Self-Regulatory Organizations; American Stock Exchange LLC; Notice of Filing of a Proposed Rule Change, and Amendment Nos. 1 and 2 Thereto, Relating to the Listing and Trading of Units of the United States Oil Fund, LP, 9614-9627 [E6-2642]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 71, Number 37 (Friday, February 24, 2006)]
[Notices]
[Pages 9614-9627]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-2642]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53324; File No. SR-Amex-2005-127]


Self-Regulatory Organizations; American Stock Exchange LLC; 
Notice of Filing of a Proposed Rule Change, and Amendment Nos. 1 and 2 
Thereto, Relating to the Listing and Trading of Units of the United 
States Oil Fund, LP

February 16, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 6, 2005, the American Stock Exchange LLC (``Amex'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II 
and III below, which Items have been prepared by the Exchange. On 
January 20, 2006, the Exchange filed Amendment No. 1 to the proposed 
rule change.\3\ On February 15, 2006, the Exchange filed Amendment No. 
2 to the proposed rule change.\4\ The Commission is publishing this 
notice to solicit comments on the proposed rule change, as amended, 
from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(l).
    \2\ 17 CFR 240.19b-4.
    \3\ See Partial Amendment dated January 20, 2006 (``Amendment 
No. 1''). In Amendment No. 1, the Amex made clarifying changes to 
the purpose section.
    \4\ See id.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to add new Rules 1500 et seq. to permit the 
listing and trading of units in a partnership that is a commodity pool 
under the Commodity Exchange Act (``CEA'') \5\ that are designed to 
track a specified commodity or index of commodities by holding any 
combination of investments (i) comprised of or based on futures 
contracts, options on futures contracts, forward contracts, swaps, and 
over-the-counter (``OTC'') contracts for commodities or based on price 
changes in commodities, and (ii) in securities that may be required to 
satisfy margin or collateral requirements associated with investments 
in the financial instruments listed in item (i) above. Pursuant to 
these proposed rules, the Amex proposes to list and trade units (the 
``Units'') of the United States Oil Fund, LP (``USOF'' or the 
``Partnership'').
    The text of the proposed rule change is set forth below. Proposed 
new language is italicized.
* * * * *

Trading of Partnership Units

    Rule 1500. (a) Applicability. The Rules in this Chapter (Trading of 
Partnership Units) are applicable only to Partnership Units. Except to 
the extent that specific Rules in this Chapter govern, or unless the 
context otherwise requires, the provisions of the Constitution and all 
other rules and policies of the Board of Governors shall be applicable 
to the trading on the Exchange of such securities. Pursuant to the 
provisions of Article I, Section 3(i) of the Constitution, Partnership 
Units are included within the definitions of ``security'' or 
``securities'' as such terms are used in the Constitution and Rules of 
the Exchange.
    (b) Definitions. The following terms as used in the Rules shall, 
unless the context otherwise requires, have the meanings herein 
specified:
    (i) Commodity. The term ``commodity'' is defined in Section 1(a)(4) 
of the Commodity Exchange Act.
    (ii) Partnership Units. The term ``Partnership Units'' for purposes 
of this Rule means a security (a) that is issued by a partnership that 
invests in any combination of futures contracts, options on futures 
contracts, forward contracts, commodities and/or securities; and (b) 
that is issued and redeemed daily in specified aggregate amounts at net 
asset value.

Commentary

    .01 The Exchange requires that members and member organizations 
provide to all purchasers of newly issued Partnership Units a 
prospectus for the series of Partnership Units.
    .02 Transactions in Partnership Units will occur between 9:30 a.m. 
and either 4 p.m. or 4:15 p.m. for each series, as specified by the 
Exchange.
    .03 (a) Limit Orders--Members and member organizations shall not 
enter orders into the Exchange's order routing system, as principal or 
agent, limit orders in the same partnership, for the account or 
accounts of the same or related beneficial owner, in such a manner that 
the member or beneficial owner(s) effectively is operating as a market 
maker by holding itself out as willing to buy and sell such Partnership 
Units on a regular or continuous basis. In determining whether a member 
or beneficial owner effectively is operating as a market maker, the 
Exchange will consider, among other things, the simultaneous or near-
simultaneous entry of limit orders to buy and sell the same Partnership 
Units; the multiple acquisition and liquidation of positions in the 
same Partnership Units during the same day; and the entry of multiple 
limit orders at different prices in the same Partnership Units.
    (b) Members and member organizations may not enter, nor permit the 
entry of, orders into the Exchange's order routing system if those 
orders are (i) created and communicated electronically without manual 
input (i.e., order entry by public customers or associated persons of 
members must involve manual input such as entering the terms of an 
order into an order-entry screen or manually selecting a displayed 
order against which an off-setting order should be sent) and (ii) 
eligible for execution through the Exchange's automatic execution 
system for Partnership Units. Nothing in this paragraph, however, 
prohibits members from electronically communicating to the Exchange 
orders manually entered by customers into front-end communication 
systems (e.g., Internet gateways, on-line networks, etc.).

Designation

    Rule 1501. The Exchange may list and trade Partnership Units based 
on an underlying asset, commodity or security. Each issue of a 
Partnership Unit shall be designated as a separate series and shall be 
identified by a unique symbol.

Initial and Continued Listing

    Rule 1502. Partnership Units will be listed and/or traded on the 
Exchange subject to application of the following criteria:
    (a) Initial Listing--The Exchange will establish a minimum number 
of Partnership Units required to be outstanding at the time of 
commencement of trading on the Exchange.
    (b) Continued Listing--The Exchange will remove from listing 
Partnership Units under any of the following circumstances:
    (i) If following the initial twelve month period following the 
commencement of trading of Partnership Units, (A) the partnership has 
more than 60 days remaining until termination and there are fewer than 
50 record and/or beneficial holders of Partnership Units for 30 or more 
consecutive trading days; (B) if the partnership has fewer than 50,000

[[Page 9615]]

Partnership Units issued and outstanding; or (C) if the market value of 
all Partnership Units issued and outstanding is less than $1,000,000;
    (ii) If the value of the underlying benchmark investment, commodity 
or asset is no longer calculated or available on at least a 15-second 
delayed basis or the Exchange stops providing a hyperlink on its Web 
site to any such investment, commodity, or asset value;
    (iii) If the Indicative Partnership Value is no longer made 
available on at least a 15-second delayed basis; or
    (iv) If such other event shall occur or condition exists which in 
the opinion of the Exchange makes further dealings on the Exchange 
inadvisable.
    Upon termination of a partnership, the Exchange requires that 
Partnership Units issued in connection with such partnership be removed 
from Exchange listing. A partnership will terminate in accordance with 
the provisions of the partnership prospectus.
---------------------------------------------------------------------------

    \5\ The offering of the units of the partnership is registered 
with the Commission under the Securities Act of 1933 (``the 1933 
Act'').
---------------------------------------------------------------------------

    (c) Term--The stated term of the partnership shall be as stated in 
the prospectus. However, such entity may be terminated under such 
earlier circumstances as may be specified in the partnership 
prospectus.
    (d) General Partner--The following requirements apply:
    (i) The general partner of a partnership must be an entity having 
substantial capital and surplus and the experience and facilities for 
handling partnership business. In cases where, for any reason, an 
individual has been appointed as general partner, a qualified entity 
must also be appointed as general partner.
    (ii) No change is to be made in the general partner of a listed 
issue without prior notice to and approval of the Exchange.
    (e) Voting--Voting rights shall be as set forth in the applicable 
partnership prospectus.

