Organization
PowerShares DB G10 Currency Harvest Fund (the Fund) was formed as a Delaware statutory trust on
April 12, 2006. DB Commodity Services LLC, a Delaware limited liability company (DBCS or the Managing Owner) seeded the Fund with a capital contribution of $1,000 in exchange for 40 General Shares of the Fund. The fiscal
year end of the Fund is December 31
st
. DBCS is the
Managing Owner of the Fund. The term of the Fund is perpetual (unless terminated earlier in certain circumstances) as provided for in the Fourth Amended and Restated Declaration of Trust and Trust Agreement of the Fund (the Trust
Agreement).
The Fund offers common units of beneficial interest (the Shares) only to certain eligible
financial institutions (the Authorized Participants) in one or more blocks of 200,000 Shares, called a Basket. The proceeds from the offering of Shares are invested in the Fund. The Fund commenced investment operations on
September 15, 2006. The Fund commenced trading on the American Stock Exchange (which became the NYSE Alternext US LLC (the NYSE Alternext)) on September 18, 2006 and is now listed on the NYSE Arca, Inc. (the NYSE
Arca) as of November 25, 2008.
As of the date of this Report, each of Deutsche Bank Securities Inc., Merrill Lynch
Professional Clearing Corp., Newedge USA LLC, Virtu Financial Capital Markets LLC, Citigroup Global Markets Inc., J.P. Morgan Securities Inc., Credit Suisse Securities (USA) LLC, Virtu Financial BD LLC, Knight Capital Americas LLC, Timber Hill LLC,
Morgan Stanley & Co. LLC, Jefferies LLC, Nomura Securities International Inc., RBC Capital Markets, LLC, UBS Securities LLC, Cantor Fitzgerald & Co., BNP Paribas Securities Corp., Goldman, Sachs & Co. and Goldman Sachs
Execution & Clearing, L.P. has executed a Participant Agreement and are the only Authorized Participants.
Fund Investment
Overview
The Fund invests the proceeds from the offering of Shares in exchange-traded currency futures comprising the
Deutsche Bank G10 Currency Future Harvest IndexExcess Return (the Index) with a view to tracking the changes, whether positive or negative, in the level of the Index calculated on an excess return basis, over time, plus the
excess, if any, of the Funds interest income from its holdings of United States Treasury Obligations and other high credit quality short-term fixed income securities over the expenses of the Fund. The Fund holds United States Treasury
Obligations and other high credit quality short-term fixed income securities for deposit with the Funds currency futures broker as margin.
The Index is designed to reflect the performance of certain currencies. The currencies comprising the Index, at any time (each an Index Currency, and collectively, the Index
Currencies) are six of the following Group of Ten currencies: United States Dollars, Euros, Japanese Yen, Canadian Dollars, Swiss Francs, British Pounds, Australian Dollars, New Zealand Dollars, Norwegian Krone and Swedish Krona, or,
collectively, the Eligible Index Currencies. At any time, the Index will consist of long futures contracts on the three Eligible Index Currencies associated with the highest interest rates and short futures contracts on the three Eligible Index
Currencies associated with the lowest interest rates. The ratio of the notional value of futures contracts in the Index to collateral used to margin those contracts is generally 2:1 when the Index re-balances quarterly. However, if the United States
Dollar is one of the Eligible Index Currencies associated with either the three highest or three lowest interest rates, the Index will not establish a futures position, and the ratio of the notional value of futures contracts to collateral used to
margin those contracts will be 1.66:1 when the Index re-balances.
A Trademark application for Deutsche Bank G10 Currency
Future Harvest Index was granted in May 2008. Any use of this trademark must be with the consent of or under license from the Index Sponsor. The Fund and the Managing Owner have been licensed by the Index Sponsor to use Deutsche Bank G10
Currency Future Harvest Index. The Index Sponsor does not approve, endorse or recommend the Fund or the Managing Owner.
The Index Sponsor obtains information for inclusion in, or for use in the calculation of, the Index from sources the Index Sponsor
considers reliable. None of the Index Sponsor, the Managing Owner, the Fund or any of their respective affiliates accepts responsibility for or guarantees the accuracy and/or completeness of the Index or any data included in the Index.
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Index Composition
The currencies that are eligible for inclusion in the Index are the currencies of The Group of Ten (the G10) countries (the
Eligible Index Currencies), which include the following currencies:
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Eligible Index Currency
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Symbol
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United States Dollar
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USD
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Euro
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EUR
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Japanese Yen
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JPY
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Canadian Dollar
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CAD
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Swiss Franc
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CHF
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British Pound
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GBP
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Australian Dollar
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AUD
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New Zealand Dollar
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NZD
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Norwegian Krone
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NOK
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Swedish Krona
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SEK
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The futures contracts referencing each of the Eligible Index Currencies (except USD) in which the Fund
invests are currently traded on the Chicago Mercantile Exchange (the CME), although currency futures contracts on the Eligible Index Currencies also trade on other exchanges in the United States and the Fund may invest in such contracts.
At any time, the Index is comprised of long futures positions in the three Eligible Index Currencies associated with the
highest interest rates and short futures positions in the three Eligible Index Currencies associated with the lowest interest rates. The Indexs six component currencies from time-to-time, comprised of the three long and three short futures
positions (each an Index Currency, and collectively, the Index Currencies), are used to calculate the value of the Index. The composition of the Index may be adjusted in the event that the Index Sponsor is not able to
calculate the closing prices of the Index Currencies.
The following table reflects the Fund and Index weights of each Index
Currency as of December 31, 2013:
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Eligible Index Currency
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Fund Weight (%)
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Index Weight
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United States Dollar
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*
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*
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Euro
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(33.11
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)%
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(33.13
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)%
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Japanese Yen
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(32.31
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)%
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(32.34
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)%
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Canadian Dollar
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Swiss Franc
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(33.01
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)%
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(33.03
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)%
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British Pound
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Australian Dollar
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32.91
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%
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32.90
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%
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New Zealand Dollar
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32.93
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%
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32.93
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%
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Norwegian Krone
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33.76
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%
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33.68
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%
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Swedish Krona
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*
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The United States Dollar was one of the Eligible Index Currencies (as hereinafter defined) associated with the three lowest interest rates. As a result, the Fund did
not establish a futures position, and the ratio of the notional value of futures contracts to collateral used to margin those contracts will be 1.66:1 when the Fund re-balances.
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The Fund is an index tracking fund and does not utilize any trading system, whether discretionary, systematic or otherwise. The
Index is a mathematical construct that is comprised of the Index Currencies, each of which is assigned an initial weight. As the value of the underlying Index Currencies changes, the relative weights of each of the Index Currencies will vary.
The Index will be re-balanced at a pre-determined frequency in order to restore the target weights. As the Fund will invest in futures contracts tied to the underlying Index Currencies (and their corresponding target base weights) with a view
to tracking the changes, whether positive or negative, in the changes in the levels of the Index, the Managing Owner serves in an administrative role in order to ensure that the Fund invests in a manner that seeks to track the Index.
As discussed above, the Fund employs leverage on an approximate 2:1 basis. As of December 31, 2013 and 2012, the Fund
had and $203,291,139 (or 100%) and $345,338,679 (or 100%), respectively, of its holdings of cash, United States Treasury Obligations and unrealized appreciation/depreciation of futures contracts on deposit with its Commodity Broker. Of this,
$6,839,551 (or 3.36%) and $8,221,754 (or 2.38%), respectively, of the Funds holdings of cash and United States
2
Treasury Obligations are required to be deposited as margin in support of the Funds futures positions as of December 31, 2013 and 2012, respectively. For additional information, please
see the Schedule of Investments as of December 31, 2013 and 2012 for details of the Funds portfolio holdings.
