Self-Regulatory Organizations; American Stock Exchange LLC; Notice of Filing of Proposed Rule Change as Modified by Amendment No. 1 Thereto Relating to the Listing and Trading of Units of the United States Natural Gas Fund, LP, 10267-10276 [E7-4040]
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Federal Register / Vol. 72, No. 44 / Wednesday, March 7, 2007 / Notices
No. SR–Amex–2007–26 on the subject
line.
SECURITIES AND EXCHANGE
COMMISSION
Paper Comments
[Release No. 34–55372; File No. SR–Amex–
2006–112]
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File No.
SR–Amex–2007–26. This file number
should be included on the subject line
if e-mail is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for inspection and copying in
the Commission’s Public Reference
Room. Copies of such filing also will be
available for inspection and copying at
the principal office of the Exchange. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File No.
SR–Amex–2007–26 and should be
submitted on or before March 28, 2007.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.13
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7–4039 Filed 3–6–07; 8:45 am]
BILLING CODE 8010–01–P
Self-Regulatory Organizations;
American Stock Exchange LLC; Notice
of Filing of Proposed Rule Change as
Modified by Amendment No. 1 Thereto
Relating to the Listing and Trading of
Units of the United States Natural Gas
Fund, LP
February 28, 2007.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 2 thereunder,
notice is hereby given that on December
1, 2006, the American Stock Exchange
LLC (‘‘Amex’’ or ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’ or ‘‘SEC’’)
the proposed rule change as described
in Items I, II, and III below, which Items
have been substantially prepared by the
Exchange. On February 14, 2007, the
Exchange submitted Amendment No. 1
to the proposed rule change. The
Commission is publishing this notice to
solicit comments on the proposed rule
change, as amended, from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to list and
trade units (a ‘‘Unit’’ or collectively, the
‘‘Units’’) of the United States Natural
Gas Fund, LP (‘‘USNG’’ or the
‘‘Partnership’’) pursuant to Amex Rules
1500 et seq.
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. 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.
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to list and
trade the Units issued by USNG (under
the symbol: ‘‘UNG’’) pursuant to
1 15
13 17
CFR 200.30–3(a)(12).
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2 17
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
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Exchange Rules 1500 et seq. 3 Amex
Rule 1500 provides for the listing of
Partnership Units, which are defined as
securities: (a) That are 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 are issued and
redeemed daily in specified aggregate
amounts at net asset value. Pursuant to
Commentary .01 to Rule 1502, the
Exchange will file separate proposals
under Section 19(b) of the Act before
listing and trading separate and distinct
Partnership Units designated on
different underlying investments,
commodities and/or assets. The
Exchange submits that the Units will
conform to the initial and continued
listing criteria under Rule 1502.4
The Units represent ownership of a
fractional undivided beneficial interest
in the net assets of USNG.5 The net
assets of USNG will consist of
investments in futures contracts based
on natural gas, crude oil, heating oil,
gasoline, and other petroleum-based
fuels traded on the New York
Mercantile Exchange (‘‘NYMEX’’),
Intercontinental Exchange (‘‘ICE
Futures’’) or other U.S. and foreign
exchanges (collectively, ‘‘Futures
Contracts’’). USNG may also invest in
other natural gas-related investments
such as cash-settled options on Futures
Contracts, forward contracts for natural
gas, and over-the-counter (‘‘OTC’’)
transactions that are based on the price
of natural gas, oil and other petroleumbased fuels, Futures Contracts and
indices based on the foregoing
(collectively, ‘‘Other Natural Gas
Related Investments’’). Futures
Contracts and Other Natural Gas Related
Investments collectively are referred to
as ‘‘Natural Gas Interests.’’
USNG will invest in Natural Gas
Interests to the fullest extent possible
without being leveraged or unable to
satisfy its current or potential margin or
collateral obligations. In pursuing this
objective, the primary focus of USNG’s
investment manager, Victoria Bay Asset
Management, LLC (‘‘Victoria Bay’’ or
‘‘General Partner’’), will be the
investment in Futures Contracts and the
management of its investments in shortterm obligations of the United States
3 See Securities Exchange Act Release No. 53582
(March 31, 2006), 71 FR 17510 (April 6, 2006) (SR–
Amex 2005–127) (approving Amex Rules 1500 et
seq. and the listing and trading of Units of the
United States Oil Fund, LP).
4 As set forth in the section ‘‘Listing and Trading
Rules,’’ the Exchange will require a minimum of
100,000 Units to be outstanding at the start of
trading.
5 USNG is commodity pool that will issue Units
that may be purchased and sold on the Exchange.
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(‘‘Treasuries’’), cash equivalents, and
cash (collectively, ‘‘Cash’’) for
margining purposes and as collateral.
The investment objective of USNG is
for changes in percentage terms of a
unit’s net asset value (‘‘NAV’’) to reflect
the changes in percentage terms of the
price of natural gas delivered at the
Henry Hub, Louisiana as measured by
the natural gas futures contract traded
on the NYMEX (the ‘‘Benchmark
Futures Contract’’). The Benchmark
Futures Contract employed is the near
month expiration contract, except when
the near month contract is within two
(2) weeks of expiration, in which case
it will invest in the next expiration
month.6
The General Partner will attempt to
place USNG’s trades in Natural Gas
Interests and otherwise manage USNG’s
investments so that ‘‘A’’ will be within
plus/minus 10 percent of ‘‘B’’, where:
• A is the average daily change in
USNG’s NAV for any period of 30
successive valuation days, i.e., any day
as of which USNG calculates its NAV,
and
• B is the average daily change in the
price of the Benchmark Futures Contract
over the same period.
An investment in the Units will allow
both retail and institutional investors to
easily gain exposure to the natural gas
market in a cost-effective manner. In
addition, the Units are also expected to
provide additional means for
diversifying an investor’s investments or
hedging exposure to changes in natural
gas prices.
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Description of the Natural Gas Market
Natural Gas. The Exchange states that
Natural gas accounts for almost a
quarter of U.S. energy consumption. The
price of natural gas is established by the
supply and demand conditions in the
North American market, and more
particularly, in the main refining center
of the U.S. Gulf Coast. The natural gas
market essentially constitutes an
auction, where the highest bidder wins
the supply. When markets are ‘‘strong’’
(i.e., when demand is high and/or
supply is low), the bidder must be
willing to pay a higher premium to
capture the supply. When markets are
‘‘weak’’ (i.e., when demand is low and/
or supply is high), a bidder may choose
not to outbid competitors, waiting
instead for later, possibly lower priced,
supplies. Demand for natural gas by
consumers, as well as agricultural,
manufacturing and transportation
6 The
Benchmark Futures Contracts will be
changed or ‘‘rolled’’ from the near month contract
to expire over to the next month to expire over a
four (4) day period.
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industries, determines the demand for
natural gas. Since the precursors of
product demand are linked to economic
activity, natural gas demand will tend to
reflect economic conditions. However,
other factors such as weather
significantly influence natural gas
demand.
The Exchange states that NYMEX is
the world’s largest physical commodity
futures exchange and the dominant
market for the trading of energy and
precious metals. The Benchmark
Futures Contract trades in units of
10,000 million British thermal units
(‘‘mmBtu’’) and is based on delivery at
the Henry Hub in Louisiana, the nexus
of 16 intra and interstate natural gas
pipeline systems that draw supplies
from the region’s prolific gas deposits.7
The pipelines serve markets throughout
the U.S. East Coast, the Gulf Coast, the
Midwest, and up to the Canadian
border.
Because of the volatility of natural gas
prices, a vigorous basis market has
developed in the pricing relationships
between the Henry Hub and other
important natural gas market centers in
the continental United States and
Canada. The NYMEX makes available
for trading a series of basis swap futures
contracts that are quoted as price
differentials between approximately 30
natural gas pricing points and the Henry
Hub. The basis contracts trade in units
of 2,500 mmBtu on the NYMEX
ClearPort trading platform.
Transactions can also be consummated
off NYMEX and submitted to the
NYMEX for clearing via the NYMEX
ClearPort 8 clearing website as an
exchange of futures for physicals or an
exchange of futures for swaps
transactions.
The price of natural gas during the
period January 1995 through October
2006, ranged from a high of $28.38 in
January 2004 to a low of $1.01 in
December 1998. As of November 9, 2006
the spot price was $7.24. Annual daily
contract volume on the NYMEX from
2001 through October 2006 was: 47,457;
97,431; 76,148; 70,048; 76,265; and
102,097, respectively.
WTI Light, Sweet Crude Oil. 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
7In practice, few natural gas Futures Contracts
result in delivery of the underlying natural gas.
8 The NYMEX ClearPortsm is an electronic trading
platform, through which a slate of energy futures
contracts are available for competitive trading.
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physical commodity. Due to the
liquidity and price transparency of oil
Futures Contracts, they are used as a
principal international pricing
benchmark. The oil futures contracts for
West Texas Intermediate (‘‘WTI’’) light,
sweet crude oil is traded 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 oil to
Cushing, Oklahoma, which is also
accessible to the world market by two
major interstate petroleum pipeline
systems.
The Exchange states that 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 of Singapore,
Northwest Europe, and the U.S. Gulf
Coast. Demand for petroleum products
by consumers, as well as agricultural,
manufacturing, and transportation
industries, determines demand for
crude oil by refiners. 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.
The price of WTI light, sweet crude
oil has historically exhibited periods of
significant volatility. The price of WTI
light, sweet crude oil during the period
January 1995 through October 2006,
ranged from a high of $77.03 in July
2006 to a low of $10.76 in December
1998. As of November 9, 2006, the spot
price was $61.16. Annual daily contract
volume on the NYMEX from 2001
through October 2006 was: 49,028;
182,718; 181,748; 212,382; 237,651; and
298,734, respectively.
Heating Oil. The Exchange states that
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 contract, listed and traded on
NYMEX, trades in units of 42,000
gallons (1,000 barrels) and is 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 October
2006, ranged from a high of $215.85 in
September 2006 to a low of $28.50 in
February 1999. As of November 9, 2006,
the spot price was $169.31. Annual
daily contract volume on the NYMEX
from 2001 through October 2006 was:
41,710; 42,781; 46,327; 51,745; 52,333;
and 60,024, respectively.
Gasoline. The Exchange states that
gasoline is the largest single volume
refined product sold in the U.S. and
accounts for almost half of national oil
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consumption. The gasoline Futures
Contract, listed and traded on the
NYMEX, trades in units of 42,000
gallons (1,000 barrels) and is 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 price of gasoline during the
period January 1995 through October
2006, ranged from a high of $2.70 in
September 2006 to a low of $0.3258 in
December 1998. As of November 9,
2006, the spot price was $1.71. Annual
daily contract volume on the NYMEX
from 2001 through October 2006 was:
38,033; 43,919; 44,688; 51,315; 52,456;
and 44,996, respectively.
Futures Regulation
The Exchange states that the
Commodity Exchange Act (‘‘CEA’’)
governs the regulation of commodity
interest transactions, markets, and
intermediaries. The CEA, as amended
by the Commodity Futures
Modernization Act of 2000, 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 reviews and inspections of the
futures exchanges’ enforcement
programs.
The Exchange states that 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.
Non-U.S. futures exchanges differ in
certain respects from their U.S.
counterparts. In contrast to U.S.
designated contract markets, some nonU.S. exchanges are principals’ markets,
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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, 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.
The CFTC and U.S. designated
contract markets have established
accountability levels and position limits
on the maximum net long or net short
Futures Contracts 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 accountability levels and
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.
The Exchange states that most U.S.
futures exchanges limit the amount of
fluctuation in some futures contract or
options on futures contract prices
during a single trading period. 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 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 option on a futures contract, no
trades may be made at a price beyond
the limit.
The Exchange states that most
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.
A portion of USNG’s assets may be
employed to enter into OTC transactions
based on natural gas, oil, and other
petroleum-based fuels. OTC transactions
are subject to little, if any, regulation.
OTC contracts are typically traded on a
principal-to-principal basis through
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10269
dealer markets that are dominated by
the major money center and investment
banks and other institutions. In
connection with the trading of OTC
instruments, USNG will not receive the
protection of 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.
Structure and Regulation of USNG
USNG, a Delaware limited
partnership formed in September 2006,
is a commodity pool that will invest in
Natural Gas Interests.9 It is operated by
Victoria Bay, a single member Delaware
limited liability company, which is
wholly owned by Wainwright Holdings,
Inc. The General Partner is registered as
a commodity pool operator (‘‘CPO’’)
with the CFTC and is a member of the
National Futures Association (the
‘‘NFA’’).
