical fact.

The Partnership accounts for open positions on the basis of fair value accounting principles. Any loss in the market value of the Partnership’s open positions is directly reflected in the Partnership’s earnings and cash flow.

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

“Value at Risk” is a measure of the maximum amount which the Partnership could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Partnership’s speculative trading and the recurrence in the markets traded by the Partnership of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or the Partnership’s experience to date (i.e., “risk of ruin”). In light of the foregoing, as well as the risks and uncertainties intrinsic to all future projections, the inclusion of the quantification in this section should not be considered to constitute any assurance or representation that the Partnership’s losses in any market sector will be limited to Value at Risk or by the Partnership’s attempts to manage its market risk.

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

Value at Risk tables represent a probabilistic assessment of the risk of loss in market risk sensitive instruments. The following tables indicate the trading Value at Risk associated with the Partnership’s open positions by market category as of June 30, 2019 and December 31, 2018, and the highest, lowest and average values during the three months ended June 30, 2019 and for the twelve months ended December 31, 2018. All open position trading risk exposures of the Partnership have been included in calculating the figures set forth below. There has been no material change in the trading Value at Risk, non trading risk and risk management information previously disclosed in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

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As of June 30, 2019, the Partnership’s total capitalization was $30,624,585.

June 30, 2019

 

                  Three Months Ended June 30, 2019  
            % of Total     High      Low      Average  

Market Sector

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

Commodity

     $ 1,216,641          3.97       $ 2,313,241        $ 737,064          $ 1,692,497    

Equity

     1,467,690          4.79         2,061,174        120,372          1,566,713    

Currencies

     2,046,137          6.68         2,327,236        1,802,811          2,072,562    

Interest rates

     1,367,881          4.47         1,512,813        578,290          1,362,464    
  

 

 

    

 

 

         

Total

     $ 6,098,349          19.91          
  

 

 

    

 

 

         

*Average of daily Value at Risk.

As of December 31, 2018, the Partnership’s total capitalization was $31,998,067.

December 31, 2018

 

                  Twelve Months Ended December 31, 2018  
            % of Total     High      Low      Average  

Market Sector

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

Commodity

     $ 1,586,440          4.96       $ 2,826,580          $ 1,257,344          $ 1,779,070    

Equity

     702,502          2.20         2,895,463          697,502          1,525,100    

Currencies

     2,290,421          7.16         3,296,206          1,764,933          2,385,254    

Interest rates

     845,986          2.64         1,771,181          823,531          1,270,502    
  

 

 

    

 

 

         

Total

     $ 5,425,349          16.96          
  

 

 

    

 

 

         

* Annual average of daily Value at Risk.

 

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Item 4.

Controls and Procedures.

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

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

The General Partner’s President and CFO have evaluated the effectiveness of the Partnership’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2019 and, based on that evaluation, the General Partner’s President and CFO have concluded that, at that date, the Partnership’s disclosure controls and procedures were effective.

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

 

   

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

 

   

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

 

   

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

There were no changes in the Partnership’s internal control over financial reporting process during the fiscal quarter ended June 30, 2019 that materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings.

This section describes the major pending legal proceedings, other than ordinary routine litigation incidental to the business, to which MS&Co. or its subsidiaries is a party or to which any of their property is subject. There are no material legal proceedings pending against the Partnership or the General Partner.

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

MS&Co. is a wholly-owned, indirect subsidiary of Morgan Stanley, a Delaware holding company. Morgan Stanley files periodic reports with the SEC as required by the Securities Exchange Act of 1934 as amended (the “Exchange Act”), which include current descriptions of material litigation and material proceedings and investigations, if any, by governmental and/or regulatory agencies or self-regulatory organizations concerning Morgan Stanley and its subsidiaries, including MS&Co. As a consolidated subsidiary of Morgan Stanley, MS&Co. does not file its own periodic reports with the SEC that contain descriptions of material litigation, proceedings and investigations. As a result, we refer you to the “Legal Proceedings” section of Morgan Stanley’s SEC 10-K filings for 2018, 2017, 2016, 2015 and 2014. In addition, MS&Co. annually prepares an Audited, Consolidated Statement of Financial Condition (“Audited Financial Statement”) that is publicly available on Morgan Stanley’s website at www.morganstanley.com. We refer you to the Commitments, Guarantees and Contingencies – Legal section of MS&Co.’s 2018 Audited Financial Statement.