The
Index Sponsor calculates the Index on both an excess return basis and a total return basis. The excess return basis calculation reflects the change in market value of the applicable underlying currency futures only. The total return basis
calculation reflects the sum of the change in market value of the applicable underlying currency futures plus the return on 3-month U.S. Treasury bills. The Fund seeks to track changes, whether positive or negative, in the level of the Index
calculated on an excess return basis, over time, plus the excess, if any, of the Funds income from its holdings of United States Treasury and other high credit quality short-term fixed income securities over the expenses of the
Fund.
The Fund will make distributions at the discretion of the Managing Owner. To the extent that the Funds actual and
projected interest income from its holdings of United States Treasury securities and other high credit quality short-term fixed income securities exceeds the actual and projected fees and expenses of the Fund, the Managing Owner expects periodically
to make distributions of the amount of such excess. The Fund currently does not expect to make distributions with respect to its capital gains. Depending on the Funds performance for the taxable year and an investors own tax situation
for such year, an investors income tax liability for the taxable year and allocable share of the Funds net ordinary income or loss and capital gain or loss may exceed any distributions an investor may receive with respect to such year.
In order to determine which Eligible Index Currencies to include in the Index from time-to-time, the Index Sponsor will
review the composition of the Index on a quarterly basis 5 business days prior to the IMM Date. IMM Date means the third Wednesday of March, June, September and December, a traditional settlement date in the International Money Market.
The Index Sponsor will review the three month Libor rate for each Eligible Index Currency other than the SEK and NOK and will
review the three month Stibor rate and the three month Nibor rate for the SEK and NOK, respectively. The Libor, Stibor and Nibor rates for the Eligible Index Currencies, as applicable, mean the London, Stockholm and Norway interbank offered rates
for overnight deposits, respectively, each of which is published by Reuters. The Eligible Index Currencies are then ranked according to yield. The three highest yielding and three lowest yielding are selected as Index Currencies for inclusion in
calculating the Index. If two Index Currencies have the same yield, then the previous quarters ranking will be used. Please see
http://www.dbxus.com
with respect to the most recently available weighted composition of the Fund and the
composition of the Funds index.
The Index is re-weighted quarterly. Upon re-weighting, the high yielding Index
Currencies are allocated a base weight of 33 1/3% and the low yielding Index Currencies are allocated a base weight of -33 1/3%. These new weights are applied during the Index re weighting period, which takes place between the fourth and
third Index Business Days prior to the applicable IMM Date (the Index Re-Weighting Period).
The CME traded
futures contract of each applicable Index Currency that is closest to expiration is used in the Index calculation. The futures contracts on the Index Currencies are rolled during the Index Re-Weighting Period. The new futures contract on an Index
Currency that has the next closest expiration date is selected. The calculation of the Index on an excess return basis is the weighted return on the change in price of the futures contracts on the Index Currencies.
A 3-month U.S. Treasury bill return is then calculated and included to calculate the total return index. Please refer to Exhibit B of the
Trust Agreement for the mathematical formula of the Index.
The Index has been calculated using historical data since
March 12, 1993. The Index is composed of notional amounts of each Index Currency. The notional amounts of the Index Currencies included in the Index are based on the Index Closing Level as of the Index Re-Weighting Period. The Index Closing
Level reflects an arithmetic weighted return of the change in the Index Currencies exchange rates against the USD since March 12, 1993. March 1993 was chosen as a starting period because it represents the earliest date on which reliable
data for all the Eligible Index Currencies exists. On March 12, 1993, the closing Index level was USD 100. Between March 12, 1993 to December 31, 2013, the Index level as calculated on an excess return basis has ranged from as high as
USD 315.27 (July 25, 2007) to as low as USD 94.03 (July 30, 1993). Past Index results are not necessarily indicative of future changes, positive or negative, in the Index.
To track the Index, the Fund generally will establish long futures positions in the three Eligible Index Currencies associated with the highest interest rates and short futures positions in the three
Eligible Index Currencies associated with the lowest interest rates and will adjust its holdings quarterly as the Index is adjusted. However, if the United States Dollar (USD) is among the Index Currencies from time-to-time, the Fund
will not establish a long or short futures position (as the case may be) in USD, because USD is the Funds home currency and, as a consequence, the Fund can never enjoy profit or suffer loss from long or short futures positions in USD. When the
USD is not associated with the highest or lowest interest
3
rates among the Eligible Index Currencies, the aggregate notional value of the Funds futures contracts at the time they are established will be double the value of the Funds holdings
of United States Treasury and other high credit quality short term fixed income securities, which means the Fund will have a leverage ratio at such time of 2:1. If the USD is associated with the highest or lowest interest rates among the Eligible
Index Currencies, the aggregate notional value of the Funds futures contracts at the time they are established will be approximately 1.66 times the value of the Funds holdings of United States Treasury and other high credit quality short
term fixed income securities, which means the Fund will have a leverage ratio at such time of approximately 1.66:1. Holding futures positions with a notional amount in excess of the Funds net asset value constitutes a form of leverage. The use
of leverage will increase the potential for both trading profits and losses, depending on the changes, positive and negative, in the Index. The Funds ability to track the Index will not be affected by the presence or absence of the USD among
the Index Currencies. Because the notional value of the Funds futures positions can rise or fall over time, the leverage ratio could be higher or lower between quarterly adjustments of the Index Currencies.
The use of long and short positions in the construction of the Index causes the Index to rise as a result of any upward price movement of
Index Currencies expected to gain relative to the USD and to rise as a result of any downward price movement of Index Currencies expected to lose relative to the USD. The inclusion of both long and short positions is also expected to reduce the
country specific foreign exchange risk of the Index (and, therefore, risk in connection with an investment in the Fund) relative to a directional (outright long or short) exposure to any or all of the Index Currencies.
There can be no assurance that the use of both long and short positions will reduce the volatility of the Index during any or all market
cycles or performance periods, or that the Fund will achieve its objectives. It is possible that, prior to an Index rebalancing, that Index Currencies expected to lose relative to the USD may rise and/or Index Currencies expected to gain relative to
the USD may fall. In such cases, the Fund may experience losses in both its long and short positions at the same time. Such losses will be greater as a result of the Funds use of leverage, reflected in its long futures exposure to Index
Currencies with a notional value of up to 100% of the Funds net asset value and its short futures exposure to Index Currencies with a notional value of up to 100% of the Funds net asset value. Under such circumstances, the Funds
losses would be greater as a result of its leverage than would be the case were it to limit its overall exposure to Index Currencies with a notional value of 100% of the Funds net asset value.
As a result of its use of leverage, the Fund will be required to deposit a greater proportion of its net assets as margin, not expected
to exceed 10% of net assets. This represents margin deposit requirements approximately twice as great as would be required if the Fund did not use leverage. Similarly, as a result of its use of leverage, the Fund will trade more futures contracts
and incur more brokerage commission expense than it would if it did not use leverage. The additional amount of brokerage commission expense generally will be proportional to the Funds leverage ratio.
The Funds portfolio also will include United States Treasury securities and other high credit quality short term fixed income
securities for deposit with the Funds Commodity Broker as margin.
The Trustee
Under the Trust Agreement, Wilmington Trust Company, the Trustee of the Fund, has delegated to the Managing Owner the exclusive management
and control of all aspects of the business of the Fund. The Trustee will have no duty or liability to supervise or monitor the performance of the Managing Owner, nor will the Trustee have any liability for the acts or omissions of the Managing
Owner. The Trustee is compensated by the Managing Owner. Under the Trust Agreement, the Managing Owner, from the assets of the Fund, will indemnify the Trustee for any liability or expense relating to the ongoing operations and termination of the
Fund incurred without gross negligence or willful misconduct of the Trustee.