Commentary

    .01 The Exchange will file separate proposals under Section 19(b) 
of the Securities Exchange Act of 1934 before listing and trading 
separate and distinct Partnership Units designated on different 
underlying investments, commodities and/or assets.

Specialist Prohibitions

    Rule 1503. Rule 175(c) shall be deemed to prohibit an equity 
specialist, his member organization, or any other member, limited 
partner, officer, or approved person thereof from acting as a market 
maker or functioning in any capacity involving market-making 
responsibilities in an underlying asset or commodity, related futures 
or options on futures, or any other related derivatives. However, an 
approved person of an equity specialist that has established and 
obtained Exchange approval of procedures restricting the flow of 
material, non-public market information between itself and the 
specialist member organization pursuant to Rule 193, and any member, 
officer, or employee associated therewith, may act in a market making 
capacity, other than as a specialist in Partnership Units on another 
market center, in the underlying asset or commodity, related futures or 
options on futures, or any other related derivatives.

Commentary

    .01 In connection with the Partnership Units, Commentaries .01, .02 
and .07 of Rule 170 shall not apply to the trading of Partnership Units 
for the purpose of bringing the price of the Partnership Units into 
parity with the value of the underlying investment, commodity or asset 
on which the Partnership Units are based, with the net asset value of 
the Partnership Units or with a futures contract on the underlying 
investment, commodity or asset on which the Partnership Units are 
based. Such transactions must be effected in a manner that is 
consistent with the maintenance of a fair and orderly market and with 
the other requirements of this rule and the supplementary material 
herein.

Securities Accounts and Orders of Specialists

    Rule 1504. (a) The member organization acting as specialist in 
Partnership Units is obligated to conduct all trading in the 
Partnership Units in its specialist account, subject only to the 
ability to have one or more investment accounts, all of which must be 
reported to the Exchange (See Rule 170). In addition, the member 
organization acting as specialist in the Partnership Units must file, 
with the Exchange, in a manner prescribed by the Exchange, and keep 
current a list identifying all accounts for trading the underlying 
physical asset or commodity, related futures or options on futures, or 
any other related derivatives, which the member organization acting as 
specialist may have or over which it may exercise investment 
discretion. No member organization acting as specialist in the 
Partnership Units shall trade in the underlying physical asset or 
commodity, related futures or options on futures, or any other related 
derivatives, in an account in which a member organization acting as 
specialist, directly or indirectly, controls trading activities, or has 
a direct interest in the profits or losses thereof, which has not been 
reported to the Exchange as required by this Rule.
    (b) In addition to the existing obligations under Exchange rules 
regarding the production of books and records (See, e.g. Rule 31), the 
member organization acting as a specialist in Partnership Units shall 
make available to the Exchange such books, records or other information 
pertaining to transactions by such entity or any member, member 
organization, limited partner, officer or approved person thereof, 
registered or non-registered employee affiliated with such entity for 
its or their own accounts in the underlying physical asset or 
commodity, related futures or options on futures, or any other related 
derivatives, as may be requested by the Exchange.
    (c) In connection with trading the underlying physical asset or 
commodity, related futures or options on futures or any other related 
derivative (including Partnership Units), the specialist registered as 
such in Partnership Units shall not use any material nonpublic 
information received from any person associated with a member, member 
organization or employee of such person regarding trading by such 
person or employee in the physical asset or commodity, futures or 
options on futures, or any other related derivatives.

Limitation on Exchange Liability

    Rule 1505. Neither the Exchange nor any agent of the Exchange shall 
have any liability for damages, claims, losses or expenses caused by 
any errors, omissions, or delays in calculating or disseminating any 
underlying asset or commodity value, the current value of the 
underlying asset or commodity if required to be deposited to the 
partnership in connection with issuance of Partnership Units; net asset 
value; or other information relating to the purchase, redemption or 
trading of Partnership Units, resulting from any negligent act or 
omission by the Exchange or any agent of the Exchange, or any act, 
condition or cause beyond the reasonable control of the Exchange or its 
agent, including, but not limited to, an act of God; fire; flood; 
extraordinary weather conditions; war; insurrection; riot; strike; 
accident; action of government; communications or power failure; 
equipment or software malfunction; or any error, omission or delay in 
the reports of transactions in an underlying asset or commodity.
* * * * *
    The revision to Sections 140 and 141 of the Amex Company Guide is 
provided below. [Bracketing] indicates

[[Page 9616]]

text to be deleted and Italics indicate new text.

Original Listing Fees

    Section 140. Stock Issues--No Change.
    Issues Listed Under Section 106 (Currency and Index Warrants) and 
Section 107
    (Other Securities)--No Change.
    Warrants--No Change.
    Bonds--No Change.
    Index Fund Shares, Trust Issued Receipts, Commodity-Based Trust 
Shares, Currency Trust Shares, Partnership Units and Closed-End Funds--
The original listing fee for Index Fund Shares listed under Rule 1000A, 
Trust Issued Receipts listed under Rule 1200, Commodity-Based Trust 
Shares listed under Rule 1200A, Currency Trust Shares listed under Rule 
1200B, Partnership Units listed under Rule 1500 and Closed-End Funds 
listed under Section 101 of the Company Guide is $5,000 for each series 
or Fund, with no application processing fee. The Board of Governors or 
its designee may, in its discretion defer, waive or rebate all or any 
part of the initial listing fee applicable to Closed-End Funds when 
such funds transfer to the Amex from another marketplace.
    Special Shareholder Rights Plans--No Change.

Annual Fees

Sec. 141. Stock Issues; Issues Listed Under Sections 106 and 107; Rules 
1200 (Trust Issued Receipts) and 1200A (Commodity-Based Trust Shares); 
Rule 1200B (Currency Trust Shares); Rule 1500 (Partnership Units); and 
Closed-End Funds

 
------------------------------------------------------------------------
        Shares or Units outstanding                     Fees
------------------------------------------------------------------------
5,000,000 shares (units) or less..........  $15,000
                                            (minimum)
5,000,001 to 10,000,000 shares (units)....  17,500
10,000,001 to 25,000,000 shares (units)...  20,000
25,000,001 to 50,000,000 shares (units)...  22,500
In excess of 50,000,000 shares (units)....  30,000
                                            (maximum)
------------------------------------------------------------------------

[The Board of Governors or its designee may, in its discretion, defer, 
waive or rebate all or any part of the applicable annual listing fee 
specified above excluding the fees applicable to issues listed under 
Sections 106 and 107 and rule 1200 (Trust Issued Receipts); and Closed-
End Funds.]