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

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

Regulatory and Governmental Matters.

On February 25, 2015, MS&Co. reached an agreement in principle with the United States Department of Justice, Civil Division and the United States Attorney’s Office for the Northern District of California, Civil Division (collectively, the “Civil Division”) to pay $2.6 billion to resolve certain claims that the Civil Division indicated it intended to bring against MS&Co. That settlement was finalized on February 10, 2016.

In October 2014, the Illinois Attorney General’s Office (“ILAG”) sent a letter to MS&Co. alleging that MS&Co. knowingly made misrepresentations related to RMBS purchased by certain pension funds affiliated with the State of Illinois and demanding that MS&Co. pay

 

23


ILAG approximately $88 million. MS&Co. and ILAG reached an agreement to resolve the matter on February 10, 2016.

On January 13, 2015, the New York Attorney General’s Office (“NYAG”), which is also a member of the RMBS Working Group, indicated that it intended to file a lawsuit related to approximately 30 subprime securitizations sponsored by MS&Co. NYAG indicated that the lawsuit would allege that MS&Co. misrepresented or omitted material information related to the due diligence, underwriting and valuation of the loans in the securitizations and the properties securing them and indicated that its lawsuit would be brought under the Martin Act. MS&Co. and NYAG reached an agreement to resolve the matter on February 10, 2016.

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

On April 21, 2015, the Chicago Board Options Exchange, Incorporated (CBOE) and the CBOE Futures Exchange, LLC (CFE) filed statements of charges against MS&Co. in connection with trading by one of MS&Co.’s former traders of EEM options contracts that allegedly disrupted the final settlement price of the November 2012 VXEM futures. CBOE alleged that MS&Co. violated CBOE Rules 4.1, 4.2 and 4.7, Sections 9(a) and 10(b) of the Exchange Act, and Rule 10b-5 thereunder. CFE alleged that MS&Co. violated CFE Rules 608, 609 and 620. The matters were resolved on July 12, 2016 and June 28, 2016, respectively, without any findings of fraud. Pursuant to the settlements, MS&Co. was required to pay a $750,000 penalty to the CBOE (for which MS&Co. and an individual were jointly and severally liable) and a $400,000 penalty to the CFE (for which MS&Co. and an individual were jointly and severally liable) and $152,664 in disgorgement.

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

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

 

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On December 20, 2016, MS&Co. consented to and became the subject of an order by the SEC in connection with allegations that MS&Co. willfully violated Sections 15(c)(3) and 17(a)(1) of the Exchange Act and Rules 15c3-3(e), 17a-5(a), and 17a-5(d) thereunder, by inaccurately calculating its Reserve Account requirement under Rule 15c3-3 by including margin loans to an affiliate in its calculations, which resulted in making inaccurate records and submitting inaccurate reports to the SEC. Without admitting or denying the underlying allegations and without adjudication of any issue of law or fact, MS&Co. consented to a cease and desist order, a censure, and a civil monetary penalty of $7,500,000.

On September 28, 2017, the CFTC issued an order filing and simultaneously settling charges against MS&Co. regarding violations of CFTC Rule 166.3 by failing to diligently supervise the reconciliation of exchange and clearing fees with the amounts it ultimately charged customers for certain transactions on multiple exchanges. The order and settlement required MS&Co. to pay a $500,000 penalty and cease and desist from violating Rule 166.3.

