Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change To List and Trade Shares of the United States Metals Index Fund, the United States Agriculture Index Fund and the United States Copper Index Fund Under NYSE Arca Equities Rule 8.200, 55956-55969 [2011-23035]

Download as PDF 55956 Federal Register / Vol. 76, No. 175 / Friday, September 9, 2011 / Notices Number SR–NASDAQ–2011–120 on the subject line. Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. SECURITIES AND EXCHANGE COMMISSION [Release No. 34–65249; File No. SR– NYSEArca–2011–63] Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change To List and Trade Shares of the United States Metals Index Fund, All submissions should refer to File the United States Agriculture Index Number SR–NASDAQ–2011–120. This Fund and the United States Copper file number should be included on the Index Fund Under NYSE Arca Equities subject line if e-mail is used. To help the Rule 8.200 Commission process and review your September 2, 2011. comments more efficiently, please use only one method. The Commission will Pursuant to Section 19(b)(1) of the post all comments on the Commission’s Securities Exchange Act of 1934 (the Internet Web site (https://www.sec.gov/ ‘‘Act’’) 1 and Rule 19b–4 thereunder,2 rules/sro.shtml). Copies of the notice is hereby given that, on August submission, all subsequent 19, 2011, NYSE Arca, Inc. (the amendments, all written statements ‘‘Exchange’’ or ‘‘NYSE Arca’’) filed with with respect to the proposed rule the Securities and Exchange change that are filed with the Commission (the ‘‘Commission’’) the Commission, and all written proposed rule change as described in communications relating to the Items I, II, and III below, which Items proposed rule change between the have been prepared by the Exchange. Commission and any person, other than The Commission is publishing this those that may be withheld from the notice to solicit comments on the public in accordance with the proposed rule change from interested provisions of 5 U.S.C. 552, will be persons. available for Web site viewing and I. Self-Regulatory Organization’s printing in the Commission’s Public Statement of the Terms of Substance of Reference Room, 100 F Street, NE., the Proposed Rule Change Washington, DC 20549, on official business days between the hours of 10 The Exchange proposes to list and a.m. and 3 p.m. Copies of the filing also trade shares of the United States Metals will be available for inspection and Index Fund (‘‘USMI’’), the United States copying at the principal office of the Agriculture Index Fund (‘‘USAI’’) and Exchange. All comments received will the United States Copper Index Fund be posted without change; the (‘‘USCUI’’) (together, the ‘‘Funds’’) Commission does not edit personal under NYSE Arca Equities Rule 8.200. identifying information from The text of the proposed rule change is submissions. You should submit only available at the Exchange, the information that you wish to make Commission’s Public Reference Room, available publicly. All submissions and https://www.nyse.com. should refer to File Number SR– II. Self-Regulatory Organization’s NASDAQ–2011–120 and should be Statement of the Purpose of, and submitted on or before September 30, Statutory Basis for, the Proposed Rule 2011. Change For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.6 Dated: September 1, 2011 Elizabeth M. Murphy Secretary mstockstill on DSK4VPTVN1PROD with NOTICES [FR Doc. 2011–23034 Filed 9–8–11; 8:45 am] BILLING CODE 8011–01–P In its filing with the Commission, the self-regulatory organization 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 those 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 parts of such statements. 1 15 6 17 CFR 200.30–3(a)(12). VerDate Mar<15>2010 16:58 Sep 08, 2011 2 17 Jkt 223001 PO 00000 U.S.C. 78s(b)(1). CFR 240.19b–4. Frm 00090 Fmt 4703 Sfmt 4703 A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose NYSE Arca Equities Rule 8.200, Commentary .02 permits the trading of Trust Issued Receipts either by listing or pursuant to unlisted trading privileges (‘‘UTP’’).3 The Exchange proposes to list and trade shares (‘‘Units’’) of the Funds pursuant to NYSE Arca Equities Rule 8.200. The Exchange notes that the Commission has previously approved the listing and trading of other issues of Trust Issued Receipts on the American Stock Exchange LLC,4 trading on NYSE Arca pursuant to unlisted trading privileges (‘‘UTP’’),5 and listing on NYSE Arca.6 Among these is the United States Commodity Index Fund, which, like the Funds, is a series of the United States Commodity Index Funds Trust (‘‘Trust’’).7 In addition, the Commission has approved the listing and trading of other exchange-traded fund-like products linked to the performance of underlying commodities.8 The Units represent beneficial ownership interests in the Funds, as described in the Registration Statement.9 The Funds are commodity 3 Commentary .02 to NYSE Arca Equities Rule 8.200 applies to Trust Issued Receipts that invest in ‘‘Financial Instruments.’’ The term ‘‘Financial Instruments,’’ as defined in Commentary .02(b)(4) to NYSE Arca Equities Rule 8.200, means any combination of investments, including cash; securities; options on securities and indices; futures contracts; options on futures contracts; forward contracts; equity caps, collars and floors; and swap agreements. 4 See, e.g., Securities Exchange Act Release No. 58161 (July 15, 2008), 73 FR 42380 (July 21, 2008) (SR–Amex–2008–39). 5 See, e.g., Securities Exchange Act Release No. 58163 (July 15, 2008), 73 FR 42391 (July 21, 2008) (SR–NYSEArca–2008–73). 6 See, e.g., Securities Exchange Act Release No. 58457 (September 3, 2008), 73 FR 52711 (September 10, 2008) (SR–NYSEArca–2008–91). 7 See Securities Exchange Act Release No. 62527 (July 19, 2010), 75 FR 43606 (July 26, 2010) (SR– NYSEArca–2010–44) (order approving listing on the Exchange of United States Commodity Index Fund). 8 See, e.g., Securities Exchange Act Release Nos. 57456 (March 7, 2008), 73 FR 13599 (March 13, 2008) (SR–NYSEArca–2007–91) (order granting accelerated approval for NYSE Arca listing the iShares GS Commodity Trusts); 59781 (April 17, 2009), 74 FR 18771 (April 24, 2009) (SR– NYSEArca–2009–28) (order granting accelerated approval for NYSE Arca listing the ETFS Silver Trust); 59895 (May 8, 2009), 74 FR 22993 (May 15, 2009) (SR–NYSEArca–2009–40) (order granting accelerated approval for NYSE Arca listing the ETFS Gold Trust); 61219 (December 22, 2009), 74 FR 68886 (December 29, 2009) (order approving listing on NYSE Arca of the ETFS Platinum Trust). 9 See the Funds’ registration statement on Form S–1 for the United States Commodity Index Funds Trust, dated November 24, 2010 (File No. 333– 170844) relating to the Funds (‘‘Registration E:\FR\FM\09SEN1.SGM 09SEN1 Federal Register / Vol. 76, No. 175 / Friday, September 9, 2011 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES pools that are series of the Trust, a Delaware statutory trust. The Funds are managed and controlled by United States Commodity Funds LLC (‘‘Sponsor’’). The Sponsor is a Delaware limited liability company that is registered as a commodity pool operator (‘‘CPO’’) with the Commodity Futures Trading Commission (‘‘CFTC’’) and is a member of the National Futures Association (‘‘NFA’’). United States Metals Index Fund (‘‘USMI’’) According to the Registration Statement, the investment objective of USMI is for the daily changes in percentage terms of its Units’ net asset value (‘‘NAV’’) to reflect the daily changes in percentage terms of the SummerHaven Dynamic Metals Index Total Return (the ‘‘Metals Index’’), less USMI’s expenses. The Metals Index is designed to reflect the performance of a diversified group of metals. The Metals Index is owned and maintained by SummerHaven Index Management, LLC (‘‘SummerHaven Indexing’’) and calculated and published by the Exchange. The Metals Index is a metal sector index designed to broadly represent industrial and precious metals while overweighting the components that are assessed to be in a low inventory state and underweighting the components assessed to be in a high inventory state. The Metals Index consists of six (6) base metals and four (4) precious metals. The base metals are aluminum, copper, zinc, nickel, tin, and lead. The precious metals are gold, silver, platinum, and palladium. Each metal is assigned a base weight based on an assessment of market liquidity and the metal’s overall economic importance. Academic research by Professors Gorton, Rouwenhorst and Hayashi has shown that commodities in relatively low inventory states tend to have higher returns than commodities in relatively high inventory states.10 Furthermore, relative inventory comparisons can be estimated by the price-based signals of momentum and basis. Momentum is the percentage price change in a commodity over the previous year. Basis is the annualized percentage difference between the nearest-to-maturity contract and the second nearest-to-maturity contract. Using these price-based signals, metals determined to be in low Statement’’). The discussion herein relating to the Trust and the Units is based, in part, on the Registration Statement. 10 See ‘‘The Fundamentals of Commodity Futures Returns,’’ Gorton, Rouwenhorst and Hayashi (September 2008), Yale International Center for Finance Working Paper No. 07–08. VerDate Mar<15>2010 16:58 Sep 08, 2011 Jkt 223001 inventory state will be weighted more heavily, and metals in high inventory state will be weighted less heavily during any given month. The Metals Index is rules-based and is rebalanced monthly based on observable price signals described above. In this context, the term ‘‘rules-based’’ is meant to indicate that the composition of the Metals Index in any given month will be determined by quantitative formulas relating to the prices of the futures contracts that relate to the commodities that are included in the Metals Index. Such formulas are not subject to adjustment based on other factors. Futures contracts for metals in the Metals Index that are traded on New York Mercantile Exchange (‘‘NYMEX’’), London Metal Exchange (‘‘LME’’), and Commodity Exchange, Inc. (‘‘COMEX’’) are collectively referred to herein as ‘‘Eligible Metals Futures Contracts.’’ The 10 Eligible Metals Futures Contracts that at any given time have been designated as a component of the Metals Index are referred to as the ‘‘Benchmark Component Metals Futures Contracts.’’ The relative weighting of the Benchmark Component Metals Futures Contracts will change on a monthly basis, based on quantitative formulas developed by SummerHaven Indexing relating to the prices of the Benchmark Component Metals Futures Contracts. The overall return on the Metals Index is generated by two components: (i) Uncollateralized returns from the Benchmark Component Metals Futures Contracts comprising the Metals Index, and (ii) a daily fixed income return reflecting the interest earned on a hypothetical 3-month U.S. Treasury Bill collateral portfolio, calculated using the weekly auction rate for the 3-Month U.S. Treasury Bill published by the U.S. Department of the Treasury. Information regarding the Metals Index methodology may also be accessed by the public from SummerHaven Indexing’s Web site at https://www.summerhavenindex.com. Because the Metals Index is comprised of actively traded contracts with scheduled expirations, it can be calculated only by reference to the prices of contracts for specified expiration, delivery or settlement periods, referred to as contract expirations. The contract expirations included in the Metals Index for each commodity during a given year are designated by SummerHaven Indexing, provided that each contract must be an active contract. An active contract for this purpose is a liquid, actively-traded contract expiration, as defined or identified by the relevant trading facility or, if no such definition or identification is provided by the relevant trading PO 00000 Frm 00091 Fmt 4703 Sfmt 4703 55957 facility, as defined by standard custom and practice in the industry. If a Futures Exchange 11 ceases trading in all contract expirations relating to a particular Benchmark Component Metals Futures Contract, SummerHaven Indexing may designate a replacement contract on the particular metal. The replacement contract must satisfy the eligibility criteria for inclusion in the Metals Index. To the extent practicable, the replacement will be effected during the next monthly review of the composition of the Metals Index. If that timing is not practicable, SummerHaven Indexing will determine the date of the replacement based on a number of factors, including the differences between the existing Benchmark Component Metals Futures Contract and the replacement contract with respect to contractual specifications and contract expirations. If a Benchmark Component Metals Futures Contract is eliminated and there is no replacement contract, the underlying metal will necessarily drop out of the Metals Index. USMI will seek to achieve its investment objective by investing to the fullest extent possible in Benchmark Component Metals Futures Contracts. Then, if constrained by regulatory requirements (as described below) or in view of market conditions (as described below), USMI will invest next in other Eligible Metals Futures Contracts based on the same metal as the futures contracts subject to such regulatory constraints or market conditions, and finally, to a lesser extent, in other exchange-traded futures contracts that are economically identical or substantially similar to the Benchmark Component Metals Futures Contracts if one or more other Eligible Metals Futures Contracts is not available. When USMI has invested to the fullest extent possible in exchange-traded futures contracts, USMI may then invest in other contracts and instruments based on the Benchmark Component Metals Futures Contracts or the metals included in the Metals Index, such as cash-settled options, forward contracts, cleared swap contracts and swap contracts other than cleared swap contracts. Other exchange-traded futures contracts that are economically identical or substantially similar to the Benchmark Component Metals Futures Contracts and other contracts and instruments based on the Benchmark Component Metals Futures Contracts, as 11 COMEX, NYMEX, LME, Kansas City Board of Trade (‘‘KCBT’’), ICE Futures (‘‘ICE Futures’’), Chicago Board of Trade (‘‘CBOT’’) and Chicago Mercantile Exchange (‘‘CME’’) are referred to, collectively, as the ‘‘Futures Exchanges.’’ E:\FR\FM\09SEN1.SGM 09SEN1 55958 Federal Register / Vol. 76, No. 175 / Friday, September 9, 2011 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES well as metals included in the Metals Index, are collectively referred to as ‘‘Other Metals-Related Investments,’’ and together with Benchmark Component Metals Futures Contracts and other Eligible Metals Futures Contracts, ‘‘Metals Interests.’’ Regulatory Requirements. As noted above, USMI may at times invest in other Eligible Metal Futures Contracts based on the same metal as the futures contracts subject to regulatory constraints (as described below), and then, to a lesser extent, in Other MetalsRelated Investments in order to comply with regulatory requirements. An example of such regulatory requirements would be if USMI is required by law or regulation, or by one of its regulators, including a Futures Exchange, to reduce its position in one or more Benchmark Component Metals Futures Contracts to the applicable position limit or to a specified accountability level for such contracts, USMI’s assets could be invested in one or more other Eligible Metal Futures Contracts. If one or more such Eligible Metal Futures Contracts were unavailable or economically impracticable, USMI could invest in Other Metals-Related Investments that are intended to replicate the return on the Metals Index or particular Benchmark Component Metals Futures Contracts. Another example would be if, because USMI’s assets were reaching higher levels, it exceeded position limits, accountability levels or other regulatory limits and, to avoid triggering such limits or levels, it invested in one or more other Eligible Metal Futures Contracts to the extent practicable and then in Other Metals-Related Investments. 12 When investing in Other MetalsRelated Investments, USMI will first invest in other exchange traded futures contracts that are economically identical or substantially similar to the Benchmark Component Metals Futures Contracts and then in cash-settled options, forward contracts, cleared swap contracts and swap contracts other than cleared swap contracts. 12 Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFTC has been tasked with implementing rules and regulations that are expected to impact position limits and visibility levels and other regulatory requirements that will be applicable to the Funds and their respective holdings. VerDate Mar<15>2010 16:58 Sep 08, 2011 Jkt 223001 Market Conditions. As also noted above, there may be market conditions that could cause USMI to invest in other Eligible Metal Futures Contracts that are based on the same metal as the futures contracts subject to such market conditions (as described below). One such type of market condition would be where demand for Benchmark Component Metals Futures Contracts exceeded supply and as a result USMI was able to obtain more favorable terms under other Eligible Metal Futures Contracts. An example of more favorable terms would be where the aggregate costs to USMI from investing in other Eligible Metal Futures Contracts (including actual or expected direct costs such as the costs to buy, hold, or sell such investments, as well as indirect costs such as opportunity costs) were less than the costs of investing in Benchmark Component Metal Futures Contracts. Only after USMI becomes subject to position limits in any Eligible Metal Futures Contracts will USMI invest in Other Metals-Related Investments to replicate exposure to the Eligible Metal Futures Contract that is position-limited. Generally, USMI will only invest in this manner in other Eligible Metal Futures Contracts or Other Metals-Related Investments if it results in materially more favorable terms, and if such investments result in a specific benefit for USMI or its shareholders, such as being able to more closely track its benchmark. USMI’s trading advisor is SummerHaven Investment Management, LLC (‘‘SummerHaven’’). The Sponsor expects to manage USMI’s investments directly, using the trading advisory services of SummerHaven for guidance with respect to the Metals Index and the Sponsor’s selection of investments on behalf of USMI. The Sponsor is also authorized to select futures commission merchants to execute USMI’s transactions in Benchmark Component Metals Futures Contracts, other Eligible Metal Futures Contracts and Other Metals-Related Investments. The Sponsor, SummerHaven Indexing and SummerHaven are not affiliated with a broker-dealer and are subject to procedures designed to prevent the use and dissemination of material nonpublic information regarding the Metals Index or USMI’s portfolio.13 13 The Sponsor represents that, in the event the Sponsor, SummerHaven Indexing, or PO 00000 Frm 00092 Fmt 4703 Sfmt 4703 According to the Registration Statement, it is anticipated that USMI will invest such that daily changes in USMI’s NAV will closely track the daily changes in the Metals Index.14 USMI’s positions in Metals Interests will be rebalanced on a monthly basis in order to track the changing nature of the Metals Index. In order that USMI’s trading does not unduly cause extraordinary market movements, and to make it more difficult for third parties to profit by trading based on market movements that could be expected from changes in the Benchmark Component Metals Futures Contracts, USMI’s investments typically will not be rebalanced entirely on a single day, but rather will typically be rebalanced over a period of four days. After fulfilling the margin and collateral requirements with respect to USMI’s Metals Interests, the Sponsor will invest the remainder of USMI’s proceeds from the sale of baskets in short-term obligations of the United States government (‘‘Treasury Securities’’ or ‘‘Treasuries’’) or cash equivalents, and/or hold such assets in cash (generally in interest-bearing accounts). According to the Registration Statement, the Sponsor endeavors to place USMI’s trades in Metals Interests and otherwise manage USMI’s investments so that A will be within plus/minus 10 percent of B, where: • A is the average daily percentage change in USMI’s NAV for any period of 30 successive NYSE Arca trading days as of which USMI calculates its NAV, and • B is the average daily percentage change in the Metals Index over the same period. The table immediately below lists the eligible metals, the relevant Futures Exchange on which each Eligible Metals Futures Contract is listed and quotation details including imposed price and position limits: SummerHaven becomes affiliated with a brokerdealer, it will implement a fire wall with respect to such broker-dealer regarding access to information concerning the composition and/or changes to a portfolio. 