| Frequently Asked Questions |
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These answers to frequently asked questions are excerpts from
the Disclosure Document.
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| What are TRAKRS? |
| TRAKRS are non-traditional futures contracts designed to provide customers with a cost-effective way to invest in a broad-based index of stocks, bonds, currencies or other financial instruments. |
| How are TRAKRS different from other diversified investments? |
| Traditional diversified investments are based upon the actual ownership of stocks, bonds, or other instruments. Stock index funds, for example, seek to deliver the performance of a particular index by building a portfolio of substantially all of the stocks included in that index and managing that portfolio to match most changes to the index. This process requires a portfolio manager to buy and sell stocks, incurring costs and subjecting customers to potential adverse tax consequences. TRAKRS are designed to provide similar investment performance characteristics, while reducing many of these inefficiencies. |
| How do TRAKRS reduce inefficiencies? |
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TRAKRS reduce many of the inefficiencies associated with more traditional, diversified investments because they are futures contracts rather than shares or other interests in an investment fund. As a result, they do not require a fund or other investment vehicle to purchase and sell stocks, bonds, currencies or other financial instruments.
TRAKRS are cash-settled, electronically traded futures contracts designed to track the performance of a particular TRAKRS Index. This means that TRAKRS reduce the costs and potential tax consequences that result from turnover in traditional investment portfolios. Similarly, because TRAKRS are futures contracts rather than shares or other interests in an investment fund, TRAKRS will not make taxable distributions to customers. |
| Are TRAKRS like traditional futures contracts? |
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TRAKRS differ from traditional futures contracts in significant ways. Many non-institutional customers have avoided using futures contracts because of their perceived complexity, the need for special futures accounts, and the fact that they could incur losses in excess of their initial investment amounts as a result of the leverage inherent in futures.
Even though a particular TRAKRS Index may include a short component and/or leverage, long TRAKRS positions themselves are not leveraged for non-institutional customers, and short TRAKRS positions have a lesser degree of leverage for non-institutional customers than short positions in traditional futures contracts. Because they are not leveraged for long non-institutional customers (or in the case of short TRAKRS, they have reduced leverage for non-institutional customers), TRAKRS reduce some of the perceived complexities associated with traditional futures contracts. In particular, non-institutional long customers, because they post 100% of the TRAKRS market value at the time of purchase, will not be subject to margin calls or any requirement to make any additional payments throughout the life of their TRAKRS positions. Non-institutional customers will be permitted to hold TRAKRS in their securities brokerage accounts and trade TRAKRS through a securities broker-dealer that is also notice registered as a futures commission merchant. See "Description of TRAKRS-Non-Institutional Customers." Non-institutional customers will not be entitled to receive any interest on the money that they use to purchase TRAKRS under the terms of TRAKRS. Non-institutional customers establishing a long position in TRAKRS will not be able to use any mark-to-market gains for reinvestment or other purposes until they liquidate their position in TRAKRS or the TRAKRS terminate. Non-institutional customers establishing a short position in TRAKRS will be able to use mark-to-market gains under specified circumstances, as described herein. In addition, TRAKRS differ from stock index futures contracts in two important respects. First, each TRAKRS Index is computed on a total return basis. Thus, TRAKRS include declared dividends and other distributions in the calculation of the value of a TRAKRS Index. Second, TRAKRS have an interest rate pass-through feature, which is further described below. |
| What are TRAKRS Indexes? |
| Each TRAKRS Index will be constructed as a broad-based index of stocks, bonds, currencies or other financial instruments. TRAKRS may be designed to reflect a particular market segment or a specific investment strategy. For example, certain TRAKRS may represent the common stocks of the largest, most liquid companies in a particular industry or market sector, or may be designed to replicate a specific investment discipline, such as value investing, or a long-short, hedge fund-like investment strategy. The underlying indexes upon which TRAKRS will be based will be calculated on a total return basis (i.e., the value reflects price fluctuations plus dividends and other distributions associated with the underlying TRAKRS Index components). Each TRAKRS Index will be reconstituted and/or rebalanced on a periodic basis to reflect changes in the market that it is designed to represent. For more information on a specific TRAKRS Index, you should review the Disclosure Document Supplement for those TRAKRS. |
| So how do TRAKRS work? |
| Non-institutional customers may buy and sell TRAKRS through a securities account with a broker-dealer that is notice registered as a futures commission merchant or through a futures account with a futures commission merchant or introducing broker. TRAKRS track the value of specific TRAKRS Indexes. Buying TRAKRS gives customers "long exposure" to the TRAKRS Index and those customers benefit when the TRAKRS Index goes up. Selling TRAKRS gives customers "short exposure" to the TRAKRS Index and those customers benefit when the TRAKRS Index goes down. TRAKRS will have a stated expiration, as specified in the Disclosure Document Supplement for the applicable TRAKRS, and will be cash-settled at the closing price of the applicable TRAKRS Index on the expiration date. |
| How do TRAKRS work for institutional customers? |
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TRAKRS can be traded by non-institutional and institutional customers alike. However, institutional customers will trade TRAKRS with leverage, as they would other futures contracts.