Information regarding USNG 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 USNG, are
included in the registration statement
regarding the offering of the Units filed
with the Commission under the
Securities Act of 1933.10
Clearing Broker. A CFTC-registered
futures commission merchant (‘‘FCM’’)
will execute and clear USNG’s futures
contract transactions, hold the margin
related to its Futures Contracts
investments and perform certain
administrative services for USNG (the
‘‘Clearing Broker’’). USNG may use
other FCMs as its investments increase
or as may be required to trade particular
Natural Gas Interests.
Administrator and Custodian. Under
separate agreements with USNG, Brown
Brothers Harriman & Co. will serve as
USNG’s administrator, registrar, transfer
agent, and custodian (the
‘‘Administrator’’ or ‘‘Custodian’’). The
Administrator will perform or supervise
the performance of services necessary
for the operation and administration of
USNG. These services include, but are
not limited to, investment accounting,
financial reporting, broker and trader
reconciliation, calculation of the NAV,
and valuation of Treasuries and cash
equivalents used to purchase or redeem
Units and other USNG assets or
liabilities. As Custodian, it: (i) Will
receive payments from purchasers of
Creation Baskets; (ii) will make
9 USNG is not an investment company as defined
in Section 3(a) of the Investment Company Act of
1940.
10 See Form S–1 filed with the Commission on
October 6, 2006 (File No. 333–137871).
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payments to Sellers for Redemption
Baskets, as described below; and (iii)
will hold the cash, cash equivalents,
and Treasuries of USNG, as well as
collateral posted by USNG’s derivatives
counterparties, and will make transfers
of margin and collateral with respect to
USNG’s investments to and from its
FCMs or counterparties.
Marketing Agent. A registered brokerdealer will be the marketing agent for
USNG (‘‘Marketing Agent’’). The
Marketing Agent, on behalf of USNG,
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’’).
Investment Strategy
USNG will pursue its investment
objective by investing its assets in
Futures Contracts and Other Natural Gas
Related Investments 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. USNG will
attempt to manage its investments so
that changes in percentage terms of a
Unit’s net asset value reflect the changes
in percentage terms of the price of
natural gas delivered at the Henry Hub,
Louisiana as measured by the
Benchmark Futures Contract, that is the
near month expiration contract, except
when the near month contract is within
two weeks of expiration, in which case
it will invest in the next expiration
month. In connection with tracking the
price of the Benchmark Futures
Contract, the General Partner will
endeavor to place USNG’s trades in
Futures Contracts and Other Natural Gas
Related Investments and otherwise
manage USNG’s investments so that
‘‘A’’ will be within ±10 percent of ‘‘B’’,
where:
• ‘‘A’’ is the average daily change in
USNG’s NAV for any period of 30
successive valuation days, i.e., any day
as of which USNG calculates its NAV;
and
• ‘‘B’’ is the average daily change in
the price of the Benchmark Futures
Contract over the same period.
The Benchmark Futures Contract will
be changed or ‘‘rolled’’ from the near
expiration month contract to the next
month expiration ratably over a four (4)
day period. The changes in the
Benchmark Futures Contract will occur
two (2) weeks prior to the expiration of
the nearest contract month. Thereafter,
the calculation of the movement in the
Benchmark Futures Contract will be
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based solely on the next month
expiration contract.
The Exchange believes that market
arbitrage opportunities should cause
USNG’s Unit price to closely track
USNG’s per Unit NAV which is targeted
at the current Benchmark Futures
Contract.
Investments. USNG believes that it
will be able to use a combination of
Futures Contracts and Other Natural Gas
Related Investments to manage the
portfolio to achieve its investment
objective. USNG further anticipates that
the exact mix of Futures Contracts and
Other Natural Gas Related Investments
held by the portfolio will vary over time
depending on, among over things, the
amount of invested assets in the
portfolio, price movements of natural
gas, the rules and regulations of the
various futures and commodities
exchanges and trading platforms that
deal in Natural Gas Interests, and
innovations in the Natural Gas Interests’
marketplace including both the creation
of new Natural Gas Interest investment
vehicles, and the creation of new
trading venues that trade in Natural Gas
Interests.
Futures Contracts. The principal
Natural Gas Interests to be invested in
by USNG are Futures Contracts. USNG
initially expects to purchase the
Benchmark Futures Contract. USNG
may also invest in Futures Contracts in
crude oil, heating oil, gasoline, and
other petroleum-based fuels that are
traded on the NYMEX, ICE Futures or
other U.S. and foreign exchanges.
The Benchmark Futures Contract has
historically closely tracked the
investment objective of USNG over both
the short-term, medium-term, and the
long-term. For that reason, USNG
anticipates making significant
investments in the Benchmark Futures
Contract. The Exchange notes that the
General Partner states that other Futures
Contracts have also tended to track the
investment objective of USNG, though
not as closely as the Benchmark Futures
Contract.
Other Natural Gas Related
Investments. USNG may also purchase
Other Natural Gas-Related Investments
such as cash-settled options on Futures
Contracts, forward contracts for natural
gas, and over-the-counter transactions
that are based on the price of natural
gas, oil and other petroleum-based fuels,
Futures Contracts, and indices based on
the foregoing. Option contracts offer
investors and hedgers another vehicle
for managing exposure to the natural gas
market. USNG may purchase options on
natural gas Futures Contracts on the
principal commodities and futures
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exchanges in pursuing its investment
objective.
The Exchange states that in addition
to these listed options, there also exists
an active OTC market in derivatives
linked to natural gas. These OTC
derivative transactions are privatelynegotiated agreements between two (2)
parties. Unlike 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 OTC contracts contain fairly
generic terms and conditions and are
available from a wide range of
participants, while other OTC contracts
have highly customized terms and
conditions and are not as widely
available. Many OTC contracts are cashsettled forwards for the future delivery
of natural gas or petroleum-based fuels
that have terms similar to the Futures
Contracts. Others take the form of
‘‘swaps’’ in which the two parties
exchange cash flows based on predetermined formulas tied to the price of
natural gas as determined by the spot,
forward or futures markets. USNG may
enter into OTC derivative contracts
whose value will be tied to changes in
the difference between the natural gas
spot price, the price of Futures
Contracts traded on NYMEX and the
prices of non-NYMEX Futures Contracts
that may be invested in by USNG.
Counterparty Procedures. To protect
itself from the credit risk that arises in
connection with such contracts, USNG
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
USNG’s exposure. 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 the natural gas
commodities markets, may also be
counterparties. 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 USNG 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.
USNG anticipates that the use of
Other Natural Gas Related Investments
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together with its investments in Futures
Contracts will produce price and total
return results that closely track the
investment objective of USNG.
Cash, Cash Equivalents, and
Treasuries. USNG will invest virtually
all of its assets not invested in Natural
Gas Interests, in cash, cash equivalents,
and Treasuries with a remaining
maturity of two years or less. The cash,
cash equivalents, and Treasuries will be
available to be used to meet USNG’s
current or potential margin and
collateral requirements with respect to
its investments in Natural Gas Interests.
USNG will not use cash, cash
equivalents, and Treasuries as margin
for new investments unless it has a
sufficient amount of cash, cash
equivalents, and Treasuries to meet the
margin or collateral requirements that
may arise due to changes in the value
of its currently held Natural Gas
Interests. Other than in connection with
a redemption of Units, USNG does not
intend to distribute cash or property to
its Unit holders. Interest earned on cash,
cash equivalents, and Treasuries held by
USNG 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 Accountability Levels and
Position Limits. The CFTC and U.S.
designated contract markets such as the
NYMEX have established accountability
levels and position limits on the
maximum net long or net short Futures
Contracts that any person or group of
persons under common trading control
(other than hedgers) may hold, own or
control in commodity interests. The
Exchange states that accountability
levels and position limits are intended
among other things, to prevent a corner
or squeeze on a market or undue
influence on prices by any single trader
or group of traders. The net position is
the difference between an individual or
firm’s open long contracts and open
short contracts in any one commodity.
The Exchange states that most U.S.
futures exchanges also limit the amount
of fluctuation in the prices of some
futures contracts or options on futures
contracts during a single trading day.
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 an option
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 option on a futures contract,
no trades may be made at a price
beyond the limit.
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The accountability levels for the
Benchmark Futures Contract and other
Futures Contracts traded on NYMEX are
not a fixed ceiling, but rather a
threshold above which the NYMEX may
exercise greater scrutiny and control
over an investor’s positions. The current
accountability level for the Benchmark
Futures Contract is 12,000 contracts. If
USNG exceeds this accountability level
for the Benchmark Futures Contract,
NYMEX will monitor USNG’s exposure
and ask for further information on
USNG’s activities including the total
size of all positions, investment and
trading strategy, and the extent of
USNG’s liquidity resources. If deemed
necessary by NYMEX, it could also
order USNG to reduce its position back
to the accountability level.
If NYMEX orders USNG to reduce its
position back to the accountability level,
or to an accountability level that
NYMEX deems appropriate for USNG,
such an accountability level may impact
the mix of investments in Natural Gas
Interests made by USNG. To illustrate,
assume that the Benchmark Futures
Contract and the unit price of USNG are
each $10, and that NYMEX has
determined that USNG may not own
more than 12,000 contracts. In such
case, USNG could invest up to $1.2
billion of its daily net assets in the
Benchmark Futures Contract (i.e., $10
per contract multiplied by 10,000 (a
Benchmark Futures Contract is a
contract for 10,000 million British
Thermal Units) multiplied by 12,000
contracts) before reaching the
accountability level imposed by the
NYMEX. Once the daily net assets of the
portfolio exceed $1.2 billion in the
Benchmark Futures Contract, the
portfolio may not be able to make any
further investments in the Benchmark
Futures Contract, depending on whether
the NYMEX imposes limits. If NYMEX
does impose limits at the $1.2 billion
level (or another level), USNG
anticipates that it will invest the
majority of its assets above that level in
a mix of other Futures Contracts or
Other Natural Gas-Related Investments.
The Exchange states that in addition
to accountability levels, NYMEX
imposes position limits on contracts
held in the last few days of trading in
the near month contract. It is unlikely
that USNG will run up against such
position limits because USNG’s
investment strategy is to exit from the
near month contract over a four day
period beginning two weeks from
expiration of the contract.
The Markets for USNG’s Units
There will be two markets for
investors to purchase and sell Units.
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10271
New issuances of the Units will be made
only in baskets of 100,000 Units or
multiples thereof (a ‘‘Basket’’). SNG will
issue and redeem Baskets of the Units
on a continuous basis, by or through
participants who have each entered into
an authorized purchaser agreement
(‘‘Authorized Purchaser Agreement’’
and each such participant, an
‘‘Authorized Purchaser’’) 11 with the
General Partner, at the NAV per Unit
next determined after an order to
purchase the Units in a Basket is
received in proper form. Baskets may be
issued and redeemed on any ‘‘business
day’’ (defined as any day other than a
day on which the Amex, the NYMEX or
the New York Stock Exchange is closed
for regular trading) through the
Marketing Agent in exchange for cash
and/or Treasuries, which the Custodian
receives from Authorized Purchasers or
transfers to Authorized Purchasers, in
each case on behalf of USNG. Baskets
are then separable upon issuance into
identical Units that will be listed and
traded on the Exchange.12
The Units will thereafter be traded on
the Exchange similar to other equity
securities. Units will be registered in
book-entry form through DTC. Trading
in the Units on the Exchange will be
effected until 4:15 p.m. Eastern time
(‘‘ET’’) each business day. The
minimum trading increment for such
units will be $.01.
Each Authorized Purchaser, and each
distributor offering and selling newly
issued Units as part of the distribution
of such Units, is required to comply
with the prospectus delivery and
disclosure requirements of the
Securities Act of 1933, as well as the
requirements of the CEA including, the
requirement that prospective investors
provide an acknowledgement of receipt
of such disclosure materials prior to the
payment for any newly issued Units.
Calculation of the Basket Amount.
Baskets will be issued in exchange for
Treasuries and/or cash in an amount
equal to the NAV per Unit times
100,000 Units (the ‘‘Basket Amount’’).
