SCHAD COMMODITY FUTURES & OPTIONS TRADING CORPORATION

Transcription

1 DISCLOSURE DOCUMENT OF SCHAD COMMODITY FUTURES & OPTIONS TRADING CORPORATION A COMMODITY TRADING ADVISOR REGISTERED WITH THE COMMODITY FUTURES TRADING COMMISSION AND A MEMBER OF THE NATIONAL FUTURES ASSOCIATION SCHAD COMMODITY FUTURES & OPTIONS TRADING CORPORATION 536 N. Clearpoint Way Eagle, Idaho Telephone (208) Fax (208) bschad@schadcommodity.com THE COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE MERITS OF PARTICIPATING IN THIS TRADING PROGRAM NOR HAS THE COMMISSION PASSED ON THE ADEQUACY OR ACCURACY OF THIS DISCLOSURE DOCUMENT. The date of this Disclosure Document is March 15, SCHAD COMMODITY FUTURES & OPTIONS TRADING CORPORATION 1

2 RISK DISCLOSURE STATEMENT THE RISK OF LOSS IN TRADING COMMODITY INTERESTS CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. IN CONSIDERING WHETHER TO TRADE OR TO AUTHORIZE SOMEONE ELSE TO TRADE FOR YOU, YOU SHOULD BE AWARE OF THE FOLLOWING: IF YOU PURCHASE A COMMODITY OPTION YOU MAY SUSTAIN A TOTAL LOSS OF THE PREMIUM AND OF ALL TRANSACTION COSTS. IF YOU PURCHASE OR SELL A COMMODITY FUTURES CONTRACT OR SELL A COMMODITY OPTION OR ENGAGE IN OFF-EXCHANGE FOREIGN CURRENCY TRADING YOU MAY SUSTAIN A TOTAL LOSS OF THE INITIAL MARGIN FUNDS OR SECURITY DEPOSIT AND ANY ADDITIONAL FUNDS THAT YOU DEPOSIT WITH YOUR BROKER TO ESTABLISH OR MAINTAIN YOUR POSITION. IF THE MARKET MOVES AGAINST YOUR POSITION, YOU MAY BE CALLED UPON BY YOUR BROKER TO DEPOSIT A SUBSTANTIAL AMOUNT OF ADDITIONAL MARGIN FUNDS, ON SHORT NOTICE, IN ORDER TO MAINTAIN YOUR POSITION. IF YOU DO NOT PROVIDE THE REQUESTED FUNDS WITHIN THE PRESCRIBED TIME, YOUR POSITION MAY BE LIQUIDATED AT A LOSS, AND YOU WILL BE LIABLE FOR ANY RESULTING DEFICIT IN YOUR ACCOUNT. UNDER CERTAIN MARKET CONDITIONS, YOU MAY FIND IT DIFFICULT OR IMPOSSIBLE TO LIQUIDATE A POSITION. THIS CAN OCCUR, FOR EXAMPLE, WHEN THE MARKET MAKES A LIMIT MOVE. THE PLACEMENT OF CONTINGENT ORDERS BY YOU OR YOUR TRADING ADVISOR, SUCH AS A STOP-LOSS OR STOP-LIMIT ORDER, WILL NOT NECESSARILY LIMIT YOUR LOSSES TO THE INTENDED AMOUNTS, SINCE MARKET CONDITIONS MAY MAKE IT IMPOSSIBLE TO EXECUTE SUCH ORDERS. A SPREAD POSITION MAY NOT BE LESS RISKY THAN A SIMPLE LONG OR SHORT POSITION. THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN COMMODITY INTEREST TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. IN SOME CASES, MANAGED COMMODITY ACCOUNTS ARE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT AND ADVISORY FEES. IT MAY BE NECESSARY FOR THOSE ACCOUNTS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS, AT PAGES 20 through 22, A COMPLETE DESCRIPTION OF EACH FEE TO BE CHARGED TO YOUR ACCOUNT BY THE COMMODITY TRADING ADVISOR. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER SIGNIFICANT ASPECTS OF THE COMMODITY INTEREST MARKETS. YOU SHOULD THEREFORE CAREFULLY STUDY THIS DISCLOSURE DOCUMENT AND COMMODITY INTEREST TRADING BEFORE YOU TRADE, INCLUDING THE DESCRIPTION OF THE PRINCIPAL RISK FACTORS OF THIS INVESTMENT, AT PAGES 12 THROUGH 18. THIS COMMODITY TRADING ADVISOR IS PROHIBITED BY LAW FROM ACCEPTING FUNDS IN THE TRADING ADVISOR S NAME FROM A CLIENT FOR TRADING COMMODITY INTERESTS. YOU MUST PLACE ALL FUNDS FOR TRADING IN THIS TRADING PROGRAM SCHAD COMMODITY FUTURES & OPTIONS TRADING CORPORATION 2

3 DIRECTLY WITH A FUTURES COMMISSION MERCHANT OR RETAIL FOREIGN EXCHANGE DEALER, AS APPLICABLE. TABLE OF CONTENTS 1. INTRODUCTION THE ADVISOR BACKGROUND OF THE PRINCIPAL SCHAD INVESTMENT OBJECTIVES AND STRATEGIES CLIENT ACCOUNTS CLEARING BROKER AND FUTURES COMMISSION MERCHANT PRINCIPAL RISK FACTORS CONFLICTS OF INTEREST FEES AND EXPENSES SPECIAL DISCLOSURE FOR NOTIONAL FUNDED ACCOUNTS PERFORMANCE SCHAD COMMODITY FUTURES & OPTIONS TRADING CORPORATION 3