On November 2, 2017, the CFTC issued an order filing and simultaneously settling charges against MS&Co. for non-compliance with applicable rules governing Part 17 Large Trader reports to the CFTC. The order requires MS&Co. to pay a $350,000 penalty and cease and desist from further violations of the Commodity Exchange Act.

Civil Litigation

On July 15, 2010, China Development Industrial Bank (“CDIB”) filed a complaint against MS&Co., styled China Development Industrial Bank v. Morgan Stanley & Co. Incorporated et al., which is pending in the Supreme Court of the State of New York, New York County (“Supreme Court of NY”). The complaint relates to a $275 million credit default swap referencing the super senior portion of the STACK 2006-1 CDO. The complaint asserts claims for common law fraud, fraudulent inducement and fraudulent concealment and alleges that MS&Co. misrepresented the risks of the STACK 2006-1 CDO to CDIB, and that MS&Co. knew that the assets backing the CDO were of poor quality when it entered into the credit default swap with CDIB. The complaint seeks compensatory damages related to the approximately $228 million that CDIB alleges it has already lost under the credit default swap, rescission of CDIB’s obligation to pay an additional $12 million, punitive damages, equitable relief, fees and costs. On February 28, 2011, the court denied MS&Co.’s motion to dismiss the complaint. On June 27, 2018, MS&Co. filed a motion for summary judgment and spoliation sanctions against CDIB. On December 21, 2018, the court denied MS&Co.’s motion for summary judgment and granted in part MS&Co,’s motion for sanctions relating to the spoliation of evidence. On January 18, 2019, CDIB filed a motion to clarify and resettle the portion of the court’s December 21, 2018 order granting spoliation sanctions. On January 24, 2019, CDIB filed a notice of appeal from the court’s December 21, 2018 order, and on January 25, 2019, MS&Co. filed a notice of appeal from the same order. On March 7, 2019, the court denied the relief that CDIB sought in a motion to clarify and resettle the portion of the court’s December 21, 2018 order granting spoliation sanctions. Based on currently available information, MS&Co. believes it could incur a loss in this action of up to approximately $240 million plus pre- and post-judgment interest, fees and costs.

 

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On October 15, 2010, the Federal Home Loan Bank of Chicago filed a complaint against MS&Co. and other defendants in the Circuit Court of the State of Illinois, styled Federal Home Loan Bank of Chicago v. Bank of America Funding Corporation et al. A corrected amended complaint was filed on April 8, 2011, which alleges that defendants made untrue statements and material omissions in the sale to plaintiff of a number of mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans and asserts claims under Illinois law. The total amount of certificates allegedly sold to plaintiff by MS&Co. at issue in the action was approximately $203 million. The complaint seeks, among other things, to rescind the plaintiff’s purchase of such certificates. The defendants filed a motion to dismiss the corrected amended complaint on May 27, 2011, which was denied on September 19, 2012. On December 13, 2013, the court entered an order dismissing all claims related to one of the securitizations at issue. On January 18, 2017, the court entered an order dismissing all claims related to an additional securitization at issue. After those dismissals, the remaining amount of certificates allegedly issued by MS&Co. or sold to plaintiff by MS&Co. was approximately $65 million. At March 25, 2019, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $36 million, and the certificates had not yet incurred actual losses. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $36 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

On May 17, 2013, plaintiff in IKB International S.A. in Liquidation, et al. v. Morgan Stanley, et al. filed a complaint against MS&Co. and certain affiliates in the Supreme Court of NY. The complaint alleges that defendants made material misrepresentations and omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. to plaintiff was approximately $133 million. The complaint alleges causes of action against MS&Co. for common law fraud, fraudulent concealment, aiding and abetting fraud, and negligent misrepresentation, and seeks, among other things, compensatory and punitive damages. On October 29, 2014, the court granted in part and denied in part MS&Co.’s motion to dismiss. All claims regarding four certificates were dismissed. After these dismissals, the remaining amount of certificates allegedly issued by MS&Co. or sold to plaintiff by MS&Co. was approximately $116 million. On August 11, 2016, the Appellate Division, First Department affirmed the trial court’s decision denying in part MS&Co.’s motion to dismiss the complaint. At March 25, 2019, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $23 million, and the certificates had incurred actual losses of $58 million. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $23 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