Baskets will be delivered by the
Marketing Agent to each Authorized
Purchaser only after execution of the
Authorized Purchaser Agreement. Units
in a Basket are issued and redeemed in
accordance with the Authorized
11 An ‘‘Authorized Purchaser’’ is a person, who at
the time of submitting to the Marketing Agent an
order to create or redeem one or more Baskets: (i)
Is a registered broker-dealer or other market
participants, such as banks and other financial
institutions, that are exempt from broker-dealer
registration; (ii) is a DTC Participant; and (iii) has
in effect a valid Authorized Participant Agreement.
12 The Exchange expects that the number of
outstanding Units will increase and decrease as a
result of creations and redemptions of Baskets.
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Purchaser Agreement. Authorized
Purchasers that wish to purchase a
Basket must transfer the Basket Amount,
for each Basket purchased, to the
Custodian (the ‘‘Deposit Amount’’).
Authorized Purchasers that wish to
redeem a Basket will receive an amount
of Treasuries and/or cash in exchange
for each Basket surrendered in an
amount equal to the NAV per Basket
(the ‘‘Redemption Amount’’).
On each business day, the
Administrator will make available
immediately prior to the opening of
trading on the Exchange, the Basket
Amount for the creation of a Basket
based on the prior day’s NAV. The
Exchange will disseminate at least every
15 seconds throughout the trading day,
via the facilities of the Consolidated
Tape Association (‘‘CTA’’), an amount
representing, on a per Unit basis, the
current indicative value of the Basket
Amount (see ‘‘Indicative Partnership
Value’’ below). Shortly after 4 p.m. ET,
the Administrator will determine the
NAV for USNG as described below. At
or about 4 p.m. ET on each business
day, the Administrator will determine
the Basket Amount for orders placed by
Authorized Purchasers received before
12 p.m. ET that day. Because orders to
purchase and/or redeem Baskets must
be placed by 12 p.m. ET, but the Basket
Amount will not be determined until
shortly after 4 p.m. ET, on the date the
purchase order or redemption order, as
applicable, is received, Authorized
Participants will not know the total
payment required to create or redeem a
Basket, as applicable, at the time they
submit such irrevocable purchase and/
or redemption order. This is similar to
exchange-traded funds and mutual
funds. USNG’s registration statement
discloses that NAV and the Basket
Amount could rise and fall substantially
between the time an irrevocable
purchase order and/or redemption order
is submitted and the time the Basket
Amount is determined.
Shortly after 4 p.m. ET on each
business day, the Administrator, Amex
and the General Partner will
disseminate the NAV for the Units and
the Basket Amount (for orders placed
during the day). The Basket Amount
and the NAV are communicated by the
Administrator to all Authorized
Purchasers via facsimile or electronic
mail message. The Amex will also
disclose the NAV and Basket Amount
on its Web site at https://www.amex.com.
The Basket Amount necessary for the
creation of a Basket will change from
day to day. On each day that the Amex
is open for regular trading, the
Administrator will adjust the Deposit
Amount as appropriate to reflect the
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prior day’s Partnership NAV and
accrued expenses. The Administrator
will then determine the Deposit Amount
for a given business day.13
Calculation of USNG’s NAV. The
Administrator will calculate NAV as
follows: (1) Determine the current value
of USNG assets and (2) subtract the
liabilities of USNG. The NAV will be
calculated shortly after the close of
trading on the Exchange using the
settlement value 14 of Futures Contracts
traded on the NYMEX as of the close of
open-outcry trading on the NYMEX at
2:30 p.m. ET, and for the value of other
Natural Gas Interests, Treasuries and
cash equivalents, the value of such
investments as of the earlier of 4 p.m.
New York time or the close of trading
on the New York Stock Exchange. The
NAV is calculated by including any
unrealized profit or loss on Futures
Contracts and Other Natural Gas Related
Investments and any other credit or
debit accruing to USNG but unpaid or
not received by USNG. The NAV is then
used to compute all fees (including the
management and administrative fees)
that are calculated from the value of
Partnership assets. The Administrator
will calculate the NAV per Unit by
dividing the NAV by the number of
Units outstanding.
When calculating NAV for USNG, the
Administrator will value Futures
Contracts based on the closing
settlement prices quoted on the relevant
commodities and futures exchange and
obtained from various market data
vendors such as Bloomberg or Reuters.
The value of the Other Natural Gas
Related Investments for purposes of
determining the NAV will be based
upon the determination of the
Administrator as to the fair market
value. Certain types of Other Natural
Gas Related Investments, such as listed
options on Futures Contracts, have
closing prices that are available from the
exchange upon which they are traded or
from various market data vendors. Other
Natural Gas Related Investments will be
valued based on the last sale price on
the exchange or market where traded. If
a contract fails to trade, the value shall
be the most recent bid quotation from
the third party source. Some types of
Other Natural Gas Related Investments,
such as natural gas forward contracts do
not trade on established exchanges, but
typically have prices that are widely
available from third-party sources. The
Administrator may make use of such
13 The Exchange will obtain a representation from
USNG that its NAV per Unit will be calculated
daily and made available to all market participants
at the same time.
14 See Rule 6.52A of the NYMEX Rulebook.
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third-party sources in calculating a fair
market value of these Other Natural Gas
Related Investments.
Certain types of Other Natural Gas
Related Investments, such as OTC
derivative contracts such as ‘‘swaps’’
also do not have established exchanges
upon which they trade and may not
have readily available price quotes from
third parties. Swaps and other similar
derivative or contractual-type
instruments will be first valued at a
price provided by a single broker or
dealer, typically the counterparty. If no
such price is available, the contract will
be valued at a price at which the
counterparty to such contract could
repurchase the instrument or terminate
the contract. In determining the fair
market value of such derivative
contracts, the Administrator may make
use of quotes from other providers of
similar derivatives. If these are not
available, the Administrator may
calculate a fair market value of the
derivative contract based on the terms of
the contract and the movement of the
underlying price factors of the contract.
Calculation and Payment of the
Deposit Amount. The Deposit Amount
of Treasuries and/or cash will be in the
same proportion to the total net assets
of USNG as the number of Units to be
created is in proportion to the total
number of Units outstanding as of the
date the purchase order is accepted. The
General Partner will determine the
requirements for the Treasuries that may
be included in the Deposit Amount and
will disseminate these requirements at
the start of each business day. The
amount of cash that is required is the
difference between the aggregate market
value of the Treasuries required to be
included in the Deposit Amount as of 4
p.m. ET on the date of purchase and the
total required deposit.
All purchase orders must be received
by the Marketing Agent by 12 p.m. ET
for consideration on that business day.
Delivery of the Deposit Amount, i.e.,
Treasuries and/or cash, to the
Administrator must occur by the third
business day following the purchase
order date (T+3).15 Thus, the General
Partner will disseminate shortly after 4
p.m. ET on the date the purchase order
was properly submitted, the amount of
Treasuries and/or cash to be deposited
with the Custodian for each Basket.
Calculation and Payment of the
Redemption Amount. The Units will not
be individually redeemable but will
only be redeemable in Baskets. To
redeem, an Authorized Purchaser will
15 Authorized Purchasers are required to pay a
transaction fee of $1,000 for each order to create one
or more Baskets.
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be required to accumulate enough Units
to constitute a Basket (i.e., 100,000
Units). An Authorized Purchaser
redeeming a Basket will receive the
Redemption Amount. Upon the
surrender of the Units and payment of
applicable redemption transaction fee,16
taxes or charges, the Custodian will
deliver to the redeeming Authorized
Purchaser the Redemption Amount. The
Redemption Amount of Treasuries and/
or cash will be in the same proportion
to the total net assets of USNG as the
number of Units to be redeemed is in
proportion to the total number of Units
outstanding as of the date the
redemption order is accepted. The
General Partner will determine the
Treasuries to be included in the
Redemption Amount. The amount of
cash that is required is the difference
between the aggregate market value of
the Treasuries required to be included
in the Redemption Amount as of 4 p.m.
ET on the date of redemption and the
total Redemption Amount. All
redemption orders must be received by
the Marketing Agent by 12 p.m. ET on
the business day redemption is
requested and are irrevocable. Delivery
of the Basket to be redeemed to the
Custodian and payment of Redemption
Amount will occur by the third business
day following the redemption order date
(T+3).
sroberts on PROD1PC70 with NOTICES
Arbitrage
The Exchange believes that the Units
will not trade at a material discount or
premium to a Unit’s NAV based on
potential arbitrage opportunities. Due to
the fact that the Units can be created
and redeemed only in Baskets at NAV,
the Exchange submits that arbitrage
opportunities should provide a
mechanism to mitigate the effect of any
premiums or discounts that may exist
from time to time.
Dissemination and Availability of
Information
Futures Contracts. The daily
settlement prices for the NYMEX traded
Futures Contracts held by USNG are
publicly available on the NYMEX
website at https://www.nymex.com. The
Exchange on its website at https://
www.amex.com will also include a
hyperlink to the NYMEX website for the
purpose of disclosing futures contract
pricing. In addition, various market data
vendors and news publications publish
futures prices and related data. The
Exchange represents that quote and last
sale information for the Futures
Contracts are widely disseminated
through a variety of market data vendors
16 Id.
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18:25 Mar 06, 2007
Jkt 211001
worldwide, including Bloomberg and
Reuters. In addition, the Exchange
further represents that real-time futures
data is available by subscription from
Reuters and Bloomberg. The NYMEX
also provides delayed futures
information on current and past trading
sessions and market news free of charge
on its Web site. The specific contract
specifications for the Futures Contracts
are also available on the NYMEX
website and the ICE Futures Web site at
https://www.icefutures.com.
USNG Units. The Web site for the
Exchange at https://www.amex.com,
which is publicly accessible at no
charge, will contain the following
information: (1) The prior business
day’s NAV and the reported closing
price; (2) the mid-point of the bid-ask
price 17 in relation to the NAV as of the
time the NAV is calculated (the ‘‘BidAsk Price’’); (3) calculation of the
premium or discount of such price
against such NAV; (4) data in chart form
displaying the frequency distribution of
discounts and premiums of the Bid-Ask
Price against the NAV, within
appropriate ranges for each of the four
(4) previous calendar quarters; (5) the
prospectus and the most recent periodic
reports filed with the SEC or required by
the CFTC; and (6) other applicable
quantitative information.
Portfolio Disclosure. USNG’s total
portfolio composition will be disclosed,
each business day that the Amex is open
for trading, on USNG’s website at
https://
www.unitedstatesnaturalgasfund.com.
USNG expects that website disclosure of
portfolio holdings will be made daily
and will include, as applicable, the
name and value of each Natural Gas
Interest, the specific types of Natural
Gas Interests and characteristics of such
Natural Gas Interests, Treasuries, and
amount of cash and cash equivalents
held in the portfolio of USNG. The
public Web site disclosure of the
portfolio composition of USNG will
coincide with the disclosure by the
Administrator on each business day of
the NAV for the Units and the Basket
Amount (for orders placed during the
day). Therefore, the same portfolio
information will be provided on the
public Web site as well as in the
facsimile or electronic mail message to
Authorized Purchasers containing the
NAV and Basket Amount (‘‘Daily
Dissemination’’). The format of the
public Web site disclosure and the Daily
Dissemination will differ because the
public Web site will list all portfolio
17 The Bid-Ask Price of Units is determined using
the highest bid and lowest offer as of the time of
calculation of the NAV.
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10273
holdings while the Daily Dissemination
will provide the portfolio holdings in a
format appropriate for Authorized
Purchasers, i.e., the exact components of
a Creation Unit.
As described above, the NAV for
USNG will be calculated and
disseminated daily.18 The Amex also
intends to disseminate for USNG on a
daily basis by means of CTA/CQ High
Speed Lines information with respect to
the Indicative Partnership Value (as
discussed below), recent NAV, Units
outstanding, the Basket Amount, and
the Deposit Amount. The Exchange will
also make available on its Web site daily
trading volume, closing prices, and the
NAV. The closing price and settlement
prices of the Futures Contracts held by
USNG are also readily available from
the NYMEX, automated quotation
systems, published or other public
sources, or on-line information services
such as Bloomberg or Reuters. In
addition, the Exchange will provide a
hyperlink on its Web site at https://
www.amex.com to USNG’s Web site.