The Managing Owner
The Managing Owner was formed on May 23, 2005. The Managing Owner is an indirect wholly owned subsidiary of Deutsche Bank AG. The
Managing Owner serves as the commodity pool operator and commodity trading advisor of the Fund. The Managing Owner was formed to be the managing owner of investment vehicles such as the Fund and has been managing such investment vehicles since
January 2006. The Managing Owner is registered as a commodity pool operator and commodity trading advisor with the Commodity Futures Trading Commission (the CFTC) and is a member of the National Futures Association (the NFA).
As a registered commodity pool operator and commodity trading advisor, with respect to the Fund, the Managing Owner must comply with various regulatory requirements under the Commodity Exchange Act (the CEAct) and the rules and
regulations of the CFTC and the NFA, including investor protection requirements, antifraud prohibitions, disclosure requirements, and reporting and recordkeeping requirements. The Managing Owner is also subject to periodic inspections and audits by
the CFTC and NFA.
4
The Managing Owners main business offices are located at 60 Wall Street, New York, New
York 10005, telephone (212) 250-5883.
The Fund pays the Managing Owner a management fee (the Management
Fee), monthly in arrears, in an amount equal to 0.75% per annum of the daily net asset value of the Fund. The Management Fee is paid in consideration of the Managing Owners currency futures trading advisory services.
Pursuant to the Trust Agreement, the Fund will indemnify the Managing Owner against any losses, judgments, liabilities, expenses and
amounts paid in settlement of any claims sustained by it in connection with its activities on behalf of the Fund incurred without negligence or misconduct.
The Commodity Broker
Deutsche Bank Securities Inc., a Delaware
corporation, serves as the Funds clearing broker (the Commodity Broker). The Commodity Broker is also an indirect wholly-owned subsidiary of Deutsche Bank AG and is an affiliate of the Managing Owner. In its capacity as clearing
broker, the Commodity Broker executes and clears the Funds futures transactions and performs certain administrative and custodial services for the Fund. As custodian of the Funds assets, the Commodity Broker is responsible, among other
things, for providing periodic accountings of all dealings and actions taken by the Fund during the reporting period, together with an accounting of all securities, cash or other indebtedness or obligations held by it or its nominees for or on
behalf of the Fund.
A variety of executing brokers execute futures transactions on behalf of the Fund. Such executing brokers
give-up, or transfer for clearing, all such transactions to the Commodity Broker. The Commodity Broker is registered with the CFTC as a futures commission merchant and is a member of the NFA in such capacity.
The Fund pays to the Commodity Broker all brokerage commissions, including applicable exchange fees, NFA fees,
give-up fees, pit brokerage fees and other transaction related fees and expenses charged in connection with trading activities. The Commodity Brokers brokerage commissions and trading fees are determined on a contract-by-contract basis.
Brokerage commissions and fees in any future fiscal year or any part of any future fiscal year may be greater. On average, total charges paid to the Commodity Broker were less than $10.00 per round-turn trade
1
for the Years Ended December 31, 2013, 2012 and 2011.
The Administrator, Custodian and Transfer Agent
The Managing Owner, on behalf of the Fund, has appointed The Bank of New York Mellon as the administrator (the Administrator) of the Fund and has entered into an Administration Agreement in
connection therewith. The Bank of New York Mellon serves as custodian (the Custodian) of the Fund and has entered into a Global Custody Agreement (the Custody Agreement) in connection therewith. The Bank of New York Mellon
serves as the transfer agent (the Transfer Agent) of the Fund and has entered into a Transfer Agency and Service Agreement in connection therewith.
The Bank of New York Mellon, a banking corporation organized under the laws of the State of New York with trust powers, has an office at 2 Hanson Place, Brooklyn, New York 11217. The Bank of New York
Mellon is subject to supervision by the New York State Banking Department and the Board of Governors of the Federal Reserve System.
Pursuant to the Administration Agreement, the Administrator performs or supervises the performance of services necessary for the operation and administration of the Fund (other than making investment
decisions), including receiving and processing orders from Authorized Participants to create and redeem Baskets, net asset value calculations, accounting and other fund administrative services. The Administrator retains certain financial books and
records, including: Basket creation and redemption books and records, fund accounting records, ledgers with respect to assets, liabilities, capital, income and expenses, the registrar, transfer journals and related details, and trading and related
documents received from futures commission merchants.
The Administration Agreement will continue in effect unless terminated
on at least 90 days prior written notice by either party to the other party. Notwithstanding the foregoing, the Administrator may terminate the Administration Agreement upon 30 days prior written notice if the Fund has materially failed
to perform its obligations under the Administration Agreement.
1
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A round-turn trade is a completed transaction involving both a purchase and a liquidating sale, or a sale followed by a covering purchase.
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The Administration Agreement provides for the exculpation and indemnification of the
Administrator from and against any costs, expenses, damages, liabilities or claims (other than those resulting from the Administrators own bad faith, negligence or willful misconduct) which may be imposed on, incurred by or asserted against
the Administrator in performing its obligations or duties under the Administration Agreement.
The Administrators
monthly fees are paid on behalf of the Fund by the Managing Owner out of the Management Fee.
The Administrator and any of its
affiliates may from time-to-time purchase or sell Shares for their own account, as agent for their customers and for accounts over which they exercise investment discretion.
The Administrator receives a transaction processing fee in connection with orders from Authorized Participants to create or redeem Baskets in the amount of $500 per order. These transaction processing
fees are paid directly by the Authorized Participants and not by the Fund.
The Distributor
ALPS Distributors, Inc. (the Distributor) provides certain distribution services to the Fund. Pursuant to the Distribution
Services Agreement among the Managing Owner, in its capacity as managing owner of the Fund, the Fund and the Distributor, the Distributor assists the Managing Owner and the Administrator with certain functions and duties relating to distribution and
marketing services to the Fund including reviewing and approving marketing materials.
The Distribution Services Agreement is
terminable without penalty on sixty days written notice by the Managing Owner or by the Distributor. The Distribution Services Agreement will automatically terminate in the event of its assignment.
Pursuant to the Distribution Services Agreement, the Fund will indemnify and hold harmless the Distributor and each of its directors and
officers and each person, if any, who controls the Distributor within the meaning of Section 15 of the 1933 Act, against any loss, liability, claim, damages or expenses (including the reasonable cost of investigating or defending any alleged
loss, liability, claim, damages or expense and reasonable counsel fees incurred in connection therewith) arising by reason of any person acquiring any Shares, based upon the ground that the registration statement, prospectus, statement of additional
information, shareholder reports or other information filed or made public by the Fund (as from time-to-time amended) included an untrue statement of a material fact or omitted to state a material fact required to be stated or necessary in order to
make the statements not misleading under the 1933 Act or any other statute or the common law.
Invesco PowerShares Capital Management LLC
Under the License Agreement among Invesco PowerShares Capital Management LLC (the
Licensor), and the Managing Owner in its own capacity and in its capacity as managing owner of the Fund (the Fund and the Managing Owner, collectively, the Licensees), the Licensor granted to each Licensee a non-exclusive
license to use the PowerShares
®
trademark (the Trademark) anywhere in the world, solely
in connection with the marketing and promotion of the Fund and to use or refer to the Trademark in connection with the issuance and trading of the Fund as necessary.
Invesco Distributors, Inc.
Through a marketing agreement between the
Managing Owner and Invesco Distributors, Inc. (Invesco Distributors), an affiliate of Invesco PowerShares Capital Management LLC, the Managing Owner, on behalf of the Fund, has appointed Invesco Distributors as a marketing agent. Invesco
Distributors assists the Managing Owner and the Administrator with certain functions and duties such as providing various educational and marketing activities regarding the Fund, primarily in the secondary trading market, which activities include,
but are not limited to, communicating the Funds name, characteristics, uses, benefits, and risks, consistent with the Funds prospectus. Invesco Distributors will not open or maintain customer accounts or handle orders for the Fund.