In addition, TRAKRS have an interest rate pass-through feature. Each trading day after the determination of the daily settlement price, each institutional customer holding long TRAKRS positions must pay its FCM, and each institutional customer holding short TRAKRS positions will receive from its FCM, a daily market rate of interest equal to the Federal Funds Effective Rate less the "Spread" specified in the Disclosure Document Supplement pertaining to the applicable TRAKRS. The CME Clearing House will determine all such interest rate pass-through amounts. See "Summary of Significant Terms." |
| Are there any costs associated with taking a position in or holding TRAKRS? |
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Customers buying and selling TRAKRS should consult with their broker regarding the brokerage commissions and fees charged for all TRAKRS transactions, in addition to CME fees and National Futures Association ("NFA") fees.
While there can be no assurance that TRAKRS will not trade at a discount relative to the value of their underlying Index, it is generally expected that TRAKRS will be traded at a premium to their underlying TRAKRS Index, and that the amount of this premium will be a function of a number of factors, including the market makers' costs relative to the funding rate, prevailing borrowing costs in the market and the "Spread" disclosed in the "Summary of Contractual Terms" appearing in the Disclosure Document Supplement that will accompany each specific TRAKRS. Non-institutional customers should view this premium as an economic cost that is embedded in the price of TRAKRS, and should consider this cost as they evaluate a position in TRAKRS. |
| Do I need to hold TRAKRS until maturity? |
| No. As with any traded instrument, a customer holding a long position in TRAKRS may sell the position in the market to close out their open long position. Similarly, customers holding a short position in TRAKRS may purchase TRAKRS in the market to close out their open short position. A customer's ability to purchase or sell TRAKRS will be subject to, among other things, market conditions and liquidity. See "Risk Factors." |
| What is the tax treatment of TRAKRS? |
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A non-institutional customer holding either a long or short TRAKRS will not be treated for U.S. federal income tax purposes as owning a "regulated futures contract." Any gain or loss recognized by a non-institutional customer will be capital gain or loss regardless of whether the contract is held to maturity or terminated prior to maturity. A non-institutional customer holding a long TRAKRS position for more than 6 months will be subject to long-term capital gain or loss treatment (unlike the 12-month holding period required for long-term capital gain or loss treatment for securities investments). Accordingly, a non-institutional customer holding a TRAKRS position will not be subject to interim taxation as a result of component changes to the applicable TRAKRS Index or as a result of dividend distributions for component stocks in the applicable index. See "Federal Income Tax Considerations."
Institutional customers will be subject to the standard futures mark-to-market tax regime under Internal Revenue Code section 1256. |
| What is the TRAKRS interest rate pass-through feature? |
| Each trading day after the determination of the daily settlement price, each institutional customer holding long TRAKRS positions must pay its FCM, and each institutional customer holding short TRAKRS positions will receive from its FCM, a daily market rate of interest equal to the Federal Funds Effective Rate less an amount (the "Spread") specified in the Disclosure Document Supplement pertaining to the applicable TRAKRS. However, if at any time the Federal Funds Effective Rate is less than the Spread, then each customer holding a short TRAKRS position must pay its FCM (based on the amount of short TRAKRS held by the institutional customer multiplied by the applicable Settlement Prices), and each institutional customer holding long TRAKRS positions will receive from its FCM (based on the amount of long TRAKRS held by the institutional customer multiplied by the applicable Settlement Prices) an amount equal to the Spread minus the Federal Funds Effective Rate. Non-institutional long customers are not responsible for paying, and non-institutional short customers are not entitled to receive, this interest rate pass-through; although the long clearing FCM (or, if the Federal Funds Effective Rate is less than the Spread, the short clearing FCM) is still responsible for paying the interest payment, which is passed-through by the CME Clearing House to the short clearing FCM (or, if applicable, the long clearing FCM). The CME Clearing House will determine all such interest rate pass-through amounts. See "Summary of Significant Terms." |
| Where are TRAKRS traded? |
| TRAKRS are electronically traded on the GLOBEX system operated by Chicago Mercantile Exchange Inc. ("CME"). CME clears and settles all transactions in TRAKRS. Additional information is available at CME's website at http://www.cme.com. |
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