14 As of January 31, 2011, the Metals Index reflects commodities in two commodity sectors: precious metals (representing approximately 38% of the Metals Index) and industrial metals (representing approximately 62% of the Metals Index). E:\FR\FM\09SEN1.SGM 09SEN1 Federal Register / Vol. 76, No. 175 / Friday, September 9, 2011 / Notices Commodity Designated contract High Grade Primary Aluminum. Copper ..... Lead ......... LME ....... COMEX .. LME ....... Primary Nickel. Tin ............ LME ....... LME ....... Gold .......... Special High Grade Zinc. Gold ......... COMEX .. Silver ......... Silver ........ COMEX .. Platinum .... Palladium .. Platinum ... Palladium NYMEX .. NYMEX .. Copper ...... Lead .......... Nickel ........ Tin ............. Zinc ........... mstockstill on DSK4VPTVN1PROD with NOTICES Accountability levels—single month Accountability levels—all months Position limits—spot month Position limits—single month and all months 25 metric tons. None ................. None ................. None .......... None .......... 06:55 AM: 12:00 PM 25,000 lbs 25 metric tons. 6 metric tons. 5 metric tons. 25 metric tons. 5000 ................. None ................. 5000 ................. None ................. 1200 ........... None .......... None .......... None .......... 08:10 AM–1:00 PM 07:15 AM: 11:45 AM None ................. None ................. None .......... None .......... 07:10 AM: 11:50 AM None ................. None ................. None .......... None .......... 07:05 AM: 11:40 AM None ................. None ................. None .......... None .......... 06:50 AM: 11:35 AM 100 troy oz. 5,000 troy oz. 50 troy oz. 100 troy oz. 6000 ................. 6000 ................. 3000 ........... None .......... 08:20 AM–1:05 PM 6000 ................. 6000 ................. 1500 ........... None .......... 08:25 AM–1:25 PM 1500 ................. 1000 ................. 1500 ................. 1000 ................. None .......... 650 ............. None .......... None .......... 08:30 AM–1:00 PM 08:20 AM–1:30 PM Exchange Aluminum .. LME ....... Units The Sponsor believes that market arbitrage opportunities will cause USMI’s Unit price on NYSE Arca to closely track USMI’s NAV per Unit. The Sponsor believes that the net effect of this expected relationship and the expected relationship described above between USMI’s NAV and the Metals Index will be that the changes in the price of USMI’s Units on NYSE Arca will closely track, in percentage terms, changes in the Metals Index, less USMI’s expenses. According to the Registration Statement, the Benchmark Component Metals Futures Contracts for each metal will remain in the Metals Index from month to month. Weights for each of the Benchmark Component Metals Futures Contracts are determined for the next month. The methodology used to calculate the Metals Index weighting is based solely on quantitative data using observable futures prices and is not subject to human bias. The monthly weighting selection is a three-step process based upon examination of the relevant futures prices for each metal. For each metal in the Metals Index, the index selects a specific Benchmark Component Metals Futures Contract with a tenor (i.e., contract month) among the Eligible Metals Futures Contracts based upon the relative prices of the Benchmark Component Metals Futures Contract within the eligible range of contract months. The previous notwithstanding, the contract expiration is not changed for that month if a Benchmark Component Metals Futures Contract remains in the Metals Index, as long as the contract does not expire or enter its notice period in the subsequent month. VerDate Mar<15>2010 18:57 Sep 08, 2011 55959 Jkt 223001 In the event of a commodity futures market where near month contracts to expire trade at a higher price than next month contracts to expire, a situation referred to as ‘‘backwardation,’’ then absent the impact of the overall movement in commodity prices, the value of the Metals Index would tend to rise as it approaches expiration. As a result USMI may benefit because it would be selling more expensive contracts and buying less expensive ones on an ongoing basis. Conversely, in the event of a commodity futures market where near month contracts trade at a lower price than next month contracts, a situation referred to as ‘‘contango,’’ then absent the impact of the overall movement in commodity prices, the value of the Metals Index would tend to decline as it approaches expiration. As a result USMI’s total return may be lower than might otherwise be the case because it would be selling less expensive contracts and buying more expensive ones. The impact of backwardation and contango may cause the total return of USMI to vary significantly from the total return of other price references, such as the spot price of the commodities comprising the Metals Index. In the event of a prolonged period of contango, and absent the impact of rising or falling commodity prices, this could have a significant negative impact on USMI’s NAV and total return. USMI will invest in Metals Interests to the fullest extent possible without being leveraged or unable to satisfy its expected current or potential margin or collateral obligations with respect to its investments in Metals Interests. The primary focus of the Sponsor is the PO 00000 Frm 00093 Fmt 4703 Sfmt 4703 Trading hours (E.T.) investment in Metals Interests and the management of USMI’s investments in Treasury Securities, cash and/or cash equivalents. The Sponsor will employ a ‘‘neutral’’ investment strategy for USMI intended to track the changes in the Metals Index regardless of whether the Metals Index goes up or goes down. USMI’s ‘‘neutral’’ investment strategy is designed to permit investors generally to purchase and sell USMI’s Units for the purpose of investing indirectly in the commodities market in a cost-effective manner, and/ or to permit participants in the commodities or other industries to hedge the risk of losses in their commodity-related transactions. Accordingly, depending on the investment objective of an individual investor, the risks generally associated with investing in the commodities market and/or the risks involved in hedging may exist. In addition, an investment in USMI involves the risks that the changes in the price of the USMI’s Units will not accurately track the changes in the Metals Index, and that changes in the Metals Index will not closely correlate with changes in the spot prices of the commodities underlying the Benchmark Component Metals Futures Contracts. Furthermore, USMI also invests in short-term Treasury Securities or holds cash to meet its current or potential margin or collateral requirements with respect to its investments in Metals Interests and invests cash not required to be used as margin or collateral. There is not expected to be any meaningful E:\FR\FM\09SEN1.SGM 09SEN1 55960 Federal Register / Vol. 76, No. 175 / Friday, September 9, 2011 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES correlation between the performance of USMI’s investments in Treasury Securities, cash or cash equivalents and the changes in the price of the Metals Index. While the level of interest earned on or the market price of these investments may in some respect correlate to changes in the price of the Metals Index, this correlation is not anticipated as part of the USMI’s efforts to meet its objectives. This and certain risk factors discussed in the Registration Statement may cause a lack of correlation between changes in USMI’s NAV and changes in the price of the Metals Index. The Sponsor does not intend to operate USMI in a fashion such that its per Unit NAV will equal, in dollar terms, the spot prices of the commodities underlying the Benchmark Component Metals Futures Contracts that comprise the Metals Index or the prices of any particular group of Benchmark Component Metals Futures Contracts. United States Agriculture Index Fund (‘‘USAI’’) According to the Registration Statement, the investment objective of USAI is for the daily changes in percentage terms of its Units’ NAV to reflect the daily changes in percentage terms of the SummerHaven Dynamic Agriculture Index Total Return (the ‘‘Agriculture Index’’), less USAI’s expenses. The Agriculture Index is designed to reflect the performance of a diversified group of agricultural commodities. The Agriculture Index is owned and maintained by SummerHaven Indexing and calculated and published by the Exchange. The Agriculture Index is an agricultural sector index designed to broadly represent major agricultural commodities while overweighting the components that are assessed to be in a low inventory state and underweighting the components assessed to be in a high inventory state. The Agriculture Index consists of fourteen agricultural markets: soybeans, corn, soft red winter wheat, hard red winter wheat, soybean oil, soybean meal, canola, sugar, cocoa, coffee, cotton, live cattle, feeder cattle and lean hogs. Each agricultural commodity is assigned a base weight based on an assessment of market liquidity and the commodity’s overall economic importance. Each commodity is U.S. Dollar based, with the exception of canola, which is quoted in Canadian Dollars and converted to U.S. Dollars for the purpose of the Agriculture Index calculation. Academic research by Professors Gorton, Rouwenhorst and Hayashi has VerDate Mar<15>2010 16:58 Sep 08, 2011 Jkt 223001 shown that commodities in relatively low inventory states tend to have higher returns that [sic] commodities in relatively high inventory states.15 Furthermore, relative inventory comparisons can be estimated by the price-based signals of momentum and basis. Momentum is the percentage price change in a commodity over the previous year. Basis is the annualized percentage difference between the nearest-to-maturity contract and the second nearest-to-maturity contract. Using these price-based signals, agricultural commodities determined to be in low inventory state will be weighted more heavily, and agricultural commodities in high inventory state will be weighted less heavily during any given month. The Agriculture Index is rules-based and rebalanced monthly based on observable price signals described above. In this context, the term ‘‘rulesbased’’ is meant to indicate that the composition of the Agriculture Index in any given month will be determined by quantitative formulas relating to the prices of the futures contracts that relate to the commodities that are included in the Agriculture Index. Such formulas are not subject to adjustment based on other factors. Futures contracts for agricultural commodities in the Agriculture Index that are currently traded on the ICE Futures, CBOT, CME, KCBT and ICE Canada are collectively referred to herein as ‘‘Eligible Agriculture Futures Contracts.’’ The 14 Eligible Agriculture Futures Contracts that at any given time have been designated as a component of the Agriculture Index are referred to as the ‘‘Benchmark Component Agriculture Futures Contracts.’’ The relative weighting of the Benchmark Component Agriculture Futures Contracts will change on a monthly basis, based on quantitative formulas developed by SummerHaven Indexing relating to the prices of the Benchmark Component Agriculture Futures Contracts. The overall return on the Agriculture Index is generated by two components: (i) uncollateralized returns from the Benchmark Component Agriculture Futures Contracts comprising the Agriculture Index, and (ii) a daily fixed income return reflecting the interest earned on a hypothetical 3-month U.S. Treasury Bill collateral portfolio, calculated using the weekly auction rate for the 3-Month U.S. Treasury Bill published by the U.S. Department of the Treasury. Because the Agriculture Index is comprised of actively traded contracts with scheduled expirations, it can be 15 See PO 00000 note 10, supra. Frm 00094 Fmt 4703 Sfmt 4703 calculated only by reference to the prices of contracts for specified expiration, delivery or settlement periods, referred to as contract expirations. The contract expirations included in the Agriculture Index for each commodity during a given year are designated by SummerHaven Indexing, provided that each contract must be an active contract. An active contract for this purpose is a liquid, actively-traded contract expiration, as defined or identified by the relevant trading facility or, if no such definition or identification is provided by the relevant trading facility, as defined by standard custom and practice in the industry. Information regarding the Agriculture Index methodology may also be accessed by the public from SummerHaven Indexing’s Web site at https://www.summerhavenindex.com. If a Futures Exchange ceases trading in all contract expirations relating to a particular Benchmark Component Agriculture Futures Contract, SummerHaven Indexing may designate a replacement contract on the particular agricultural commodity. The replacement contract must satisfy the eligibility criteria for inclusion in the Agriculture Index. To the extent practicable, the replacement will be effected during the next monthly review of the composition of the Agriculture Index. If that timing is not practicable, SummerHaven Indexing will determine the date of the replacement based on a number of factors, including the differences between the existing Benchmark Component Agriculture Futures Contract and the replacement contract with respect to contractual specifications and contract expirations. If a Benchmark Component Agriculture Futures Contract is eliminated and there is no replacement contract, the underlying agricultural commodity will necessarily drop out of the Agriculture Index. USAI will seek to achieve its investment objective by investing to the fullest extent possible in Benchmark Component Agriculture Futures Contracts. Then, if constrained by regulatory requirements (described below) or in view of market conditions (described below), USAI will invest next in other Eligible Agriculture Futures Contracts based on the same agricultural commodity as the futures contracts subject to such regulatory constraints or market conditions, and finally, to a lesser extent, in other exchange traded futures contracts that are economically identical or substantially similar to the Benchmark Component Agriculture Futures Contracts, if one or more Eligible Agriculture Futures Contracts is E:\FR\FM\09SEN1.SGM 09SEN1 mstockstill on DSK4VPTVN1PROD with NOTICES Federal Register / Vol. 76, No. 175 / Friday, September 9, 2011 / Notices not available. When USAI has invested to the fullest extent possible in exchange-traded futures contracts, USAI may then invest in other contracts and instruments based on the Benchmark Component Agriculture Futures Contracts or the agricultural commodities included in the Agriculture Index, such as cash-settled options, forward contracts, cleared swap contracts and swap contracts other than cleared swap contracts. Other exchangetraded futures contracts that are economically identical or substantially similar to the Benchmark Component Agriculture Futures Contracts and other contracts and instruments based on the Benchmark Component Agriculture Futures Contracts, as well as metals included in the Agriculture Index, are collectively referred to as ‘‘Other Agriculture-Related Interests,’’ and together with Benchmark Component Agriculture Futures Contracts and other Eligible Agriculture Futures Contracts, ‘‘Agriculture Interests.’’ Regulatory Requirements. As noted above, USAI may at times invest in Eligible Agriculture Futures Contracts based on the same agricultural commodity as the futures contracts subject to regulatory constraints (as described below), and then to a lesser extent in Other Agriculture-Related Investments in order to comply with regulatory requirements. An example of such regulatory requirements would be if USAI is required by law or regulation, or by one of its regulators, including a Futures Exchange, to reduce its position in one or more Benchmark Component Agriculture Futures Contracts to the applicable position limit or to a specified accountability level for such contracts, USAI’s assets could be invested in one or more other Eligible Agriculture Futures Contracts. If one or more such Eligible Agriculture Futures Contracts was unavailable or economically impracticable, USAI could invest in Other Agriculture-Related Investments that are intended to replicate the return on the Agriculture Index or particular Benchmark Component Agriculture Futures Contracts. Another example would be if because USAI’s assets were reaching higher levels, it exceeded position limits, accountability levels or other regulatory limits and, to avoid triggering such limits or levels, it invested in one or more other Eligible Agriculture 16 See note 13, supra. of January 31, 2011, the Agriculture Index reflects commodities in three commodity sectors: 17 As VerDate Mar<15>2010 16:58 Sep 08, 2011 Jkt 223001 55961 Futures Contracts to the extent practicable and then in Other Agriculture-Related Investments. When investing in Other AgricultureRelated Investments, USAI will first invest in other exchange traded futures contracts that are economically identical or substantially similar to the Benchmark Component Agriculture Futures Contracts and then in cash settled options, forward contracts, cleared swap contracts and swap contracts other than cleared swap contracts. Market Conditions. As also noted above, there may be market conditions that could cause USAI to invest in other Eligible Agriculture Futures Contracts that are based on the same agricultural commodity as the futures contracts subject to such market conditions (as described below). One such type of market condition would be where demand for Benchmark Component Agriculture Futures Contracts exceeded supply and as a result USAI was able to obtain more favorable terms under other Eligible Agriculture Futures Contracts. An example of more favorable terms would be where the aggregate costs to USAI from investing in other Eligible Agriculture Futures Contracts or Other Agriculture-Related Investments (including actual or expected direct costs such as the costs to buy, hold, or sell such investments, as well as indirect costs such as opportunity costs) were less than the costs of investing in Benchmark Component Agriculture Futures Contracts. Only after USAI becomes subject to position limits in any Eligible Agriculture Futures Contract will USAI invest in Other Agriculture-Related Investments to replicate exposure to the Eligible Agriculture Futures Contract that is position-limited. Generally, USAI will only invest in this manner in other Eligible Agriculture Futures Contracts or Other Agriculture-Related Investments if it results in materially more favorable terms, and if such investments result in a specific benefit for USAI or its shareholders, such as being able to more closely track its benchmark. USAI’s trading advisor is SummerHaven. The Sponsor expects to manage USAI’s investments directly, using the trading advisory services of SummerHaven for guidance with respect to the Agriculture Index and the Sponsor’s selection of investments on behalf of USAI. The Sponsor is also authorized to select futures commission merchants to execute USAI’s transactions in Benchmark Component Agriculture Futures Contracts, other Eligible Agriculture Futures Contracts and Other Agriculture-Related Investments. The Sponsor, SummerHaven Indexing and SummerHaven are not affiliated with a broker-dealer and are subject to procedures designed to prevent the use and dissemination of material nonpublic information regarding the Agriculture Index or USAI’s portfolio.16 According to the Registration Statement, it is anticipated that USAI will invest such that daily changes in USAI’s NAV will closely track the daily changes in the Agriculture Index.17 USAI’s positions in Agriculture Interests will be rebalanced on a monthly basis in order to track the changing nature of the Agriculture Index. In order that USAI’s trading does not unduly cause extraordinary market movements, and to make it more difficult for third parties to profit by trading based on market movements that could be expected from changes in the Benchmark Component Agriculture Futures Contracts, USAI’s investments typically will not be rebalanced entirely on a single day, but rather will typically be rebalanced over a period of four days. After fulfilling the margin and collateral requirements with respect to USAI’s Agriculture Interests, the Sponsor will invest the remainder of USAI’s proceeds from the sale of baskets in Treasury Securities or cash equivalents, and/or hold such assets in cash (generally in interest-bearing accounts). According to the Registration Statement, the Sponsor endeavors to place USAI’s trades in Agriculture Interests and otherwise manage USAI’s investments so that A will be within plus/minus 10 percent of B, where: • A is the average daily percentage change in USAI’s NAV for any period of 30 successive NYSE Arca trading days as of which USAI calculates its NAV, and • B is the average daily percentage change in the Agriculture Index over the same period. The table immediately below lists the eligible agricultural commodities, the relevant Futures Exchange on which each Eligible Agriculture Futures Contract is listed and quotation details. grains (representing approximately 47% of the Agriculture Index), soft commodities (e.g., sugar, cotton, coffee, cocoa) (representing approximately 36% of the Agriculture Index), and livestock (representing approximately 17% of the Agriculture Index). PO 00000 Frm 00095 Fmt 4703 Sfmt 4703 E:\FR\FM\09SEN1.SGM 09SEN1 55962 Federal Register / Vol. 76, No. 175 / Friday, September 9, 2011 / Notices Position limits— single month Position limits— all months 600 6500 ..... 10000 ... 10:30 AM–2:15 PM None ................. 600 13500 ... 22000 ... 10:30 AM–2:15 PM None ................. None ................. 600 5000 ..... 6500 ..... 10:30 AM–2:15 PM None ................. None ................. 600 5000 ..... 6500 ..... 09:30 AM–1:15PM None ................. None ................. 540 5000 ..... 6500 ..... 10:30 AM–2:15 PM None ................. None ................. 720 5000 ..... 6500 ..... 09:30 AM–1:15 PM 37,500 lbs. 10 metric tons. 112,000 lbs. 5000 ................. 5000 ................. 500 5000 ..... 5000 ..... 03:30 AM–2:00 PM 6000 ................. 6000 ................. 1000 None .... None .... 04:00 AM–2:00 PM 10000 ............... 15000 ............... 5000 None .... None .... 03:30 AM–2:00 PM 20 tonnes. 50,000 lbs. 50,000 lbs. 40,000 lbs. 40,000 lbs. None ................. None ................. 1000 None .... None .... 08:00 PM–2:15 PM None ................. None ................. 300 3500 ..... 5000 ..... 9:00 PM–2:30 PM None ................. None ................. 300 1950 ..... None .... 09:05 AM–1:00 PM None ................. None ................. 450 6300 ..... None .... 10:05 AM–2:00 PM None ................. None ................. 950 4150 ..... None .... 09:05 AM–1:00 PM Commodity Designated contract Exchange Units Soybeans. Soybeans. CBOT ....... Corn ...... Corn ...... CBOT ....... Soft Red Winter Wheat. Hard Red Winter Wheat. Soft Red Winter Wheat. Hard Red Winter Wheat. Soybean Oil. Soybean Meal. Coffee ‘‘C’’. Cocoa ... CBOT ....... ICE–US .... Canola ... World Sugar No. 11. Canola .. Cotton ... Cotton ... Feeder Cattle. Live Cattle. Lean Hogs. Feeder Cattle. Live Cattle. Lean Hogs. Soybean Oil. Soybean Meal. Coffee ... Cocoa .... mstockstill on DSK4VPTVN1PROD with NOTICES Sugar .... KCBT ....... CBOT ....... CBOT ....... ICE–US .... ICE–US .... ICE–CANADA. ICE–US .... CME ......... CME ......... CME ......... Accountability levels—single month Accountability levels all months 5,000 bushels. 5,000 bushels. 5,000 bushels. 5,000 bushels. None ................. None ................. None ................. 60,000 lbs. 100 tons The Sponsor believes that market arbitrage opportunities will cause USAI’s Unit price on NYSE Arca to closely track USAI’s NAV per Unit. The Sponsor believes that the net effect of this expected relationship and the expected relationship described above between USAI’s NAV and the Agriculture Index will be that the changes in the price of USAI’s Units on NYSE Arca will closely track, in percentage terms, changes in the Agriculture Index, less USAI’s expenses. According to the Registration Statement, the Benchmark Component Agriculture Futures Contracts for each agricultural commodity will remain in the Agriculture Index from month to month. Weights for each of the Benchmark Component Agriculture Futures Contracts in the Agriculture Index are determined for the next month. The methodology used to calculate the Agriculture Index weighting is based solely on quantitative data using observable futures prices and is not subject to human bias. The monthly weighting selection is a three-step process based upon examination of the relevant futures prices for each agricultural VerDate Mar<15>2010 18:57 Sep 08, 2011 Jkt 223001 Position limits— spot month commodity. For each agricultural commodity in the Agriculture Index, the index selects a specific Benchmark Component Agriculture Futures Contract with a tenor (i.e., contract month) among the Eligible Agriculture Futures Contracts based upon the relative prices of the Benchmark Component Agriculture Futures Contracts within the eligible range of contract months. The previous notwithstanding, the contract expiration is not changed for that month if a Benchmark Component Agriculture Futures Contract remains in the Agriculture Index, as long as the contract does not enter expire or enter its notice period in the subsequent month. In the event of a commodity futures market where near month contracts to expire trade at a higher price than next month contracts to expire, a situation referred to as ‘‘backwardation,’’ then absent the impact of the overall movement in commodity prices, the value of the Agriculture Index would tend to rise as it approaches expiration. As a result USAI may benefit because it would be selling more expensive contracts and buying less expensive PO 00000 Frm 00096 Fmt 4703 Sfmt 4703 Trading hours (E.T.) ones on an ongoing basis. Conversely, in the event of a commodity futures market where near month contracts trade at a lower price than next month contracts, a situation referred to as ‘‘contango,’’ then absent the impact of the overall movement in commodity prices, the value of the Agriculture Index would tend to decline as it approaches expiration. As a result USAI’s total return may be lower than might otherwise be the case because it would be selling less expensive contracts and buying more expensive ones. The impact of backwardation and contango may cause the total return of USAI to vary significantly from the total return of other price references, such as the spot price of the commodities comprising the Agriculture Index. In the event of a prolonged period of contango, and absent the impact of rising or falling commodity prices, this could have a significant negative impact on USAI’s NAV and total return. USAI will invest in Agriculture Interests to the fullest extent possible without being leveraged or unable to satisfy its expected current or potential margin or collateral obligations with respect to its investments in Agriculture E:\FR\FM\09SEN1.SGM 09SEN1 mstockstill on DSK4VPTVN1PROD with NOTICES Federal Register / Vol. 76, No. 175 / Friday, September 9, 2011 / Notices Interests. The primary focus of the Sponsor is the investment in Agriculture Interests and the management of USAI’s investments in Treasury Securities, cash and/or cash equivalents. The Sponsor will employ a ‘‘neutral’’ investment strategy for USAI intended to track the changes in the Agriculture Index regardless of whether the Agriculture Index goes up or goes down. USAI’s ‘‘neutral’’ investment strategy is designed to permit investors generally to purchase and sell USAI’s Units for the purpose of investing indirectly in the commodities market in a costeffective manner, and/or to permit participants in the commodities or other industries to hedge the risk of losses in their commodity-related transactions. Accordingly, depending on the investment objective of an individual investor, the risks generally associated with investing in the commodities market and/or the risks involved in hedging may exist. In addition, an investment in USAI involves the risks that the changes in the price of the USAI’s Units will not accurately track the changes in the Agriculture Index, and that changes in the Agriculture Index will not closely correlate with changes in the spot prices of the commodities underlying the Benchmark Component Agriculture Futures Contracts. Furthermore, USAI also invests in short-term Treasury Securities or holds cash to meet its current or potential margin or collateral requirements with respect to its investments in Agriculture Interests and invests cash not required to be used as margin or collateral. There is not expected to be any meaningful correlation between the performance of USAI’s investments in Treasury Securities, cash or cash equivalents and the changes in the price of the Agriculture Index. While the level of interest earned on or the market price of these investments may in some respect correlate to changes in the price of the Agriculture Index, this correlation is not anticipated as part of USAI’s efforts to meet its objectives. This and certain risk factors discussed in the Registration Statement may cause a lack of correlation between changes in USAI’s NAV and changes in the price of the Agriculture Index. The Sponsor does not intend to operate USAI in a fashion such that its per Unit NAV will equal, in dollar terms, the spot prices of the commodities underlying the Benchmark Component Agriculture Futures Contracts that comprise the Agriculture Index or the prices of any particular VerDate Mar<15>2010 16:58 Sep 08, 2011 Jkt 223001 group of Benchmark Component Agriculture Futures Contracts. United States Copper Index Fund (‘‘USCUI’’) According to the Registration Statement, the investment objective of USCUI is for the daily changes in percentage terms of its Units’ NAV to reflect the daily changes in percentage terms of the SummerHaven Copper Index Total Return (the ‘‘Copper Index’’), less USCUI’s expenses. The Copper Index is designed to reflect the performance of the investment returns from a portfolio of futures contracts for copper that are traded on the COMEX (such futures contracts, collectively, ‘‘Eligible Copper Futures Contracts’’). The Copper Index is owned and maintained by SummerHaven Indexing and calculated and published by the Exchange. For reasons discussed below, the Copper Index is comprised of either two or three Eligible Copper Futures Contracts that are selected on a monthly basis based on quantitative formulas relating to the prices of the Eligible Copper Futures Contracts developed by SummerHaven Indexing. The Eligible Copper Futures Contracts that at any given time make up the Copper Index are referred to herein as ‘‘Benchmark Component Copper Futures Contracts.’’ The Copper Index is a singlecommodity index designed to be an investment benchmark for copper as an asset class. The Copper Index is composed of copper futures contracts on the COMEX exchange. The Copper Index attempts to maximize backwardation and minimize contango while utilizing contracts in liquid portions of the futures curve. The Copper Index is rules-based and is rebalanced monthly based on observable price signals. In the case of the Copper Index, the price signal is based on ‘‘basis.’’ Basis is the annualized percentage difference between the nearest-to-maturity contract’s price and the second nearestto-maturity contract’s price. The basis calculation can produce a positive number, such that the nearest-tomaturity contract is higher than the second nearest-to-maturity contract’s price (a condition also referred to as ‘‘backwardation’’), or it can produce a negative number, such that the nearestto-maturity contract’s price is lower than the second nearest-to-maturity contract’s price (a condition also referred to as ‘‘contango’’). At the end of each month, (1) the copper futures curve is assessed to be in either backwardation or contango as discussed above, and (2) the annualized PO 00000 Frm 00097 Fmt 4703 Sfmt 4703 55963 percentage price difference between the closest-to-expiration Eligible Copper Futures Contract and each of the next four Eligible Copper Futures Contracts is calculated. If the copper futures curve is in backwardation at the end of a month, the Copper Index takes positions in the two Eligible Copper Futures Contracts with the highest annualized percentage price difference, each weighted at 50%. If the copper futures curve is in contango, then the Copper Index takes positions in three Eligible Copper Futures Contracts, as follows: first, the Copper Index takes positions in the two Eligible Copper Futures Contracts with the highest annualized percentage price difference, each weighted at 25%; then the Copper Index also takes a position in the nearest-tomaturity December Eligible Copper Futures Contract that has expiration more distant than the fourth nearest Eligible Copper Futures Contract, which position is weighted at 50%. In this context, the term ‘‘rules-based’’ is meant to indicate that the composition of the Copper Index in any given month will be determined by quantitative formulas relating to the prices of the futures contracts that are included in the Copper Index. Such formulas are not subject to adjustment based on other factors. The overall return on the Copper Index is generated by two components: (i) Uncollateralized returns from the Benchmark Component Copper Futures Contracts comprising the Copper Index, and (ii) a daily fixed income return reflecting the interest earned on a hypothetical 3-month U.S. Treasury Bill collateral portfolio, calculated using the weekly auction rate for the 3-Month U.S. Treasury Bills published by the U.S. Department of the Treasury. Because the Copper Index is comprised of actively traded contracts with scheduled expirations, it can be calculated only by reference to the prices of contracts for specified expiration, delivery or settlement periods, referred to as contract expirations. The contract expirations included in the Copper Index for each commodity during a given year are designated by SummerHaven Indexing, provided that each contract must be an active contract. An active contract for this purpose is a liquid, actively-traded contract expiration, as defined or identified by the relevant trading facility or, if no such definition or identification is provided by the relevant trading facility, as defined by standard custom and practice in the industry. Information regarding the Copper Index methodology may also be accessed by the public from SummerHaven E:\FR\FM\09SEN1.SGM 09SEN1 mstockstill on DSK4VPTVN1PROD with NOTICES 55964 Federal Register / Vol. 76, No. 175 / Friday, September 9, 2011 / Notices Indexing’s Web site at https:// www.summerhavenindex.com. If a Futures Exchange ceases trading in all contract expirations relating to a Benchmark Component Copper Futures Contract, SummerHaven Indexing may designate a replacement contract. The replacement contract must satisfy the eligibility criteria for inclusion in the Copper Index. To the extent practicable, the replacement will be effected during the next monthly review of the composition of the Copper Index. If that timing is not practicable, SummerHaven Indexing will determine the date of the replacement based on a number of factors, including the differences between the existing Benchmark Component Copper Futures Contract and the replacement contract with respect to contractual specifications and contract expirations. USCUI will seek to achieve its investment objective by investing to the fullest extent possible in the Benchmark Component Copper Futures Contracts. Then if constrained by regulatory requirements (described below) or in view of market conditions (described below), USCUI will invest next in other Eligible Copper Futures Contracts, and finally to a lesser extent, in other exchange-traded futures contracts that are economically identical or substantially similar to the Benchmark Component Copper Futures Contracts if one or more other Eligible Copper Futures Contracts is not available. When USCUI has invested to the fullest extent possible in exchange-traded futures contracts, USCUI may then invest in other contracts and instruments based on the Benchmark Component Copper Futures Contracts, other Eligible Copper Futures Contracts or copper, such as cash-settled options, forward contracts, cleared swap contracts and swap contracts other than cleared swap contracts. Other exchange-traded futures contracts that are economically identical or substantially similar to the Benchmark Component Copper Futures Contracts and other contracts and instruments based on the Benchmark Component Copper Futures Contracts, are collectively referred to as ‘‘Other Copper-Related Investments,’’ and together with Benchmark Component Copper Futures Contracts and other Eligible Copper Futures Contracts, ‘‘Copper Interests.’’ Regulatory Requirements. As noted above, USCUI may at times invest in other Eligible Copper Futures Contracts based on the same metal as the futures contracts subject to regulatory constraints (as described below), and finally to a lesser extent, in other exchange traded futures contracts that VerDate Mar<15>2010 16:58 Sep 08, 2011 Jkt 223001 are economically identical or substantially similar to the Benchmark Component Copper Futures Contracts if one or more other Eligible Copper Futures Contracts is not available in order to comply with regulatory requirements. An example of such regulatory requirements would be if USCUI is required by law or regulation, or by one of its regulators, including a Futures Exchange, to reduce its position in one or more Benchmark Component Copper Futures Contracts to the applicable position limit or to a specified accountability level for such contracts, USCUI’s assets could be invested in one or more other Eligible Copper Futures Contracts. If one or more such Eligible Copper Futures Contracts were unavailable or economically impracticable, USCUI could invest in Other Copper-Related Investments that are intended to replicate the return on the Copper Index or particular Benchmark Component Copper Futures Contracts. Another example would be if, because USCUI’s assets were reaching higher levels, it exceeded position limits, accountability levels or other regulatory limits and, to avoid triggering such limits or levels, it invested in one or more other Eligible Copper Futures Contracts to the extent practicable and then in Other CopperRelated Investments. When investing in Other CopperRelated Investments, USCUI will first invest in other exchange traded futures contracts that are economically identical or substantially similar to the Benchmark Component Copper Futures Contracts, other Eligible Copper Futures Contracts, and then in cash-settled options, forward contracts, cleared swap contracts and swap contracts other than cleared swap contracts. Market Conditions. As also noted above, there may be market conditions that could cause USCUI to invest in other Eligible Copper Futures Contracts that are based on the same metal as the futures contracts subject to such market conditions (as described below). One such type of market condition would be where demand for Benchmark Component Copper Futures Contracts exceeded supply and as a result USCUI was able to obtain more favorable terms under other Eligible Copper Futures Contracts. An example of more favorable terms would be where the aggregate costs to USCUI from investing in other Eligible Copper Futures Contracts (including actual or expected direct costs such as the costs to buy, hold, or sell such investments, as well as indirect costs such as opportunity costs) were less than the costs of investing in Benchmark Component PO 00000 Frm 00098 Fmt 4703 Sfmt 4703 Copper Futures Contracts. Only after USCUI becomes subject to position limits in any Eligible Copper Futures Contract will USCUI invest in Other Copper-Related Investments to replicate exposure to the Eligible Copper Futures Contract that is position-limited. Generally, USCUI will only invest in this manner in other Eligible Copper Futures Contracts or Other CopperRelated Investments if it results in materially more favorable terms, and if such investments result in a specific benefit for USCUI or its shareholders, such as being able to more closely track its benchmark. USCUI’s trading advisor is SummerHaven. The Sponsor expects to manage USCUI’s investments directly, using the trading advisory services of SummerHaven for guidance with respect to the Copper Index and the Sponsor’s selection of investments on behalf of USCUI. The Sponsor is also authorized to select futures commission merchants to execute USCUI’s transactions in Benchmark Component Copper Futures Contracts and Other Copper-Related Investments. The Sponsor, SummerHaven Indexing and SummerHaven are not affiliated with a broker-dealer and are subject to procedures designed to prevent the use and dissemination of material nonpublic information regarding the Copper Index or USCUI’s portfolio.18 According to the Registration Statement, it is anticipated that USCUI will invest in Benchmark Component Copper Futures Contracts, other Eligible Copper Futures Contracts and Other Copper-Related Investments such that daily changes in USCUI’s NAV will closely track the daily changes in the Copper Index. USCUI’s positions in Copper Interests will be rebalanced on a monthly basis in order to track the changing nature of the Copper Index. In order that USCUI’s trading does not unduly cause extraordinary market movements, and to make it more difficult for third parties to profit by trading based on market movements that could be expected from changes in the Benchmark Component Copper Futures Contracts, USCUI’s investments typically will not be rebalanced entirely on a single day, but rather will typically be rebalanced over a period of four days. After fulfilling the margin and collateral requirements with respect to USCUI’s Copper Interests, the Sponsor will invest the remainder of USCUI’s proceeds from the sale of baskets in Treasury Securities or cash equivalents, and/or hold such assets in cash (generally in interest-bearing accounts). 18 See E:\FR\FM\09SEN1.SGM note 13, supra. 09SEN1 Federal Register / Vol. 76, No. 175 / Friday, September 9, 2011 / Notices According to the Registration Statement, the Sponsor endeavors to place USCUI’s trades in Copper Interests and otherwise manage USCUI’s investments so that A will be within plus/minus 10 percent of B, where: • A is the average daily percentage change in USCUI’s NAV for any period of 30 successive NYSE Arca trading days as of which USCUI calculates its NAV, and Designated contract Exchange Units Copper .. mstockstill on DSK4VPTVN1PROD with NOTICES Commodity Copper .................. COMEX .. 25,000 lbs. The Sponsor believes that market arbitrage opportunities will cause USCUI’s Unit price on NYSE Arca to closely track USCUI’s NAV per Unit. The Sponsor believes that the net effect of this expected relationship and the expected relationship described above between USCUI’s NAV and the Copper Index will be that the changes in the price of USCUI’s Units on NYSE Arca will closely track, in percentage terms, changes in the Copper Index, less USCUI’s expenses. In the event of a commodity futures market where near month contracts to expire trade at a higher price than next month contracts to expire, a situation referred to as ‘‘backwardation,’’ then absent the impact of the overall movement in commodity prices, the value of the Copper Index would tend to rise as it approaches expiration. As a result USCUI may benefit because it would be selling more expensive contracts and buying less expensive ones on an ongoing basis. Conversely, in the event of a commodity futures market where near month contracts trade at a lower price than next month contracts, a situation referred to as ‘‘contango,’’ then absent the impact of the overall movement in commodity prices, the value of the Copper Index would tend to decline as it approaches expiration. As a result USCUI’s total return may be lower than might otherwise be the case because it would be selling less expensive contracts and buying more expensive ones. The impact of backwardation and contango may cause the total return of USCUI to vary significantly from the total return of other price references, such as the spot price of the commodities comprising the Copper Index. In the event of a prolonged period of contango, and absent the impact of rising or falling commodity prices, this could have a significant negative impact on USCUI’s NAV and total return. VerDate Mar<15>2010 16:58 Sep 08, 2011 Jkt 223001 PO 00000 • B is the average daily percentage change in the Copper Index over the same period. The table immediately below lists the Futures Exchange on which the Eligible Copper Futures Contracts are listed and quotation details. Accountability levels—single month Accountability levels—all months Position limits— spot month Position limits— single month and all months 5000 ................. 5000 ................. 1200 ........ None ....... USCUI will invest in Copper Interests to the fullest extent possible without being leveraged or unable to satisfy its expected current or potential margin or collateral obligations with respect to its investments in Copper Interests. The primary focus of the Sponsor is the investment in Copper Interests and the management of USCUI’s investments in Treasury Securities, cash and/or cash equivalents. The Sponsor will employ a ‘‘neutral’’ investment strategy for USCUI intended to track the changes in the Copper Index regardless of whether the Copper Index goes up or goes down. USCUI’s ‘‘neutral’’ investment strategy is designed to permit investors generally to purchase and sell USCUI’s Units for the purpose of investing indirectly in the commodities market in a costeffective manner, and/or to permit participants in the commodities or other industries to hedge the risk of losses in their commodity-related transactions. Accordingly, depending on the investment objective of an individual investor, the risks generally associated with investing in the commodities market and/or the risks involved in hedging may exist. In addition, an investment in USCUI involves the risks that the changes in the price of the USCUI’s Units will not accurately track the changes in the Copper Index, and that changes in the Copper Index will not closely correlate with changes in the spot prices of the commodities underlying the Benchmark Component Copper Futures Contracts. Furthermore, USCUI also invests in short-term Treasury Securities or holds cash to meet its current or potential margin or collateral requirements with respect to its investments in Copper Interests and invests cash not required to be used as margin or collateral. There is not expected to be any meaningful correlation between the performance of a USCUI’s investments in Treasury Securities, cash or cash equivalents and Frm 00099 Fmt 4703 Sfmt 4703 55965 Trading hours (E.T.) 08:10 AM–1:00 PM the changes in the price of the Copper Index. While the level of interest earned on or the market price of these investments may in some respect correlate to changes in the price of the Copper Index, this correlation is not anticipated as part of the USCUI’s efforts to meet its objectives. This and certain risk factors discussed in the Registration Statement may cause a lack of correlation between changes in USCUI’s NAV and changes in the price of the Copper Index. The Sponsor does not intend to operate USCUI in a fashion such that its per Unit NAV will equal, in dollar terms, the spot prices of the commodities underlying the Benchmark Component Copper Futures Contracts that comprise the Copper Index or the prices of any particular group of Benchmark Component Copper Futures Contracts. Creation and Redemption of Units Each Fund will create Units only in blocks of 100,000 Units called Creation Baskets and redeem Units only in blocks of 100,000 Units called Redemption Baskets. Only authorized purchasers may purchase or redeem Creation Baskets or Redemption Baskets, respectively. An authorized purchaser is under no obligation to create or redeem baskets, and an authorized purchaser is under no obligation to offer to the public Units of any baskets it does create. Baskets are generally created when there is a demand for Units, including, but not limited to, when the market price per Unit is at a premium to the NAV per Unit. Authorized purchasers will then sell such Units, which will be listed on NYSE Arca, to the public at per Unit offering prices that are expected to reflect, among other factors, the trading price of the Units on NYSE Arca, the NAV of the applicable Fund at the time the authorized purchaser purchased the Creation Baskets and the NAV at the time of the offer of the Units to the public, the E:\FR\FM\09SEN1.SGM 09SEN1 mstockstill on DSK4VPTVN1PROD with NOTICES 55966 Federal Register / Vol. 76, No. 175 / Friday, September 9, 2011 / Notices supply of and demand for Units at the time of sale, and the liquidity of the applicable Fund’s Benchmark Component Futures Contracts and Other Related Investments.19 Baskets are generally redeemed when the market price per Unit is at a discount to the NAV per Unit. Retail investors seeking to purchase or sell Units on any day will effect such transactions in the secondary market, on NYSE Arca, at the market price per Unit, rather than in connection with the creation or redemption of baskets. Purchase and redemption orders must be placed by 10:30 a.m. Eastern Time (‘‘E.T.’’) or the close of regular trading on the NYSE Arca, whichever is earlier. The creation and redemption of baskets are only made in exchange for delivery to the applicable Fund or the distribution by the applicable Fund of the amount of Treasury Securities and/ or cash equal to the combined NAV of the number of Units included in the baskets being created or redeemed, determined as of 4 p.m. E.T. on the day the order to create or redeem baskets is properly received. All proceeds from the sale of Creation Baskets will be invested as quickly as practicable in the investments described in the Registration Statement. Investments and related margin or collateral are held through the custodian for the Funds, Brown Brothers Harriman & Co., in accounts with the applicable Fund’s commodity futures broker, Newedge USA, LLC, or, in some instances when agreed to by the applicable Fund, in collateral accounts held by third parties with respect to its non-exchange traded or cleared overthe-counter applicable interests. The Funds will meet the initial and continued listing requirements applicable to Trust Issued Receipts in NYSE Arca Equities Rule 8.200 and Commentary .02 thereto. With respect to application of Rule 10A–3 20 under the Act, the Trust relies on the exception contained in Rule 10A–3(c)(7).21 A minimum of 100,000 Units for each Fund will be outstanding as of the start of trading on the Exchange. A more detailed description of the Funds’ investments as well as investment risks, are set forth in the Registration Statement. All terms relating to the Funds that are referred to, but not defined in, this proposed rule change are defined in the Registration Statement. 19 Other Related Metal Investments, Other Related Agriculture Investments and Other Related Copper Investments are collectively referred to as ‘‘Other Related Investments.’’ 20 17 CFR 240.10A–3. 21 17 CFR 240.10A–3(c)(7). VerDate Mar<15>2010 16:58 Sep 08, 2011 Jkt 223001 Net Asset Value A Fund’s NAV is calculated by: • Taking the current market value of its total assets, and • Subtracting any liabilities. Brown Brothers Harriman & Co., Inc, (the ‘‘Administrator’’), will calculate the NAV of each Fund once each NYSE Arca trading day. The NAV for a particular trading day will be released after 4 p.m. E.T. Trading during the Core Trading Session on NYSE Arca typically closes at 4 p.m. E.T. The Administrator will use the closing prices on the relevant Futures Exchanges of the Applicable Benchmark Component Futures Contracts (determined at the earlier of the close of such exchange or 2:30 p.m. E.T.) for the contracts traded on the Futures Exchanges, but will calculate or determine the value of all other investments of a Fund using market quotations, if available, or other information customarily used to determine the fair value of such investments as of the earlier of the close of NYSE Arca or 4 p.m. E.T. in accordance with the current Administrative Agency Agreement among Brown Brothers Harriman & Co., Inc., each Fund and the Sponsor. ‘‘Other information’’ customarily used in determining fair value includes information consisting of market data in the relevant market supplied by one or more third parties including, without limitation, relevant rates, prices, yields, yield curves, volatilities, spreads, correlations or other market data in the relevant market; or information of the types described above from internal sources if that information is of the same type used by the Funds in the regular course of their business for the valuation of similar transactions. The information may include costs of funding, to the extent costs of funding are not and would not be a component of the other information being utilized. Third parties supplying quotations or market data may include, without limitation, dealers in the relevant markets, end-users of the relevant product, information vendors, brokers and other sources of market information. In addition, other Applicable Benchmark Component Futures Contracts, Other Related Investments and Treasuries held by a Fund will be valued by the Administrator, using rates and points received from clientapproved third party vendors (such as Reuters and WM Company) and advisor quotes. Availability of Information Regarding the Units The NAV for the Funds will be disseminated daily to all market participants at the same time. The Exchange will make available on its Web site daily trading volume of each of the Units, closing prices of such Units, and number of Units outstanding. The closing prices and settlement prices of the futures contracts are also readily available from the websites of the relevant Futures Exchanges, automated quotation systems, published or other public sources, or on-line information services such as Bloomberg or Reuters. Complete real-time data for the futures contracts is available by subscription from Reuters and Bloomberg. The relevant Futures Exchanges also provide delayed futures information on current and past trading sessions and market news free of charge on their respective websites. The specific contract specifications for the futures contracts are also available on such websites, as well as other financial informational sources. Information regarding exchange-traded cash-settled options and cleared swap contracts will be available from the applicable exchanges and major market data vendors. Quotation and last-sale information regarding the Units will be disseminated through the facilities of the CTA. In addition, the Funds’ websites will display the applicable end of day closing index levels and NAV. The Web site for USMI is https:// www.unitedstatesmetalsindexfund.com; the Web site for USAI is https://www. unitedstatesagricultureindexfund.com; and the Web site for USCUI is https:// www.unitedstatescopperindexfund.com. The Funds will provide Web site disclosure of portfolio holdings daily and will include, as applicable, the names and value (in U.S. dollars) of financial instruments and characteristics of such instruments and cash equivalents, and amount of cash held in the portfolios of the Funds. This Web site disclosure of the portfolio composition of the Funds will occur at the same time as the disclosure by the Sponsor of the portfolio composition to authorized purchasers so that all market participants are provided portfolio composition information at the same time. Therefore, the same portfolio information will be provided on the public Web site as well as in electronic files provided to authorized purchasers. Accordingly, each investor will have access to the current portfolio composition of the Funds through each Fund’s Web site. PO 00000 Frm 00100 Fmt 4703 Sfmt 4703 E:\FR\FM\09SEN1.SGM 09SEN1 Federal Register / Vol. 76, No. 175 / Friday, September 9, 2011 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES The Metals Index, Agriculture Index and Copper Index are calculated and disseminated by NYSE Arca to market data vendors during NYSE Arca Core Trading Hours, from 9:30 a.m. E.T. to 4 p.m. E.T., daily on 15 second intervals based