Invesco Distributors engages in public seminars, road shows, conferences, media interviews, and distributes sales literature and other communications (including electronic media) regarding the Fund.
Tax Reporting
The Fund
has retained the services of PricewaterhouseCoopers LLP to assist with certain tax reporting requirements of the Fund and its Shareholders.
6
Regulation
Futures exchanges in the United States are subject to regulation under the CEAct by the CFTC, the governmental agency having responsibility for regulation of futures exchanges and trading on those
exchanges. No U.S. governmental agency regulates the over-the-counter (the OTC) foreign exchange markets.
The
CEAct and the CFTC also regulate the activities of commodity trading advisors and commodity pool operators and the CFTC has adopted regulations with respect to certain of such persons activities. Pursuant to its
authority, the CFTC requires a commodity pool operator (such as the Managing Owner) to keep accurate, current and orderly records with respect to each pool it operates. The CFTC may suspend the registration of a commodity pool operator if the CFTC
finds that the operator has violated the CEAct or regulations thereunder and in certain other circumstances. Suspension, restriction or termination of the Managing Owners registration as a commodity pool operator would prevent it, until such
time (if any) as such registration were to be reinstated, from managing, and might result in the termination of, the Fund. The CEAct gives the CFTC similar authority with respect to the activities of commodity trading advisors, such as the Managing
Owner. If the registration of a managing owner as a commodity trading advisor were to be terminated, restricted or suspended, the managing owner would be unable, until such time (if any) as such registration were to be reinstated, to render trading
advice to the Fund. The Fund is not registered with the CFTC in any capacity.
The CEAct requires all futures commission
merchants, such as the Commodity Broker, to meet and maintain specified fitness and financial requirements, segregate customer funds from proprietary funds and account separately for all customers funds and positions, and to maintain
specified books and records open to inspection by the staff of the CFTC.
The CEAct also gives the states certain powers to
enforce its provisions and the regulations of the CFTC.
Shareholders are afforded certain rights for reparations under the
CEAct. Shareholders may also be able to maintain a private right of action for certain violations of the CEAct. The CFTC has adopted rules implementing the reparation provisions of the CEAct which provide that any person may file a complaint for a
reparations award with the CFTC for violation of the CEAct against a floor broker, futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, and their respective associated persons.
Pursuant to authority in the CEAct, the NFA was formed and registered with the CFTC as a registered futures association. At
the present time, the NFA is the only non-exchange self-regulatory organization for commodities professionals. NFA members are subject to NFA standards relating to fair trade practices, financial condition, and consumer protection. As the
self-regulatory body of the commodities industry, the NFA promulgates rules governing the conduct of commodity professionals and disciplines those professionals who do not comply with such standards. The CFTC has delegated to the NFA responsibility
for the registration of commodity trading advisors, commodity pool operators, futures commission merchants, introducing brokers and their respective associated persons and floor brokers. The Commodity Broker and the Managing Owner are members of the
NFA (the Fund is not required to become a member of the NFA).
The CFTC has no authority to regulate trading on foreign
commodity exchanges and markets.
Employees
The Fund has no employees.
Available Information
The Fund files with or submits to the SEC annual, quarterly and current reports and other information meeting the informational
requirements of the Exchange Act. These reports are available on the Managing Owners website at
http://www.dbxus.com
. Investors may also inspect and copy these reports, proxy statements and other information, and related exhibits and
schedules, at the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549. Investors may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an
Internet site that contains reports, proxy and information statements and other information filed electronically by us with the SEC which are available on the SECs Internet site at
http://www.sec.gov
.
The Fund also posts monthly performance reports and its annual report, as required by the CFTC, on the Managing Owners website at
the address listed above.
7
An
investment in the securities of the Fund involves a high degree of risk. Investors should consider carefully all of the risks described below, together with the other information contained in this report and the Prospectus, before making a decision
to invest in the securities of the Fund. If any of the following risks occur, the business, financial condition and results of operations of the Fund may be adversely affected.
Investment and Trading Related Risks
The Value of the Shares Relates Directly
to the Value of the Futures Contracts on the Index Currencies and Other Assets Held by the Fund and Fluctuations in the Price of These Assets Could Materially Adversely Affect an Investment in the Shares.
The Shares are designed to reflect as closely as possible the changes, positive or negative, in the level of the Index, over time, through
the Funds portfolio of exchange traded futures contracts on the Index Currencies. The value of the Shares relates directly to the value of the portfolio, less the liabilities (including estimated accrued but unpaid expenses) of the Fund. The
price of the Index Currencies may fluctuate widely. Several factors may affect the prices of the Index Currencies, including, but not limited to:
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National debt levels and trade deficits, including changes in balances of payments and trade;
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Domestic and foreign inflation rates and investors expectations concerning inflation rates;
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Domestic and foreign interest rates and investors expectations concerning interest rates;
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Currency exchange rates;
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Investment and trading activities of mutual funds, hedge funds and currency funds;
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Global or regional political, economic or financial events and situations;
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Supply and demand changes which influence the foreign exchange rates of various currencies;
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Monetary policies of governments (including exchange control programs, restrictions on local exchanges or markets and limitations on foreign investment
in a country or on investment by residents of a country in other countries), trade restrictions, currency devaluations and revaluations;
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Governmental intervention in the currency market, directly and by regulation, in order to influence currency prices; and
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Expectations among market participants that a currencys value soon will change.
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Net Asset Value May Not Always Correspond to Market Price and, as a Result, Baskets May be Created or Redeemed at a Value that Differs from the
Market Price of the Shares.
The net asset value per Share will change as fluctuations occur in the market value of its
portfolio. Investors should be aware that the public trading price of a Basket may be different from the net asset value of a Basket (i.e., 200,000 Shares may trade at a premium over, or a discount to, net asset value of a Basket) and similarly the
public trading price per Share may be different from the net asset value per Share. Consequently, an Authorized Participant may be able to create or redeem a Basket at a discount or a premium to the public trading price per Share. This price
difference may be due, in large part, to the fact that supply and demand forces at work in the secondary trading market for Shares are closely related, but not identical to, the same forces influencing the prices of the Index Currencies trading
individually or in the aggregate at any point in time. Investors also should note that the size of the Fund in terms of total assets held may change substantially over time and from time to time as Baskets are created and redeemed.
8
Authorized Participants or their clients or customers may have an opportunity to realize a
riskless profit if they can purchase a Basket at a discount to the public trading price of the Shares or can redeem a Basket at a premium over the public trading price of the Shares. The Managing Owner expects that the exploitation of such arbitrage
opportunities by Authorized Participants and their clients and customers will tend to cause the public trading price to track net asset value per Share closely over time.
The value of a Share may be influenced by non concurrent trading hours between the NYSE Arca and the various futures exchanges on which the Index Currencies are traded. As a result, during periods when
the NYSE Arca is open and the futures exchanges on which the Index Currencies are traded are closed, trading spreads and the resulting premium or discount on the Shares may widen, and, therefore, increase the difference between the price of the
Shares and the net asset value of the Shares.
The Funds Performance May Not Always Replicate Exactly the Changes in the Levels of
its Index.
It is possible that the Funds performance may not fully replicate the changes in the closing levels
of the Index due to disruptions in the markets for the Index Currencies or due to other extraordinary circumstances. In addition, the Fund is not able to replicate exactly the changes in the closing levels of the Index because the total return
generated by the Fund is reduced by expenses and transaction costs, including those incurred in connection with the Funds trading activities, and increased by interest income from the Funds holdings of
short-term
high credit quality fixed income securities. Tracking the Index requires trading of the Funds portfolio with a view to tracking the Index over time and is dependent upon the skills of the
Managing Owner and its trading principals, among other factors.