    Issues Listed Under Rule 1000A (Index Fund Shares)--No Change.
    The annual fee is payable in January of each year and is based on 
the total number of all classes of shares (excluding treasury shares) 
and warrants according to information available on Exchange records as 
of December 31 of the preceding year. (The above fee schedule also 
applies to companies whose securities are admitted to unlisted trading 
privileges.)
    In the calendar year in which a company first lists, the annual fee 
will be prorated to reflect only that portion of the year during which 
the security has been admitted to dealings and will be payable within 
30 days of the date the company receives the invoice, based on the 
total number of outstanding shares of all classes of stock at the time 
of original listing.
    The annual fee for issues listed under Rule 1000A (Index Fund 
Shares), [and] Rule 1200 (Trust Issued Receipts), Rule 1200A 
(Commodity-Based Trust Shares), Rule 1200B (Currency Trust Shares), and 
Rule 1500 (Partnership Units) is based upon the number of shares of a 
series of Index Fund Shares, Trust Issued Receipts, [or] Commodity-
Based Trust Shares, Currency Trust Shares or Partnership Units 
outstanding at the end of each calendar year. For multiple series of 
Index Fund Shares issued by an open-end management investment company, 
[or] for multiple series of Trust Issued Receipts and/or Commodity-
Based Trust Shares, for multiple series of Currency Trust Shares or for 
multiple series of Partnership Units, the annual listing fee is based 
on the aggregate number of shares in all series outstanding at the end 
of each calendar year.
    The annual fee for a Closed-End Fund listed under Section 101 of 
the Company Guide is based upon the number of shares outstanding of 
such Fund at the end of each calendar year. For multiple Closed-End 
Funds of the same sponsor, the annual listing fee is based on the 
aggregate number of shares outstanding of all such Funds at the end of 
each calendar year.
    Bond Issues--No Change.
    Late Fee--No Change.
    Note: No Change.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Amex included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Amex has prepared summaries, set forth in sections 
A, B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to add new Rules 1500 et seq. so that it may 
list and/or trade units in a partnership that holds commodity-based or 
linked investments. The Amex initially proposes to list and trade the 
Units, which represent ownership of a fractional undivided beneficial 
interest in the net assets of USOF. The assets of USOF will consist of 
futures contracts for light, sweet crude oil and other petroleum based 
fuels that are traded on the New York Mercantile Exchange (``NYMEX'') 
or other U.S. and foreign exchanges (collectively, ``Oil Futures 
Contracts'') and other oil interests, such as cash-settled options on 
Oil Futures Contracts, forward contracts for oil, and OTC transactions 
that are based on the price of oil, other petroleum-based fuels, and 
indices based on the foregoing (collectively, ``Other Oil Interests'') 
(Oil Futures Contracts and Other Oil Interests are collectively 
referred to as ``Oil Interests''). USOF will also invest in short term 
obligations of the United States Government (``Treasuries'') to be used 
to satisfy its current or future margin and collateral requirements and 
to otherwise satisfy its obligations with respect to its investments in 
Oil Interests.
    The investment objective of the USOF is for its net asset value 
(``NAV'') \6\ to reflect the performance of the spot price of West 
Texas Intermediate light, sweet crude oil \7\ delivered to Cushing, 
Oklahoma (the ``WTI light, sweet crude oil''),\8\ less the expense of 
operation of

[[Page 9617]]

USOF. This ``neutral'' investment strategy, as stated by the Exchange, 
is expected to cause the Unit price to track the price of WTI light, 
sweet crude oil.
---------------------------------------------------------------------------

    \6\ NAV is the total assets, less total liabilities of USOF, 
determined on the basis of generally accepted accounting principles. 
NAV per Unit is the NAV of USOF divided by the number of outstanding 
Units.
    \7\ USOF will attempt to manage its investments so that its NAV 
closely tracks the price of the NYMEX traded near-month (i.e., spot 
month) future contract for delivery of West Texas Intermediate 
light, sweet crude oil.
    \8\ The types of crude oil are typically described by a 
combination of their physical attributes and their place of origin. 
A few of these types of crude oil are widely traded and their prices 
serve as benchmarks in determining the spot and forward prices of 
the other types of crude oil. The three most important types of 
crude oil that are used as benchmarks are the light, sweet crude 
from the United States known as ``West Texas Intermediate,'' a 
light, sweet crude from Europe's North Sea known as ``Brent Crude,'' 
and a medium crude oil from the Middle East known as ``Dubai 
Crude.'' These three types of crude oil are the ones used most 
frequently in the trading of listed futures contracts, listed 
options, and non-exchange listed derivative contracts based on crude 
oil.
---------------------------------------------------------------------------

    The Exchange states that WTI light, sweet crude oil is the world's 
most actively-traded commodity, and the markets for oil and financial 
instruments based on WTI light, sweet crude oil are well-developed, 
liquid, and efficient. An investment in the Units will allow both 
retail and institutional investors to easily gain exposure to the crude 
oil market in a cost-effective manner. In addition, the Exchange states 
that the Units are also expected to provide additional means for 
diversifying an investor's investments or hedging exposure to changes 
in oil prices.
    In January 2005, the Commission approved Exchange rules (Amex Rule 
1200A et seq.) for the listing and trading of Commodity-Based Trust 
Shares.\9\ Commodity-Based Trust Shares are trust issued receipts 
(``TIRs'') based on the value of an underlying commodity or index of 
commodities held by a trust.\10\ Because of USOF's structure as a 
partnership and the nature of its investments, the current Commodity-
Based Trust Shares rules (Amex Rules 1200A et seq.) do not specifically 
permit the Exchange to list this product.\11\ This proposal seeks to 
expand the ability of the Exchange to list and/or trade securities 
based on a portfolio of underlying investments that may not be 
``securities'' in circumstances where the issuer is a partnership, 
organized as a commodities pool under the CEA.
---------------------------------------------------------------------------