on the most recent reported prices of the underlying commodities in the Indexes. A static Index value will be disseminated between the close of trading of all applicable Futures Contracts on Futures Exchanges and the close of the NYSE Arca Core Trading Session. Dissemination of Indicative Fund Value In addition, in order to provide updated information relating to each Fund for use by investors and market professionals, NYSE Arca will calculate and disseminate throughout the Core Trading Session on each trading day an updated Indicative Fund Value (‘‘IFV’’). The IFV will be calculated by using the prior day’s closing NAV per Unit of the Fund as a base and updating that value throughout the trading day to reflect changes in the most recently reported price level of the Applicable Index as reported by Bloomberg or another reporting service. The IFV Unit basis disseminated during NYSE Arca Core Trading Session hours should not be viewed as an actual real time update of the NAV, because NAV is calculated only once at the end of each trading day based upon the relevant end of day values of the applicable Fund’s investments. The IFV will be disseminated on a per Unit basis every 15 seconds during the regular NYSE Arca Core Trading Session. The normal trading hours of the Futures Exchanges vary, with some ending their trading hours before the close of the Core Trading Session on NYSE Arca (for example, the normal trading hours of the NYMEX are 10 a.m. E.T. to 2:30 p.m. E.T. When a Fund holds applicable Benchmark Component Futures Contracts from Futures Exchanges with different trading hours than NYSE Arca there will be a gap in time at the beginning and/ or the end of each day during which Units will be traded on NYSE Arca, but real-time Futures Exchange trading prices for Applicable Benchmark Component Futures Contracts traded on such Futures Exchanges will not be available. As a result, during those gaps there will be no update to the IFV. A static IFV will be disseminated between the close of trading of all applicable Futures Contracts on Futures Exchanges and the close of the NYSE Arca Core Trading Session. In addition, other applicable Benchmark Component Futures VerDate Mar<15>2010 16:58 Sep 08, 2011 Jkt 223001 55967 Contracts, Other Related Investments and Treasuries held by a Fund will not be included in the IFV. The IFV is based on the prior day’s NAV and moves up and down solely according to changes in the Applicable Index value as reported on Bloomberg or another reporting service. The Exchange believes that dissemination of the IFV provides additional information that is not otherwise available to the public and is useful to investors and market professionals in connection with the trading of the Units of each Fund on NYSE Arca. day in which the interruption to the dissemination of the IFV or the value of the underlying futures contracts occurs. If the interruption to the dissemination of the IFV or the value of the underlying futures contracts 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. In addition, if the Exchange becomes aware that the NAV with respect to the Units is not disseminated to all market participants at the same time, it will halt trading in the Units until such time as the NAV is available to all market participants. Trading Rules The Exchange deems the Units to be equity securities, thus rendering trading in the Units subject to the Exchange’s existing rules governing the trading of equity securities. Units will trade on the NYSE Arca Marketplace from 4 a.m. to 8 p.m. E.T. The Exchange has appropriate rules to facilitate transactions in the Units during all trading sessions. As provided in NYSE Arca Equities Rule 7.6, Commentary .03, the minimum price variation (‘‘MPV’’) for quoting and entry of orders in equity securities traded on the NYSE Arca Marketplace is $0.01, with the exception of securities that are priced less than $1.00 for which the MPV for order entry is $0.0001. The trading of the Units will be subject to NYSE Arca Equities Rule 8.200, Commentary .02(e), which sets forth certain restrictions on Equity Trading Permit (‘‘ETP’’) Holders acting as registered Market Makers in Trust Issued Receipts to facilitate surveillance. See ‘‘Surveillance’’ below for more information. With respect to trading halts, the Exchange may consider all relevant factors in exercising its discretion to halt or suspend trading in the Units. Trading may be halted because of market conditions or for reasons that, in the view of the Exchange, make trading in the Units inadvisable. These may include: (1) The extent to which trading is not occurring in the underlying futures contracts, or (2) whether other unusual conditions or circumstances detrimental to the maintenance of a fair and orderly market are present. In addition, trading in Units will be subject to trading halts caused by extraordinary market volatility pursuant to the Exchange’s ‘‘circuit breaker’’ rule 22 or by the halt or suspension of trading of the underlying futures contracts. The Exchange represents that the Exchange may halt trading during the Surveillance 22 See PO 00000 NYSE Arca Equities Rule 7.12. Frm 00101 Fmt 4703 Sfmt 4703 The Exchange intends to utilize its existing surveillance procedures applicable to derivative products, including Trust Issued Receipts, to monitor trading in the Units. The Exchange represents that these procedures are adequate to properly monitor Exchange trading of the Units in all trading sessions and to deter and detect violations of Exchange rules and applicable Federal securities laws. The Exchange’s current trading surveillances focus on detecting securities trading outside their normal patterns. When such situations are detected, surveillance analysis follows and investigations are opened, where appropriate, to review the behavior of all relevant parties for all relevant trading violations. The Exchange is able to obtain information regarding trading in the Units, the physical commodities included in, or options, futures or options on futures on, Units through ETP Holders, in connection with such ETP Holders’ proprietary or customer trades through ETP Holders which they effect on any relevant market. The Exchange can obtain market surveillance information, including customer identity information, with respect to transactions occurring on exchanges that are members of the Intermarket Surveillance Group (‘‘ISG’’), including CME, CBOT, COMEX, NYMEX (all of which are part of CME Group, Inc.) and ICE Futures. In addition, the Exchange currently has in place a comprehensive surveillance sharing agreement with the LME and KCBT for the purpose of providing information in connection with trading in or related to futures contracts traded on LME and KCBT, respectively. A list of ISG members is available at https:// www.isgportal.org.23 23 The Exchange notes that not all Other Related Investments may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement. E:\FR\FM\09SEN1.SGM 09SEN1 55968 Federal Register / Vol. 76, No. 175 / Friday, September 9, 2011 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES In addition, with respect to each Fund’s futures contracts traded on exchanges, not more than 10% of the weight of such futures contracts in the aggregate shall consist of components whose principal trading market is not a member of ISG or is a market with which the Exchange does not have a comprehensive surveillance sharing agreement. The Exchange also has a general policy prohibiting the distribution of material, non-public information by its employees. Information Bulletin Prior to the commencement of trading, the Exchange will inform its ETP Holders in an Information Bulletin of the special characteristics and risks associated with trading the Units. Specifically, the Information Bulletin will discuss the following: (1) The risks involved in trading the Units during the Opening and Late Trading Sessions when an updated IFV will not be calculated or publicly disseminated; (2) the procedures for purchases and redemptions of Units in Creation Baskets and Redemption Baskets (and that Units are not individually redeemable); (3) NYSE Arca Equities Rule 9.2(a), which imposes a duty of due diligence on its ETP Holders to learn the essential facts relating to every customer prior to trading the Units; (4) how information regarding the IFV is disseminated; (5) the requirement that ETP Holders deliver a prospectus to investors purchasing newly issued Units prior to or concurrently with the confirmation of a transaction; and (6) trading information. In addition, the Information Bulletin will advise ETP Holders, prior to the commencement of trading, of the prospectus delivery requirements applicable to a Fund. The Exchange notes that investors purchasing Units directly from a Fund will receive a prospectus. ETP Holders purchasing Units from a Fund for resale to investors will deliver a prospectus to such investors. The Information Bulletin will also discuss any exemptive, no-action and interpretive relief granted by the Commission from any rules under the Act. In addition, the Information Bulletin will reference that a Fund is subject to various fees and expenses described in the Registration Statement. The Information Bulletin will also reference that the CFTC has regulatory jurisdiction over the trading of futures contracts traded on U.S. markets. The Information Bulletin will also disclose the trading hours of the Units of a Fund and that the NAV for the VerDate Mar<15>2010 16:58 Sep 08, 2011 Jkt 223001 Units is calculated after 4 p.m. E.T. each trading day. The Bulletin will disclose that information about the Units of a Fund is publicly available on the Fund’s Web site. 2. Statutory Basis The basis under the Act for this proposed rule change is the requirement under Section 6(b)(5) 24 that an exchange have rules that are designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to, and perfect the mechanism of a free and open market and, in general, to protect investors and the public interest. The Exchange believes that the proposed rule change is designed to prevent fraudulent and manipulative acts and practices in that the Units will be listed and traded on the Exchange pursuant to the initial and continued listing criteria in NYSE Arca Equities Rule 8.200 and Commentary .02 thereto. The Exchange has in place surveillance procedures that are adequate to properly monitor trading in the Units in all trading sessions and to deter and detect violations of Exchange rules and applicable federal securities laws. The Exchange may obtain information via ISG from other exchanges that are members of ISG or with which the Exchange has entered into a comprehensive surveillance sharing agreement. The closing prices and settlement prices of the futures contracts held by the Funds are readily available from the websites of the relevant Futures Exchanges, automated quotation systems, published or other public sources, or on-line information services such as Bloomberg or Reuters. The relevant Futures Exchanges also provide delayed futures information on current and past trading sessions and market news free of charge on their respective Web sites. Quotation and last sale information for the Units will be available via CTA. In addition, the Funds’ Web sites will display the applicable end of day closing index levels and NAV. The Funds’ total portfolio composition will be disclosed on the Funds’ Web sites. The proposed rule change is designed to promote just and equitable principles of trade and to protect investors and the public interest in that a large amount of information is publicly available regarding the Funds and the Units, thereby promoting market transparency. NYSE Arca will calculate and disseminate throughout the Core Trading Session on each trading day an 24 15 PO 00000 U.S.C. 78f(b)(5). Frm 00102 Fmt 4703 Sfmt 4703 updated IFV. Trading in Units of the Funds will be halted if the circuit breaker parameters in NYSE Arca Equities Rule 7.12 have been reached or because of market conditions or for reasons that, in the view of the Exchange, make trading in the Units inadvisable. Moreover, prior to the commencement of trading, the Exchange will inform its ETP Holders in an Information Bulletin of the special characteristics and risks associated with trading the Units. The proposed rule change is designed to perfect the mechanism of a free and open market and, in general, to protect investors and the public interest in that it will facilitate the listing and trading of additional types of actively-managed exchange-traded products that will enhance competition among market participants, to the benefit of investors and the marketplace. As noted above, the Exchange has in place surveillance procedures relating to trading in the Units and may obtain information via ISG from other exchanges that are members of ISG or with which the Exchange has entered into a comprehensive surveillance sharing agreement. In addition, as noted above, investors will have ready access to information regarding the Funds’ holdings, IFV, and quotation and last sale information for the Units. 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 No written comments were solicited or received with respect to the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 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 or disapprove the proposed rule change, or E:\FR\FM\09SEN1.SGM 09SEN1 Federal Register / Vol. 76, No. 175 / Friday, September 9, 2011 / Notices (B) institute proceedings to determine whether the proposed rule change should be disapproved. 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 Act. Comments may be submitted by any of the following methods: Electronic Comments • 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–NYSEArca–2011–63 on the subject line. mstockstill on DSK4VPTVN1PROD with NOTICES Paper comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–NYSEArca–2011–63. 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 Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. 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 Number SR– NYSEArca–2011–63 and should be submitted on or before September 30, 2011. VerDate Mar<15>2010 16:58 Sep 08, 2011 Jkt 223001 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.25 Elizabeth M. Murphy, Secretary. [FR Doc. 2011–23035 Filed 9–8–11; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–65256; File No. SR–C2– 2011–008] Self-Regulatory Organizations; C2 Options Exchange, Incorporated; Order Approving Proposed Rule Change to Establish a Pilot Program To List and Trade a p.m.-Settled CashSettled S&P 500 Index Option Product September 2, 2011. I. Introduction On February 28, 2011, C2 Options Exchange, Incorporated (the ‘‘Exchange’’ or ‘‘C2’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 a proposed rule change to permit the listing and trading of p.m.-settled, cashsettled options on the Standard & Poor’s 500 Index (‘‘S&P 500’’). The proposed rule change was published for comment in the Federal Register on March 8, 2011.3 The Commission received seven comment letters on the proposal, some of which urged the Commission to disapprove the proposal.4 C2 responded to the comment letters in a response letter dated April 20, 2011.5 To ensure that the Commission had sufficient time to consider and take action on the Exchange’s proposal in light of, among other things, the comments received on the proposal, the Commission extended the time period in which to either approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine 25 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 64011 (March 2, 2011), 76 FR 12775 (‘‘Notice’’). 4 See Letters to Elizabeth M. Murphy, Secretary, Commission, from Randall Mayne, Blue Capital Group, dated March 18, 2011 and April 28, 2011 (‘‘Mayne Letter 1’’ and ‘‘Mayne Letter 2’’); Michael J. Simon, Secretary, International Securities Exchange, LLC (‘‘ISE’’), dated March 29, 2011 and May 11, 2011 (‘‘ISE Letter 1’’ and ‘‘ISE Letter 2’’); Andrew Stevens, Legal Counsel, IMC Financial Markets, dated March 24, 2011 (‘‘IMC Letter’’); John Trader, dated April 20, 2011 (‘‘Trader Letter’’); and JP, dated April 30, 2011 (‘‘JP Letter’’). 5 See Letter to Elizabeth M. Murphy, Secretary, Commission, from Joanne Moffic-Silver, Secretary, C2, dated April 20, 2011 (‘‘C2 Response Letter’’). 1 15 PO 00000 Frm 00103 Fmt 4703 Sfmt 4703 55969 whether to disapprove the proposed rule change, to June 6, 2011.6 In order to solicit additional input from interested parties, including relevant data and analysis, on the issues presented by C2’s proposed rule change, on June 3, 2011, the Commission instituted proceedings to determine whether to approve or disapprove C2’s proposal.7 In its order instituting the proceedings, the Commission specifically noted its interest in receiving additional data and analysis relating to the potential effect that proposed p.m.-settled index options could have on the underlying cash equities markets. In response to the proceedings, the Commission received an additional three comment letters on the proposal as well as a rebuttal letter from C2.8 This order approves the proposed rule change on a 14-month pilot basis. II. Description of the Proposal The Exchange’s proposal would permit it to list and trade cash-settled S&P 500 index options with thirdFriday-of-the-month (‘‘Expiration Friday’’) expiration dates for which the exercise settlement value will be based on the index value derived from the closing prices of component securities (‘‘p.m.-settled’’). The proposed contract (referred to as ‘‘SPXPM’’) would use a $100 multiplier, and the minimum trading increment would be $0.05 for options trading below $3.00 and $0.10 for all other series. Strike price intervals would be set no less than 5 points apart. Consistent with existing rules for index options, the Exchange would allow up to twelve near-term expiration months, as well as LEAPS. Expiration processing would occur on the Saturday following Expiration Friday. The product would have European-style exercise and would not be subject to position limits, though there would be enhanced reporting requirements. The Exchange proposes that the SPXPM product be approved on a pilot basis for an initial period of fourteen months. As part of the pilot program, the Exchange committed to submit a pilot program report to the Commission at least two months prior to the 6 See Securities Exchange Act Release No. 64266 (April 8, 2011), 76 FR 20757 (April 13, 2011). 7 See Securities Exchange Act Release No. 64599 (June 3, 2011), 76 FR 33798 (June 9, 2011). 8 See Letters to Elizabeth M. Murphy, Secretary, Commission, from Michael J. Simon, Secretary, International Securities Exchange, LLC dated July 11, 2011 (‘‘ISE Letter 3’’); William J. Brodsky, Chairman and Chief Executive Officer, C2, dated July 11, 2011 (‘‘CBOE Letter 3’’); Thomas Foertsch, President, Exchange Capital Resources, dated July 11, 2011; and William J. Brodsky, Chairman and Chief Executive Officer, C2, dated July 25, 2011. E:\FR\FM\09SEN1.SGM 09SEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 76, Number 175 (Friday, September 9, 2011)]
[Notices]
[Pages 55956-55969]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-23035]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65249; File No. SR-NYSEArca-2011-63]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change To List and Trade Shares of the United States
Metals Index Fund, the United States Agriculture Index Fund and the
United States Copper Index Fund Under NYSE Arca Equities Rule 8.200