Indicative Partnership Value. In order
to provide updated information relating
to USNG for use by investors,
professionals, and persons wishing to
create or redeem the Units, the
Exchange will disseminate through the
facilities of the CTA an updated
Indicative Partnership Value (the
‘‘Indicative Partnership Value’’). The
Indicative Partnership Value will be
disseminated on a per Unit basis at least
every fifteen seconds during the regular
Amex trading hours of 9:30 a.m. to 4:15
p.m. ET. The Indicative Partnership
Value will be calculated based on the
Treasuries and cash required for
creations and redemptions (i.e., NAV
per limit x 100,000) adjusted to reflect
the price changes of the Benchmark
Futures Contract.
The Indicative Partnership Value will
not reflect price changes to the price of
the Benchmark Futures Contract
between the close of open-outcry
trading of such contract on the NYMEX
at 2:30 p.m. ET and the open of trading
on the NYMEX ACCESS market at 3:15
p.m. ET. The Indicative Partnership
Value after 3:15 p.m. ET 19 will reflect
changes to the Benchmark Futures
Contract as provided for through
NYMEX ACCESS. The value of a Unit
18 The Exchange will obtain a representation from
USNG that its NAV per Unit will be calculated
daily and made available to all market participants
at the same time.
19 NYMEX ACCESS, an electronic trading
system, is open for price discovery on the
Benchmark Futures Contract each Monday through
Thursday at 3:15 p.m. ET through the following
morning at 9:30 a.m. E.T., and from 7 p.m. Sunday
night until Monday morning 9:30 a.m. E.T.
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may accordingly be influenced by nonconcurrent trading hours between the
Amex and NYMEX. While the Units
will trade on the Amex from 9:30 a.m.
to 4:15 p.m. ET, the Benchmark Futures
Contract will trade, in open-outcry, on
the NYMEX from 10 a.m. ET to 2:30 pm
ET and NYMEX ACCESS from 3:15 p.m.
ET through the following morning 9:30
a.m. ET.
While the NYMEX is open for trading,
the Indicative Partnership Value can be
expected to closely approximate the
value per unit of the Basket Amount.
However, during Amex trading hours
when the Futures Contracts have ceased
trading, spreads and resulting premiums
or discounts may widen, and therefore,
increase the difference between the
price of the Units and the NAV of the
Units. The Exchange submits that the
Indicative Partnership Value on a per
Unit basis disseminated during Amex
trading hours should not be viewed as
a real-time update of the NAV, which is
calculated only once a day. The
Exchange believes that dissemination of
the Indicative Partnership Value based
on the cash amount required for a
Basket provides additional information
that is not otherwise available to the
public and is useful to professionals and
investors in connection with the Units
trading on the Exchange or the creation
or redemption of the Units.
sroberts on PROD1PC70 with NOTICES
Partnership Termination Events
USNG will continue in effect from the
date of its formation in perpetuity,
unless sooner terminated upon the
occurrence of any one or more of the
following circumstances: (1) The death,
adjudication of incompetence,
bankruptcy, dissolution, withdrawal, or
removal of a general partner who is the
sole remaining general partner, unless a
majority in interest of limited partners
within 90 days after such event elects to
continue USNG and appoints a
successor general partner; or (2) the
affirmative vote to terminate USNG by
a majority in interest of the limited
partners subject to certain conditions.
Upon termination of USNG, holders
of the Units will surrender their Units
and the assets of USNG shall be
distributed to the Unit holders pro rata
in accordance with the value of the
Units, in cash or in kind, as determined
by the General Partner.
Disclosure
The Exchange, in an Information
Circular (described below) to Exchange
members and member organizations,
will inform members and member
organizations, prior to the
commencement of trading, of the
prospectus delivery requirements
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18:25 Mar 06, 2007
Jkt 211001
applicable to USNG. The Exchange
notes that investors purchasing Units
directly from USNG (by delivery of the
Deposit Amount) will receive a
prospectus. Amex members purchasing
Units from USNG for resale to investors
will deliver a prospectus to such
investors.
Purchase and Redemptions in Baskets
In the Information Circular, members
and member organizations will be
informed that procedures for purchases
and redemptions of Units in Baskets are
described in the Prospectus and that
Units are not individually redeemable
but are redeemable only in Baskets or
multiples thereof.
Listing and Trading Rules
USNG will be subject to the criteria in
Rule 1502 for initial and continued
listing of the Units. The Exchange will
require a minimum of 100,000 Units to
be outstanding at the start of trading.
The Exchange expects that the initial
price of a Unit will be $50.00.20 The
Exchange believes that the anticipated
minimum number of Units outstanding
at the start of trading is sufficient to
provide adequate market liquidity and
to further USNG’s objective to seek to
provide a simple and cost effective
means of accessing the commodity
futures markets. The Exchange
represents that it prohibits the initial
and/or continued listing of any security
that is not in compliance with Rule
10A–3 under the Act.21 The Exchange
will file a proposed rule change with the
Commission pursuant to Rule 19b–4
under the 1934 Act seeking approval to
continue trading the Units and, unless
approved, the Exchange will commence
delisting the Units if more than a
temporary disruption exists in
connection with the pricing of the
Benchmark Futures Contract or the
calculation or dissemination of the NAV
is more than temporarily disrupted, or
the NAV is not disseminated to all
market participants at the same time.
The Amex original listing fee
applicable to the listing of USNG is
$5,000. In addition, the annual listing
fee applicable under Section 141 of the
Amex Company Guide will be based
upon the year-end aggregate number of
Units in all series of USNG outstanding
at the end of each calendar year.
20 USNG expects that the initial Authorized
Purchaser will purchase the initial Basket of
100,000 Units at the initial offering price per Unit
of $50.00. On the date of the public offering and
thereafter, USNG will continuously issue Units in
Baskets of 100,000 Units to Authorized Purchasers
at NAV.
21 See 17 CFR 240.10A–3.
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Frm 00163
Fmt 4703
Sfmt 4703
Amex Rule 154, Commentary .04(c)
provides that stop and stop limit orders
to buy or sell a security (other than an
option, which is covered by Rule 950(f)
and Commentary thereto) the price of
which is derivatively priced based upon
another security or index of securities,
may with the prior approval of a Floor
Official, be elected by a quotation, as set
forth in Commentary .04(c) (i–v). The
Exchange has designated the Units as
eligible for this treatment.22
The Units will be deemed ‘‘Eligible
Securities’’, as defined in Amex Rule
230, for purposes of the Intermarket
Trading System Plan and therefore will
be subject to the trade through
provisions of Amex Rule 236, which
requires that Amex members avoid
initiating trade-throughs for ITS
securities.
Specialist transactions of the Units
made in connection with the creation
and redemption of Units will not be
subject to the prohibitions of Amex Rule
190.23 The Units will not be subject to
the short sale rule, Rule 10a–1 under the
Act, pursuant to no-action relief
granted.24 If exemptive or no-action
relief is provided, the Exchange will
issue a notice detailing the terms of the
exemption or relief. The Units will
generally be subject to the Exchange’s
stabilization rule, Amex Rule 170,
except that specialists may buy on ‘‘plus
ticks’’ and sell on ‘‘minus ticks,’’ in
order to bring the Units into parity with
the underlying commodity or
commodities and/or futures contract
price. Proposed Commentary .01 to
Amex Rule 1503 sets forth this limited
exception to Rule 170.
The Exchange submits that its
surveillance procedures are adequate to
deter and detect violations of Exchange
rules relating to the trading of the Units.
The surveillance procedures for the
Units will be similar to those used for
units of the United States Oil Fund, LP
as well as other commodity-based trusts,
trust issued receipts (‘‘TIR’’s) and
exchange-traded funds. In addition, the
surveillance procedures will incorporate
and rely upon existing Amex
surveillance procedures governing
options and equities.
Amex Rule 1503 relating to certain
specialist prohibitions will address
potential conflicts of interest in
22 See Securities Exchange Act Release No. 29063
(April 10, 1991), 56 FR 15652 (April 17, 1991) (SR–
Amex 90–31) at note 9, regarding the Exchange’s
designation of equity derivative securities as
eligible for such treatment under Amex Rule 154,
Commentary .04(c).
23 See Commentary .05 to Amex Rule 190.
24 See letter to George T. Simon, Esq. Foley &
Lardner, LLP, from Racquel L. Russell, Branch
Chief, Office of Trading Practices and Processing,
Commission, dated June 21, 2006.
E:\FR\FM\07MRN1.SGM
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sroberts on PROD1PC70 with NOTICES
connection with acting as a specialist in
the Units. Specifically, Rule 1503
provides that the prohibitions in Rule
175(c) apply to a specialist in the Units
so that the specialist or affiliated person
may not act or function as a marketmaker in an underlying asset, related
futures contract or option or any other
related derivative. An affiliated person
of the specialist consistent with Rule
193 may be afforded an exemption to act
in a market making capacity, other than
as a specialist in the Units on another
market center, in the underlying asset,
related futures or options or any other
related derivative. In particular, Amex
Rule 1503 provides that an approved
person of an equity specialist that has
established and obtained Exchange
approval for procedures restricting the
flow of material, non-public market
information between itself and the
specialist member organization, and any
member, officer, or employee associated
therewith, may act in a market making
capacity, other than as a specialist in the
Units on another market center, in the
underlying asset or commodity, related
futures or options on futures, or any
other related derivatives.
Amex Rule 1504 will also ensure that
specialists handling the Units provide
the Exchange with all the necessary
information relating to their trading in
physical assets or commodities, related
futures contracts and options thereon or
any other derivative. As a general
matter, the Exchange has regulatory
jurisdiction over its members, member
organizations and approved persons of a
member organization. The Exchange
also has regulatory jurisdiction over any
person or entity controlling a member
organization as well as a subsidiary or
affiliate of a member organization that is
in the securities business. A subsidiary
or affiliate of a member organization
that does business only in commodities
or futures contracts would not be
subject to Exchange jurisdiction, but the
Exchange could obtain information
regarding the activities of such
subsidiary or affiliate through
surveillance sharing agreements with
regulatory organizations of which such
subsidiary or affiliate is a member.
Trading Halts
If the Indicative Partnership Value is
not being disseminated by one or more
major market data vendors, the
Exchange may halt trading during the
day in which the interruption to the
dissemination of such Indicative
Partnership Value occurs. If the
interruption to the dissemination of an
Indicative Partnership Value persists
past the trading day in which it
occurred, the Exchange will halt trading
VerDate Aug<31>2005
18:25 Mar 06, 2007
Jkt 211001
no later than the beginning of the
trading day following the interruption.
Prior to the commencement of
trading, the Exchange will issue an
Information Circular to members
informing them of, among other things,
Exchange policies regarding trading
halts in the Units. First, the Information
Circular will advise that trading will be
halted in the event the market volatility
trading halt parameters set forth in
Amex Rule 117 have been reached.
Second, the Information Circular will
advise that, in addition to the
parameters set forth in Rule 117, the
Exchange will halt trading in the Units
if trading in the underlying Futures
Contract(s) is halted or suspended.
Third, with respect to a halt in trading
that is not specified above, the Exchange
may also consider other relevant factors
and the existence of unusual conditions
or circumstances that may be
detrimental to the maintenance of a fair
and orderly market.
Suitability
The Information Circular will inform
members and member organizations of
the characteristics of USNG Units and of
applicable Exchange rules, as well as of
the requirements of Amex Rule 411
(Duty to Know and Approve
Customers).
The Exchange notes that pursuant to
Rule 411, members and member
organizations are required in connection
with recommending transactions in the
Units to have a reasonable basis to
believe that a customer is suitable for
the particular investment given
reasonable inquiry concerning the
customer’s investment objectives,
financial situation, needs, and any other
information known by such member.
Information Circular
The Amex will distribute an
Information Circular to its members in
connection with the trading of the
Units. The Information Circular will
discuss the special characteristics of and
risks of trading in the Units.
Specifically, the Information Circular,
among other things, will discuss what
the Units are, how a basket is created
and redeemed, the requirement that
members and member firms deliver a
prospectus to investors purchasing the
Units prior to or concurrently with the
confirmation of a transaction, applicable
Amex rules, dissemination information
regarding the per unit Indicative
Partnership Value, trading information
and applicable suitability rules. The
Information Circular will also explain
that USNG is subject to various fees and
expenses described in the Registration
Statement. The Information Circular
PO 00000
Frm 00164
Fmt 4703
Sfmt 4703
10275
will also reference the fact that there is
no regulated source of last sale
information regarding physical
commodities, that the SEC has no
jurisdiction over the trading of natural
gas, crude oil, heating oil, gasoline or
other petroleum-based fuels, and that
the CFTC has regulatory jurisdiction
over the trading of natural gas-based
futures contracts and related options.