    \9\ See Securities Exchange Act Release No. 51058 (January 19, 
2005), 70 FR 3749 (January 26, 2005).
    \10\ See Securities Exchange Act Release No. 51446 (March 29, 
2005), 70 FR 17272 (April 5, 2005). The Exchange listed and traded 
the iShares(r) COMEX Gold Trust under Amex Rule 1200A as the first 
Commodity Based Trust Share. Recently, the Exchange commenced the 
trading of shares of the streetTRACKS(r) Gold Trust (GLD) pursuant 
to Amex Rule 1000B on an unlisted trading privileges (``UTP'') 
basis. See also Securities Exchange Act Release No. 53105 (January 
11, 2006), 71 FR 3129 (January 19, 2006) (order approving listing 
and trading of DB Commodity Index Tracking Fund).
    \11\ As noted above, the Commission has permitted the listing 
and trading of products linked to the performance of an underlying 
commodity or commodities. See Securities Exchange Act Release Nos. 
51058 (January 19, 2005), 70 FR 3749 (January 26, 2005) (approving 
the listing and trading of iShares(r) COMEX Gold Trust); 50603 
(October 28, 2004), 69 FR 64614 (November 5, 2004) (approving the 
listing and trading of streetTRACKS(r) Gold Shares); 39402 (December 
4, 1997), 62 FR 65459 (December 12, 1997) (approving the listing and 
trading of commodity index preferred or debt securities (ComPS) on 
various agricultural futures contracts and commodities indexes); 
36885 (February 26, 1996), 61 FR 8315 (March 4, 1996) (approving the 
listing and trading of ComPS linked to the value of single 
commodity); 35518 (March 21, 1995), 60 FR 15804 (March 27, 1995) 
(approving the listing and trading of commodity indexed notes or 
COINs); and 43427 (October 10, 2000), 65 FR 62783 (October 19, 2000) 
(approving the listing and trading of inflation indexed securities). 
See also Central Fund of Canada (Registration No. 033-15180) 
(closed-end fund listed and traded on the Amex that invests in gold) 
and Salomon Phibro Oil Trust (Registration No. 033-33823) (trust 
units listed and traded on the Amex that held the right to a forward 
contract for the delivery of crude oil).
---------------------------------------------------------------------------

    Under proposed Amex Rule 1501, the Exchange would be able to list 
and trade the Units issued by USOF. For units issued by other 
commodity-based partnerships or other types of units issued by USOF, if 
any, the Exchange will submit a filing pursuant to Section 19(b) of the 
Act, subject to the review and approval of the Commission. The Exchange 
submits that the Units will conform to the initial and continued 
listing criteria under proposed Amex Rule 1502.\12\
---------------------------------------------------------------------------

    \12\ Proposed Amex Rule 1502 for listing the Units is 
substantially similar to current Amex Rule 1202A relating to 
Commodity-Based Trust Shares. As set forth in the section ``Initial 
and Continued Listing'' of proposed Amex Rule 1502, the Exchange 
expects the minimum number of Units required to be outstanding at 
the time of trading to be 100,000. This section of the proposed rule 
specifically details the initial and continued listing standards for 
the Units.
---------------------------------------------------------------------------

Description of the Oil Market

    The Exchange states that crude oil is the world's most actively 
traded commodity. The Oil Futures Contracts for light, sweet crude oil 
that are traded on the NYMEX are the world's most liquid forum for 
crude oil trading, as well as the most liquid futures contracts on a 
physical commodity. Due to the liquidity and price transparency of Oil 
Futures Contracts, they are used as a principal international pricing 
benchmark. Oil Futures Contracts for WTI light, sweet crude oil trade 
on the NYMEX in units of 1,000 U.S. barrels (42,000 gallons) and, if 
not closed out before maturity, will result in delivery of the oil to 
Cushing, Oklahoma, which is also accessible to the world market by two 
major interstate petroleum pipeline systems.\13\ USOF will primarily 
purchase WTI light, sweet crude Oil Futures Contracts traded on the 
NYMEX, but may also purchase Oil Futures Contracts on other exchanges, 
including the Intercontinental Exchange, formerly known as the 
International Petroleum Exchange (``ICE Futures'') and the Singapore 
Oil Exchange.\14\ In total, therefore, Oil Futures Contracts for light, 
sweet crude oil provide for delivery of several grades of domestic and 
internationally traded foreign crude oils, which makes them a hedging 
and trading instrument for the international oil industry, and they 
serve the diverse needs of the physical market.
---------------------------------------------------------------------------

    \13\ In practice, few Oil Futures Contracts result in delivery 
of the underlying oil.
    \14\ The Commission would expect the Exchange to have entered 
into the appropriate comprehensive surveillance sharing arrangements 
with such exchanges. Telephone conversation between Jeffrey Burns, 
Senior Associate General Counsel, Amex, Florence Harmon, Senior 
Special Counsel, Division, Commission and Johnna B. Dumler, 
Attorney, Division, Commission, on February 13, 2006.
---------------------------------------------------------------------------

    The price of crude oil is established by the supply and demand 
conditions in the global market overall, and more particularly, in the 
main refining centers: Singapore, Northwest Europe, and the U.S. Gulf 
Coast. These oil markets essentially constitute a global auction--the 
highest bidder will win the supply. When markets are ``strong'' (when 
demand is high and/or supply is low), a bidder must be willing to pay a 
higher premium to capture the supply. When markets are ``weak'' (demand 
low and/or supply high), a bidder may choose not to outbid competitors, 
waiting instead for later, possibly lower priced, supplies. NYMEX is 
the world's largest physical commodity futures exchange and the 
dominant market for the trading of energy and precious metals.
    Demand for petroleum products by consumers, as well as 
agricultural, manufacturing and transportation industries, determines 
demand for crude oil by refiners. The Exchange states that since the 
precursors of product demand are linked to economic activity, crude oil 
demand will tend to reflect economic conditions. However, other factors 
such as weather also influence product and crude oil demand.
    Crude oil supply is determined by both economic and political 
factors. Oil prices (along with drilling costs, availability of 
attractive prospects for drilling, taxes and technology) determine 
exploration and development spending, which influence output capacity 
with a lag. In the short run, production decisions by the Organization 
of Petroleum Exporting Countries (``OPEC'') also affect supply and 
prices. Oil export embargoes and the current conflicts in Iraq 
represent other routes through which political developments move the 
market.
    Oil prices are a result of thousands of transactions taking place 
simultaneously around the world, at all levels of the distribution. 
Contract arrangements in the oil market cover most oil that changes 
hands. Oil is also sold in ``spot transactions,'' that is, cargo-by-
cargo, transaction-by-transaction arrangements. In addition,

[[Page 9618]]

oil is traded in the futures markets. Both spot markets and futures 
markets provide critical price information for contract markets.
    The Exchange states that prices in spot markets send a clear signal 
about the supply/demand balance. Rising prices indicate that more 
supply is needed, and falling prices indicate that there is too much 
supply for the prevailing demand level. Furthermore, while most oil 
flows under contract, its price varies with the spot markets. Futures 
markets also provide information about the physical supply/demand 
balance as well as the market's expectations.
    Additional underlying influences in the supply/demand balance, and 
hence in price fluctuations, include seasonal swings, level of 
inventories, regional cost differences, transportation and storage 
costs, and ease of refining. With regard to the refining process, 
light, sweet crude oil is preferred by refiners because of the low 
sulfur content and relatively high yields of high-value products such 
as gasoline, diesel fuel, heating oil and jet fuel. The denser crude 
oils require additional processing to produce the desired range of 
products.