September 2, 2011.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that, on August 19, 2011, NYSE Arca, Inc. (the ``Exchange'' or ``NYSE
Arca'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

The Exchange proposes to list and trade shares of the United States
Metals Index Fund (``USMI''), the United States Agriculture Index Fund
(``USAI'') and the United States Copper Index Fund (``USCUI'')
(together, the ``Funds'') under NYSE Arca Equities Rule 8.200. The text
of the proposed rule change is available at the Exchange, the
Commission's Public Reference Room, and https://www.nyse.com.

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 self-regulatory organization
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 those 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 parts of such statements.

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

1. Purpose
NYSE Arca Equities Rule 8.200, Commentary .02 permits the trading
of Trust Issued Receipts either by listing or pursuant to unlisted
trading privileges (``UTP'').\3\ The Exchange proposes to list and
trade shares (``Units'') of the Funds pursuant to NYSE Arca Equities
Rule 8.200.
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\3\ Commentary .02 to NYSE Arca Equities Rule 8.200 applies to
Trust Issued Receipts that invest in ``Financial Instruments.'' The
term ``Financial Instruments,'' as defined in Commentary .02(b)(4)
to NYSE Arca Equities Rule 8.200, means any combination of
investments, including cash; securities; options on securities and
indices; futures contracts; options on futures contracts; forward
contracts; equity caps, collars and floors; and swap agreements.
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The Exchange notes that the Commission has previously approved the
listing and trading of other issues of Trust Issued Receipts on the
American Stock Exchange LLC,\4\ trading on NYSE Arca pursuant to
unlisted trading privileges (``UTP''),\5\ and listing on NYSE Arca.\6\
Among these is the United States Commodity Index Fund, which, like the
Funds, is a series of the United States Commodity Index Funds Trust
(``Trust'').\7\ In addition, the Commission has approved the listing
and trading of other exchange-traded fund-like products linked to the
performance of underlying commodities.\8\
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\4\ See, e.g., Securities Exchange Act Release No. 58161 (July
15, 2008), 73 FR 42380 (July 21, 2008) (SR-Amex-2008-39).
\5\ See, e.g., Securities Exchange Act Release No. 58163 (July
15, 2008), 73 FR 42391 (July 21, 2008) (SR-NYSEArca-2008-73).
\6\ See, e.g., Securities Exchange Act Release No. 58457
(September 3, 2008), 73 FR 52711 (September 10, 2008) (SR-NYSEArca-
2008-91).
\7\ See Securities Exchange Act Release No. 62527 (July 19,
2010), 75 FR 43606 (July 26, 2010) (SR-NYSEArca-2010-44) (order
approving listing on the Exchange of United States Commodity Index
Fund).
\8\ See, e.g., Securities Exchange Act Release Nos. 57456 (March
7, 2008), 73 FR 13599 (March 13, 2008) (SR-NYSEArca-2007-91) (order
granting accelerated approval for NYSE Arca listing the iShares GS
Commodity Trusts); 59781 (April 17, 2009), 74 FR 18771 (April 24,
2009) (SR-NYSEArca-2009-28) (order granting accelerated approval for
NYSE Arca listing the ETFS Silver Trust); 59895 (May 8, 2009), 74 FR
22993 (May 15, 2009) (SR-NYSEArca-2009-40) (order granting
accelerated approval for NYSE Arca listing the ETFS Gold Trust);
61219 (December 22, 2009), 74 FR 68886 (December 29, 2009) (order
approving listing on NYSE Arca of the ETFS Platinum Trust).
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The Units represent beneficial ownership interests in the Funds, as
described in the Registration Statement.\9\ The Funds are commodity

[[Page 55957]]

pools that are series of the Trust, a Delaware statutory trust. The
Funds are managed and controlled by United States Commodity Funds LLC
(``Sponsor''). The Sponsor is a Delaware limited liability company that
is registered as a commodity pool operator (``CPO'') with the Commodity
Futures Trading Commission (``CFTC'') and is a member of the National
Futures Association (``NFA'').
---------------------------------------------------------------------------

\9\ See the Funds' registration statement on Form S-1 for the
United States Commodity Index Funds Trust, dated November 24, 2010
(File No. 333-170844) relating to the Funds (``Registration
Statement''). The discussion herein relating to the Trust and the
Units is based, in part, on the Registration Statement.
---------------------------------------------------------------------------

United States Metals Index Fund (``USMI'')
According to the Registration Statement, the investment objective
of USMI is for the daily changes in percentage terms of its Units' net
asset value (``NAV'') to reflect the daily changes in percentage terms
of the SummerHaven Dynamic Metals Index Total Return (the ``Metals
Index''), less USMI's expenses. The Metals Index is designed to reflect
the performance of a diversified group of metals. The Metals Index is
owned and maintained by SummerHaven Index Management, LLC
(``SummerHaven Indexing'') and calculated and published by the
Exchange.
The Metals Index is a metal sector index designed to broadly
represent industrial and precious metals while overweighting the
components that are assessed to be in a low inventory state and
underweighting the components assessed to be in a high inventory state.
The Metals Index consists of six (6) base metals and four (4) precious
metals. The base metals are aluminum, copper, zinc, nickel, tin, and
lead. The precious metals are gold, silver, platinum, and palladium.
Each metal is assigned a base weight based on an assessment of market
liquidity and the metal's overall economic importance.
Academic research by Professors Gorton, Rouwenhorst and Hayashi has
shown that commodities in relatively low inventory states tend to have
higher returns than commodities in relatively high inventory
states.\10\ Furthermore, relative inventory comparisons can be
estimated by the price-based signals of momentum and basis. Momentum is
the percentage price change in a commodity over the previous year.
Basis is the annualized percentage difference between the nearest-to-
maturity contract and the second nearest-to-maturity contract. Using
these price-based signals, metals determined to be in low inventory
state will be weighted more heavily, and metals in high inventory state
will be weighted less heavily during any given month.
---------------------------------------------------------------------------

\10\ See ``The Fundamentals of Commodity Futures Returns,''
Gorton, Rouwenhorst and Hayashi (September 2008), Yale International
Center for Finance Working Paper No. 07-08.
---------------------------------------------------------------------------

The Metals Index is rules-based and is rebalanced monthly based on
observable price signals described above. In this context, the term
``rules-based'' is meant to indicate that the composition of the Metals
Index in any given month will be determined by quantitative formulas
relating to the prices of the futures contracts that relate to the
commodities that are included in the Metals Index. Such formulas are
not subject to adjustment based on other factors.
Futures contracts for metals in the Metals Index that are traded on
New York Mercantile Exchange (``NYMEX''), London Metal Exchange
(``LME''), and Commodity Exchange, Inc. (``COMEX'') are collectively
referred to herein as ``Eligible Metals Futures Contracts.'' The 10
Eligible Metals Futures Contracts that at any given time have been
designated as a component of the Metals Index are referred to as the
``Benchmark Component Metals Futures Contracts.'' The relative
weighting of the Benchmark Component Metals Futures Contracts will
change on a monthly basis, based on quantitative formulas developed by
SummerHaven Indexing relating to the prices of the Benchmark Component
Metals Futures Contracts.
The overall return on the Metals Index is generated by two
components: (i) Uncollateralized returns from the Benchmark Component
Metals Futures Contracts comprising the Metals Index, and (ii) a daily
fixed income return reflecting the interest earned on a hypothetical 3-
month U.S. Treasury Bill collateral portfolio, calculated using the
weekly auction rate for the 3-Month U.S. Treasury Bill published by the
U.S. Department of the Treasury. Information regarding the Metals Index
methodology may also be accessed by the public from SummerHaven
Indexing's Web site at https://www.summerhavenindex.com.
Because the Metals Index is comprised of actively traded contracts
with scheduled expirations, it can be calculated only by reference to
the prices of contracts for specified expiration, delivery or
settlement periods, referred to as contract expirations. The contract
expirations included in the Metals Index for each commodity during a
given year are designated by SummerHaven Indexing, provided that each
contract must be an active contract. An active contract for this
purpose is a liquid, actively-traded contract expiration, as defined or
identified by the relevant trading facility or, if no such definition
or identification is provided by the relevant trading facility, as
defined by standard custom and practice in the industry.
If a Futures Exchange \11\ ceases trading in all contract
expirations relating to a particular Benchmark Component Metals Futures
Contract, SummerHaven Indexing may designate a replacement contract on
the particular metal. The replacement contract must satisfy the
eligibility criteria for inclusion in the Metals Index. To the extent
practicable, the replacement will be effected during the next monthly
review of the composition of the Metals Index. If that timing is not
practicable, SummerHaven Indexing will determine the date of the
replacement based on a number of factors, including the differences
between the existing Benchmark Component Metals Futures Contract and
the replacement contract with respect to contractual specifications and
contract expirations.
---------------------------------------------------------------------------

\11\ COMEX, NYMEX, LME, Kansas City Board of Trade (``KCBT''),
ICE Futures (``ICE Futures''), Chicago Board of Trade (``CBOT'') and
Chicago Mercantile Exchange (``CME'') are referred to, collectively,
as the ``Futures Exchanges.''
---------------------------------------------------------------------------

If a Benchmark Component Metals Futures Contract is eliminated and
there is no replacement contract, the underlying metal will necessarily
drop out of the Metals Index.
USMI will seek to achieve its investment objective by investing to
the fullest extent possible in Benchmark Component Metals Futures
Contracts. Then, if constrained by regulatory requirements (as
described below) or in view of market conditions (as described below),
USMI will invest next in other Eligible Metals Futures Contracts based
on the same metal as the futures contracts subject to such regulatory
constraints or market conditions, and finally, to a lesser extent, in
other exchange-traded futures contracts that are economically identical
or substantially similar to the Benchmark Component Metals Futures
Contracts if one or more other Eligible Metals Futures Contracts is not
available. When USMI has invested to the fullest extent possible in
exchange-traded futures contracts, USMI may then invest in other
contracts and instruments based on the Benchmark Component Metals
Futures Contracts or the metals included in the Metals Index, such as
cash-settled options, forward contracts, cleared swap contracts and
swap contracts other than cleared swap contracts. Other exchange-traded
futures contracts that are economically identical or substantially
similar to the Benchmark Component Metals Futures Contracts and other
contracts and instruments based on the Benchmark Component Metals
Futures Contracts, as

[[Page 55958]]

well as metals included in the Metals Index, are collectively referred
to as ``Other Metals-Related Investments,'' and together with Benchmark
Component Metals Futures Contracts and other Eligible Metals Futures
Contracts, ``Metals Interests.''
Regulatory Requirements. As noted above, USMI may at times invest
in other Eligible Metal Futures Contracts based on the same metal as
the futures contracts subject to regulatory constraints (as described
below), and then, to a lesser extent, in Other Metals-Related
Investments in order to comply with regulatory requirements. An example
of such regulatory requirements would be if USMI is required by law or
regulation, or by one of its regulators, including a Futures Exchange,
to reduce its position in one or more Benchmark Component Metals
Futures Contracts to the applicable position limit or to a specified
accountability level for such contracts, USMI's assets could be
invested in one or more other Eligible Metal Futures Contracts. If one
or more such Eligible Metal Futures Contracts were unavailable or
economically impracticable, USMI could invest in Other Metals-Related
Investments that are intended to replicate the return on the Metals
Index or particular Benchmark Component Metals Futures Contracts.
Another example would be if, because USMI's assets were reaching higher
levels, it exceeded position limits, accountability levels or other
regulatory limits and, to avoid triggering such limits or levels, it
invested in one or more other Eligible Metal Futures Contracts to the
extent practicable and then in Other Metals-Related Investments. \12\
---------------------------------------------------------------------------

\12\ Pursuant to the Dodd-Frank Wall Street Reform and Consumer
Protection Act, the CFTC has been tasked with implementing rules and
regulations that are expected to impact position limits and
visibility levels and other regulatory requirements that will be
applicable to the Funds and their respective holdings.
---------------------------------------------------------------------------

When investing in Other Metals-Related Investments, USMI will first
invest in other exchange traded futures contracts that are economically
identical or substantially similar to the Benchmark Component Metals
Futures Contracts and then in cash-settled options, forward contracts,
cleared swap contracts and swap contracts other than cleared swap
contracts.
Market Conditions. As also noted above, there may be market
conditions that could cause USMI to invest in other Eligible Metal
Futures Contracts that are based on the same metal as the futures
contracts subject to such market conditions (as described below). One
such type of market condition would be where demand for Benchmark
Component Metals Futures Contracts exceeded supply and as a result USMI
was able to obtain more favorable terms under other Eligible Metal
Futures Contracts. An example of more favorable terms would be where
the aggregate costs to USMI from investing in other Eligible Metal
Futures Contracts (including actual or expected direct costs such as
the costs to buy, hold, or sell such investments, as well as indirect
costs such as opportunity costs) were less than the costs of investing
in Benchmark Component Metal Futures Contracts. Only after USMI becomes
subject to position limits in any Eligible Metal Futures Contracts will
USMI invest in Other Metals-Related Investments to replicate exposure
to the Eligible Metal Futures Contract that is position-limited.
Generally, USMI will only invest in this manner in other Eligible Metal
Futures Contracts or Other Metals-Related Investments if it results in
materially more favorable terms, and if such investments result in a
specific benefit for USMI or its shareholders, such as being able to
more closely track its benchmark.
USMI's trading advisor is SummerHaven Investment Management, LLC
(``SummerHaven''). The Sponsor expects to manage USMI's investments
directly, using the trading advisory services of SummerHaven for
guidance with respect to the Metals Index and the Sponsor's selection
of investments on behalf of USMI. The Sponsor is also authorized to
select futures commission merchants to execute USMI's transactions in
Benchmark Component Metals Futures Contracts, other Eligible Metal
Futures Contracts and Other Metals-Related Investments. The Sponsor,
SummerHaven Indexing and SummerHaven are not affiliated with a broker-
dealer and are subject to procedures designed to prevent the use and
dissemination of material nonpublic information regarding the Metals
Index or USMI's portfolio.\13\
---------------------------------------------------------------------------

\13\ The Sponsor represents that, in the event the Sponsor,
SummerHaven Indexing, or SummerHaven becomes affiliated with a
broker-dealer, it will implement a fire wall with respect to such
broker-dealer regarding access to information concerning the
composition and/or changes to a portfolio.
---------------------------------------------------------------------------

According to the Registration Statement, it is anticipated that
USMI will invest such that daily changes in USMI's NAV will closely
track the daily changes in the Metals Index.\14\ USMI's positions in
Metals Interests will be rebalanced on a monthly basis in order to
track the changing nature of the Metals Index. In order that USMI's
trading does not unduly cause extraordinary market movements, and to
make it more difficult for third parties to profit by trading based on
market movements that could be expected from changes in the Benchmark
Component Metals Futures Contracts, USMI's investments typically will
not be rebalanced entirely on a single day, but rather will typically
be rebalanced over a period of four days. After fulfilling the margin
and collateral requirements with respect to USMI's Metals Interests,
the Sponsor will invest the remainder of USMI's proceeds from the sale
of baskets in short-term obligations of the United States government
(``Treasury Securities'' or ``Treasuries'') or cash equivalents, and/or
hold such assets in cash (generally in interest-bearing accounts).
---------------------------------------------------------------------------

\14\ As of January 31, 2011, the Metals Index reflects
commodities in two commodity sectors: precious metals (representing
approximately 38% of the Metals Index) and industrial metals
(representing approximately 62% of the Metals Index).
---------------------------------------------------------------------------

According to the Registration Statement, the Sponsor endeavors to
place USMI's trades in Metals Interests and otherwise manage USMI's
investments so that A will be within plus/minus 10 percent of B, where:
A is the average daily percentage change in USMI's NAV for
any period of 30 successive NYSE Arca trading days as of which USMI
calculates its NAV, and
B is the average daily percentage change in the Metals
Index over the same period.
The table immediately below lists the eligible metals, the relevant
Futures Exchange on which each Eligible Metals Futures Contract is
listed and quotation details including imposed price and position
limits:

[[Page 55959]]