The Fund Is Not Actively Managed and Tracks the Index During Periods in
Which the Index Is Flat or Declining as Well as when the Index Is Rising.
The Fund is not actively managed by
traditional methods. Therefore, if positions in any one or more of the Index Currencies are declining in value, the Fund will not close out such positions, except in connection with a change in the composition or weighting of the Index. The Managing
Owner seeks to cause the net asset value to track the Index during periods in which the Index is flat or declining as well as when the Index is rising.
The Dual Assumptions Underpinning the Index that High Yielding Interest Rates With Respect to Certain Eligible Index Currencies Suggest Taking Long Positions in Futures Contracts in Such Currencies
and Low Yielding Interest Rates With Respect to Certain Eligible Index Currencies Suggest Taking Short Positions in Futures Contracts in Such Currencies May Be Detrimental to the Value of Your Shares Should Either or Both Assumptions Fail.
The Index is expected to rise as a result of any upward price movement on long positions in futures contracts on the
Index Currencies when the prices of these long futures contracts increase relative to the USD. The Index also is expected to rise as a result of any downward price movement on short positions in futures contracts on the Index Currencies when the
prices of these short futures contracts decrease relative to the USD. Because the price of your Shares is expected to track the Index, if the price of the Funds long futures contracts decreases relative to the USD or the price of the
Funds short futures contracts increases relative to the USD on any or all of the Index Currencies, the value of your Shares may decrease. The decrease in the value of your Shares will be amplified if both assumptions fail simultaneously (i.e.,
both the price of the Funds long futures contracts decreases relative to the USD and the price of the Funds short futures contracts increases relative to the USD on any or all of the Index Currencies).
Interest Rates Will Change Between Re-Weightings of the Index.
The Index is re-weighted quarterly based upon the three highest and three lowest yielding Eligible Index Currencies at the time of re-weighting. At any point in time between quarterly re-weightings, the
Index Currencies may not be among the three highest or lowest yielding Eligible Index Currencies. Between quarterly re-weightings of the Index, a currency that was among the three highest yielding Eligible Index Currencies could be among the three
lowest yielding Eligible Index Currencies, or vice-versa. Under such circumstances, the Fund may not be able to exploit efficiently the trend that currencies associated with relatively high interest rates, on average, tend to rise in value relative
to currencies associated with relatively low interest rates. If the interest rates associated with the Eligible Index Currencies change sufficiently during any quarter, the Fund may find itself positioned such that the effects of this trend will
cause the Fund to lose money. Even if the interest rates associated with the Eligible Index Currencies vary substantially between re-weightings, the Fund will not adjust its portfolio of currency futures until the next quarterly re-weighting.
9
The NYSE Arca May Halt Trading in the Shares Which Would Adversely Impact Your Ability to Sell Shares.
The Shares are listed on the NYSE Arca under the market symbol DBV. Trading in the Shares may be halted
due to market conditions or, in light of NYSE Arca rules and procedures, for reasons that, in the view of the NYSE Arca, make trading in the Shares inadvisable. In addition, trading is subject to trading halts caused by extraordinary market
volatility pursuant to circuit breaker rules that require trading to be halted for a specified period based on a specified market decline. There can be no assurance that the requirements necessary to maintain the listing of the Shares
will continue to be met or will remain unchanged. The Fund will be terminated if the Shares are delisted.
The Lack of An Active Trading
Market for the Shares May Result in Losses on Your Investment in the Fund at the Time of Disposition of Your Shares.
Although the Shares are listed and traded on the NYSE Arca, there can be no guarantee that an active trading market for the Shares will be
maintained. If you need to sell your Shares at a time when no active market for them exists, the price you receive for your Shares, assuming that you are able to sell them, likely will be lower than the price you would receive if an active market
did exist.
The Shares Could Decrease in Value if Unanticipated Operational or Trading Problems Arise.
The mechanisms and procedures governing the creation, redemption and offering of the Shares have been developed specifically for this
securities product. Consequently, there may be unanticipated problems or issues with respect to the mechanics of the operations of the Fund and the trading of the Shares that could have a material adverse effect on an investment in the Shares. In
addition, although the Fund is not actively managed by traditional methods, to the extent that unanticipated operational or trading problems or issues arise, the Managing Owners past experience and qualifications may not be
suitable for solving these problems or issues.
As the Managing Owner and its Principals have Been Operating Investment Vehicles like
the Fund Since January 2006, their Experience May be Relatively Inadequate or Unsuitable to Manage the Fund.
The
Managing Owner was formed to be the managing owner of investment vehicles such as the Fund and has been managing such investment vehicles since January 2006. The past performances of the Managing Owners management of other commodity pools are
no indication of its ability to manage investment vehicles such as the Fund. If the experience of the Managing Owner and its principals is not relatively adequate or suitable to manage investment vehicles such as the Fund, the operations of the Fund
may be adversely affected.
You May Not Rely on Past Performance or Index Results in Deciding Whether to Buy Shares.
Although past performance is not necessarily indicative of future results, the Funds performance history might (or might not)
provide you with more information on which to evaluate an investment in the Fund. Likewise, the Index has a history which might (or might not) be indicative of the future Index results, or of the future performance of the Fund. Therefore, you will
have to make your decision to invest in the Fund without relying on the Funds past performance history or the Indexs closing level history.
Fewer Representative Index Currencies May Result In Greater Index Volatility.
The ten Eligible Index Currencies are United States Dollars, Euro, Japanese Yen, Canadian Dollars, Swiss Francs, British Pounds, Australian Dollars, New Zealand Dollars, Norwegian Krone and Swedish Krona.
The Index is comprised of only six of the ten Eligible Index Currencies from time-to-time. Accordingly, the Index is concentrated in terms of the number of currencies represented. You should be aware that other currency indices are more diversified
in terms of the number of currencies included. Concentration in fewer currencies may result in a greater degree of volatility in the Index and the net asset value of the Fund, which track the Index under specific market conditions and over time.
Leverage Will Fluctuate Between Index Re-Weighting Periods and May be Greater or Less than the Leverage on Each Index Re-Weighting
Period.
Although the Fund does not establish positions that exceed a leverage ratio of 2:1 at the time of
establishment, movements in the market price of the Funds futures positions between the Index Re-Weighting Periods may increase or decrease the Funds leverage ratio. Any such increase or decrease, respectively, in the Funds
leverage ratio will magnify or decrease, respectively, the potential for loss or gain of the Funds futures positions and, in turn, the value of your Shares.
10
Because the Funds Trading will be Leveraged, a Relatively Small Movement in the Price of a
Contract May Cause Greater Losses.
The Fund will take long futures positions in the high-yielding Eligible Index
Currencies and will take short futures positions in the low-yielding Eligible Index Currencies with a view to tracking the changes in the Index over time. Assuming that the USD is not one of the three highest or lowest yielding currencies during any
Index Re-Weighting Period, the long futures positions and short futures positions in the Index Currencies will each have a notional value approximately equal to the Funds net asset value. Accordingly, if the USD is not one of the three highest
or lowest yielding currencies during any the Index Re-Weighting Period, the aggregate notional amount of the futures positions held by the Fund is expected to be approximately, but not in excess of, 200% of the Funds net asset value. If the
USD is one of the three highest or lowest yielding currencies, the Fund will not establish a long or short futures position (as the case may be) in USD, as the Fund never can enjoy profit or suffer loss from long or short futures positions in USD
because USD is the Funds home currency. Consequently, if USD is one of the three highest or lowest yielding currencies, the aggregate notional amount of the futures positions held by the Fund is expected to be approximately, but not in excess
of, 166 2/3% of the Funds net asset value. Holding futures positions with a notional amount in excess of the Funds net asset value constitutes a form of leverage. The use of leverage increases the potential for both trading profits and
losses, depending on the changes in market value of the Index Currencies in which the Fund has long futures positions relative to the Index Currencies in which the Fund has short futures positions.