Domestic Oil

    The price of WTI light, sweet crude oil has historically exhibited 
periods of significant volatility. The spot price per barrel price of 
WTI light, sweet crude oil during the period January 1995 through 
November 2005, ranged from a high of $70.85 in August 2005 to a low of 
$10.35 in December 1998. As of December 2, 2005, the spot price per 
barrel was $59.32 per barrel.\15\ The WTI light, sweet crude oil 
contract, listed and traded at the NYMEX trades in units of 42,000 
gallons (1,000 barrels). Annual daily contract volume on the NYMEX from 
2001 through October 2005 was 149,028, 182,718, 181,748, 212,382 and 
242,262, respectively.
---------------------------------------------------------------------------

    \15\ Amex clarified that quantitative references in this 
paragraph were intended to reflect the per barrel price. Telephone 
conversation between Jeffrey Burns, Senior Associate General 
Counsel, Amex, and Florence Harmon, Senior Special Counsel, 
Division, Commission and Johnna B. Dumler, Attorney, Division, 
Commission, on February 8, 2006.
---------------------------------------------------------------------------

International Oil

    In Europe, Brent crude oil is the standard for futures contracts 
traded on the ICE Futures, an electronic marketplace for energy trading 
and price discovery. Brent crude oil is the price reference for two-
thirds of the world's traded oil. The spot price per barrel price of 
Brent crude oil during the period January 1995 through November 2005, 
ranged from a high of $68.89 in August 2005 to a low of $9.55 in 
December 1998. As of December 2, 2005, the spot price per barrel was 
$55.58. Annual daily contract volume on the ICE Futures from 2001 
through October 2005 was 74,011, 86,499, 96,767, 102,361 and 120,695 
respectively.\16\
---------------------------------------------------------------------------

    \16\ See supra note 15.
---------------------------------------------------------------------------

Heating Oil

    Heating oil, also known as No. 2 fuel oil, accounts for 25% of the 
yield of a barrel of crude oil, the second largest ``cut'' from oil 
after gasoline. The heating oil futures contracts, listed and traded at 
the NYMEX, trade in units of 42,000 gallons (1,000 barrels) and are 
based on delivery in New York harbor, the principal cash market center. 
The price of heating oil is volatile. The price of heating oil during 
the period January 1995 through November 2005, ranged from a high of 
$221.00 per barrel in September 2005 to a low of $29.20 in February 
1999. As of December 2, 2005, the spot price per barrel was $166.47. 
Annual daily contract volume on the NYMEX from 2001 through October 
2005 was 41,710, 42,781, 46,327, 51,745 and 52,334, respectively.\17\
---------------------------------------------------------------------------

    \17\ See supra note 15.
---------------------------------------------------------------------------

Natural Gas

    Natural gas accounts for almost a quarter of U.S. energy 
consumption. The natural gas futures contracts, listed and traded on 
the NYMEX, trade in units of 10,000 million British Thermal Units 
(``BTUs'') and are based on delivery at the Henry Hub in Louisiana, the 
nexus of 16 intra- and inter-state natural gas pipeline systems that 
draw supplies from the region's prolific gas deposits. The pipelines 
serve markets throughout the U.S. East Coast, the Gulf Coast, the 
Midwest, and up to the Canadian border. The price of natural gas is 
volatile.
    The price of natural gas (in BTUs) during the period January 1995 
through November 2005, ranged from a high of $14.75 in October 2005 to 
a low of $1.25 in January 1995. As of December 2, 2005, the spot price 
per BTU was $12.56. Annual daily contract volume on the NYMEX from 2001 
through October 2005 was 47,457, 97,431, 76,148, 70,048 and 77,149, 
respectively.

Gasoline

    Gasoline is the largest single volume refined product sold in the 
U.S. and accounts for almost half of the national oil consumption. The 
natural gas futures contracts, listed and traded on the NYMEX, trade in 
units of 42,000 gallons (1,000 barrels) and are based on delivery at 
petroleum products terminals in the New York harbor, the major East 
Coast trading center for imports and domestic shipments from refineries 
in the New York harbor area or from the Gulf Coast refining centers. 
The price of gasoline is volatile.
    The per gallon price of gasoline during the period January 1995 
through November 2005, ranged from a high of $2.92 in August 2005 to a 
low of $0.3258 in November 1998. As of December 2, 2005, the spot price 
per gallon was $2.124. Annual daily contract volume on the NYMEX from 
2001 through October 2005 was 38,033, 43,919, 44,688, 51,315 and 
53,577, respectively.\18\
---------------------------------------------------------------------------

    \18\ See supra note 15.
---------------------------------------------------------------------------

Futures Regulation
    The CEA \19\ governs the regulation of commodity interest 
transactions, markets, and intermediaries. The Exchange states that the 
CEA, as amended by the Commodity Futures Modernization Act of 2000 
(``CFMA''),\20\ requires commodity futures exchanges to have rules and 
procedures to prevent market manipulation, abusive trade practices, and 
fraud. The Commodity Futures Trading Commission (``CFTC'') administers 
the CEA and conducts regular review and inspection of the futures 
exchanges' enforcement programs.
---------------------------------------------------------------------------

    \19\ 7 U.S.C. 1 et seq.
    \20\ Pub. L. No. 106-554, 114 Stat. 2763 (2000).
---------------------------------------------------------------------------

    The CEA provides for varying degrees of regulation of commodity 
interest transactions, depending upon the variables of the transaction. 
In general, these variables include (1) the type of instrument being 
traded (e.g., contracts for future delivery, options, swaps, or spot 
contracts); (2) the type of commodity underlying the instrument 
(distinctions are made between instruments based on agricultural 
commodities, energy and metals commodities, and financial commodities); 
(3) the nature of the parties to the transaction (retail, eligible 
contract participant, or eligible commercial entity); (4) whether the 
transaction is entered into on a principal-to-principal or 
intermediated basis; (5) the type of market on which the transaction 
occurs; and (6) whether the transaction is subject to clearing through 
a clearing organization.
    The Exchange states that the function of the CFTC is to implement 
the objectives of the CEA of preventing price manipulation and other 
disruptions to market integrity, avoiding