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Aluminum...................... High Grade LME.......... 25 metric tons.. None................. None................. None............ None............ 06:55 AM: 12:00 PM
Primary
Aluminum.
Copper........................ Copper.......... COMEX........ 25,000 lbs...... 5000................. 5000................. 1200............ None............ 08:10 AM-1:00 PM
Lead.......................... Lead............ LME.......... 25 metric tons.. None................. None................. None............ None............ 07:15 AM: 11:45 AM
Nickel........................ Primary Nickel.. LME.......... 6 metric tons... None................. None................. None............ None............ 07:10 AM: 11:50 AM
Tin........................... Tin............. LME.......... 5 metric tons... None................. None................. None............ None............ 07:05 AM: 11:40 AM
Zinc.......................... Special High LME.......... 25 metric tons.. None................. None................. None............ None............ 06:50 AM: 11:35 AM
Grade Zinc.
Gold.......................... Gold............ COMEX........ 100 troy oz. 6000................. 6000................. 3000............ None............ 08:20 AM-1:05 PM
Silver........................ Silver.......... COMEX........ 5,000 troy oz. 6000................. 6000................. 1500............ None............ 08:25 AM-1:25 PM
Platinum...................... Platinum........ NYMEX........ 50 troy oz. 1500................. 1500................. None............ None............ 08:30 AM-1:00 PM
Palladium..................... Palladium....... NYMEX........ 100 troy oz. 1000................. 1000................. 650............. None............ 08:20 AM-1:30 PM
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Sponsor believes that market arbitrage opportunities will cause
USMI's Unit price on NYSE Arca to closely track USMI's NAV per Unit.
The Sponsor believes that the net effect of this expected relationship
and the expected relationship described above between USMI's NAV and
the Metals Index will be that the changes in the price of USMI's Units
on NYSE Arca will closely track, in percentage terms, changes in the
Metals Index, less USMI's expenses.
According to the Registration Statement, the Benchmark Component
Metals Futures Contracts for each metal will remain in the Metals Index
from month to month. Weights for each of the Benchmark Component Metals
Futures Contracts are determined for the next month. The methodology
used to calculate the Metals Index weighting is based solely on
quantitative data using observable futures prices and is not subject to
human bias. The monthly weighting selection is a three-step process
based upon examination of the relevant futures prices for each metal.
For each metal in the Metals Index, the index selects a specific
Benchmark Component Metals Futures Contract with a tenor (i.e.,
contract month) among the Eligible Metals Futures Contracts based upon
the relative prices of the Benchmark Component Metals Futures Contract
within the eligible range of contract months. The previous
notwithstanding, the contract expiration is not changed for that month
if a Benchmark Component Metals Futures Contract remains in the Metals
Index, as long as the contract does not expire or enter its notice
period in the subsequent month.
In the event of a commodity futures market where near month
contracts to expire trade at a higher price than next month contracts
to expire, a situation referred to as ``backwardation,'' then absent
the impact of the overall movement in commodity prices, the value of
the Metals Index would tend to rise as it approaches expiration. As a
result USMI may benefit because it would be selling more expensive
contracts and buying less expensive ones on an ongoing basis.
Conversely, in the event of a commodity futures market where near month
contracts trade at a lower price than next month contracts, a situation
referred to as ``contango,'' then absent the impact of the overall
movement in commodity prices, the value of the Metals Index would tend
to decline as it approaches expiration. As a result USMI's total return
may be lower than might otherwise be the case because it would be
selling less expensive contracts and buying more expensive ones. The
impact of backwardation and contango may cause the total return of USMI
to vary significantly from the total return of other price references,
such as the spot price of the commodities comprising the Metals Index.
In the event of a prolonged period of contango, and absent the impact
of rising or falling commodity prices, this could have a significant
negative impact on USMI's NAV and total return.
USMI will invest in Metals Interests to the fullest extent possible
without being leveraged or unable to satisfy its expected current or
potential margin or collateral obligations with respect to its
investments in Metals Interests. The primary focus of the Sponsor is
the investment in Metals Interests and the management of USMI's
investments in Treasury Securities, cash and/or cash equivalents.
The Sponsor will employ a ``neutral'' investment strategy for USMI
intended to track the changes in the Metals Index regardless of whether
the Metals Index goes up or goes down. USMI's ``neutral'' investment
strategy is designed to permit investors generally to purchase and sell
USMI's Units for the purpose of investing indirectly in the commodities
market in a cost-effective manner, and/or to permit participants in the
commodities or other industries to hedge the risk of losses in their
commodity-related transactions. Accordingly, depending on the
investment objective of an individual investor, the risks generally
associated with investing in the commodities market and/or the risks
involved in hedging may exist. In addition, an investment in USMI
involves the risks that the changes in the price of the USMI's Units
will not accurately track the changes in the Metals Index, and that
changes in the Metals Index will not closely correlate with changes in
the spot prices of the commodities underlying the Benchmark Component
Metals Futures Contracts. Furthermore, USMI also invests in short-term
Treasury Securities or holds cash to meet its current or potential
margin or collateral requirements with respect to its investments in
Metals Interests and invests cash not required to be used as margin or
collateral. There is not expected to be any meaningful

[[Page 55960]]

correlation between the performance of USMI's investments in Treasury
Securities, cash or cash equivalents and the changes in the price of
the Metals Index. While the level of interest earned on or the market
price of these investments may in some respect correlate to changes in
the price of the Metals Index, this correlation is not anticipated as
part of the USMI's efforts to meet its objectives. This and certain
risk factors discussed in the Registration Statement may cause a lack
of correlation between changes in USMI's NAV and changes in the price
of the Metals Index. The Sponsor does not intend to operate USMI in a
fashion such that its per Unit NAV will equal, in dollar terms, the
spot prices of the commodities underlying the Benchmark Component
Metals Futures Contracts that comprise the Metals Index or the prices
of any particular group of Benchmark Component Metals Futures
Contracts.
United States Agriculture Index Fund (``USAI'')
According to the Registration Statement, the investment objective
of USAI is for the daily changes in percentage terms of its Units' NAV
to reflect the daily changes in percentage terms of the SummerHaven
Dynamic Agriculture Index Total Return (the ``Agriculture Index''),
less USAI's expenses. The Agriculture Index is designed to reflect the
performance of a diversified group of agricultural commodities. The
Agriculture Index is owned and maintained by SummerHaven Indexing and
calculated and published by the Exchange.
The Agriculture Index is an agricultural sector index designed to
broadly represent major agricultural commodities while overweighting
the components that are assessed to be in a low inventory state and
underweighting the components assessed to be in a high inventory state.
The Agriculture Index consists of fourteen agricultural markets:
soybeans, corn, soft red winter wheat, hard red winter wheat, soybean
oil, soybean meal, canola, sugar, cocoa, coffee, cotton, live cattle,
feeder cattle and lean hogs. Each agricultural commodity is assigned a
base weight based on an assessment of market liquidity and the
commodity's overall economic importance. Each commodity is U.S. Dollar
based, with the exception of canola, which is quoted in Canadian
Dollars and converted to U.S. Dollars for the purpose of the
Agriculture Index calculation.
Academic research by Professors Gorton, Rouwenhorst and Hayashi has
shown that commodities in relatively low inventory states tend to have
higher returns that [sic] commodities in relatively high inventory
states.\15\ Furthermore, relative inventory comparisons can be
estimated by the price-based signals of momentum and basis. Momentum is
the percentage price change in a commodity over the previous year.
Basis is the annualized percentage difference between the nearest-to-
maturity contract and the second nearest-to-maturity contract. Using
these price-based signals, agricultural commodities determined to be in
low inventory state will be weighted more heavily, and agricultural
commodities in high inventory state will be weighted less heavily
during any given month.
---------------------------------------------------------------------------

\15\ See note 10, supra.
---------------------------------------------------------------------------

The Agriculture Index is rules-based and rebalanced monthly based
on observable price signals described above. In this context, the term
``rules-based'' is meant to indicate that the composition of the
Agriculture Index in any given month will be determined by quantitative
formulas relating to the prices of the futures contracts that relate to
the commodities that are included in the Agriculture Index. Such
formulas are not subject to adjustment based on other factors.
Futures contracts for agricultural commodities in the Agriculture
Index that are currently traded on the ICE Futures, CBOT, CME, KCBT and
ICE Canada are collectively referred to herein as ``Eligible
Agriculture Futures Contracts.'' The 14 Eligible Agriculture Futures
Contracts that at any given time have been designated as a component of
the Agriculture Index are referred to as the ``Benchmark Component
Agriculture Futures Contracts.'' The relative weighting of the
Benchmark Component Agriculture Futures Contracts will change on a
monthly basis, based on quantitative formulas developed by SummerHaven
Indexing relating to the prices of the Benchmark Component Agriculture
Futures Contracts.
The overall return on the Agriculture Index is generated by two
components: (i) uncollateralized returns from the Benchmark Component
Agriculture Futures Contracts comprising the Agriculture Index, and
(ii) a daily fixed income return reflecting the interest earned on a
hypothetical 3-month U.S. Treasury Bill collateral portfolio,
calculated using the weekly auction rate for the 3-Month U.S. Treasury
Bill published by the U.S. Department of the Treasury. Because the
Agriculture Index is comprised of actively traded contracts with
scheduled expirations, it can be calculated only by reference to the
prices of contracts for specified expiration, delivery or settlement
periods, referred to as contract expirations. The contract expirations
included in the Agriculture Index for each commodity during a given
year are designated by SummerHaven Indexing, provided that each
contract must be an active contract. An active contract for this
purpose is a liquid, actively-traded contract expiration, as defined or
identified by the relevant trading facility or, if no such definition
or identification is provided by the relevant trading facility, as
defined by standard custom and practice in the industry. Information
regarding the Agriculture Index methodology may also be accessed by the
public from SummerHaven Indexing's Web site at https://www.summerhavenindex.com.
If a Futures Exchange ceases trading in all contract expirations
relating to a particular Benchmark Component Agriculture Futures
Contract, SummerHaven Indexing may designate a replacement contract on
the particular agricultural commodity. The replacement contract must
satisfy the eligibility criteria for inclusion in the Agriculture
Index. To the extent practicable, the replacement will be effected
during the next monthly review of the composition of the Agriculture
Index. If that timing is not practicable, SummerHaven Indexing will
determine the date of the replacement based on a number of factors,
including the differences between the existing Benchmark Component
Agriculture Futures Contract and the replacement contract with respect
to contractual specifications and contract expirations.
If a Benchmark Component Agriculture Futures Contract is eliminated
and there is no replacement contract, the underlying agricultural
commodity will necessarily drop out of the Agriculture Index.
USAI will seek to achieve its investment objective by investing to
the fullest extent possible in Benchmark Component Agriculture Futures
Contracts. Then, if constrained by regulatory requirements (described
below) or in view of market conditions (described below), USAI will
invest next in other Eligible Agriculture Futures Contracts based on
the same agricultural commodity as the futures contracts subject to
such regulatory constraints or market conditions, and finally, to a
lesser extent, in other exchange traded futures contracts that are
economically identical or substantially similar to the Benchmark
Component Agriculture Futures Contracts, if one or more Eligible
Agriculture Futures Contracts is

[[Page 55961]]

not available. When USAI has invested to the fullest extent possible in
exchange-traded futures contracts, USAI may then invest in other
contracts and instruments based on the Benchmark Component Agriculture
Futures Contracts or the agricultural commodities included in the
Agriculture Index, such as cash-settled options, forward contracts,
cleared swap contracts and swap contracts other than cleared swap
contracts. Other exchange-traded futures contracts that are
economically identical or substantially similar to the Benchmark
Component Agriculture Futures Contracts and other contracts and
instruments based on the Benchmark Component Agriculture Futures
Contracts, as well as metals included in the Agriculture Index, are
collectively referred to as ``Other Agriculture-Related Interests,''
and together with Benchmark Component Agriculture Futures Contracts and
other Eligible Agriculture Futures Contracts, ``Agriculture
Interests.''
Regulatory Requirements. As noted above, USAI may at times invest
in Eligible Agriculture Futures Contracts based on the same
agricultural commodity as the futures contracts subject to regulatory
constraints (as described below), and then to a lesser extent in Other
Agriculture-Related Investments in order to comply with regulatory
requirements. An example of such regulatory requirements would be if
USAI is required by law or regulation, or by one of its regulators,
including a Futures Exchange, to reduce its position in one or more
Benchmark Component Agriculture Futures Contracts to the applicable
position limit or to a specified accountability level for such
contracts, USAI's assets could be invested in one or more other
Eligible Agriculture Futures Contracts. If one or more such Eligible
Agriculture Futures Contracts was unavailable or economically
impracticable, USAI could invest in Other Agriculture-Related
Investments that are intended to replicate the return on the
Agriculture Index or particular Benchmark Component Agriculture Futures
Contracts. Another example would be if because USAI's assets were
reaching higher levels, it exceeded position limits, accountability
levels or other regulatory limits and, to avoid triggering such limits
or levels, it invested in one or more other Eligible Agriculture
Futures Contracts to the extent practicable and then in Other
Agriculture-Related Investments.
When investing in Other Agriculture-Related Investments, USAI will
first invest in other exchange traded futures contracts that are
economically identical or substantially similar to the Benchmark
Component Agriculture Futures Contracts and then in cash settled
options, forward contracts, cleared swap contracts and swap contracts
other than cleared swap contracts.
Market Conditions. As also noted above, there may be market
conditions that could cause USAI to invest in other Eligible
Agriculture Futures Contracts that are based on the same agricultural
commodity as the futures contracts subject to such market conditions
(as described below). One such type of market condition would be where
demand for Benchmark Component Agriculture Futures Contracts exceeded
supply and as a result USAI was able to obtain more favorable terms
under other Eligible Agriculture Futures Contracts. An example of more
favorable terms would be where the aggregate costs to USAI from
investing in other Eligible Agriculture Futures Contracts or Other
Agriculture-Related Investments (including actual or expected direct
costs such as the costs to buy, hold, or sell such investments, as well
as indirect costs such as opportunity costs) were less than the costs
of investing in Benchmark Component Agriculture Futures Contracts. Only
after USAI becomes subject to position limits in any Eligible
Agriculture Futures Contract will USAI invest in Other Agriculture-
Related Investments to replicate exposure to the Eligible Agriculture
Futures Contract that is position-limited. Generally, USAI will only
invest in this manner in other Eligible Agriculture Futures Contracts
or Other Agriculture-Related Investments if it results in materially
more favorable terms, and if such investments result in a specific
benefit for USAI or its shareholders, such as being able to more
closely track its benchmark.
USAI's trading advisor is SummerHaven. The Sponsor expects to
manage USAI's investments directly, using the trading advisory services
of SummerHaven for guidance with respect to the Agriculture Index and
the Sponsor's selection of investments on behalf of USAI. The Sponsor
is also authorized to select futures commission merchants to execute
USAI's transactions in Benchmark Component Agriculture Futures
Contracts, other Eligible Agriculture Futures Contracts and Other
Agriculture-Related Investments. The Sponsor, SummerHaven Indexing and
SummerHaven are not affiliated with a broker-dealer and are subject to
procedures designed to prevent the use and dissemination of material
nonpublic information regarding the Agriculture Index or USAI's
portfolio.\16\
---------------------------------------------------------------------------

\16\ See note 13, supra.
---------------------------------------------------------------------------

According to the Registration Statement, it is anticipated that
USAI will invest such that daily changes in USAI's NAV will closely
track the daily changes in the Agriculture Index.\17\ USAI's positions
in Agriculture Interests will be rebalanced on a monthly basis in order
to track the changing nature of the Agriculture Index. In order that
USAI's trading does not unduly cause extraordinary market movements,
and to make it more difficult for third parties to profit by trading
based on market movements that could be expected from changes in the
Benchmark Component Agriculture Futures Contracts, USAI's investments
typically will not be rebalanced entirely on a single day, but rather
will typically be rebalanced over a period of four days. After
fulfilling the margin and collateral requirements with respect to
USAI's Agriculture Interests, the Sponsor will invest the remainder of
USAI's proceeds from the sale of baskets in Treasury Securities or cash
equivalents, and/or hold such assets in cash (generally in interest-
bearing accounts).
---------------------------------------------------------------------------

\17\ As of January 31, 2011, the Agriculture Index reflects
commodities in three commodity sectors: grains (representing
approximately 47% of the Agriculture Index), soft commodities (e.g.,
sugar, cotton, coffee, cocoa) (representing approximately 36% of the
Agriculture Index), and livestock (representing approximately 17% of
the Agriculture Index).
---------------------------------------------------------------------------

According to the Registration Statement, the Sponsor endeavors to
place USAI's trades in Agriculture Interests and otherwise manage
USAI's investments so that A will be within plus/minus 10 percent of B,
where:
A is the average daily percentage change in USAI's NAV for
any period of 30 successive NYSE Arca trading days as of which USAI
calculates its NAV, and
B is the average daily percentage change in the
Agriculture Index over the same period.
The table immediately below lists the eligible agricultural
commodities, the relevant Futures Exchange on which each Eligible
Agriculture Futures Contract is listed and quotation details.