In August of 2017, MS&Co. was named as a defendant in a purported antitrust class action in the United States District Court for the United States District Court for the Southern District of New York styled Iowa Public Employees’ Retirement System et al. v. Bank of America Corporation et al. Plaintiffs allege, inter alia, that MS&Co., together with a number of other financial institution defendants, violated U.S. antitrust laws and New York state law in connection with their alleged efforts to prevent the development of electronic exchange-based platforms for securities lending. The class action complaint was filed on behalf of a purported

 

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class of borrowers and lenders who entered into stock loan transactions with the defendants. The class action complaint seeks, among other relief, certification of the class of plaintiffs and treble damages. On September 27, 2018, the court denied the defendants’ motion to dismiss the class action complaint.

Beginning on March 25, 2019, MS&Co. was named as a defendant in a series of putative class action complaints filed in the Southern District of New York, the first of which was styled Alaska Electrical Pension Fund v. BofA Secs., Inc., et al. Each complaint alleges a conspiracy to fix prices and restrain competition in the market for unsecured bonds issued by the following Government-Sponsored Enterprises: the Federal National Mortgage Association; the Federal Home Loan Mortgage Corporation; the Federal Farm Credit Banks Funding Corporation; and the Federal Home Loan Banks. Each complaint raises a claim under Section 1 of the Sherman Act and seeks, among other things, injunctive relief and treble compensatory damages. On May 23, 2019, plaintiffs filed a consolidated amended class action complaint, now styled In re GSE Bonds Antitrust Litigation. The purported class period in the consolidated amended complaint is now from January 1, 2009 to January 1, 2016. On June 13, 2019, the defendants filed a joint motion to dismiss the consolidated amended complaint.

Settled Civil Litigation

On December 23, 2009, the Federal Home Loan Bank of Seattle filed a complaint against MS&Co. and another defendant in the Superior Court of the State of Washington, styled Federal Home Loan Bank of Seattle v. Morgan Stanley & Co. Inc., et al. The amended complaint, filed on September 28, 2010, alleged that defendants made untrue statements and material omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sold to plaintiff by MS&Co. was approximately $233 million. The complaint raised claims under the Washington State Securities Act and sought, among other things, to rescind the plaintiff’s purchase of such certificates. On January 23, 2017, the parties reached an agreement to settle the litigation.

On March 15, 2010, the Federal Home Loan Bank of San Francisco filed a complaint against MS&Co. and other defendants in the Superior Court of the State of California styled Federal Home Loan Bank of San Francisco v. Credit Suisse Securities (USA) LLC, et al. An amended complaint filed on June 10, 2010 alleged that defendants made untrue statements and material omissions in connection with the sale to plaintiff of a number of mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The amount of certificates allegedly sold to plaintiff by MS&Co. was approximately $704 million. The complaint raised claims under both the federal securities laws and California law and sought, among other things, to rescind the plaintiff’s purchase of such certificates. On January 26, 2015, as a result of a settlement with certain other defendants, the plaintiff requested and the court subsequently entered a dismissal with prejudice of certain of the plaintiff’s claims, including all remaining claims against MS&Co.

On March 15, 2010, the Federal Home Loan Bank of San Francisco filed a complaint against MS&Co. and other defendants in the Superior Court of the State of California styled Federal Home Loan Bank of San Francisco v. Deutsche Bank Securities Inc. et al. An amended complaint, filed on June 10, 2010, alleged that defendants made untrue statements and material omissions in connection with the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The amount of certificates allegedly sold to plaintiff by MS&Co. was approximately $276 million. The complaint raised

 

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claims under both the federal securities laws and California law and sought, among other things, to rescind the plaintiff’s purchase of such certificates. On December 21, 2016, the parties reached an agreement to settle the litigation.