[[Page 9619]]

systemic risk, preventing fraud, and promoting innovation, competition 
and financial integrity of transactions. Among other things, the CEA 
provides that the trading of commodity interest contracts generally 
must be upon exchanges designated as contract markets or derivatives 
transaction execution facilities and that all trading on those 
exchanges must be done by or through exchange members. Commodity 
interest trading between sophisticated persons may be traded on a 
trading facility not regulated by the CFTC. As a general matter, the 
Exchange states that trading in spot contracts, forward contracts, 
options on forward contracts or options on commodities, or swap 
contracts between eligible contract participants is not within the 
jurisdiction of the CFTC and may therefore be effectively unregulated.
    Non-U.S. futures exchanges differ in certain respects from their 
U.S. counterparts. Importantly, non-U.S. futures exchanges are not 
subject to regulation by the CFTC, but rather are regulated by their 
home country regulator. In contrast to U.S. designated contract 
markets, some non-U.S. exchanges are principals' markets, where trades 
remain the liability of the traders involved, and the exchange or an 
affiliated clearing organization, if any, does not become substituted 
for any party. Due to the absence of a clearing system, the Exchange 
states that such exchanges are significantly more susceptible to 
disruptions. Further, participants in such markets must often satisfy 
themselves as to the individual creditworthiness of each entity with 
which they enter into a trade. Trading on non-U.S. exchanges is often 
in the currency of the exchange's home jurisdiction. Consequently, USOF 
may be subject to the additional risk of fluctuations in the exchange 
rate between such currencies and U.S. dollars and the possibility that 
exchange controls could be imposed in the future.
    The CFTC and U.S. designated contract markets have established 
limits or position accountability rules (i.e., speculative position 
limits or position limits) on the maximum net long or net short 
speculative position that any person or group of persons under common 
trading control (other than a hedger) may hold, own, or control in 
commodity interests. Among the purposes of speculative position limits 
is to prevent a corner or squeeze on a market or undue influence on 
prices by any single trader or group of traders.
    Most U.S. futures exchanges limit the amount of fluctuation in some 
futures contracts or options on futures contract prices during a single 
trading session.\21\ These regulations specify what are referred to as 
daily price fluctuation limits (i.e., daily limits). The daily limits 
establish the maximum amount that the price of a futures contract or 
options on a futures contract may vary either up or down from the 
previous day's settlement price. Once the daily limit has been reached 
in a particular futures contract or options on a futures contract, no 
trades may be made at a price beyond the limit.
---------------------------------------------------------------------------

    \21\ Amex clarified that this sentence was intended to reflect 
the limits on the amount of fluctuation during a single trading 
session. Telephone conversation between Jeffrey Burns, Senior 
Associate General Counsel, Amex, Florence Harmon, Senior Special 
Counsel, Division, Commission and Johnna B. Dumler, Attorney, 
Division, Commission, on February 8, 2006.
---------------------------------------------------------------------------

    The Exchange states that commodity prices are volatile and, 
although ultimately determined by the interaction of supply and demand, 
are subject to many other influences, including the psychology of the 
marketplace and speculative assessments of future world and economic 
events. Political climate, interest rates, treaties, balance of 
payments, exchange controls and other governmental interventions, as 
well as numerous other variables, affect the commodity markets, and 
even with complete information it is impossible for any trader to 
reliably predict commodity prices.
    The CFTC also possesses exclusive jurisdiction to regulate the 
activities of Commodity Pool Operators (``CPOs'') and has adopted 
regulations with respect to the activities of those persons and/or 
entities.\22\
---------------------------------------------------------------------------

    \22\ See Part 4 of CFTC Regulation, 17 CFR Section 4.1 et al. A 
COP is any person engaged in a business that is of the nature of an 
investment trust, syndicate, or similar form of enterprise, and who, 
in connection therewith, solicits, accepts, or receives from others, 
funds, securities, or property, either directly or through capital 
contributions, the sale of stock or other forms of securities, or 
otherwise, for the purpose of trading in any commodity for future 
delivery on or subject to the rules of any contract market or 
derivatives transaction execution facility, except that the term 
does not include such persons not within the intent of the 
definition of the term as the CFTC may specify by rule, regulation, 
or order.
---------------------------------------------------------------------------

    A portion of USOF's assets may be employed to enter into OTC 
transactions based on oil. OTC transactions are subject to little, if 
any, regulation. OTC contracts are typically traded on a principal-to-
principal basis through dealer markets that are dominated by the major 
money centers and investment banks and other institutions and are 
essentially unregulated by the CFTC. In connection with the trading of 
OTC instruments, USOF will not receive the protection of CFTC 
regulation or the CEA. The markets for OTC contracts rely upon the 
integrity of market participants, as well as contractual margin 
payments, collateral and/or credit supports in lieu of additional 
regulation that is imposed by the CFTC on the futures markets.
Structure and Regulation of USOF
    USOF, a Delaware limited partnership formed in May of 2005, is a 
commodity pool that will invest in Oil Interests.\23\ It is operated by 
Victoria Bay Asset Management, LLC, a single member Delaware limited 
liability company (the ``General Partner'' or ``Victoria Bay'') which 
is wholly owned by Wainwright Holdings, Inc. The General Partner was 
formed for the specific purpose of managing and controlling USOF and 
has registered as a CPO with the CFTC and has become a member of the 
National Futures Association (``NFA'').\24\ As a CPO, the General 
Partner must comply with numerous provisions of the CEA and the rules 
and regulations thereunder, including provisions that require adequate 
disclosure to investors of the risks of investing in a commodity pool 
managed by the CPO, and provisions designed to protect investors from 
fraud. Both the CFTC and the NFA perform regular, periodic inspections 
of their members.
---------------------------------------------------------------------------

    \23\ The Exchange states that USOF is not an investment company 
as defined in Section 3(a) of the Investment Company Act of 1940.
    \24\ Telephone conversation between Jeffrey Burns, Senior 
Associate General Counsel, Amex, Florence Harmon, Senior Special 
Counsel, Division, Commission and Johnna B. Dumler, Attorney, 
Division, Commission, on February 15, 2006.
---------------------------------------------------------------------------

    Information regarding USOF and the General Partner, as well as 
detailed descriptions of the manner in which the Units will be offered 
and sold, and the investment strategy of USOF, are included in the 
registration statement regarding the offering of the Units filed with 
the Commission under the 1933 Act.\25\
---------------------------------------------------------------------------

    \25\ See Pre-Effective Amendment No. 4 to Form S-1 filed with 
the Commission on January 19, 2006 (File No. 333-124950). Telephone 
conversation between Jeffrey Burns, Senior Associate General 
Counsel, Amex, Florence Harmon, Senior Special Counsel, Division, 
Commission and Johnna B. Dumler, Attorney, Division, Commission, on 
February 13, 2006 (changing reference from Amendment No. 3 to 
Amendment No. 4 to Form S-1).
---------------------------------------------------------------------------

Clearing Broker

    ABN AMRO, the clearing broker (``Clearing Broker''), is registered 
with the CFTC as a futures commission merchant (``FCM''). The Clearing 
Broker will execute and clear USOF's futures contract transactions, 
hold the margin related to its Oil Futures Contracts investments, and 
perform certain administrative services for USOF. USOF

[[Page 9620]]

may use other FCMs as its investments increase or as may be required to 
trade particular Oil Interests.