4 PRIVACY DISCLOSURE The following privacy disclosure describes the standards Schad Commodity Futures & Options Trading Corporation ( Schad Commodity ) follows for the collection, use, and protection of the client s non-public personal information. Information Schad Commodity Collects Schad Commodity collects non-public information about clients from the following sources: (i) information on account documents and other forms, which may include a client s name, address, tax identification number, age, marital state, number of dependents, assets, debts, income, employment history, beneficiary information, and personal bank account information; (ii) information from a client s transactions with Schad Commodity, such as account history or balance; and (iii) correspondence, whether written, telephonic or electronic, between a client, Schad Commodity and/or any service providers for a client s account. Information Schad Commodity Discloses Schad Commodity does not disclose any non-public personal information that it collects to unaffiliated third parties except to the extent necessary for a financial service provider, such as an FCM, to process the client s account(s) and as expressly permitted by a client or by law. Schad Commodity treats non-public personal information concerning former clients in the same way it treats such information about current clients. Information Schad Commodity Protects Schad Commodity treats non-public personal information in a confidential manner and limits access to the non-public personal information it has about clients to its employees, affiliates, and financial services providers who have an appropriate reason to access it, and to third parties to which a client has requested such disclosure. In addition, Schad Commodity endeavors to maintain appropriate safeguards such as physical, electronic and procedural safeguards to protect such information and requires third parties with whom it shares such information to maintain safeguards as well. 1. INTRODUCTION Schad Commodity Futures & Options Trading Corporation intends to begin using this Disclosure Document on March 15, The Disclosure Document shall not be used or relied upon by any investor opening an account with Schad Commodity Futures & Options Trading Corporation ( SCFOTC ) more than twelve months past the date above. Futures and option contract trading is speculative in nature, involves a high degree of risk, and is not suitable for all investors. Each investor should consult his or her financial advisor before opening a managed futures account. A prospective client in Schad Commodity s trading programs should consider carefully the highly speculative nature and risks of loss inherent in trading in the futures and options markets. A client should be financially capable of accepting the risks associated with such trading. Further, a client should have significant resources beyond any funds, which are traded by Schad Commodity. SCHAD COMMODITY FUTURES & OPTIONS TRADING CORPORATION 4

5 This document is not a contract and does not modify or limit the terms of any agreement, including the Commodity Advisory Agreement between Schad Commodity and any client participating in Schad Commodity s Diversified Agricultural Trading Program. Clients participating in the Schad Commodity Diversified Agricultural Trading Program should carefully review the specific terms of the Commodity Advisory Agreement and trading authorization and the authorization to pay fees enclosed with this Disclosure Document. 2. THE ADVISOR Schad Commodity Futures & Options Trading Corporation (the Advisor ), under the name PTA Consultation Services, Inc., became registered with the Commodity Futures Trading Commission ( CFTC ) as a commodity trading advisor ( CTA ) in January The sole proprietor and principal of the Advisor, Brian Schad, has maintained the Advisor since its inception. PTA Consultation Services, Inc. functioned as an advisory CTA and also published an agricultural and financial newsletter from January 1997 until April In 2003, PTA Consultation Services, Inc. reorganized its advisory CTA business under the name Schad Commodity Futures & Options Trading Corporation, but did not maintain registration with the CFTC or membership with the National Futures Association ( NFA ) between April 2003 and October 2007, functioning primarily to publish an advisory newsletter. The Advisor, which has continuously published an advisory newsletter since 1997, currently operates as Schad Commodity Futures & Options Trading Corporation, and was incorporated in Nevada in The Advisor became re-registered with the CFTC as a CTA in October 2007, maintained NFA Member status between October 2007 and October 2008, and was approved as an NFA Member again in December During the period between October 2007 and December 2010, the Advisor s primary business involved the publication of an advisory newsletter. The Advisor s principal place of business is 536 N. Clearpoint Way, Eagle, Idaho 83616, telephone: (888) The books and records of the Advisor are located at 536 N. Clearpoint Way, Eagle, Idaho The performance of the Advisor is presented in Section 11. Brian R. Schad is the president, founder, sole shareholder and sole principal of Schad Commodity Futures & Options Trading Corporation. There has never been any material administrative, civil, or criminal proceedings against Brian R. Schad, or Schad Commodity Futures & Options Trading Corporation. 3. BACKGROUND OF THE PRINCIPAL Brian R. Schad, Principal. Brian is the president, director, sole shareholder and sole principal of Schad Commodity Futures & Options Trading Corporation (the Advisor ). He has been listed as a principal of the Advisor since October 2007 to the present, and has maintained registration as an associated person ( AP ) of the Advisor with the CFTC since October 2007 until the present. Brian functioned as an advisory CTA and also published an agricultural and financial advisory newsletter under the name PTA Consultation Services, Inc. from January 1997 until April 2003 and Brian was listed as the principal of the Advisor during that period. In May of 2002, Brian was handpicked by his long-time trading mentor, Larry Williams, to temporarily co-publish Mr. Williams 33-year running advisory newsletter the Commodity Timing Report until July of In January of 2005, the World Cup Advisor Company of Chicago, IL a company that tracks and trades stock and commodity advisory newsletters began following Brian s trades and utilizing the Advisor s newsletter services until September of In August 2003, PTA Consultation Services, Inc. reorganized its advisory CTA business in the state of Nevada under the name Schad Commodity SCHAD COMMODITY FUTURES & OPTIONS TRADING CORPORATION 5