The use of long and short positions in the construction of the Index causes the Index to rise as a result of any upward price movement of
Index Currencies expected to gain relative to the USD and to rise as a result of any downward price movement of Index Currencies expected to lose relative to the USD. The inclusion of both long and short positions is also expected to reduce the
country specific foreign exchange risk of the Index (and, therefore, risk in connection with an investment in the Fund) relative to a directional (outright long or short) exposure to any or all of the Index Currencies.
There can be no assurance that the use of both long and short positions will reduce the volatility of the Index during any or all market
cycles or periods, or that the Fund will achieve its objectives. It is possible that, prior to an Index rebalancing, that Index Currencies expected to lose relative to the USD may rise and/or Index Currencies expected to gain relative to the USD may
fall. In such cases, the Fund may experience losses in both its long and short positions at the same time. Such losses will be greater as a result of the Funds use of leverage, reflected in its long futures exposure to Index Currencies with a
notional value of up to 100% of the Funds net asset value and its short futures exposure to Index Currencies with a notional value of up to 100% of the Funds net asset value. Under such circumstances, the Funds losses would be
greater as a result of its leverage than would be the case were it to limit its overall exposure to Index Currencies with a notional value of 100% of the Funds net assets.
As a result of its use of leverage, the Fund is required to deposit a greater proportion of its net assets as margin, not expected to
exceed 10% of net assets. This represents margin deposit requirements approximately twice as great as would be required if the Fund did not use leverage. Similarly, as a result of its use of leverage, the Fund will trade more futures contracts and
incur more brokerage commission expense than it would if it did not use leverage. The additional amount of brokerage commission expense generally is proportional to the Funds leverage ratio.
Short Selling Theoretically Exposes the Fund to Unlimited Losses.
The Fund holds short futures positions in the three lowest-yielding Eligible Index Currencies (other than the USD).
A long futures position in a foreign currency requires the Fund to purchase at a future date the equivalent in USD of a fixed amount of a foreign currency at a fixed price in USD. The Fund profits if the
price of the foreign currency rises relative to the USD while the contract is open and the Fund suffers losses if the price of the foreign currency falls relative to the USD while the contract is open. Because the price in USD of the foreign
currency cannot fall below zero, the Funds exposure to loss is limited to the value in USD of the fixed amount of the foreign currency at the time of the establishment of the long futures contract.
By contrast, a short futures position in a foreign currency requires the Fund to deliver at a future date an amount in USD equal to the
price in USD of a fixed amount of the foreign currency at that future date. The Fund will profit if the price of the foreign currency falls relative to the USD while the contract is open and the Fund will suffer loss if the price of the foreign
currency rises relative to the USD while the contract is open. Because the price in USD of a fixed amount of the foreign currency could, in theory, rise to infinity, a short futures position exposes the Fund to theoretically unlimited liability.
The Funds losses could result in the total loss of your investment.
11
Price Volatility May Possibly Cause the Total Loss of Your Investment.
Futures contracts have a high degree of price variability and are subject to occasional rapid and substantial changes. Consequently, you
could lose all or substantially all of your investment in the Fund.
The following table* reflects various measures of
volatility** of the Index as calculated on an excess return basis:
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Volatility Type
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Volatility
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Daily volatility over full history
|
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10.16
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%
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Average rolling 3 month daily volatility
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|
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8.88
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%
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Monthly return volatility
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9.13
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%
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Average annual volatility
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9.26
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%
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The following table reflects the daily volatility on an annual basis of the Index:
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Year***
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Daily
Volatility
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1993
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|
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8.67
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%
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1994
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|
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4.97
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%
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1995
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|
|
13.93
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%
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1996
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|
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7.01
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%
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1997
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|
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7.73
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%
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1998
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|
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8.90
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%
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1999
|
|
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5.70
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%
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2000
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|
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6.17
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%
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2001
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|
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5.37
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%
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2002
|
|
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7.45
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%
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2003
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6.69
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%
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2004
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|
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7.90
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%
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2005
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5.41
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%
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2006
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|
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7.10
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%
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2007
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|
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10.95
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%
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2008
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|
|
21.86
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%
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2009
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|
|
17.10
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%
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2010
|
|
|
12.86
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%
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2011
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|
|
13.58
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%
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2012
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|
|
7.00
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%
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2013
|
|
|
8.12
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%
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*
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As of December 31, 2013. Past Index levels are not necessarily indicative of future changes, positive or negative, in the Index levels.
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**
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Volatility, for these purposes, means the following:
|
Daily Volatility
: The relative rate at which the price of the Index moves up and down, found by calculating the annualized standard deviation of the daily change in price.
Monthly Return Volatility
: The relative rate at which the price of the Index moves up and down, found by calculating the annualized
standard deviation of the monthly change in price.
Average Annual Volatility
: The average of yearly volatilities for a
given sample period. The yearly volatility is the relative rate at which the price of the Index moves up and down, found by calculating the annualized standard deviation of the daily change in price for each business day in the given year.
***
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As of December 31 except for 1993 which is as of March 12.
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12
Fees and Commissions are Charged Regardless of Profitability and May Result in Depletion of Assets.
The Fund is directly subject to the fees and expenses described herein which are payable irrespective of
profitability. Such fees and expenses include asset-based fees of 0.75% per annum. Additional charges include brokerage fees of approximately 0.06% per annum in the aggregate and selling commissions. For the avoidance of doubt, selling
commissions are not included in the Funds breakeven calculation. The Fund is expected to earn interest income at an annual rate of 0.05% per annum, based upon the yield on 3-month U.S. Treasury bills as of January 17, 2014. Because
the Funds current interest income does not exceed its fees and expenses, the Fund will need to have a positive performance that exceeds the difference between the Funds interest income and its fees and expenses in order to break even. If
the aggregate of the Funds performance and interest income do not exceed the Funds fees and expenses described herein, then, the expenses of the Fund could, over time, result in losses to your investment therein. You may never achieve
profits, significant or otherwise.
You Cannot Be Assured of the Managing Owners Continued Services, Which Discontinuance May Be
Detrimental to the Fund.
You cannot be assured that the Managing Owner will be willing or able to continue to service
the Fund for any length of time. If the Managing Owner discontinues its activities on behalf of the Fund, the Fund may be adversely affected.
Possible Illiquid Markets May Exacerbate Losses.
Futures positions cannot always be liquidated at the desired price. It is difficult to execute a trade at a specific price when there is a relatively small volume of buy and sell orders in a market. A
market disruption, such as when foreign governments may take or be subject to political actions which disrupt the markets in their currency or major exports, can also make it difficult to liquidate a position.
There can be no assurance that market illiquidity will not cause losses for the Fund. The large size of the positions which the Fund may
acquire increases the risk of illiquidity by both making its positions more difficult to liquidate and increasing the losses incurred while trying to do so.
You May Be Adversely Affected by Redemption Orders that Are Subject To Postponement, Suspension or Rejection Under Certain Circumstances.
The Fund may, in its discretion, suspend the right of redemption or postpone the redemption order settlement date, for (1) any period
during which an emergency exists as a result of which the redemption distribution is not reasonably practicable, or (2) such other period as the Managing Owner determines to be necessary for the protection of the Shareholders. In addition, the
Fund will reject a redemption order if the order is not in proper form as described in the participant agreement among the Authorized Participant, the Managing Owner and the Managing Owner in its capacity as managing owner of the Fund or if the
fulfillment of the order, in the opinion of its counsel, might be unlawful. Any such postponement, suspension or rejection could adversely affect a redeeming Authorized Participant. For example, the resulting delay may adversely affect the value of
the Authorized Participants redemption proceeds if the net asset value of the Fund declines during the period of delay. The Fund disclaims any liability for any loss or damage that may result from any such suspension or postponement.