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

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

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

On April 25, 2012, The Prudential Insurance Company of America and certain affiliates filed a complaint against MS&Co. and certain affiliates in the Superior Court of the State of New Jersey, styled The Prudential Insurance Company of America, et al. v. Morgan Stanley, et al. On October 16, 2012, plaintiffs filed an amended complaint. The amended complaint alleged that defendants made untrue statements and material omissions in connection with the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. was approximately $1.073 billion. The amended complaint raised claims under the New Jersey Uniform Securities Law, as well as common law claims of negligent misrepresentation, fraud, fraudulent inducement, equitable fraud, aiding and abetting fraud, and violations of the New Jersey RICO statute, and included a claim for treble damages. On January 8, 2016, the parties reached an agreement to settle the litigation.

In re Morgan Stanley Mortgage Pass-Through Certificates Litigation, which had been pending in the SDNY, was a putative class action involving allegations that, among other things,

 

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the registration statements and offering documents related to the offerings of certain mortgage pass-through certificates in 2006 and 2007 contained false and misleading information concerning the pools of residential loans that backed these securitizations. On December 18, 2014, the parties’ agreement to settle the litigation received final court approval, and on December 19, 2014, the court entered an order dismissing the action.

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

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

On September 23, 2013, the plaintiff in National Credit Union Administration Board v. Morgan Stanley & Co. Inc., et al. filed a complaint against MS&Co. and certain affiliates in the SDNY. The complaint alleged that defendants made untrue statements of material fact or omitted to state material facts in the sale to the plaintiff of certain mortgage pass-through certificates issued by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. to plaintiffs in the matter was approximately $417 million. The complaint alleged violations of federal and various state securities laws and sought, among other things, rescissionary and compensatory damages. On November 23, 2015, the parties reached an agreement to settle the matter.

On September 16, 2014, the Virginia Attorney General’s Office filed a civil lawsuit, styled Commonwealth of Virginia ex rel. Integra REC LLC v. Barclays Capital Inc., et al., against MS&Co. and several other defendants in the Circuit Court of the City of Richmond related to RMBS. The lawsuit alleged that MS&Co. and the other defendants knowingly made misrepresentations and omissions related to the loans backing RMBS purchased by the Virginia Retirement System. The complaint asserted claims under the Virginia Fraud Against Taxpayers Act, as well as common law claims of actual and constructive fraud, and sought, among other things, treble damages and civil penalties. On January 6, 2016, the parties reached an agreement to settle the litigation. An order dismissing the action with prejudice was entered on January 28, 2016.

On April 20, 2011, the Federal Home Loan Bank of Boston filed a complaint against MS&Co. and other defendants in the Superior Court of the Commonwealth of Massachusetts styled Federal Home Loan Bank of Boston v. Ally Financial, Inc. F/K/A GMAC LLC et al. An amended complaint was filed on June 29, 2012 and alleged that defendants made untrue statements and material omissions in the sale to plaintiff of certain mortgage pass-through

 

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certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly issued by MS&Co. or sold to plaintiff by MS&Co. was approximately $385 million. The amended complaint raised claims under the Massachusetts Uniform Securities Act, the Massachusetts Consumer Protection Act and common law and sought, among other things, to rescind the plaintiff’s purchase of such certificates. On November 25, 2013, July 16, 2014, and May 19, 2015, respectively, the plaintiff voluntarily dismissed its claims against MS&Co. with respect to three of the securitizations at issue. After these voluntary dismissals, the remaining amount of certificates allegedly issued by MS&Co. or sold to plaintiff by MS&Co. was approximately $332 million. On July 13, 2018, the parties reached an agreement in principle to settle the litigation.