[[Page 55962]]

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Position Position Position
Commodity Designated Exchange Units Accountability Accountability limits--spot limits--single limits--all Trading hours (E.T.)
contract levels--single month levels all months month month months
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Soybeans.................... Soybeans....... CBOT......... 5,000 bushels.. None................ None................ 600 6500.......... 10000...... 10:30 AM-2:15 PM
Corn........................ Corn........... CBOT......... 5,000 bushels.. None................ None................ 600 13500......... 22000...... 10:30 AM-2:15 PM
Soft Red Winter Wheat....... Soft Red Winter CBOT......... 5,000 bushels.. None................ None................ 600 5000.......... 6500....... 10:30 AM-2:15 PM
Wheat.
Hard Red Winter Wheat....... Hard Red Winter KCBT......... 5,000 bushels.. None................ None................ 600 5000.......... 6500....... 09:30 AM-1:15PM
Wheat.
Soybean Oil................. Soybean Oil.... CBOT......... 60,000 lbs..... None................ None................ 540 5000.......... 6500....... 10:30 AM-2:15 PM
Soybean Meal................ Soybean Meal... CBOT......... 100 tons....... None................ None................ 720 5000.......... 6500....... 09:30 AM-1:15 PM
Coffee...................... Coffee ``C''... ICE-US....... 37,500 lbs..... 5000................ 5000................ 500 5000.......... 5000....... 03:30 AM-2:00 PM
Cocoa....................... Cocoa.......... ICE-US....... 10 metric tons. 6000................ 6000................ 1000 None.......... None....... 04:00 AM-2:00 PM
Sugar....................... World Sugar No. ICE-US....... 112,000 lbs.... 10000............... 15000............... 5000 None.......... None....... 03:30 AM-2:00 PM
11.
Canola...................... Canola......... ICE-CANADA... 20 tonnes...... None................ None................ 1000 None.......... None....... 08:00 PM-2:15 PM
Cotton...................... Cotton......... ICE-US....... 50,000 lbs..... None................ None................ 300 3500.......... 5000....... 9:00 PM-2:30 PM
Feeder Cattle............... Feeder Cattle.. CME.......... 50,000 lbs..... None................ None................ 300 1950.......... None....... 09:05 AM-1:00 PM
Live Cattle................. Live Cattle.... CME.......... 40,000 lbs..... None................ None................ 450 6300.......... None....... 10:05 AM-2:00 PM
Lean Hogs................... Lean Hogs...... CME.......... 40,000 lbs..... None................ None................ 950 4150.......... None....... 09:05 AM-1:00 PM
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Sponsor believes that market arbitrage opportunities will cause
USAI's Unit price on NYSE Arca to closely track USAI's NAV per Unit.
The Sponsor believes that the net effect of this expected relationship
and the expected relationship described above between USAI's NAV and
the Agriculture Index will be that the changes in the price of USAI's
Units on NYSE Arca will closely track, in percentage terms, changes in
the Agriculture Index, less USAI's expenses.
According to the Registration Statement, the Benchmark Component
Agriculture Futures Contracts for each agricultural commodity will
remain in the Agriculture Index from month to month. Weights for each
of the Benchmark Component Agriculture Futures Contracts in the
Agriculture Index are determined for the next month. The methodology
used to calculate the Agriculture Index weighting is based solely on
quantitative data using observable futures prices and is not subject to
human bias. The monthly weighting selection is a three-step process
based upon examination of the relevant futures prices for each
agricultural commodity. For each agricultural commodity in the
Agriculture Index, the index selects a specific Benchmark Component
Agriculture Futures Contract with a tenor (i.e., contract month) among
the Eligible Agriculture Futures Contracts based upon the relative
prices of the Benchmark Component Agriculture Futures Contracts within
the eligible range of contract months. The previous notwithstanding,
the contract expiration is not changed for that month if a Benchmark
Component Agriculture Futures Contract remains in the Agriculture
Index, as long as the contract does not enter expire or enter its
notice period in the subsequent month.
In the event of a commodity futures market where near month
contracts to expire trade at a higher price than next month contracts
to expire, a situation referred to as ``backwardation,'' then absent
the impact of the overall movement in commodity prices, the value of
the Agriculture Index would tend to rise as it approaches expiration.
As a result USAI may benefit because it would be selling more expensive
contracts and buying less expensive ones on an ongoing basis.
Conversely, in the event of a commodity futures market where near month
contracts trade at a lower price than next month contracts, a situation
referred to as ``contango,'' then absent the impact of the overall
movement in commodity prices, the value of the Agriculture Index would
tend to decline as it approaches expiration. As a result USAI's total
return may be lower than might otherwise be the case because it would
be selling less expensive contracts and buying more expensive ones. The
impact of backwardation and contango may cause the total return of USAI
to vary significantly from the total return of other price references,
such as the spot price of the commodities comprising the Agriculture
Index. In the event of a prolonged period of contango, and absent the
impact of rising or falling commodity prices, this could have a
significant negative impact on USAI's NAV and total return.
USAI will invest in Agriculture Interests to the fullest extent
possible without being leveraged or unable to satisfy its expected
current or potential margin or collateral obligations with respect to
its investments in Agriculture

[[Page 55963]]

Interests. The primary focus of the Sponsor is the investment in
Agriculture Interests and the management of USAI's investments in
Treasury Securities, cash and/or cash equivalents.
The Sponsor will employ a ``neutral'' investment strategy for USAI
intended to track the changes in the Agriculture Index regardless of
whether the Agriculture Index goes up or goes down. USAI's ``neutral''
investment strategy is designed to permit investors generally to
purchase and sell USAI's Units for the purpose of investing indirectly
in the commodities market in a cost-effective manner, and/or to permit
participants in the commodities or other industries to hedge the risk
of losses in their commodity-related transactions. Accordingly,
depending on the investment objective of an individual investor, the
risks generally associated with investing in the commodities market
and/or the risks involved in hedging may exist. In addition, an
investment in USAI involves the risks that the changes in the price of
the USAI's Units will not accurately track the changes in the
Agriculture Index, and that changes in the Agriculture Index will not
closely correlate with changes in the spot prices of the commodities
underlying the Benchmark Component Agriculture Futures Contracts.
Furthermore, USAI also invests in short-term Treasury Securities or
holds cash to meet its current or potential margin or collateral
requirements with respect to its investments in Agriculture Interests
and invests cash not required to be used as margin or collateral. There
is not expected to be any meaningful correlation between the
performance of USAI's investments in Treasury Securities, cash or cash
equivalents and the changes in the price of the Agriculture Index.
While the level of interest earned on or the market price of these
investments may in some respect correlate to changes in the price of
the Agriculture Index, this correlation is not anticipated as part of
USAI's efforts to meet its objectives. This and certain risk factors
discussed in the Registration Statement may cause a lack of correlation
between changes in USAI's NAV and changes in the price of the
Agriculture Index. The Sponsor does not intend to operate USAI in a
fashion such that its per Unit NAV will equal, in dollar terms, the
spot prices of the commodities underlying the Benchmark Component
Agriculture Futures Contracts that comprise the Agriculture Index or
the prices of any particular group of Benchmark Component Agriculture
Futures Contracts.
United States Copper Index Fund (``USCUI'')
According to the Registration Statement, the investment objective
of USCUI is for the daily changes in percentage terms of its Units' NAV
to reflect the daily changes in percentage terms of the SummerHaven
Copper Index Total Return (the ``Copper Index''), less USCUI's
expenses. The Copper Index is designed to reflect the performance of
the investment returns from a portfolio of futures contracts for copper
that are traded on the COMEX (such futures contracts, collectively,
``Eligible Copper Futures Contracts''). The Copper Index is owned and
maintained by SummerHaven Indexing and calculated and published by the
Exchange.
For reasons discussed below, the Copper Index is comprised of
either two or three Eligible Copper Futures Contracts that are selected
on a monthly basis based on quantitative formulas relating to the
prices of the Eligible Copper Futures Contracts developed by
SummerHaven Indexing. The Eligible Copper Futures Contracts that at any
given time make up the Copper Index are referred to herein as
``Benchmark Component Copper Futures Contracts.''
The Copper Index is a single-commodity index designed to be an
investment benchmark for copper as an asset class. The Copper Index is
composed of copper futures contracts on the COMEX exchange. The Copper
Index attempts to maximize backwardation and minimize contango while
utilizing contracts in liquid portions of the futures curve.
The Copper Index is rules-based and is rebalanced monthly based on
observable price signals. In the case of the Copper Index, the price
signal is based on ``basis.'' Basis is the annualized percentage
difference between the nearest-to-maturity contract's price and the
second nearest-to-maturity contract's price. The basis calculation can
produce a positive number, such that the nearest-to-maturity contract
is higher than the second nearest-to-maturity contract's price (a
condition also referred to as ``backwardation''), or it can produce a
negative number, such that the nearest-to-maturity contract's price is
lower than the second nearest-to-maturity contract's price (a condition
also referred to as ``contango'').
At the end of each month, (1) the copper futures curve is assessed
to be in either backwardation or contango as discussed above, and (2)
the annualized percentage price difference between the closest-to-
expiration Eligible Copper Futures Contract and each of the next four
Eligible Copper Futures Contracts is calculated. If the copper futures
curve is in backwardation at the end of a month, the Copper Index takes
positions in the two Eligible Copper Futures Contracts with the highest
annualized percentage price difference, each weighted at 50%. If the
copper futures curve is in contango, then the Copper Index takes
positions in three Eligible Copper Futures Contracts, as follows:
first, the Copper Index takes positions in the two Eligible Copper
Futures Contracts with the highest annualized percentage price
difference, each weighted at 25%; then the Copper Index also takes a
position in the nearest-to-maturity December Eligible Copper Futures
Contract that has expiration more distant than the fourth nearest
Eligible Copper Futures Contract, which position is weighted at 50%.
In this context, the term ``rules-based'' is meant to indicate that
the composition of the Copper Index in any given month will be
determined by quantitative formulas relating to the prices of the
futures contracts that are included in the Copper Index. Such formulas
are not subject to adjustment based on other factors.
The overall return on the Copper Index is generated by two
components: (i) Uncollateralized returns from the Benchmark Component
Copper Futures Contracts comprising the Copper Index, and (ii) a daily
fixed income return reflecting the interest earned on a hypothetical 3-
month U.S. Treasury Bill collateral portfolio, calculated using the
weekly auction rate for the 3-Month U.S. Treasury Bills published by
the U.S. Department of the Treasury. Because the Copper Index is
comprised of actively traded contracts with scheduled expirations, it
can be calculated only by reference to the prices of contracts for
specified expiration, delivery or settlement periods, referred to as
contract expirations. The contract expirations included in the Copper
Index for each commodity during a given year are designated by
SummerHaven Indexing, provided that each contract must be an active
contract. An active contract for this purpose is a liquid, actively-
traded contract expiration, as defined or identified by the relevant
trading facility or, if no such definition or identification is
provided by the relevant trading facility, as defined by standard
custom and practice in the industry. Information regarding the Copper
Index methodology may also be accessed by the public from SummerHaven

[[Page 55964]]

Indexing's Web site at https://www.summerhavenindex.com.
If a Futures Exchange ceases trading in all contract expirations
relating to a Benchmark Component Copper Futures Contract, SummerHaven
Indexing may designate a replacement contract. The replacement contract
must satisfy the eligibility criteria for inclusion in the Copper
Index. To the extent practicable, the replacement will be effected
during the next monthly review of the composition of the Copper Index.
If that timing is not practicable, SummerHaven Indexing will determine
the date of the replacement based on a number of factors, including the
differences between the existing Benchmark Component Copper Futures
Contract and the replacement contract with respect to contractual
specifications and contract expirations.
USCUI will seek to achieve its investment objective by investing to
the fullest extent possible in the Benchmark Component Copper Futures
Contracts. Then if constrained by regulatory requirements (described
below) or in view of market conditions (described below), USCUI will
invest next in other Eligible Copper Futures Contracts, and finally to
a lesser extent, in other exchange-traded futures contracts that are
economically identical or substantially similar to the Benchmark
Component Copper Futures Contracts if one or more other Eligible Copper
Futures Contracts is not available. When USCUI has invested to the
fullest extent possible in exchange-traded futures contracts, USCUI may
then invest in other contracts and instruments based on the Benchmark
Component Copper Futures Contracts, other Eligible Copper Futures
Contracts or copper, such as cash-settled options, forward contracts,
cleared swap contracts and swap contracts other than cleared swap
contracts. Other exchange-traded futures contracts that are
economically identical or substantially similar to the Benchmark
Component Copper Futures Contracts and other contracts and instruments
based on the Benchmark Component Copper Futures Contracts, are
collectively referred to as ``Other Copper-Related Investments,'' and
together with Benchmark Component Copper Futures Contracts and other
Eligible Copper Futures Contracts, ``Copper Interests.''
Regulatory Requirements. As noted above, USCUI may at times invest
in other Eligible Copper Futures Contracts based on the same metal as
the futures contracts subject to regulatory constraints (as described
below), and finally to a lesser extent, in other exchange traded
futures contracts that are economically identical or substantially
similar to the Benchmark Component Copper Futures Contracts if one or
more other Eligible Copper Futures Contracts is not available in order
to comply with regulatory requirements. An example of such regulatory
requirements would be if USCUI is required by law or regulation, or by
one of its regulators, including a Futures Exchange, to reduce its
position in one or more Benchmark Component Copper Futures Contracts to
the applicable position limit or to a specified accountability level
for such contracts, USCUI's assets could be invested in one or more
other Eligible Copper Futures Contracts. If one or more such Eligible
Copper Futures Contracts were unavailable or economically
impracticable, USCUI could invest in Other Copper-Related Investments
that are intended to replicate the return on the Copper Index or
particular Benchmark Component Copper Futures Contracts. Another
example would be if, because USCUI's assets were reaching higher
levels, it exceeded position limits, accountability levels or other
regulatory limits and, to avoid triggering such limits or levels, it
invested in one or more other Eligible Copper Futures Contracts to the
extent practicable and then in Other Copper-Related Investments.
When investing in Other Copper-Related Investments, USCUI will
first invest in other exchange traded futures contracts that are
economically identical or substantially similar to the Benchmark
Component Copper Futures Contracts, other Eligible Copper Futures
Contracts, and then in cash-settled options, forward contracts, cleared
swap contracts and swap contracts other than cleared swap contracts.
Market Conditions. As also noted above, there may be market
conditions that could cause USCUI to invest in other Eligible Copper
Futures Contracts that are based on the same metal as the futures
contracts subject to such market conditions (as described below). One
such type of market condition would be where demand for Benchmark
Component Copper Futures Contracts exceeded supply and as a result
USCUI was able to obtain more favorable terms under other Eligible
Copper Futures Contracts. An example of more favorable terms would be
where the aggregate costs to USCUI from investing in other Eligible
Copper Futures Contracts (including actual or expected direct costs
such as the costs to buy, hold, or sell such investments, as well as
indirect costs such as opportunity costs) were less than the costs of
investing in Benchmark Component Copper Futures Contracts. Only after
USCUI becomes subject to position limits in any Eligible Copper Futures
Contract will USCUI invest in Other Copper-Related Investments to
replicate exposure to the Eligible Copper Futures Contract that is
position-limited. Generally, USCUI will only invest in this manner in
other Eligible Copper Futures Contracts or Other Copper-Related
Investments if it results in materially more favorable terms, and if
such investments result in a specific benefit for USCUI or its
shareholders, such as being able to more closely track its benchmark.
USCUI's trading advisor is SummerHaven. The Sponsor expects to
manage USCUI's investments directly, using the trading advisory
services of SummerHaven for guidance with

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