The Information Circular will also
notify members and member
organizations about the procedures for
purchases and redemptions of Units in
Baskets, and that Units are not
individually redeemable but are
redeemable only in Baskets or multiples
thereof. The Information Circular will
advise members of their suitability
obligations with respect to
recommended transactions to customers
in the Units. The Information Circular
will also discuss any relief, if granted,
by the Commission or the staff from any
rules under the Act.
The Information Circular will disclose
that the NAV for Units will be
calculated shortly after 4 p.m. ET each
trading day.
Surveillance
Exchange surveillance procedures
applicable to trading in the proposed
Units will be similar to those applicable
to TIRs, Portfolio Depository Receipts,
Index Fund Shares, and Partnership
Units currently trading on the Exchange.
The Exchange currently has in place an
Information Sharing Agreement with the
NYMEX and ICE Futures for the
purpose of providing information in
connection with trading in or related to
futures contracts traded on the NYMEX
and ICE Futures, respectively. To the
extent that USNG invests in Natural Gas
Interests traded on other exchanges, the
Amex will seek to enter into
Information Sharing arrangements with
those particular exchanges.
2. Statutory Basis
The Amex believes that the proposed
rule change is consistent with the
requirements of Section 6(b) of the
Act 25 in general, and furthers the
objectives of Section 6(b)(5),26 of the Act
in particular, in that it is designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to foster
cooperation and coordination with
persons engaged in facilitating
transactions in securities, and to remove
impediments to and perfect the
25 15
26 15
E:\FR\FM\07MRN1.SGM
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
07MRN1
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Federal Register / Vol. 72, No. 44 / Wednesday, March 7, 2007 / Notices
mechanism of a free and open market
and a national market system.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
The Exchange has neither solicited
nor received written comments on the
proposed rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) By order approve such proposed
rule change or
(B) Institute proceedings to determine
whether the proposed rule change
should be disapproved.
The Amex has requested accelerated
approval of this proposed rule change
prior to the 30th day after the date of
publication of the notice of the filing
thereof. The Commission has
determined that a 15-day comment
period is appropriate in this case.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Exchange
Act. Comments may be submitted by
any of the following methods:
Electronic Comments
sroberts on PROD1PC70 with NOTICES
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–Amex–2006–112 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
VerDate Aug<31>2005
18:25 Mar 06, 2007
Jkt 211001
All submissions should refer to File
Number SR–Amex–2006–112. This file
number should be included on the
subject line if e-mail is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for inspection and copying in
the Commission’s Public Reference
Room. Copies of the filing also will be
available for inspection and copying at
the principal office of the Amex. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–Amex–2006–112 and
should be submitted on or before March
21, 2007.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.27
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7–4040 Filed 3–6–07; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–55373; File No. SR–BSE–
2006–11]
Self-Regulatory Organizations; Boston
Stock Exchange, Inc.; Notice of Filing
of Proposed Rule Change and
Amendments No. 1 and 2 Relating to
the Boston Options Exchange’s Minor
Rule Violation Plan
February 28, 2007.
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 March 6,
2006, the Boston Stock Exchange
(‘‘BSE’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
27 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
PO 00000
Frm 00165
Fmt 4703
Sfmt 4703
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
substantially prepared by the Exchange.
The Exchange filed Amendments Nos. 1
and 2 to the proposed rule change on
June 28, 2006, and July 14, 2006,
respectively. The Commission is
publishing this notice to solicit
comments on the proposed rule change,
as amended, from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend and
make additions to sections of the Boston
Options Exchange (‘‘BOX’’) Rules
related to its Minor Rule Violation Plan
(‘‘MRVP’’). The text of the proposed rule
change is available on BSE’s Web site at
https://www.bostonstock.com/legal, at
BSE’s principal office, and at the
Commission’s Public Reference Room.
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
BSE 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 Exchange 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 amend
Chapter X of its rules relating to the
BOX MRVP to include five additional
violations of BOX’s rules governing
Market Makers doing business on BOX
and the Intermarket Linkage Rules. The
rule proposal imposes sanctions for
each violation, which become more
significant with each additional
violation occurring within a 24-month
period.
These provisions impose sanctions in
BOX Rule Chapter X, Section 2(e) for
contrary exercise advice infractions of
Chapter VII, Section 1(c), (d), (f), and (g);
in Section 2(f) for locked and crossed
market infringements of Chapter XII,
Section 4; in Section 2(g) for Market
Maker assigned activity violations of
Chapter VI, Section 4(e); in Section 2(h)
for a Market Maker’s failure to respond
to a request for a quote within the
E:\FR\FM\07MRN1.SGM
07MRN1
]]>Agencies
[Federal Register Volume 72, Number 44 (Wednesday, March 7, 2007)]
[Notices]
[Pages 10267-10276]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-4040]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-55372; File No. SR-Amex-2006-112]
Self-Regulatory Organizations; American Stock Exchange LLC;
Notice of Filing of Proposed Rule Change as Modified by Amendment No. 1
Thereto Relating to the Listing and Trading of Units of the United
States Natural Gas Fund, LP
February 28, 2007.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 \2\ thereunder, notice is hereby given
that on December 1, 2006, the American Stock Exchange LLC (``Amex'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') the proposed rule change as described in
Items I, II, and III below, which Items have been substantially
prepared by the Exchange. On February 14, 2007, the Exchange submitted
Amendment No. 1 to the proposed rule change. 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)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to list and trade units (a ``Unit'' or
collectively, the ``Units'') of the United States Natural Gas Fund, LP
(``USNG'' or the ``Partnership'') pursuant to Amex Rules 1500 et seq.
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. 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 list and trade the Units issued by USNG
(under the symbol: ``UNG'') pursuant to Exchange Rules 1500 et seq. \3\
Amex Rule 1500 provides for the listing of Partnership Units, which are
defined as securities: (a) That are 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 are issued and redeemed daily in specified aggregate amounts at
net asset value. Pursuant to Commentary .01 to Rule 1502, the Exchange
will file separate proposals under Section 19(b) of the Act before
listing and trading separate and distinct Partnership Units designated
on different underlying investments, commodities and/or assets. The
Exchange submits that the Units will conform to the initial and
continued listing criteria under Rule 1502.\4\
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release No. 53582 (March 31,
2006), 71 FR 17510 (April 6, 2006) (SR-Amex 2005-127) (approving
Amex Rules 1500 et seq. and the listing and trading of Units of the
United States Oil Fund, LP).
\4\ As set forth in the section ``Listing and Trading Rules,''
the Exchange will require a minimum of 100,000 Units to be
outstanding at the start of trading.
---------------------------------------------------------------------------
The Units represent ownership of a fractional undivided beneficial
interest in the net assets of USNG.\5\ The net assets of USNG will
consist of investments in futures contracts based on natural gas, crude
oil, heating oil, gasoline, and other petroleum-based fuels traded on
the New York Mercantile Exchange (``NYMEX''), Intercontinental Exchange
(``ICE Futures'') or other U.S. and foreign exchanges (collectively,
``Futures Contracts''). USNG may also invest in other natural gas-
related investments such as cash-settled options on Futures Contracts,
forward contracts for natural gas, and over-the-counter (``OTC'')
transactions that are based on the price of natural gas, oil and other
petroleum-based fuels, Futures Contracts and indices based on the
foregoing (collectively, ``Other Natural Gas Related Investments'').
Futures Contracts and Other Natural Gas Related Investments
collectively are referred to as ``Natural Gas Interests.''
---------------------------------------------------------------------------
\5\ USNG is commodity pool that will issue Units that may be
purchased and sold on the Exchange.
---------------------------------------------------------------------------
USNG will invest in Natural Gas Interests to the fullest extent
possible without being leveraged or unable to satisfy its current or
potential margin or collateral obligations. In pursuing this objective,
the primary focus of USNG's investment manager, Victoria Bay Asset
Management, LLC (``Victoria Bay'' or ``General Partner''), will be the
investment in Futures Contracts and the management of its investments
in short-term obligations of the United States
[[Page 10268]]
(``Treasuries''), cash equivalents, and cash (collectively, ``Cash'')
for margining purposes and as collateral.
The investment objective of USNG is for changes in percentage terms
of a unit's net asset value (``NAV'') to reflect the changes in
percentage terms of the price of natural gas delivered at the Henry
Hub, Louisiana as measured by the natural gas futures contract traded
on the NYMEX (the ``Benchmark Futures Contract''). The Benchmark
Futures Contract employed is the near month expiration contract, except
when the near month contract is within two (2) weeks of expiration, in
which case it will invest in the next expiration month.\6\
---------------------------------------------------------------------------
\6\ The Benchmark Futures Contracts will be changed or
``rolled'' from the near month contract to expire over to the next
month to expire over a four (4) day period.
---------------------------------------------------------------------------
The General Partner will attempt to place USNG's trades in Natural
Gas Interests and otherwise manage USNG's investments so that ``A''
will be within plus/minus 10 percent of ``B'', where:
A is the average daily change in USNG's NAV for any period
of 30 successive valuation days, i.e., any day as of which USNG
calculates its NAV, and
B is the average daily change in the price of the
Benchmark Futures Contract over the same period.
An investment in the Units will allow both retail and institutional
investors to easily gain exposure to the natural gas market in a cost-
effective manner. In addition, the Units are also expected to provide
additional means for diversifying an investor's investments or hedging
exposure to changes in natural gas prices.
Description of the Natural Gas Market
Natural Gas. The Exchange states that Natural gas accounts for
almost a quarter of U.S. energy consumption. The price of natural gas
is established by the supply and demand conditions in the North
American market, and more particularly, in the main refining center of
the U.S. Gulf Coast. The natural gas market essentially constitutes an
auction, where the highest bidder wins the supply. When markets are
``strong'' (i.e., when demand is high and/or supply is low), the bidder
must be willing to pay a higher premium to capture the supply. When
markets are ``weak'' (i.e., when demand is low and/or supply is high),
a bidder may choose not to outbid competitors, waiting instead for
later, possibly lower priced, supplies. Demand for natural gas by
consumers, as well as agricultural, manufacturing and transportation
industries, determines the demand for natural gas. Since the precursors
of product demand are linked to economic activity, natural gas demand
will tend to reflect economic conditions. However, other factors such
as weather significantly influence natural gas demand.
The Exchange states that NYMEX is the world's largest physical
commodity futures exchange and the dominant market for the trading of
energy and precious metals. The Benchmark Futures Contract trades in
units of 10,000 million British thermal units (``mmBtu'') and is based
on delivery at the Henry Hub in Louisiana, the nexus of 16 intra and
interstate natural gas pipeline systems that draw supplies from the
region's prolific gas deposits.\7\ The pipelines serve markets
throughout the U.S. East Coast, the Gulf Coast, the Midwest, and up to
the Canadian border.
---------------------------------------------------------------------------
\7\In practice, few natural gas Futures Contracts result in
delivery of the underlying natural gas.
---------------------------------------------------------------------------
Because of the volatility of natural gas prices, a vigorous basis
market has developed in the pricing relationships between the Henry Hub
and other important natural gas market centers in the continental
United States and Canada. The NYMEX makes available for trading a
series of basis swap futures contracts that are quoted as price
differentials between approximately 30 natural gas pricing points and
the Henry Hub. The basis contracts trade in units of 2,500 mmBtu on the
NYMEX ClearPort[supreg] trading platform. Transactions can also be
consummated off NYMEX and submitted to the NYMEX for clearing via the
NYMEX ClearPort[supreg] \8\ clearing website as an exchange of futures
for physicals or an exchange of futures for swaps transactions.
---------------------------------------------------------------------------
\8\ The NYMEX ClearPort\sm\ is an electronic trading platform,
through which a slate of energy futures contracts are available for
competitive trading.
---------------------------------------------------------------------------
The price of natural gas during the period January 1995 through
October 2006, ranged from a high of $28.38 in January 2004 to a low of
$1.01 in December 1998. As of November 9, 2006 the spot price was
$7.24. Annual daily contract volume on the NYMEX from 2001 through
October 2006 was: 47,457; 97,431; 76,148; 70,048; 76,265; and 102,097,
respectively.
WTI Light, Sweet Crude Oil. 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. The oil futures contracts
for West Texas Intermediate (``WTI'') light, sweet crude oil is traded
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 oil to
Cushing, Oklahoma, which is also accessible to the world market by two
major interstate petroleum pipeline systems.