Because the Futures Contracts Have No Intrinsic Value, the Positive Performance of Your Investment Is Wholly Dependent Upon an Equal
and Offsetting Loss.
Futures trading is a risk transfer economic activity. For every gain there is an equal and
offsetting loss rather than an opportunity to participate over time in general economic growth. Unlike most alternative investments, an investment in Shares does not involve acquiring any asset with intrinsic value. Overall stock and bond prices
could rise significantly and the economy as a whole prosper while Shares trade unprofitably.
Failure of Currency Futures Markets to
Exhibit Low to Negative Correlation to General Financial Markets Will Reduce Benefits of Diversification and May Exacerbate Losses to Your Portfolio.
Historically, currency futures returns have tended to exhibit low to negative correlation with the returns of other assets such as stocks and bonds. Although currency futures trading can provide a
diversification benefit to investor portfolios because of its low to negative correlation with other financial assets, the fact that the Index is not 100% negatively correlated with financial assets such as stocks and bonds means the Fund cannot be
expected to be automatically profitable during unfavorable periods for the stock or bond market, or vice versa. If the Shares perform in a manner that correlates with the general financial markets or do not perform successfully, you will obtain no
diversification benefits by investing in the Shares and the Shares may produce no gains to offset your losses from other investments.
13
Shareholders Do Not Have the Protections Associated With Ownership of Shares in an Investment Company
Registered Under the Investment Company Act of 1940.
The Fund is not registered as an investment company under the
Investment Company Act of 1940 and is not required to register under such Act. Consequently, Shareholders do not have the regulatory protections provided to investors in registered and regulated investment companies.
Various Actual and Potential Conflicts of Interest May Be Detrimental to Shareholders.
The Fund is subject to actual and potential conflicts of interest involving the Managing Owner, various commodity futures brokers and
Authorized Participants. The Managing Owner and its principals, all of whom are engaged in other investment activities, are not required to devote substantially all of their time to the business of the Fund, which also presents the potential for
numerous conflicts of interest with the Fund. As a result of these and other relationships, parties involved with the Fund have a financial incentive to act in a manner other than in the best interests of the Fund and the Shareholders. The Managing
Owner has not established any formal procedure to resolve conflicts of interest. Consequently, investors are dependent on the good faith of the respective parties subject to such conflicts to resolve them equitably. Although the Managing Owner
attempts to monitor these conflicts, it is extremely difficult, if not impossible, for the Managing Owner to ensure that these conflicts do not, in fact, result in adverse consequences to the Shareholders.
The Fund may be subject to certain conflicts with respect to the Commodity Broker, including, but not limited to, conflicts that result
from receiving greater amounts of compensation from other clients, or purchasing opposite or competing positions on behalf of third party accounts traded through the Commodity Broker.
Tax Related Risks
Shareholders Will Be Subject to Taxation on Their Allocable
Share of the Funds Taxable Income, Whether or Not They Receive Cash Distributions.
Shareholders will be subject
to U.S. federal income taxation and, in some cases, state, local, or foreign income taxation on their allocable share of the Funds taxable income, whether or not they receive cash distributions from the Fund. Shareholders may not receive cash
distributions equal to their share of the Funds taxable income or even the tax liability that results from such income.
Items of
Income, Gain, Loss and Deduction With Respect to Shares could be Reallocated if the IRS does not Accept the Assumptions or Conventions Used by the Fund in Allocating Such Tax Items.
U.S. federal income tax rules applicable to partnerships are complex and often difficult to apply to publicly traded partnerships. The
Fund will apply certain assumptions and conventions in an attempt to comply with applicable rules and to report items of income, gain, loss and deduction to the Funds Shareholders in a manner that reflects the Shareholders beneficial
interest in such tax items, but these assumptions and conventions may not be in compliance with all aspects of the applicable tax requirements. It is possible that the IRS will successfully assert that the conventions and assumptions used by the
Fund do not satisfy the technical requirements of the Code and/or Treasury Regulations and could require that items of income, gain, loss and deduction be adjusted or reallocated in a manner that adversely affects one or more Shareholders.
The Current Treatment of Long-Term Capital Gains Under Current U.S. Federal Income Tax Law May Be Adversely Affected, Changed or
Repealed in the Future.
Under current law, long-term capital gains are taxed to non-corporate investors at reduced
U.S. federal income tax rates. This tax treatment may be adversely affected, changed or repealed by future changes in, or the expiration of, tax laws at any time.
PROSPECTIVE INVESTORS ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISERS AND COUNSEL WITH RESPECT TO THE POSSIBLE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE SHARES; SUCH TAX CONSEQUENCES MAY
DIFFER WITH RESPECT TO DIFFERENT INVESTORS.
14
Other Risks
Failure of Futures Commission Merchants or Commodity Brokers to Segregate Assets May Increase Losses; Despite Segregation of Assets, the Fund Remains at Risk of Significant Losses Because the Fund
May Only Receive a Pro-Rata Share of the Assets, or No Assets at All.
The CEAct requires a clearing broker to
segregate all funds received from customers from such brokers proprietary assets. If the Commodity Broker fails to do so, the assets of the Fund might not be fully protected in the event of the Commodity Brokers bankruptcy. Furthermore,
in the event of the Commodity Brokers bankruptcy, the Fund could be limited to recovering either a pro rata share of all available funds segregated on behalf of the Commodity Brokers combined customer accounts or the Fund may not recover
any assets at all, even though certain property specifically traceable to the Fund was held by the Commodity Broker. The Commodity Broker may, from time-to-time, have been the subject of certain regulatory and private causes of action.
In the event of a bankruptcy or insolvency of any exchange or a clearing house, the Fund could experience a loss of the funds deposited
through its Commodity Broker as margin with the exchange or clearing house, a loss of any unrealized profits on its open positions on the exchange, and the loss of profits on its closed positions on the exchange.
The Effect Of Market Disruptions and Government Intervention Are Unpredictable And May Have An Adverse Effect On The Value Of Your Shares.
The global financial markets have in the past few years gone through pervasive and fundamental disruptions that have
led to extensive and unprecedented governmental intervention. Such intervention has in certain cases been implemented on an emergency basis, suddenly and substantially eliminating market participants ability to continue to
implement certain strategies or manage the risk of their outstanding positions. In additionas one would expect given the complexities of the financial markets and the limited time frame within which governments have felt compelled to take
actionthese interventions have typically been unclear in scope and application, resulting in confusion and uncertainty which in itself has been materially detrimental to the efficient functioning of the markets as well as previously successful
investment strategies.
The Fund may incur major losses in the event of disrupted markets and other extraordinary events in
which historical pricing relationships become materially distorted. The risk of loss from pricing distortions is compounded by the fact that in disrupted markets many positions become illiquid, making it difficult or impossible to close out
positions against which the markets are moving. The financing available to market participants from their banks, dealers and other counterparties is typically reduced in disrupted markets. Such a reduction may result in substantial losses to the
affected market participants. Market disruptions may from time to time cause dramatic losses, and such events can result in otherwise historically low-risk strategies performing with unprecedented volatility and risk.
Regulatory Changes or Actions, Including the Implementation of the Dodd-Frank Act, May Alter the Operations and Profitability of the Fund.
The regulation of commodity interest transactions in the United States is a rapidly changing area of law and is
subject to ongoing modification by governmental and judicial action. Considerable regulatory attention has been focused on non-traditional investment pools that are publicly distributed in the United States. The Dodd-Frank Act seeks to regulate
markets, market participants and financial instruments that previously have been unregulated and substantially alters the regulation of many other markets, market participants and financial instruments. Because many provisions of the Dodd-Frank Act
require rulemaking by the applicable regulators before becoming fully effective and the Dodd-Frank Act mandates multiple agency reports and studies (which could result in additional legislative or regulatory action), it is difficult to predict the
impact of the Dodd-Frank Act on the Fund, the Managing Owner, and the markets in which the Fund may invest, the Net Asset Value of the Fund or the market price of the Shares. The Dodd-Frank Act could result in the Funds investment strategy
becoming non-viable or non-economic to implement. Therefore, the Dodd-Frank Act and regulations adopted pursuant to the Dodd-Frank Act could have a material adverse impact on the profit potential of the Fund and in turn the value of your Shares.