Administrator and Custodian

    Under separate agreements with USOF, Brown Brothers Harriman & Co., 
a registered broker-dealer under the Act,\26\ will serve as USOF's 
administrator, registrar, transfer agent, and custodian for USOF (the 
``Administrator'' or ``Custodian''). The Administrator will perform or 
supervise the performance of services necessary for the operation and 
administration of USOF. These services include, but are not limited to, 
investment accounting, financial reporting, broker and trader 
reconciliation, calculation of the NAV, and valuation of Treasuries 
used to purchase or redeem Units and other USOF assets or liabilities. 
As Custodian, it will receive payments to USOF from purchasers of 
Creation Baskets and will make payments to Sellers for Redemption 
Baskets, as described below, and will hold the Treasuries and cash of 
USOF, as well as collateral posted by USOF's derivatives 
counterparties, and will make transfers of margin and collateral with 
respect to USOF's investments to and from its FCMs or counterparties.
---------------------------------------------------------------------------

    \26\ Telephone conversation between Jeffrey Burns, Senior 
Associate General Counsel, Amex, Florence Harmon, Senior Special 
Counsel, Division, Commission and Johnna B. Dumler, Attorney, 
Division, Commission, on February 15, 2006.
---------------------------------------------------------------------------

Marketing Agent

    ALPS Distributors, Inc., a registered broker-dealer under the 
Act,\27\ will be the marketing agent for USOF (``Marketing Agent''). 
The Marketing Agent, on behalf of USOF, will continuously offer 
Creation and Redemption Baskets and will receive and process orders 
from Authorized Purchasers (as defined below) and coordinate the 
processing of orders for the creation or redemption of Units with the 
General Partner and the Depository Trust Company (``DTC'').
---------------------------------------------------------------------------

    \27\ See id.
---------------------------------------------------------------------------

Investment Strategy

    USOF will pursue its investment objective by investing its assets 
in Oil Interests to the fullest extent possible without being leveraged 
or unable to satisfy its current or potential margin or collateral 
obligations with respect to those investments. USOF will attempt to 
manage its investments so that its NAV closely tracks the price of a 
specified Oil Futures Contract (the ``Benchmark Oil Futures Contract'') 
that the General Partner believes has historically exhibited a close 
price correlation with the spot price of WTI light, sweet crude oil. 
Currently, the Benchmark Oil Futures Contract is the NYMEX traded near-
month (i.e., spot month) futures contract for delivery of WTI light, 
sweet crude oil.\28\ In connection with tracking the price of the 
Benchmark Oil Futures contract, the General Partner will endeavor to 
place USOF's trades in Oil Futures Contracts and Other Oil Interests 
and otherwise manage USOF's investments so that ``A'' will be within +/
-10 percent of ``B'', where:
---------------------------------------------------------------------------

    \28\ The Exchange will file a Form 19b-4 to obtain Commission 
approval for the continued listing and trading of the Units should 
the General Partner change the Benchmark Oil Futures Contract from 
this NYMEX WTI light, sweet crude oil futures contract. Telephone 
conversation between Jeffrey Burns, Senior Associate General 
Counsel, Amex, Florence Harmon, Senior Special Counsel, Division, 
Commission and Johnna B. Dumler, Attorney, Division, Commission, on 
February 13, 2006.
---------------------------------------------------------------------------

     A is the average daily change in USOF's NAV for any period 
of 30 successive valuation days, i.e., any day as of which USOF 
calculates its NAV; and
     B is the average daily change in the price of the 
Benchmark Oil Futures Contract over the same period.
    Therefore, USOF's investment objective is to manage its assets so 
that the average daily change in the NAV for any period of 30 
successive valuation days will be within 10% of the average daily 
change in the price of the Benchmark Oil Futures Contract over the same 
period.\29\
---------------------------------------------------------------------------

    \29\ Telephone conversation between Jeffrey Burns, Senior 
Associate General Counsel, Amex, Florence Harmon, Senior Sepcial 
Counsel, Division, Commission and Johnna B. Dumler, Attorney, 
Division, Commission, on February 13, 2006.
---------------------------------------------------------------------------

    The Exchange believes that market arbitrage opportunities should 
cause USOF's Unit price to closely track USOF's per Unit NAV which is 
targeted at the current Benchmark Oil Futures Contract. The price of 
the Benchmark Oil Futures Contract has closely tracked the spot price 
of WTI light, sweet crude oil over time.\30\ Accordingly, the General 
Partner expects that the price of USOF's Units on the Exchange will 
closely track the spot price of a barrel of WTI light, sweet crude oil, 
less USOF's expenses.
---------------------------------------------------------------------------

    \30\ See Exhibit A attached to the Form 19b-4 filed by the 
Exchange, showing the tracking of the Benchmark Oil Futures Contract 
and the WTI spot price.
---------------------------------------------------------------------------

Investments
    USOF believes that it will be able to use a combination of Oil 
Futures Contracts and Other Oil Interests to manage the portfolio to 
achieve its investment objective of tracking the price of the Benchmark 
Oil Futures Contract. USOF further anticipates that the exact mix of 
Oil Futures Contracts and Other Oil Interests held by the portfolio 
will vary over time depending on, among over things, the amount of 
invested assets in the portfolio, price movements of oil, the rules and 
regulations of the various futures and commodities exchanges and 
trading platforms that deal in Oil Interests, and innovations in the 
Oil Interests marketplace including both the creation of new Oil 
Interest investment vehicles and the creation of new trading venues 
that trade in Oil Interests. USOF's total portfolio composition will be 
disclosed, each business day that the Amex is open for trading, on its 
Web site at https://www.unitedstatesoilfund.com and/or the Exchange's 
Web site at https://www.amex.com. USOF expects that Web site disclosure 
of portfolio holdings will be made daily and will include, as 
applicable, the name and value of each Oil Interest, the specific types 
of Other Oil Interests and characteristics of such Other Oil Interests, 
Treasuries and amount of cash held in the portfolio of USOF.

Oil Futures Contracts

    The principal Oil Interests to be invested in by USOF are Oil 
Futures Contracts. USOF expects to purchase Oil Futures Contracts 
traded on the NYMEX on the WTI light, sweet crude oil. USOF may also 
purchase Oil Futures Contracts traded on NYMEX based on Brent crude 
oil.\31\ Brent crude oil futures contracts are also listed on the ICE 
Futures. In addition to the commodities and futures exchanges in New 
York and London, several other established futures exchanges currently 
offer, or have announced plans to offer, trading in futures contracts 
on light, medium, or heavy crude oils, including exchanges in 
Singapore, Tokyo, Shanghai and Dubai.\32\
---------------------------------------------------------------------------

    \31\ Brent crude oil is the price reference for two-thirds of 
the world's traded oil.
    \32\ See note 14, supra. The Exchange has represented that the 
USOF will only purchase Oil Futures Contracts on markets where the 
Exchange has entered into the appropriate comprehensive surveillance 
sharing arrangements. See note 49, infra.
---------------------------------------------------------------------------