The Exchange states that 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 of Singapore, Northwest
Europe, and the U.S. Gulf Coast. Demand for petroleum products by
consumers, as well as agricultural, manufacturing, and transportation
industries, determines demand for crude oil by refiners. 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.
The price of WTI light, sweet crude oil has historically exhibited
periods of significant volatility. The price of WTI light, sweet crude
oil during the period January 1995 through October 2006, ranged from a
high of $77.03 in July 2006 to a low of $10.76 in December 1998. As of
November 9, 2006, the spot price was $61.16. Annual daily contract
volume on the NYMEX from 2001 through October 2006 was: 49,028;
182,718; 181,748; 212,382; 237,651; and 298,734, respectively.
Heating Oil. The Exchange states that 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 contract, listed and traded on NYMEX, trades in units of 42,000
gallons (1,000 barrels) and is 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
October 2006, ranged from a high of $215.85 in September 2006 to a low
of $28.50 in February 1999. As of November 9, 2006, the spot price was
$169.31. Annual daily contract volume on the NYMEX from 2001 through
October 2006 was: 41,710; 42,781; 46,327; 51,745; 52,333; and 60,024,
respectively.
Gasoline. The Exchange states that gasoline is the largest single
volume refined product sold in the U.S. and accounts for almost half of
national oil
[[Page 10269]]
consumption. The gasoline Futures Contract, listed and traded on the
NYMEX, trades in units of 42,000 gallons (1,000 barrels) and is 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 price of gasoline during the period January 1995 through
October 2006, ranged from a high of $2.70 in September 2006 to a low of
$0.3258 in December 1998. As of November 9, 2006, the spot price was
$1.71. Annual daily contract volume on the NYMEX from 2001 through
October 2006 was: 38,033; 43,919; 44,688; 51,315; 52,456; and 44,996,
respectively.
Futures Regulation
The Exchange states that the Commodity Exchange Act (``CEA'')
governs the regulation of commodity interest transactions, markets, and
intermediaries. The CEA, as amended by the Commodity Futures
Modernization Act of 2000, 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 reviews and
inspections of the futures exchanges' enforcement programs.
The Exchange states that 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.
Non-U.S. futures exchanges differ in certain respects from their
U.S. counterparts. 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, 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.
The CFTC and U.S. designated contract markets have established
accountability levels and position limits on the maximum net long or
net short Futures Contracts 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
accountability levels and 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.
The Exchange states that most U.S. futures exchanges limit the
amount of fluctuation in some futures contract or options on futures
contract prices during a single trading period. 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 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 option
on a futures contract, no trades may be made at a price beyond the
limit.
The Exchange states that most 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.
A portion of USNG's assets may be employed to enter into OTC
transactions based on natural gas, oil, and other petroleum-based
fuels. 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 center and
investment banks and other institutions. In connection with the trading
of OTC instruments, USNG will not receive the protection of 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.
Structure and Regulation of USNG
USNG, a Delaware limited partnership formed in September 2006, is a
commodity pool that will invest in Natural Gas Interests.\9\ It is
operated by Victoria Bay, a single member Delaware limited liability
company, which is wholly owned by Wainwright Holdings, Inc. The General
Partner is registered as a commodity pool operator (``CPO'') with the
CFTC and is a member of the National Futures Association (the ``NFA'').
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\9\ USNG is not an investment company as defined in Section 3(a)
of the Investment Company Act of 1940.
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Information regarding USNG 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 USNG, are included in the
registration statement regarding the offering of the Units filed with
the Commission under the Securities Act of 1933.\10\
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\10\ See Form S-1 filed with the Commission on October 6, 2006
(File No. 333-137871).
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Clearing Broker. A CFTC-registered futures commission merchant
(``FCM'') will execute and clear USNG's futures contract transactions,
hold the margin related to its Futures Contracts investments and
perform certain administrative services for USNG (the ``Clearing
Broker''). USNG may use other FCMs as its investments increase or as
may be required to trade particular Natural Gas Interests.
Administrator and Custodian. Under separate agreements with USNG,
Brown Brothers Harriman & Co. will serve as USNG's administrator,
registrar, transfer agent, and custodian (the ``Administrator'' or
``Custodian''). The Administrator will perform or supervise the
performance of services necessary for the operation and administration
of USNG. These services include, but are not limited to, investment
accounting, financial reporting, broker and trader reconciliation,
calculation of the NAV, and valuation of Treasuries and cash
equivalents used to purchase or redeem Units and other USNG assets or
liabilities. As Custodian, it: (i) Will receive payments from
purchasers of Creation Baskets; (ii) will make
[[Page 10270]]
payments to Sellers for Redemption Baskets, as described below; and
(iii) will hold the cash, cash equivalents, and Treasuries of USNG, as
well as collateral posted by USNG's derivatives counterparties, and
will make transfers of margin and collateral with respect to USNG's
investments to and from its FCMs or counterparties.
Marketing Agent. A registered broker-dealer will be the marketing
agent for USNG (``Marketing Agent''). The Marketing Agent, on behalf of
USNG, 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'').
Investment Strategy
USNG will pursue its investment objective by investing its assets
in Futures Contracts and Other Natural Gas Related Investments 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. USNG will attempt to manage its investments so
that changes in percentage terms of a Unit's net asset value reflect
the changes in percentage terms of the price of natural gas delivered
at the Henry Hub, Louisiana as measured by the Benchmark Futures
Contract, that is the near month expiration contract, except when the
near month contract is within two weeks of expiration, in which case it
will invest in the next expiration month. In connection with tracking
the price of the Benchmark Futures Contract, the General Partner will
endeavor to place USNG's trades in Futures Contracts and Other Natural
Gas Related Investments and otherwise manage USNG's investments so that
``A'' will be within 10 percent of ``B'', where:
``A'' is the average daily change in USNG's NAV for any
period of 30 successive valuation days, i.e., any day as of which USNG
calculates its NAV; and
``B'' is the average daily change in the price of the
Benchmark Futures Contract over the same period.
The Benchmark Futures Contract will be changed or ``rolled'' from
the near expiration month contract to the next month expiration ratably
over a four (4) day period. The changes in the Benchmark Futures
Contract will occur two (2) weeks prior to the expiration of the
nearest contract month. Thereafter, the calculation of the movement in
the Benchmark Futures Contract will be based solely on the next month
expiration contract.
The Exchange believes that market arbitrage opportunities should
cause USNG's Unit price to closely track USNG's per Unit NAV which is
targeted at the current Benchmark Futures Contract.
Investments. USNG believes that it will be able to use a
combination of Futures Contracts and Other Natural Gas Related
Investments to manage the portfolio to achieve its investment
objective. USNG further anticipates that the exact mix of Futures
Contracts and Other Natural Gas Related Investments held by the
portfolio will vary over time depending on, among over things, the
amount of invested assets in the portfolio, price movements of natural
gas, the rules and regulations of the various futures and commodities
exchanges and trading platforms that deal in Natural Gas Interests, and
innovations in the Natural Gas Interests' marketplace including both
the creation of new Natural Gas Interest investment vehicles, and the
creation of new trading venues that trade in Natural Gas Interests.
Futures Contracts. The principal Natural Gas Interests to be
invested in by USNG are Futures Contracts. USNG initially expects to
purchase the Benchmark Futures Contract. USNG may also invest in
Futures Contracts in crude oil, heating oil, gasoline, and other
petroleum-based fuels that are traded on the NYMEX, ICE Futures or
other U.S. and foreign exchanges.
The Benchmark Futures Contract has historically closely tracked the
investment objective of USNG over both the short-term, medium-term, and
the long-term. For that reason, USNG anticipates making significant
investments in the Benchmark Futures Contract. The Exchange notes that
the General Partner states that other Futures Contracts have also
tended to track the investment objective of USNG, though not as closely
as the Benchmark Futures Contract.
Other Natural Gas Related Investments. USNG may also purchase Other
Natural Gas-Related Investments such as cash-settled options on Futures
Contracts, forward contracts for natural gas, and over-the-counter
transactions that are based on the price of natural gas, oil and other
petroleum-based fuels, Futures Contracts, and indices based on the
foregoing. Option contracts offer investors and hedgers another vehicle
for managing exposure to the natural gas market. USNG may purchase
options on natural gas Futures Contracts on the principal commodities
and futures exchanges in pursuing its investment objective.
The Exchange states that in addition to these listed options, there
also exists an active OTC market in derivatives linked to natural gas.
These OTC derivative transactions are privately-negotiated agreements
between two (2) parties. Unlike 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 OTC contracts contain fairly generic terms and conditions and
are available from a wide range of participants, while other OTC
contracts have highly customized terms and conditions and are not as
widely available. Many OTC contracts are cash-settled forwards for the
future delivery of natural gas or petroleum-based fuels that have terms
similar to the 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 natural gas as determined by the spot,
forward or futures markets. USNG may enter into OTC derivative
contracts whose value will be tied to changes in the difference between
the natural gas spot price, the price of Futures Contracts traded on
NYMEX and the prices of non-NYMEX Futures Contracts that may be
invested in by USNG.
Counterparty Procedures. To protect itself from the credit risk
that arises in connection with such contracts, USNG 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 USNG's exposure. 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 the natural gas commodities markets,
may also be counterparties. 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 USNG 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.
USNG anticipates that the use of Other Natural Gas Related
Investments
[[Page 10271]]
together with its investments in Futures Contracts will produce price
and total return results that closely track the investment objective of
USNG.
Cash, Cash Equivalents, and Treasuries. USNG will invest virtually
all of its assets not invested in Natural Gas Interests, in cash, cash
equivalents, and Treasuries with a remaining maturity of two years or
less. The cash, cash equivalents, and Treasuries will be available to
be used to meet USNG's current or potential margin and collateral
requirements with respect to its investments in Natural Gas Interests.
USNG will not use cash, cash equivalents, and Treasuries as margin for
new investments unless it has a sufficient amount of cash, cash
equivalents, and Treasuries to meet the margin or collateral
requirements that may arise due to changes in the value of its
currently held Natural Gas Interests. Other than in connection with a
redemption of Units, USNG does not intend to distribute cash or
property to its Unit holders. Interest earned on cash, cash
equivalents, and Treasuries held by USNG 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 Accountability Levels and Position Limits. The CFTC and
U.S. designated contract markets such as the NYMEX have established
accountability levels and position limits on the maximum net long or
net short Futures Contracts that any person or group of persons under
common trading control (other than hedgers) may hold, own or control in
commodity interests. The Exchange states that accountability levels and
position limits are intended among other things, to prevent a corner or
squeeze on a market or undue influence on prices by any single trader
or group of traders. The net position is the difference between an
individual or firm's open long contracts and open short contracts in
any one commodity.
The Exchange states that most U.S. futures exchanges also limit the
amount of fluctuation in the prices of some futures contracts or
options on futures contracts during a single trading day. 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 an option 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 option on a futures contract, no trades may be made at a
price beyond the limit.
The accountability levels for the Benchmark Futures Contract and
other Futures Contracts traded on NYMEX are not a fixed ceiling, but
rather a threshold above which the NYMEX may exercise greater scrutiny
and control over an investor's positions. The current accountability
level for the Benchmark Futures Contract is 12,000 contracts. If USNG
exceeds this accountability level for the Benchmark Futures Contract,
NYMEX will monitor USNG's exposure and ask for further information on
USNG's activities including the total size of all positions, investment
and trading strategy, and the extent of USNG's liquidity resources. If
deemed necessary by NYMEX, it could also order USNG to reduce its
position back to the accountability level.
If NYMEX orders USNG to reduce its position back to the
accountability level, or to an accountability level that NYMEX deems
appropriate for USNG, such an accountability level may impact the mix
of investments in Natural Gas Interests made by USNG. To illustrate,
assume that the Benchmark Futures Contract and the unit price of USNG
are each $10, and that NYMEX has determined that USNG may not own more
than 12,000 contracts. In such case, USNG could invest up to $1.2
billion of its daily net assets in the Benchmark Futures Contract
(i.e., $10 per contract multiplied by 10,000 (a Benchmark Futures
Contract is a contract for 10,000 million British Thermal Units)
multiplied by 12,000 contracts) before reaching the accountability
level imposed by the NYMEX. Once the daily net assets of the portfolio
exceed $1.2 billion in the Benchmark Futures Contract, the portfolio
may not be able to make any further investments in the Benchmark
Futures Contract, depending on whether the NYMEX imposes limits. If
NYMEX does impose limits at the $1.2 billion level (or another level),
USNG anticipates that it will invest the majority of its assets above
that level in a mix of other Futures Contracts or Other Natural Gas-
Related Investments.