6 Futures & Options Trading Corporation, but did not maintain registration with NFA or CFTC between April 2003 and October 2007, and functioned primarily to publish an advisory newsletter. There is a lapse in NFA membership between February 2013 until March 2014 as Brian Schad considered transitioning Schad Commodity from a CTA to an independent introducing broker ( IIB ). An application request for an IIB formally began in April 2013 and was ultimately withdrawn in February SCHAD INVESTMENT OBJECTIVES AND STRATEGIES The primary objective of Schad Commodity s Diversified Agricultural Trading Programs are capital appreciation through speculation in exchange-listed futures contracts, and options thereon with two specific account portfolio program increments. The two, completely separate, trading programs offered by Schad Commodity are the $25K Diversified Agricultural Trading Program and the $50K Diversified Agricultural Trading Program which trades six more markets than the $25K program the Schad Commodity $25K Diversified Agricultural Trading Program (which trades seven-markets: 1) hard-red winter wheat, 2) sugar #11, 3) cotton #2, 4) soymeal, 5) corn, 6) soft-red winter wheat, and 7) mini-gold) and the Schad Commodity $50K Diversified Agricultural Trading Program (which trades a total of 13 markets: the first six-markets of the aforementioned portfolio and replacing mini-gold with COMEX Gold, plus 8) lean hogs, 9) feeder cattle, 10) soybeans, 11) soy oil, 12) high-grade copper, and 13) coffee). Schad Commodity will attempt to meet the objective of capital appreciation by making trading decisions based upon his proprietary trading methods. There can be no assurance that Schad Commodity and its client accounts will achieve this objective, or that the client accounts will not incur losses. Moreover, there can be no assurance that Schad Commodity s trading will yield the same results as it has in the past. Schad Commodity s Diversified Agricultural Trading Programs are designed for sophisticated investors. An investment in an account to be traded by Schad Commodity should only be considered by investors that can assume the significant risk of commodity futures trading, including losses in excess of their initial investment. In managing the accounts of customers, Schad Commodity employs the trading concepts and strategies developed by Mr. Schad, Schad Commodity s sole principal. Since the trading methods to be utilized by Mr. Schad are proprietary and confidential, the discussion that follows is of a general nature and not intended to be exhaustive. Schad s trading models are designed to detect and exploit price changes occurring with trending markets, while also applying risk management and portfolio management principles. Schad believes that utilizing multiple markets for the same client account provides an important level of diversification, and is most beneficial when option contracts of each market traded are employed as a hedging tool. Schad Commodity s trading model may not trade every market as only trending markets are intended to be traded. Over the course of a price change, there are times when the risk of the market does not appear to be justified by the potential reward. In such circumstances, Schad s trading method may exit a winning position prior to the end of a price move, or hedge the position with the options. While there is some risk to this method (for example, being out of the market during a significant portion of a price move, or hedging with covered options), Schad s research indicates that this is well compensated for by the decreased volatility of performance that may result. SCHAD COMMODITY FUTURES & OPTIONS TRADING CORPORATION 6

7 Schad s trading methods include trend following trading models, counter-trend trading models and trading models that do not seek to identify or follow price trends at all (the latter usually at the beginning of a new trend). Schad Commodity expects to develop additional trading models and to modify models currently in use and may or may not employ all such models for all clients accounts. The trading models currently used by Schad Commodity may be eliminated from use if Schad ever believes such action is warranted. While Schad Commodity generally follows a disciplined systematic approach to trading, on occasion it may override the signals generated by the trading models when, in Schad s opinion, market conditions dictate otherwise. While such action may be taken for any reason at any time at Schad s discretion, it will normally only be taken to reduce risk, and may or may not enhance the results that would otherwise be achieved. Moreover, although technical trading systems normally consist of a series of fixed rules applied manually or by computer, Schad believes that such systems still require certain subjective judgments and decisions. For example, Mr. Schad will select the contracts and markets which will be followed, the contracts and markets which will be actively traded and the contract months in which positions will be maintained. Mr. Schad will also determine when to roll over a position (i.e., liquidate a position which is about to expire and initiate a new position in a more distant contract month). These types of decisions require consideration of, among other things, the volatility of a particular market, the pattern of price movements (both inter-day and intraday), open interest, trading volume, changes in spread relationships between various contract months and between various contracts, and overall portfolio balance and risk exposure. With respect to the timing and execution of trades, Schad Commodity may also rely to some extent on the judgment of others, such as trading desks and floor brokers. No assurance can be made that consideration will be given to any or all of the foregoing factors by Mr. Schad with respect to every trade for an account managed by Schad Commodity Futures & Options Trading Corporation or that consideration of any such factors in a particular situation will lessen the account s risk of loss. Clients should be aware that such decisions may involve a substantial element of judgment and Mr. Schad s unavailability to make such decisions could materially impair the operation of trading strategies. Schad Commodity seeks to maintain a commitment to consistent portfolio construction and program integrity excellence. Schad generally has not been persuaded to change the fundamental elements of the portfolios by short-term performance, although adjustments may be, and have been, made over time. In addition, Schad has not changed the basic methodologies that identify signals in the markets for each program. Schad believes that the Advisor s proprietary account results, which commenced trading in January 2010, has benefited substantially from its adherence to its models during and after periods of negative returns; however, adherence to its strategy may lead to prolonged periods of market losses and high risk. The dynamic elements of the Schad Commodity investment process involve periodic adaptation to changing market conditions and subjective discretionary decisions on such matters as portfolio weightings, leverage, position size, effective trade execution, capacity and entry into new markets- all of which depend on professional experience and market knowledge. These changes are made as warranted by Schad s research findings concerning its portfolios and their performance. From time to time, Schad Commodity s trading strategies and systems may be revised, refined or abandoned, and the implementation of its trading strategies may be changed as a result of ongoing research and development as Schad seeks to devise new trading strategies and systems as well SCHAD COMMODITY FUTURES & OPTIONS TRADING CORPORATION 7