    As noted above, the NYMEX Oil Futures Contracts for WTI light, 
sweet crude oil have historically closely tracked the investment 
objective of USOF over both the short-term, medium-term, and the long-
term. For that reason, USOF anticipates making significant investments 
in the current Benchmark Oil Futures Contract. The General Partner 
submits that Other Oil Futures Contracts, such as the Brent crude oil 
futures contract traded on the NYMEX and ICE Futures, the Dubai

[[Page 9621]]

crude oil futures contract traded in Singapore and elsewhere, and other 
NYMEX petroleum-based futures contracts such as heating oil and 
gasoline,\33\ have also tended to track the investment objective of 
USOF, though not as closely as the NYMEX light, sweet crude (WTI) oil 
futures contract.\34\
---------------------------------------------------------------------------

    \33\ USOF may also invest in futures contracts traded on the 
NYMEX that are based on gasoline and heating oil. Gasoline is the 
largest single volume refined product sold in the U.S. and accounts 
for almost half of national oil consumption. Heating oil accounts 
for 25% of the yield of a barrel of crude oil, the second largest 
``cut'' from oil after gasoline.
    \34\ See Exhibit B attached to the Form 19b-4 filed by the 
Exchange, tracking the NYMEX futures contracts on light, sweet crude 
oil, heating oil, natural gas and gasoline from November 17, 1995 to 
November 11, 2005.
---------------------------------------------------------------------------

Other Oil Interests

    In addition to Oil Futures Contracts, there are also a number of 
listed options on Oil Futures Contracts on the principal commodities 
and futures exchanges. These option contracts offer investors and 
hedgers another vehicle for managing exposure to the crude oil market. 
USOF may purchase oil-related listed options on these exchanges in 
pursuing its investment objective.
    In addition to the Oil Futures Contracts and related listed 
options, there also exists an active OTC market in derivatives linked 
to crude oil. These OTC derivative transactions are privately-
negotiated agreements between two parties. Unlike most of the exchange-
traded Oil Futures Contracts or related options, each party to an OTC 
contract bears the credit risk that the counterparty may not be able to 
perform its obligations.
    Some oil-based derivatives transactions contain fairly generic 
terms and conditions and are available from a wide range of 
participants. Other oil-based derivatives have highly customized terms 
and conditions and are not as widely available. Many of these OTC 
contracts are cash-settled forwards for the future delivery of oil-or 
petroleum-based fuels that have terms similar to the Oil Futures 
Contracts. Others take the form of ``swaps'' in which the two parties 
exchange cash flows based on pre-determined formulas tied to the price 
of oil as determined by the spot, forward, or futures markets. USOF may 
enter into OTC derivative contracts whose value will be tied to changes 
in the difference between the WTI spot price, the price of Oil Futures 
Contracts traded on NYMEX, and the prices of non-NYMEX Oil Futures 
Contracts that may be invested in by USOF.
    To protect itself from the credit risk that arises in connection 
with such contracts, USOF will enter into agreements with each 
counterparty that provide for the netting of its overall exposure to 
its counterparty and/or provide collateral or other credit support to 
address USOF's exposure.\35\ The counterparties to an OTC contract will 
generally be major broker-dealers and banks or their affiliates, though 
certain institutions, such as large energy companies or other 
institutions active in oil commodities markets, may also be 
counterparties. The creditworthiness of each potential counterparty 
will be assessed by the General Partner. The General Partner will 
assess or review, as appropriate, the creditworthiness of each 
potential or existing counterparty to an OTC contract pursuant to 
guidelines approved by the General Partner's Board of Directors. 
Furthermore, the General Partner on behalf of USOF will only enter into 
OTC contracts with (a) members of the Federal Reserve System or foreign 
banks with branches regulated by the Federal Reserve Board; (b) primary 
dealers in U.S. government securities; (c) broker-dealers; (d) 
commodities futures merchants; or (e) affiliates of the foregoing. 
Existing counterparties will also be reviewed periodically by the 
General Partner.
---------------------------------------------------------------------------

    \35\ The agreements published by the International Swap and 
Derivatives Association (``ISDA'') and used extensively in the OTC 
derivatives market provides ``netting'' provisions. As discussed 
above, USOF's total portfolio composition will be disclosed, each 
business day that the Amex is open for trading, on its Web site at 
https://www.unitedstatesoilfund.com and/or the Exchange's Web site at 
https://www.amex.com, with a valuation assigned to these instruments.
---------------------------------------------------------------------------

    USOF anticipates that the use of Other Oil Interests, together with 
its investments in Oil Futures Contracts, will produce price and total 
return results that closely track the investment objective of USOF.\36\
---------------------------------------------------------------------------

    \36\ See ``Investment Strategy,'' supra.
---------------------------------------------------------------------------

Treasuries and Cash

    USOF will invest virtually all of its assets not invested in Oil 
Interests in Treasuries, currently anticipated to be those securities 
with a remaining maturity of two years or less. The Treasuries and any 
cash will be available to be used to meet USOF's current or potential 
margin and collateral requirements with respect to its investments in 
Oil Interests. USOF will not use Treasuries as margin for new 
investments unless it has a sufficient amount of Treasuries and cash to 
meet the margin or collateral requirements that may arise due to 
changes in the value of its currently held Oil Interests. Other than in 
connection with a redemption of Units, USOF does not intend to 
distribute cash or property to its Unit holders. Interest earned on 
Treasuries and cash held by USOF will be retained by it to pay its 
expenses, to make investments to satisfy its investment objectives, or 
to satisfy its margin or collateral requirements.

Impact of Speculative Position Limits

    As stated above, the CFTC and U.S. designated contract markets such 
as the NYMEX have speculative position limits or position limits on the 
maximum net long or net short speculative position that any person or 
group of persons under common trading control (other than a hedger) may 
hold, own, or control in commodity interests.\37\
---------------------------------------------------------------------------

    \37\ Similarly, most U.S. futures exchanges also have ``daily 
limits'' to limit the amount of fluctuation in the prices of some 
futures contracts or options on futures contracts during a single 
trading day. See ``Futures Regulation,'' supra.
---------------------------------------------------------------------------

    The foregoing speculative position limits will impact the mix of 
investments in Oil Interests by USOF, with such mix varying depending 
on the level of assets held by USOF. The following example illustrates 
how the mix will vary as assets increase, assuming the spot price of 
WTI light, sweet crude oil remains the same: Assuming the spot price 
for WTI light, sweet crude oil and the Unit price were each $60, USOF 
anticipates that it would invest the first $300 million of its daily 
net assets only in Oil Futures Contracts. The majority of those 
contracts will consist of the current Benchmark Oil Futures Contract. 
At this level, USOF could purchase 5,000 of such contacts or 25% of the 
NYMEX's speculative position limit for such contracts. When daily net 
assets exceed $300 million, USOF anticipates that it will invest the 
majority of its assets above that amount in t