Lack of Independent Advisers Representing Investors.
The Managing Owner has consulted with counsel, accountants and other advisers regarding the formation and operation of the Fund. No counsel has been appointed to represent you in connection with the
offering of the Shares. Accordingly, you should consult your own legal, tax and financial advisers regarding the desirability of an investment in the Shares.
15
Possibility of Termination of the Fund May Adversely Affect Your Portfolio.
The Managing Owner may withdraw from the Fund upon 120 days notice, which would cause the Fund to terminate unless a substitute
managing owner was obtained. Owners of 50% of the Shares have the power to terminate the Fund. If it is so exercised, investors who may wish to continue to invest in a vehicle that tracks the Funds Index will have to find another vehicle, and
may not be able to find another vehicle that offers the same features as the Fund. Such detrimental developments could cause you to liquidate your investments and upset the overall maturity and timing of your investment portfolio. If the
registrations with the CFTC or memberships in the NFA of the Managing Owner or the Commodity Broker were revoked or suspended, such entity would no longer be able to provide services to the Fund.
Shareholders Do Not Have the Rights Enjoyed by Investors in Certain Other Vehicles.
As interests in an investment trust, the Shares have none of the statutory rights normally associated with the ownership of shares of a
corporation (including, for example, the right to bring oppression or derivative actions). In addition, the Shares have limited voting and distribution rights (for example, Shareholders do not have the right to elect
directors and the Fund is not required to pay regular distributions, although the Fund may pay distributions in the discretion of the Managing Owner).
An Investment in the Shares May Be Adversely Affected by Competition From Other Methods of Investing in Currencies.
The Fund is a relatively new type of investment vehicle. They compete with other financial vehicles, including other commodity pools, hedge funds, traditional debt and equity securities issued by
companies and foreign governments, other securities backed by or linked to currencies, and direct investments in the underlying currencies or currencies futures contracts. Market and financial conditions, and other conditions beyond the Managing
Owners control, may make it more attractive to invest in other financial vehicles or to invest in such currencies directly, which could limit the market for the Shares and reduce the liquidity of the Shares.
Competing Claims Over Ownership of Intellectual Property Rights Related to the Fund Could Adversely Affect the Fund and an Investment in the
Shares.
While the Managing Owner believes that all intellectual property rights needed to operate the Fund are either
owned by or licensed to the Managing Owner or have been obtained, third parties may allege or assert ownership of intellectual property rights which may be related to the design, structure and operations of the Fund. To the extent any claims of such
ownership are brought or any proceedings are instituted to assert such claims, the negotiation, litigation or settlement of such claims, or the ultimate disposition of such claims in a court of law if a suit is brought, may adversely affect the Fund
and an investment in the Shares, for example, resulting in expenses or damages or the termination of the Fund.
The Value of the Shares
Will Be Adversely Affected if the Fund is Required to Indemnify the Trustee or the Managing Owner.
Under the Trust
Agreement, the Trustee and the Managing Owner have the right to be indemnified for any liability or expense either incurs without negligence or misconduct. That means the Managing Owner may require the assets of the Fund to be sold in order to cover
losses or liability suffered by it or by the Trustee. Any sale of that kind would reduce the net asset value of the Fund and, consequently, the value of the Shares.
The Net Asset Value Calculation of the Fund May Be Overstated or Understated Due to the Valuation Method Employed When a Settlement Price is not Available on the Date of Net Asset Value Calculation.
Calculating the net asset value of the Fund includes, in part, any unrealized profits or losses on open foreign
exchange futures contracts. Under normal circumstances, the net asset value of the Fund reflects the settlement price of open foreign exchange futures contracts on the date when the net asset value is being calculated. However, if a foreign exchange
futures contract traded on an exchange (both U.S. and, to the extent it becomes applicable, non-U.S. exchanges) could not be liquidated on such day (due to the operation of daily limits or other rules of the exchange upon which that position is
traded or otherwise), the Managing Owner may value such futures contract pursuant to policies the Managing Owner has adopted, which are consistent with normal industry standards. In such a situation, there is a risk that the calculation of the net
asset value of the Fund on such day will not accurately reflect the realizable market value of such foreign exchange futures contract. For example, daily limits are generally triggered in the event of a significant change in market price of a
foreign exchange futures contract. Therefore, as a result of the daily limit, the current settlement price is unavailable. Because the Managing Owner may value such futures contract pursuant to policies the Managing Owner has adopted, which are
consistent with normal industry standards, there is a risk that the resulting calculation of the net asset value of the Fund could be under or overstated, perhaps to a significant degree. Although the Eligible Index Currencies that the Fund will
invest in are not currently subject to daily limits, the terms and conditions of these contracts may change in the future, and thus, may subject the Fund to the above-described risks.
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Exchange Rates on the Index Currencies Could be Volatile and Could Materially and Adversely Affect the
Performance of the Shares.
Foreign exchange rates are influenced by national debt levels and trade deficits, domestic
and foreign inflation rates and investors expectations concerning inflation rates, domestic and foreign interest rates and investors expectations concerning interest rates, currency exchange rates, investment and trading activities of
mutual funds, hedge funds and currency funds; and global or regional political, economic or financial events and situations. Additionally, foreign exchange rates on the Index Currencies may also be influenced by changing supply and demand for a
particular Index Currency, monetary policies of governments (including exchange control programs, restrictions on local exchanges or markets and limitations on foreign investment in a country or on investment by residents of a country in other
countries), changes in balances of payments and trade, trade restrictions, currency devaluations and revaluations. Also, governments from time-to-time intervene in the currency markets, directly and by regulation, in order to influence prices
directly. Additionally, expectations among market participants that a currencys value soon will change may also affect exchange rates on the Index Currencies. These events and actions are unpredictable. The resulting volatility in the exchange
rates on the underlying Index Currencies may materially and adversely affect the market value of the futures contracts on the Index Currencies, which would then negatively impact the value of your Shares.
Substantial Sales of Index Currencies by the Official Sector Could Adversely Affect an Investment in the Shares.
The official sector consists of central banks, other governmental agencies and multi-lateral institutions that buy, sell and hold certain
Index Currencies as part of their reserve assets. The official sector holds a significant amount of Index Currencies that can be mobilized in the open market. In the event that future economic, political or social conditions or pressures require
members of the official sector to sell their Index Currencies simultaneously or in an uncoordinated manner, the demand for Index Currencies might not be sufficient to accommodate the sudden increase in the supply of certain Index Currencies to the
market. Consequently, the price of an Index Currency may decline, which may then negatively impact the Shares.
Although the Shares are
Limited Liability Investments, Certain Circumstances such as Bankruptcy of the Fund or Indemnification of the Fund by the Shareholders will Increase a Shareholders Liability.
The Shares are limited liability investments; investors may not lose more than the amount that they invest plus any profits recognized on
their investment. However, Shareholders could be required, as a matter of bankruptcy law, to return to the estate of the Fund any distribution they received at a time when the Fund was in fact insolvent or in violation of its Trust Agreement. In
addition, although the Managing Owner is not aware of this provision ever having been invoked in the case of any public futures fund, Shareholders agree in the Trust Agreement that they will indemnify the Fund for any harm suffered by it as a result
of
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Shareholders actions unrelated to the business of the Fund, or
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Taxes imposed on the Shares by the states or municipalities in which such investors reside.
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