8 as test methods currently employed. The trading strategies and systems used by Schad in the future may differ significantly from those presently used, due to the changes, which may result from this research in the ever changing marketplace. Clients will not be notified or be given an opportunity to approve of any changes, or a revision to Schad s trading strategies, or the implementation of its trading strategies. If however, the Advisor makes any material changes to this Disclosure Document, the Advisor will notify each client of such change within twenty-one (21) days. Markets Traded Schad Commodity Futures & Options Trading Corporation emphasizes a wide range of diversification by utilizing a multi-sector portfolio of futures contracts including, but not limited to, precious and industrial metals, and agricultural products. These futures contracts are traded on a highly leveraged basis. The decision to periodically add or subtract markets from investment programs shall be at the sole discretion of Schad Commodity Futures & Options Trading Corporation. Clients will not be informed of these changes as they occur. In addition, Schad Commodity will effect transactions on exchanges solely located in the United States, which include but are not limited to those listed below. Schad may decide to trade on other additional exchanges without the clients prior approval. Chicago Board of Trade Chicago Mercantile Exchange New York Board of Trade New York Mercantile Exchange New York Commodities Exchange Kansas City Board of Trade Minneapolis Grain Exchange Leverage and Risk Management Schad Commodity Futures & Options Trading Corporation applies risk management and portfolio management strategies to measure and manage overall portfolio risk. These strategies include diversification, portfolio structure, risk balance, capital allocation and risk limitation. One objective of risk and portfolio management is to determine periods of relatively high and low portfolio risk, and when such points are reached Schad Commodity may reduce or increase position size accordingly. Such reduction or increase in position size may not enhance the results achieved over time. Schad Commodity maintains certain risk management procedures for determining the appropriate quantity of contracts to be traded for an account of a given size and for all accounts. Schad may continually adjust its trading portfolios and the position size of an order immediately prior to placement, and/or after the initial position is established, based on such factors as past market volatility, prices of commodities, amount of risk, potential return and margin requirements. The decision not to trade a certain market at certain times or to reduce the number of contracts traded in a particular market may result in missing significant profit opportunities that otherwise might have been captured if Schad depended solely on the computer-based aspects of its trading strategy or on differing trading strategies altogether. SCHAD COMMODITY FUTURES & OPTIONS TRADING CORPORATION 8

9 Schad Commodity Futures & Options Trading Corporation may, at its discretion, adjust leverage in certain markets or entire portfolios. Adjustments to certain positions or entire portfolios for leverage may positively or negatively affect performance. Factors that may affect the decision to adjust leverage include research, portfolio diversification, current market volatility, risk exposure, subjective judgment, and evaluation of other general market conditions. No assurance is given to clients that such leverage adjustments will be to their financial benefit, and such leverage adjustments may actually result in lost opportunities or substantial losses. Since Schad Commodity considers preservation of initial assets paramount to producing trading results, Schad employs risk management techniques in an effort to reduce risk. These techniques include attempts to trade multiple uncorrelated markets in an effort to diversify as well as to limit the equity committed to each market and market sector. No assurance can be given to clients that such techniques will be to their financial benefit, and such techniques may actually result in lost opportunities or substantial losses. By committing equity to multiple markets and to different strategies, diversification reduces the dependence of the programs on any one particular market or trading system for trading profits. Due to the importance of diversification across different market groups and trading strategies, Schad Commodity suggests a minimum account size of $25,000 per unit traded, or two units of the sole agricultural markets. Accounts positioned with larger dollar amounts may reduce historical profit percentage gains, and reduce draw down percentages accordingly. Account Size and Funding 5. CLIENT ACCOUNTS The minimum account size is $25,000 for Schad Commodity s Diversified Agricultural Trading Programs which will include options used as a hedge (at Schad s discretion). All customer accounts reported, pursuant to an Advisory published by the CFTC, must be documented by an agreement between Schad Commodity and its client specifying the Nominal Account Size (agreed level of trading irrespective of amount of Actual Funds, including non-cash, margin qualifying assets on deposit), how margin qualifying assets would affect or be related to the Nominal Account Size, and how and to what extent (as a percentage of the account s Nominal Account Size) the account will be funded with Actual Funds. Actual Funds is defined as the amount of margin-qualifying assets on deposit in a commodity interest account, generally cash and marketable securities. Nominal Account Size shall be increased to reflect profits and decreased to reflect losses. Cash additions and cash withdrawals from Actual Funds will be offset with Notional Funds so that the Nominal Account Size is not impacted. Opening an Account To open an account you should complete the account-opening documents, which accompany this Disclosure Document. There are additional requirements for corporations and partnership. If you are interested in opening a notionally funded account, please also complete the forms and provide the information for notionally funded accounts. Schad Commodity will place an account on active status within ten business days after receipt of all signed Schad Commodity documents and agreements from the client or the client s representative and notification from the FCM or IB that the account is ready to trade. Active status means that Schad Commodity is monitoring the SCHAD COMMODITY FUTURES & OPTIONS TRADING CORPORATION 9