The Exchange states that in addition to accountability levels,
NYMEX imposes position limits on contracts held in the last few days of
trading in the near month contract. It is unlikely that USNG will run
up against such position limits because USNG's investment strategy is
to exit from the near month contract over a four day period beginning
two weeks from expiration of the contract.
The Markets for USNG's Units
There will be two markets for investors to purchase and sell Units.
New issuances of the Units will be made only in baskets of 100,000
Units or multiples thereof (a ``Basket''). SNG will issue and redeem
Baskets of the Units on a continuous basis, by or through participants
who have each entered into an authorized purchaser agreement
(``Authorized Purchaser Agreement'' and each such participant, an
``Authorized Purchaser'') \11\ with the General Partner, at the NAV per
Unit next determined after an order to purchase the Units in a Basket
is received in proper form. Baskets may be issued and redeemed on any
``business day'' (defined as any day other than a day on which the
Amex, the NYMEX or the New York Stock Exchange is closed for regular
trading) through the Marketing Agent in exchange for cash and/or
Treasuries, which the Custodian receives from Authorized Purchasers or
transfers to Authorized Purchasers, in each case on behalf of USNG.
Baskets are then separable upon issuance into identical Units that will
be listed and traded on the Exchange.\12\
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\11\ An ``Authorized Purchaser'' is a person, who at the time of
submitting to the Marketing Agent an order to create or redeem one
or more Baskets: (i) Is a registered broker-dealer or other market
participants, such as banks and other financial institutions, that
are exempt from broker-dealer registration; (ii) is a DTC
Participant; and (iii) has in effect a valid Authorized Participant
Agreement.
\12\ The Exchange expects that the number of outstanding Units
will increase and decrease as a result of creations and redemptions
of Baskets.
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The Units will thereafter be traded on the Exchange similar to
other equity securities. Units will be registered in book-entry form
through DTC. Trading in the Units on the Exchange will be effected
until 4:15 p.m. Eastern time (``ET'') each business day. The minimum
trading increment for such units will be $.01.
Each Authorized Purchaser, and each distributor offering and
selling newly issued Units as part of the distribution of such Units,
is required to comply with the prospectus delivery and disclosure
requirements of the Securities Act of 1933, as well as the requirements
of the CEA including, the requirement that prospective investors
provide an acknowledgement of receipt of such disclosure materials
prior to the payment for any newly issued Units.
Calculation of the Basket Amount. Baskets will be issued in
exchange for Treasuries and/or cash in an amount equal to the NAV per
Unit times 100,000 Units (the ``Basket Amount''). Baskets will be
delivered by the Marketing Agent to each Authorized Purchaser only
after execution of the Authorized Purchaser Agreement. Units in a
Basket are issued and redeemed in accordance with the Authorized
[[Page 10272]]
Purchaser Agreement. Authorized Purchasers that wish to purchase a
Basket must transfer the Basket Amount, for each Basket purchased, to
the Custodian (the ``Deposit Amount''). Authorized Purchasers that wish
to redeem a Basket will receive an amount of Treasuries and/or cash in
exchange for each Basket surrendered in an amount equal to the NAV per
Basket (the ``Redemption Amount'').
On each business day, the Administrator will make available
immediately prior to the opening of trading on the Exchange, the Basket
Amount for the creation of a Basket based on the prior day's NAV. The
Exchange will disseminate at least every 15 seconds throughout the
trading day, via the facilities of the Consolidated Tape Association
(``CTA''), an amount representing, on a per Unit basis, the current
indicative value of the Basket Amount (see ``Indicative Partnership
Value'' below). Shortly after 4 p.m. ET, the Administrator will
determine the NAV for USNG as described below. At or about 4 p.m. ET on
each business day, the Administrator will determine the Basket Amount
for orders placed by Authorized Purchasers received before 12 p.m. ET
that day. Because orders to purchase and/or redeem Baskets must be
placed by 12 p.m. ET, but the Basket Amount will not be determined
until shortly after 4 p.m. ET, on the date the purchase order or
redemption order, as applicable, is received, Authorized Participants
will not know the total payment required to create or redeem a Basket,
as applicable, at the time they submit such irrevocable purchase and/or
redemption order. This is similar to exchange-traded funds and mutual
funds. USNG's registration statement discloses that NAV and the Basket
Amount could rise and fall substantially between the time an
irrevocable purchase order and/or redemption order is submitted and the
time the Basket Amount is determined.
Shortly after 4 p.m. ET on each business day, the Administrator,
Amex and the General Partner will disseminate the NAV for the Units and
the Basket Amount (for orders placed during the day). The Basket Amount
and the NAV are communicated by the Administrator to all Authorized
Purchasers via facsimile or electronic mail message. The Amex will also
disclose the NAV and Basket Amount on its Web site at https://
www.amex.com. The Basket Amount necessary for the creation of a Basket
will change from day to day. On each day that the Amex is open for
regular trading, the Administrator will adjust the Deposit Amount as
appropriate to reflect the prior day's Partnership NAV and accrued
expenses. The Administrator will then determine the Deposit Amount for
a given business day.\13\
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\13\ The Exchange will obtain a representation from USNG that
its NAV per Unit will be calculated daily and made available to all
market participants at the same time.
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Calculation of USNG's NAV. The Administrator will calculate NAV as
follows: (1) Determine the current value of USNG assets and (2)
subtract the liabilities of USNG. The NAV will be calculated shortly
after the close of trading on the Exchange using the settlement value
\14\ of Futures Contracts traded on the NYMEX as of the close of open-
outcry trading on the NYMEX at 2:30 p.m. ET, and for the value of other
Natural Gas Interests, Treasuries and cash equivalents, the value of
such investments as of the earlier of 4 p.m. New York time or the close
of trading on the New York Stock Exchange. The NAV is calculated by
including any unrealized profit or loss on Futures Contracts and Other
Natural Gas Related Investments and any other credit or debit accruing
to USNG but unpaid or not received by USNG. The NAV is then used to
compute all fees (including the management and administrative fees)
that are calculated from the value of Partnership assets. The
Administrator will calculate the NAV per Unit by dividing the NAV by
the number of Units outstanding.
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\14\ See Rule 6.52A of the NYMEX Rulebook.
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When calculating NAV for USNG, the Administrator will value Futures
Contracts based on the closing settlement prices quoted on the relevant
commodities and futures exchange and obtained from various market data
vendors such as Bloomberg or Reuters. The value of the Other Natural
Gas Related Investments for purposes of determining the NAV will be
based upon the determination of the Administrator as to the fair market
value. Certain types of Other Natural Gas Related Investments, such as
listed options on Futures Contracts, have closing prices that are
available from the exchange upon which they are traded or from various
market data vendors. Other Natural Gas Related Investments will be
valued based on the last sale price on the exchange or market where
traded. If a contract fails to trade, the value shall be the most
recent bid quotation from the third party source. Some types of Other
Natural Gas Related Investments, such as natural gas forward contracts
do not trade on established exchanges, but typically have prices that
are widely available from third-party sources. The Administrator may
make use of such third-party sources in calculating a fair market value
of these Other Natural Gas Related Investments.
Certain types of Other Natural Gas Related Investments, such as OTC
derivative contracts such as ``swaps'' also do not have established
exchanges upon which they trade and may not have readily available
price quotes from third parties. Swaps and other similar derivative or
contractual-type instruments will be first valued at a price provided
by a single broker or dealer, typically the counterparty. If no such
price is available, the contract will be valued at a price at which the
counterparty to such contract could repurchase the instrument or
terminate the contract. In determining the fair market value of such
derivative contracts, the Administrator may make use of quotes from
other providers of similar derivatives. If these are not available, the
Administrator may calculate a fair market value of the derivative
contract based on the terms of the contract and the movement of the
underlying price factors of the contract.
Calculation and Payment of the Deposit Amount. The Deposit Amount
of Treasuries and/or cash will be in the same proportion to the total
net assets of USNG as the number of Units to be created is in
proportion to the total number of Units outstanding as of the date the
purchase order is accepted. The General Partner will determine the
requirements for the Treasuries that may be included in the Deposit
Amount and will disseminate these requirements at the start of each
business day. The amount of cash that is required is the difference
between the aggregate market value of the Treasuries required to be
included in the Deposit Amount as of 4 p.m. ET on the date of purchase
and the total required deposit.
All purchase orders must be received by the Marketing Agent by 12
p.m. ET for consideration on that business day. Delivery of the Deposit
Amount, i.e., Treasuries and/or cash, to the Administrator must occur
by the third business day following the purchase order date (T+3).\15\
Thus, the General Partner will disseminate shortly after 4 p.m. ET on
the date the purchase order was properly submitted, the amount of
Treasuries and/or cash to be deposited with the Custodian for each
Basket.
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\15\ Authorized Purchasers are required to pay a transaction fee
of $1,000 for each order to create one or more Baskets.
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Calculation and Payment of the Redemption Amount. The Units will
not be individually redeemable but will only be redeemable in Baskets.
To redeem, an Authorized Purchaser will
[[Page 10273]]
be required to accumulate enough Units to constitute a Basket (i.e.,
100,000 Units). An Authorized Purchaser redeeming a Basket will receive
the Redemption Amount. Upon the surrender of the Units and payment of
applicable redemption transaction fee,\16\ taxes or charges, the
Custodian will deliver to the redeeming Authorized Purchaser the
Redemption Amount. The Redemption Amount of Treasuries and/or cash will
be in the same proportion to the total net assets of USNG as the number
of Units to be redeemed is in proportion to the total number of Units
outstanding as of the date the redemption order is accepted. The
General Partner will determine the Treasuries to be included in the
Redemption Amount. The amount of cash that is required is the
difference between the aggregate market value of the Treasuries
required to be included in the Redemption Amount as of 4 p.m. ET on the
date of redemption and the total Redemption Amount. All redemption
orders must be received by the Marketing Agent by 12 p.m. ET on the
business day redemption is requested and are irrevocable. Delivery of
the Basket to be redeemed to the Custodian and payment of Redemption
Amount will occur by the third business day following the redemption
order date (T+3).
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\16\ Id.
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Arbitrage
The Exchange believes that the Units will not trade at a material
discount or premium to a Unit's NAV based on potential arbitrage
opportunities. Due to the fact that the Units can be created and
redeemed only in Baskets at NAV, the Exchange submits that arbitrage
opportunities should provide a mechanism to mitigate the effect of any
premiums or discounts that may exist from time to time.
Dissemination and Availability of Information
Futures Contracts. The daily settlement prices for the NYMEX traded
Futures Contracts held by USNG are publicly available on the NYMEX
website at https://www.nymex.com. The Exchange on its website at https://
www.amex.com will also include a hyperlink to the NYMEX website for the
purpose of disclosing futures contract pricing. In addition, various
market data vendors and news publications publish futures prices and
related data. The Exchange represents that quote and last sale
information for the Futures Contracts are widely disseminated through a
variety of market data vendors worldwide, including Bloomberg and
Reuters. In addition, the Exchange further represents that real-time
futures data is available by subscription from Reuters and Bloomberg.
The NYMEX also provides delayed futures information on current and past
trading sessions and market news free of charge on its Web site. The
specific contract specifications for the Futures Contracts are also
available on the NYMEX website and the ICE Futures Web site at https://
www.icefutures.com.
USNG Units. The Web site for the Exchange at https://www.amex.com,
which is publicly accessible at no charge, will contain the following
information: (1) The prior business day's NAV and the reported closing
price; (2) the mid-point of the bid-ask price \17\ in relation to the
NAV as of the time the NAV is calculated (the ``Bid-Ask Price''); (3)
calculation of the premium or discount of such price against such NAV;
(4) data in chart form displaying the frequency distribution of
discounts and premiums of the Bid-Ask Price against the NAV, within
appropriate ranges for each of the four (4) previous calendar quarters;
(5) the prospectus and the most recent periodic reports filed with the
SEC or required by the CFTC; and (6) other applicable quantitative
information.
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\17\ The Bid-Ask Price of Units is determined using the highest
bid and lowest offer as of the time of calculation of the NAV.