On May 3, 2013, plaintiffs in Deutsche Zentral-Genossenschaftsbank AG et al. v. Morgan Stanley et al. filed a complaint against the Firm, certain affiliates, and other defendants in the Supreme Court of NY. The complaint alleged that defendants made material misrepresentations and omissions in the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by the Firm to plaintiff was approximately $634 million. The complaint alleged causes of action against the Firm for common law fraud, fraudulent concealment, aiding and abetting fraud, negligent misrepresentation, and rescission and seeks, among other things, compensatory and punitive damages. On June 26, 2018, the parties entered into an agreement to settle the litigation.

On April 1, 2016, the California Attorney General’s Office filed an action against MS&Co. in California state court styled California v. Morgan Stanley, et al., on behalf of California investors, including the California Public Employees’ Retirement System and the California Teachers’ Retirement System. The complaint alleged that MS&Co. made misrepresentations and omissions regarding residential mortgage-backed securities and notes issued by the Cheyne SIV, and asserts violations of the California False Claims Act and other state laws and sought treble damages, civil penalties, disgorgement, and injunctive relief. On April 24, 2019, the parties reached an agreement to settle the litigation.

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

 

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Item 1A.   Risk Factors.

There have been no material changes to the risk factors set forth under Part I, Item 1A. “Risk Factors.” in the Partnership’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as updated by Part II, Item 1A. “Risk Factors.” in the Partnership’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019.

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

The Partnership no longer offers Units.

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

 

Period   (a) Total Number of
Units Purchased *
  (b) Average Price
Paid per Unit **
  (c ) Total Number of
Units Purchased as Part
of Publicly Announced
Plans or Programs
  (d) Maximum Number (or
Approximate Dollar
Value) of Units that May
Yet Be Purchased Under
the Plans or Programs

April 1, 2019 - April 30, 2019             

  30,288.278    $                  21.79   N/A   N/A

May 1, 2019 - May 31, 2019

  30,251.766    $                  21.52   N/A   N/A

June 1, 2019 - June 30, 2019

  22,331.565    $                  21.95   N/A   N/A
     82,871.609    $                  21.73          

 

*

Generally, limited partners are permitted to redeem their Units as of the end of each month if notice is received by the General Partner no later than 3:00 P.M., New York City time, on the last day of the month in which the redemption is to be effective. Under certain circumstances, the General Partner can compel redemption, although to date, the General Partner has not exercised this right. Purchases of Units by the Partnership reflected in the chart above were made in the ordinary course of the Partnership’s business in connection with effecting redemptions for limited partners.

 

**

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

Item 3.      Defaults Upon Senior Securities. — None.

Item 4.      Mine Safety Disclosures. — Not applicable.

Item 5.      Other Information. — None.

 

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Item 6. Exhibits.

 

  31.1    Certification of President and Director of Ceres Managed Futures LLC, the General Partner of the Partnership, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2    Certification of Chief Financial Officer and Director of Ceres Managed Futures LLC, the General Partner of the Partnership, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1    Certification of President and Director of Ceres Managed Futures LLC, the General Partner of the Partnership, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section  906 of the Sarbanes-Oxley Act of 2002.
  32.2    Certification of Chief Financial Officer and Director of Ceres Managed Futures LLC, the General Partner of the Partnership, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section  906 of the Sarbanes-Oxley Act of 2002.
101.INS*    XBRL Instance Document
101.SCH*    XBRL Taxonomy Extension Schema Document
101.CAL*    XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB*    XBRL Taxonomy Extension Label Document
101.PRE*    XBRL Taxonomy Extension Presentation Document
101.DEF*    XBRL Taxonomy Extension Definition Document

Notes to Exhibits List

* Submitted electronically herewith.

 

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SIGNATURES

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

MORGAN STANLEY SMITH BARNEY SPECTRUM SELECT L.P.

By: Ceres Managed Futures LLC

(General Partner)

 

By:   /s/ Patrick T. Egan
 

Patrick T. Egan

President and Director

Date: August 8, 2019

 

By:   /s/ Steven Ross
  Steven Ross
 

Chief Financial Officer and Director

(Principal Accounting Officer)

Date: August 8, 2019

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

 

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