10 account for possible trade executions, based on entry and exit signals from Schad Commodity s models. New Accounts Each new account will encounter a startup period during which it may incur certain risks related to the initial investment of assets. For example, during an account s start-up period, the level of diversification may be lower than a previously existing account with a fully committed and diversified portfolio. In an effort to manage such risk, Schad Commodity has developed procedures governing the appropriate timing for the commencement of trading and the appropriate means of moving toward full portfolio commitment for new accounts. Schad Commodity at its discretion may delay the actual start of trading for an account for an extended period of time or invest a new account more slowly than it would a more mature account. These procedures may be modified from time to time, and no assurance is given that they will be successful in moving an account toward full portfolio commitment without substantial losses, which might have been avoided, or foregoing substantial profits, which might have been achieved, by other means of initiating investment in the markets. Closing an Account A client may close his or her account at any time by notifying the FCM or IB. The Advisor also recommends that the client notify the Advisor at least 5 business days prior to the client closing his or her account with the FCM or IB, if the intention is to cease trading with the Advisor. Account Additions and Withdrawals Funds may be added or withdrawn at any time by deposits or withdrawals made directly with the FCM. The Advisor also recommends that the client notify the Advisor at least 5 business days in advance of any cash funding change. You should note that if a cash addition or withdrawal is made to a client account, and the nominal trading level in a client s account is not changed by the client, the Advisor will not change the level of trading on behalf of such client account. Specifically, the Advisor will not change the level of trading, even if there is a addition or withdrawal made from the account, unless prior notification by fax or is received from the client indicating a new nominal size (and trading level) for the account. Order Entry and Allocation Schad Commodity will generally place a block order for all Schad Commodity accounts, including any proprietary accounts in which the same commodity interest is being traded through the same executing FCM. In this instance, Schad Commodity employs an objective price allocation procedure in which all accounts are listed by an internal account number and then trades are assigned, with the lowest number on the list receiving the lowest buy and the lowest sell and the highest number on the list receiving the highest buy and the highest sell. Allocation records, including our composite performance figures are available for review by clients upon reasonable notice. 6. CLEARING BROKER AND FUTURES COMMISSION MERCHANT SCHAD COMMODITY FUTURES & OPTIONS TRADING CORPORATION 10

11 Each client must select a futures commission merchant ( FCM ) to hold the assets of his or her account with Schad Commodity. Clients are free to open an account with the FCM of their choice, and may also choose to use an introducing broker ( IB ). However, Schad Commodity reserves the right to approve FCMs selected by its clients. Schad Commodity s approval will take into consideration such factors as execution capability, costs associated with brokerage, commissions, clearing, exchanges and NFA fees (such fees will vary per product), services provided, financial resources and industry reputation not to exceed a $10 round-turn commission rate. Each client generally will be provided with a statement from his FCM disclosing the amount of brokerage commissions charged to his account. Each client account -- and not Schad Commodity -- is responsible for paying the FCM or IB brokerage commissions on its futures contract transactions. Trading pursuant to Schad Commodity s Diversified Agricultural Trading Programs may generate a high volume of trading activity. Schad Commodity anticipates that brokerage commission in connection there with will be substantial, and could negatively impact the profitability of an account. Schad Commodity will have the right to direct all trades to any FCM or floor broker it chooses for execution with instructions to give-up to the client s clearing broker. Schad Commodity may utilize numerous FCMs and floor brokers (both independent and FCM-affiliated) for trade execution. The clearing broker will then pay both floor brokerage and additional give-up fees to the executing FCM or floor broker from the client s account. In addition, clients will be required to sign documentation, which specifically authorizes Schad Commodity to execute orders utilizing a giveup procedure and to enter into give-up agreements with the executing and clearing brokers involved, and authorizing Schad Commodity to act on behalf of the client in negotiating those agreements (not to exceed $2.50 per half turn trade). A qualified investor wishing to open an account with Schad Commodity must authorize Schad Commodity to manage assets pursuant to a limited power of attorney contained in the Commodity Advisory Agreement, a copy of which is included with this Disclosure Document as Exhibit B. In addition to the Commodity Advisory Agreement, each client will also be required to execute the various new account forms, powers-of attorney, risk disclosure documents, authorization to do give ups, notional equity agreement (where applicable) and customer agreements of the FCM or IB for the client s account. 7. PRINCIPAL RISK FACTORS Schad Commodity directs the trading for customers in futures and options contracts (collectively referred to as futures or futures trading in this Disclosure Document, excluding FOREX transactions). Before investing in futures, prospective clients should consult with their financial and tax advisers to inform themselves fully about futures trading and to determine whether futures are suitable investments for them. Futures trading involve many risks. In addition to the risks inherent in trading futures pursuant to instructions provided by Schad Commodity, there are additional risk factors, including those described below, in connection with a client participating in Schad Commodity s Diversified Agricultural Trading Programs. Prospective clients should read and consider all of the risk factors contained in this section and elsewhere in this Disclosure Document prior to investing in the futures markets. SCHAD COMMODITY FUTURES & OPTIONS TRADING CORPORATION 11