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Portfolio Disclosure. USNG's total portfolio composition will be
disclosed, each business day that the Amex is open for trading, on
USNG's website at https://www.unitedstatesnaturalgasfund.com. USNG
expects that website disclosure of portfolio holdings will be made
daily and will include, as applicable, the name and value of each
Natural Gas Interest, the specific types of Natural Gas Interests and
characteristics of such Natural Gas Interests, Treasuries, and amount
of cash and cash equivalents held in the portfolio of USNG. The public
Web site disclosure of the portfolio composition of USNG will coincide
with the disclosure by the Administrator on each business day of the
NAV for the Units and the Basket Amount (for orders placed during the
day). Therefore, the same portfolio information will be provided on the
public Web site as well as in the facsimile or electronic mail message
to Authorized Purchasers containing the NAV and Basket Amount (``Daily
Dissemination''). The format of the public Web site disclosure and the
Daily Dissemination will differ because the public Web site will list
all portfolio holdings while the Daily Dissemination will provide the
portfolio holdings in a format appropriate for Authorized Purchasers,
i.e., the exact components of a Creation Unit.
As described above, the NAV for USNG will be calculated and
disseminated daily.\18\ The Amex also intends to disseminate for USNG
on a daily basis by means of CTA/CQ High Speed Lines information with
respect to the Indicative Partnership Value (as discussed below),
recent NAV, Units outstanding, the Basket Amount, and the Deposit
Amount. The Exchange will also make available on its Web site daily
trading volume, closing prices, and the NAV. The closing price and
settlement prices of the Futures Contracts held by USNG are also
readily available from the NYMEX, automated quotation systems,
published or other public sources, or on-line information services such
as Bloomberg or Reuters. In addition, the Exchange will provide a
hyperlink on its Web site at https://www.amex.com to USNG's Web site.
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\18\ The Exchange will obtain a representation from USNG that
its NAV per Unit will be calculated daily and made available to all
market participants at the same time.
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Indicative Partnership Value. In order to provide updated
information relating to USNG for use by investors, professionals, and
persons wishing to create or redeem the Units, the Exchange will
disseminate through the facilities of the CTA an updated Indicative
Partnership Value (the ``Indicative Partnership Value''). The
Indicative Partnership Value will be disseminated on a per Unit basis
at least every fifteen seconds during the regular Amex trading hours of
9:30 a.m. to 4:15 p.m. ET. The Indicative Partnership Value will be
calculated based on the Treasuries and cash required for creations and
redemptions (i.e., NAV per limit x 100,000) adjusted to reflect the
price changes of the Benchmark Futures Contract.
The Indicative Partnership Value will not reflect price changes to
the price of the Benchmark Futures Contract between the close of open-
outcry trading of such contract on the NYMEX at 2:30 p.m. ET and the
open of trading on the NYMEX ACCESS market at 3:15 p.m. ET. The
Indicative Partnership Value after 3:15 p.m. ET \19\ will reflect
changes to the Benchmark Futures Contract as provided for through NYMEX
ACCESS. The value of a Unit
[[Page 10274]]
may accordingly be influenced by non-concurrent trading hours between
the Amex and NYMEX. While the Units will trade on the Amex from 9:30
a.m. to 4:15 p.m. ET, the Benchmark Futures Contract will trade, in
open-outcry, on the NYMEX from 10 a.m. ET to 2:30 pm ET and NYMEX
ACCESS from 3:15 p.m. ET through the following morning 9:30 a.m. ET.
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\19\ NYMEX ACCESS[supreg], an electronic trading system, is open
for price discovery on the Benchmark Futures Contract each Monday
through Thursday at 3:15 p.m. ET through the following morning at
9:30 a.m. E.T., and from 7 p.m. Sunday night until Monday morning
9:30 a.m. E.T.
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While the NYMEX is open for trading, the Indicative Partnership
Value can be expected to closely approximate the value per unit of the
Basket Amount. However, during Amex trading hours when the Futures
Contracts have ceased trading, spreads and resulting premiums or
discounts may widen, and therefore, increase the difference between the
price of the Units and the NAV of the Units. The Exchange submits that
the Indicative Partnership Value on a per Unit basis disseminated
during Amex trading hours should not be viewed as a real-time update of
the NAV, which is calculated only once a day. The Exchange believes
that dissemination of the Indicative Partnership Value based on the
cash amount required for a Basket provides additional information that
is not otherwise available to the public and is useful to professionals
and investors in connection with the Units trading on the Exchange or
the creation or redemption of the Units.
Partnership Termination Events
USNG will continue in effect from the date of its formation in
perpetuity, unless sooner terminated upon the occurrence of any one or
more of the following circumstances: (1) The death, adjudication of
incompetence, bankruptcy, dissolution, withdrawal, or removal of a
general partner who is the sole remaining general partner, unless a
majority in interest of limited partners within 90 days after such
event elects to continue USNG and appoints a successor general partner;
or (2) the affirmative vote to terminate USNG by a majority in interest
of the limited partners subject to certain conditions.
Upon termination of USNG, holders of the Units will surrender their
Units and the assets of USNG shall be distributed to the Unit holders
pro rata in accordance with the value of the Units, in cash or in kind,
as determined by the General Partner.
Disclosure
The Exchange, in an Information Circular (described below) to
Exchange members and member organizations, will inform members and
member organizations, prior to the commencement of trading, of the
prospectus delivery requirements applicable to USNG. The Exchange notes
that investors purchasing Units directly from USNG (by delivery of the
Deposit Amount) will receive a prospectus. Amex members purchasing
Units from USNG for resale to investors will deliver a prospectus to
such investors.
Purchase and Redemptions in Baskets
In the Information Circular, members and member organizations will
be informed that procedures for purchases and redemptions of Units in
Baskets are described in the Prospectus and that Units are not
individually redeemable but are redeemable only in Baskets or multiples
thereof.
Listing and Trading Rules
USNG will be subject to the criteria in Rule 1502 for initial and
continued listing of the Units. The Exchange will require a minimum of
100,000 Units to be outstanding at the start of trading. The Exchange
expects that the initial price of a Unit will be $50.00.\20\ The
Exchange believes that the anticipated minimum number of Units
outstanding at the start of trading is sufficient to provide adequate
market liquidity and to further USNG's objective to seek to provide a
simple and cost effective means of accessing the commodity futures
markets. The Exchange represents that it prohibits the initial and/or
continued listing of any security that is not in compliance with Rule
10A-3 under the Act.\21\ The Exchange will file a proposed rule change
with the Commission pursuant to Rule 19b-4 under the 1934 Act seeking
approval to continue trading the Units and, unless approved, the
Exchange will commence delisting the Units if more than a temporary
disruption exists in connection with the pricing of the Benchmark
Futures Contract or the calculation or dissemination of the NAV is more
than temporarily disrupted, or the NAV is not disseminated to all
market participants at the same time.
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\20\ USNG expects that the initial Authorized Purchaser will
purchase the initial Basket of 100,000 Units at the initial offering
price per Unit of $50.00. On the date of the public offering and
thereafter, USNG will continuously issue Units in Baskets of 100,000
Units to Authorized Purchasers at NAV.
\21\ See 17 CFR 240.10A-3.
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The Amex original listing fee applicable to the listing of USNG is
$5,000. In addition, the annual listing fee applicable under Section
141 of the Amex Company Guide will be based upon the year-end aggregate
number of Units in all series of USNG outstanding at the end of each
calendar year.
Amex Rule 154, Commentary .04(c) provides that stop and stop limit
orders to buy or sell a security (other than an option, which is
covered by Rule 950(f) and Commentary thereto) the price of which is
derivatively priced based upon another security or index of securities,
may with the prior approval of a Floor Official, be elected by a
quotation, as set forth in Commentary .04(c) (i-v). The Exchange has
designated the Units as eligible for this treatment.\22\
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\22\ See Securities Exchange Act Release No. 29063 (April 10,
1991), 56 FR 15652 (April 17, 1991) (SR-Amex 90-31) at note 9,
regarding the Exchange's designation of equity derivative securities
as eligible for such treatment under Amex Rule 154, Commentary
.04(c).
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The Units will be deemed ``Eligible Securities'', as defined in
Amex Rule 230, for purposes of the Intermarket Trading System Plan and
therefore will be subject to the trade through provisions of Amex Rule
236, which requires that Amex members avoid initiating trade-throughs
for ITS securities.
Specialist transactions of the Units made in connection with the
creation and redemption of Units will not be subject to the
prohibitions of Amex Rule 190.\23\ The Units will not be subject to the
short sale rule, Rule 10a-1 under the Act, pursuant to no-action relief
granted.\24\ If exemptive or no-action relief is provided, the Exchange
will issue a notice detailing the terms of the exemption or relief. The
Units will generally be subject to the Exchange's stabilization rule,
Amex Rule 170, except that specialists may buy on ``plus ticks'' and
sell on ``minus ticks,'' in order to bring the Units into parity with
the underlying commodity or commodities and/or futures contract price.
Proposed Commentary .01 to Amex Rule 1503 sets forth this limited
exception to Rule 170.
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\23\ See Commentary .05 to Amex Rule 190.
\24\ See letter to George T. Simon, Esq. Foley & Lardner, LLP,
from Racquel L. Russell, Branch Chief, Office of Trading Practices
and Processing, Commission, dated June 21, 2006.
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The Exchange submits that its surveillance procedures are adequate
to deter and detect violations of Exchange rules relating to the
trading of the Units. The surveillance procedures for the Units will be
similar to those used for units of the United States Oil Fund, LP as
well as other commodity-based trusts, trust issued receipts (``TIR''s)
and exchange-traded funds. In addition, the surveillance procedures
will incorporate and rely upon existing Amex surveillance procedures
governing options and equities.
Amex Rule 1503 relating to certain specialist prohibitions will
address potential conflicts of interest in
[[Page 10275]]
connection with acting as a specialist in the Units. Specifically, Rule
1503 provides that the prohibitions in Rule 175(c) apply to a
specialist in the Units so that the specialist or affiliated person may
not act or function as a market-maker in an underlying asset, related
futures contract or option or any other related derivative. An
affiliated person of the specialist consistent with Rule 193 may be
afforded an exemption to act in a market making capacity, other than as
a specialist in the Units on another market center, in the underlying
asset, related futures or options or any other related derivative. In
particular, Amex Rule 1503 provides that an approved person of an
equity specialist that has established and obtained Exchange approval
for procedures restricting the flow of material, non-public market
information between itself and the specialist member organization, and
any member, officer, or employee associated therewith, may act in a
market making capacity, other than as a specialist in the Units on
another market center, in the underlying asset or commodity, related
futures or options on futures, or any other related derivatives.
Amex Rule 1504 will also ensure that specialists handling the Units
provide the Exchange with all the necessary information relating to
their trading in physical assets or commodities, related futures
contracts and options thereon or any other derivative. As a general
matter, the Exchange has regulatory jurisdiction over its members,
member organizations and approved persons of a member organization. The
Exchange also has regulatory jurisdiction over any person or entity
controlling a member organization as well as a subsidiary or affiliate
of a member organization that is in the securities business. A
subsidiary or affiliate of a member organization that does business
only in commodities or futures contracts would not be subject to
Exchange jurisdiction, but the Exchange could obtain information
regarding the activities of such subsidiary or affiliate through
surveillance sharing agreements with regulatory organizations of which
such subsidiary or affiliate is a member.
Trading Halts
If the Indicative Partnership Value is not being disseminated by
one or more major market data vendors, the Exchange may halt trading
during the day in which the interruption to the dissemination of such
Indicative Partnership Value occurs. If the interruption to the
dissemination of an Indicative Partnership Value persists past the
trading day in which it occurred, the Exchange will halt trading no
later than the beginning of the trading day following the interruption.
Prior to the commencement of trading, the Exchange will issue an
Information Circular to members informing them of, among other things,
Exchange policies regarding trading halts in the Units. First, the
Information Circular will advise that trading will be halted in the
event the market volatility trading halt parameters set forth in Amex
Rule 117 have been reached. Second, the Information Circular will
advise that, in addition to the parameters set forth in Rule 117, the
Exchange will halt trading in the Units if trading in the underlying
Futures Contract(s) is halted or suspended. Third, with respect to a
halt in trading that is not specified above, the Exchange may also
consider other relevant factors and the existence of unusual conditions
or circumstances that may be detrimental to the maintenance of a fair
and orderly market.
Suitability
The Information Circular will inform members and member
organizations of the characteristics of