12 Clients participating in Schad Commodity s Diversified Agricultural Trading Programs will be subjected to a number of risks, including, but not limited to the following: Volatility A principle risk in futures trading is the tremendous volatility (or rapid fluctuation) in the market prices of commodities. The profitability of an account will depend on anticipating fluctuations in market prices. Prices of futures are affected by a wide variety of factors which are complex and difficult to predict, such as changing supply and demand relationships, weather, government trading and fiscal policies, national and international political events and changes in interest and currency exchange rates. None of these factors can be controlled by Schad Commodity and no assurance can be given that Schad Commodity s advice will result in profitable trades for a participating client or that a client will not incur losses. Leverage A futures position can be established with margin that typically ranges between 1% and 5% of the total value of the futures contract. Low margin provides large amount of leverage, i.e., commodity futures contracts for a large number of units (bushels, pounds, etc.) of a commodity, having a value substantially greater that the margin may be traded for a relatively small amount of money. Hence a relatively small change in the market price of the underlying commodity can result in a substantial price movement relative to the margin deposit and may result in immediate and substantial losses to a client s account. If Schad Commodity invested a substantial portion of the assets of a client s account in such a situation, then a substantial change (up or down) in the value of the account would result. For example, if at the time of purchase 5% of the price of a futures contract is deposited as margin, a 5% decrease in the price of the futures contract would, if the contract were closed out, result in a total loss of the margin deposit. Brokerage commissions and other expenses also would be incurred and would have to be paid despite the loss. Thus, although the use of leverage can substantially improve the return on invested capital, like other leveraged investments, any leveraged trade may result in losses in excess of the amount invested. Notionally Funded Accounts Clients who use notional funds to fund their accounts with Schad Commodity will increase the trading leverage of their accounts. Increased trading leverage increases both the gains and losses experienced by a notionally funded account, and may potentially increase the volatility of the returns experienced by such accounts, compared to the returns experienced by accounts that are not notionally funded. Liquidity and Stop Loss Orders The Advisor seeks to employ a portfolio of systematic market timing models that is diversified across asset class, technique, and time frame. The Advisor intends to utilize trading methods, which may last up to several months, and no inter-day trading is intended. However, positions may nonetheless be opened and closed in the same day. Most futures contracts are subject to either daily price limitations or circuit breakers, which mean that the exchanges have prohibited or slowed the trading of futures contracts if the price fluctuates by a certain amount. It is not always possible to execute a buy or sell order at the desired price, or to close out an open position due to market conditions and/or price fluctuations. Futures prices have occasionally moved the daily limit for SCHAD COMMODITY FUTURES & OPTIONS TRADING CORPORATION 12

13 several consecutive days with little or no trading. It should be noted that when the market price of a futures contract reaches its daily price fluctuation limit no trades, or only a limited number of trades, can be executed. Similar occurrences in markets in which Schad Commodity and its clients may hold positions at that time could prevent Schad Commodity from promptly liquidating unfavorable positions and subject it (and the client s account) to substantial losses. Daily price fluctuation limits are established by the exchanges and approved by the CFTC. In certain commodities, the daily price fluctuation limits may apply throughout the life of the contract, and the holder of a futures contract who cannot liquidate his position by the end of trading on the last trading day may be required to make or take delivery of the commodity. Daily limits may reduce liquidity, but they do not limit ultimate losses, as such limits apply only on a day-to-day basis. Another instance of difficult or impossible execution occurs in thinly traded markets or markets which lack sufficient trading liquidity. As a result, no assurance can be given that Schad Commodity s orders will be executed at or near the desired price. Although Schad Commodity may utilize stop loss orders in an attempt to limit client losses, there can be no assurances that such orders will be executed at the prices specified and in fact limit losses to the intended amounts. Speculative Position Limits The CFTC and the commodity exchanges have established limits on the maximum net long or net short futures positions which any person or group of persons acting together may hold or control. Any commodity accounts owned or managed by Schad Commodity or its principals, including client accounts, must be combined for position limit purposes. Schad Commodity believes that the current limits will not adversely affect its trading on behalf of its clients. However, it is possible that Schad Commodity s trading decisions may have to be modified and positions held by clients accounts may have to be liquidated in order to avoid exceeding such limits. Counter Party Creditworthiness Under CFTC regulations, FCM s are required to maintain customers assets in a segregated account. If a participating client s FCM fails to do so, the customer may be subject to a risk of loss of the funds on deposit with the client s FCM in the event of the FCM s bankruptcy. In addition, under certain circumstances, such as the inability of another client of the FCM or the FCM itself to satisfy substantial deficiencies in such other client s account, a participating client may be subject to a risk of loss of funds on deposit with the client s FCM. Regardless in the case of any such bankruptcy or client loss, a participating client with a segregated account may or may not recover, even in respect of property specifically traceable to the client, only a pro rata share of all property available for distribution to all of the FCM s clients. Trading of Options Contracts Presents Unique Risks Schad Commodity may engage in the trading of options (both puts and calls) on commodity futures contracts. The value of an option depends largely upon the likelihood of favorable price movements in the underlying futures contract as they relate to the exercise (or strike) price during the life of the option. Therefore, many of the risks applicable to trading the underlying futures contracts also apply to options trading. However, there are a number of other risks associated solely with the trading of options: The purchaser of an option runs the risk of losing the entire investment, i.e., the premium paid, as well as the commissions and other transaction fees associated with purchasing the option. SCHAD COMMODITY FUTURES & OPTIONS TRADING CORPORATION 13

14 The uncovered writer of an option is subject to the risk of loss due to an adverse price movement in the underlying futures positions. Spread positions using options are subject to the same risks involved in the purchase and writing of options. In the event Schad Commodity were to write uncovered options and such options were exercised by the purchasing party, Schad Commodity would be required to purchase or deliver the underlying futures contract in accordance with the terms of the option, in this case the uncovered writer of an option is then subjected to a loss which may be unlimited. Substantial Fees and Expenses Clients will be subject to substantial brokerage commissions and other transaction costs, as well substantial management fees and/or incentive fees. On option trading, bid-ask spreads and prime brokerage fees may be incorporated into the pricing of option contracts by the counter parties, in addition to the brokerage commissions paid. Schad Commodity is not able to quantify the bid ask spreads that will be paid by client accounts because the profits made by the counter parties cannot be determined. Accordingly, a client s account will have to earn substantial trading profits and/or interest income to avoid depletion of the client s funds due to such commissions, costs and fees. Each client, and not Schad Commodity, is directly responsible for paying to such client s FCM or IB, as appropriate, all margins, option premiums, brokerage commissions and fees, and other transaction costs and expenses incurred in connection with transactions effected for the client s account by Schad Commodity. Brokerage commissions and other transaction costs may be substantial. Schad Commodity considers the interests of its clients paramount and intends to manage all accounts to further the interests of its clients. Nevertheless, Schad Commodity can give no assurance as to any minimum or maximum number of transactions, which will be entered into for a client s account during any period for which Schad Commodity manages the account. The fees charged by Schad Commodity for providing management services to a client generally include a management fee and an incentive fee, and such fees may be higher or lower than the fees paid by other clients of Schad Commodity. Monthly management fees payable to Schad Commodity are based on the net asset value (defined under 9. Fees and Expenses ) of a client s account as of the beginning of each calendar month, without regard to the profitability of the account. Incentive fees payable to Schad Commodity are based on the Net New Profits in the client s account as of the end of each calendar month. The calculation of Net New Profits includes unrealized profits (net of unrealized losses) in open positions, and includes interest income earned in the account. Any such unrealized profits in a client s account may never be realized. Further, because Schad Commodity s incentive fees will generally be paid on a monthly basis, Schad Commodity could receive an incentive fee for a calendar month even though it s trading on an annual basis and/or over the entire term of the account was unprofitable. Once an incentive fee is paid, Schad Commodity retains the fee regardless of its subsequent performance, but no new incentive fee will be paid by a client to Schad Commodity until the client recoups any previous loss. A client is responsible for bearing any and all expenses, losses, and fees incurred as a result of maintaining and having Schad Commodity trade the client s account. In the Commodity Trading SCHAD COMMODITY FUTURES & OPTIONS TRADING CORPORATION 14

15 Agreement (attached as Exhibit B to this Disclosure Document), a client agrees to indemnify and hold harmless Schad Commodity and its employees, affiliates, and agents in this regard. See 9. Fees and Expenses. An Investment in Managed Futures May Not Diversify an Overall Portfolio Historically, alternative investments such as managed futures have been generally non-correlated to the performance or other asset classes such as stocks and bonds. Non-correlation means that there is no statistically valid relationship between the past performances of futures and option contracts on the one hand and stocks or bonds on the other hand. Non-correlation should not be confused with negative correlation, where the performance of two asset classes would be opposite. Because of this non-correlation, a client s account cannot be expected to be automatically profitable during unfavorable periods for the stock market or vice versa. The futures and option markets are fundamentally different from the securities markets in that for every gain made in a futures or option transaction, the opposing side of that transaction will have an equal and offsetting loss. If a client s account does not perform in a manner non-correlated with the general financial markets or does not perform successfully, a client will obtain no diversification benefits by investing in managed futures and a client s account may have no gains or offset losses from investments. Technical Analysis The trading systems used by Schad s clients accounts are primarily technical. The profitability of trading under these systems depends on, among other things, the occurrence of significant price movements, up or down, in futures or option prices. Such price movements may not develop; there have been periods in the past without such price movements. No assurance can be given that Schad s methods will be successful in the future, or that investment results of a client s account will be similar to those achieved by Schad Commodity Futures & Options Trading Corporation in the past. A limiting factor in the use of technical analysis is that such an approach requires price movement data, which can be translated into price trends sufficient to dictate a market entry or exit decision. Any trading method, which is based upon such technical concepts, will not perform well when markets are trendless or erratic, because a technical method may fail to identify a trend on which action should be taken or the method may react to minor price trends, which may result in losses. In addition, a technical trading method may under-perform other trading methods when fundamental factors dominate prices moves within a given market. For example, since technical analysis generally does not take into account fundamental factors such as supply, demand, and political and economic events, except insofar as certain factors may have influenced the technical data constituting input information for such strategies, a technical trading method may be unable to respond to fundamental causation events until after their impact has ceased to influence the market; positions dictated by such resultant price movements may be incorrect in light of the fundamental factors then affecting the market. Increase in Assets Under Management May Make Profitable Trading More Difficult Schad Commodity has not agreed to limit the amount of assets it may manage, and is actively engaged in raising assets for existing and new accounts. The more assets Schad Commodity manages, the more difficult it may become for Schad Commodity to trade profitability because of SCHAD COMMODITY FUTURES & OPTIONS TRADING CORPORATION 15

16 the difficulty of trading larger positions without adversely affecting prices and performance. Accordingly, such increases in equity under management may require Schad Commodity to modify its trading decisions, which could have a detrimental effect on a client s investment. Such considerations may also cause Schad Commodity to eliminate smaller markets from consideration for inclusion in its various portfolios, reducing the range of markets in which trading opportunities may be pursued. Schad Commodity reserves the right to reduce account size by returning assets or profits to clients in an effort to control asset growth. In doing so, Schad Commodity may have an incentive to favor other accounts because the compensation received from some other accounts may exceed the compensation it receives from certain other accounts. Because records with respect to other accounts are not accessible, an investor will not be able to determine if Schad Commodity is favoring other accounts. Performance May Vary From Other Accounts During the Start of Trading A client s account may incur certain risks relating to the initial investment of its assets. Due to market conditions Schad Commodity may take several days or months before a client s account is fully invested. Notwithstanding any delay in becoming fully invested, a client s account may commence trading operations at an unpropitious time, such as after sustained moves in a number of markets. Past Performance The future performance of a client s account is not predictable, and no assurance can be given that a client s account will perform successfully in the future. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Conflicts of Interest While Schad Commodity will seek to avoid conflicts of interest to the extent feasible and to resolve all conflicts that may arise equitably and in a manner consistent with its responsibilities to a client s account, no specific policies regarding conflicts of interest have been or are intended to be adopted by Schad Commodity. Reliance on Principal The incapability of Brian Schad, Schad Commodity s sole principal, could have a material and adverse effect on Schad Commodity s ability to discharge its obligations to its clients. Proposed Regulatory Change is Impossible to Predict The commodities markets are subject to comprehensive statutes, regulations and margin requirements. In addition, the CFTC and the exchanges are authorized to take extraordinary actions in the event of a market emergency, including, for example, the retroactive implementation of speculative position limits or higher margin requirements, the establishment of daily price limits and the suspension of trading. The regulation of futures and option transactions in the United States is a rapidly changing area of law and is subject to modification by government and judicial action. In addition, various national governments have expressed concern regarding the disruptive effects of speculative trading in the currency markets and the need to regulate the derivatives SCHAD COMMODITY FUTURES & OPTIONS TRADING CORPORATION 16

17 markets in general. The effect of any future regulatory change on a client s account is impossible to predict, but could be substantial and adverse. Incentive Fees Schad Commodity employs a speculative strategy and receives incentive fees based on the trading profits earned by it. Schad Commodity would not agree to manage a client s account in the absence of such fee arrangement. Electronic Trading Schad Commodity expects to trade increasingly through electronic trading systems provided by the brokerage firms used by its clients. Trades placed by electronic means are governed by the terms of the relevant electronic brokerage trading agreements and by exchange rules. Electronic trading systems vary in terms of order matching procedures, opening and closing procedures and prices, error trade policies, trading limitations or Requirements, qualifications for access, grounds for terminating access and limitations on the types of orders that may be entered. Additional risk may occur due to limitation of system access, varying response times and security requirements. In the case of Internet-based systems, there may be additional risks related to service providers and the receipt and monitoring of electronic mail. In the event of electronic system or component failure, it might not be possible to enter new orders, execute existing orders or modify or cancel orders that were previously entered, and orders may be lost or lose priority. Schad Commodity will retain the capability of placing orders by the traditional means of telephone and will use this method if electronic trading is not possible for a period of time. Exchanges may have adopted rules to limit their ability, the liability of futures brokers and software and communications systems vendors and the amount that may be collected for system failures and delays. Potential Inability to Trade or Report Due to Systems Failure Schad Commodity s strategies are dependent to a significant degree on the proper function of its internal computer systems. Accordingly, systems failures, whether due to third party failures upon which systems are dependent or the failure of Schad Commodity s hardware or software, could disrupt trading and make trading impossible until such failure is remedied. Any such failure, and consequential inability to trade (even for a short time), could, in certain market conditions, cause a client s account to experience significant trading losses or to miss profitable trading opportunities. Additionally, any such failures could cause a temporary delay in reports to clients. Potential Disruption or Inability to Trade Due to a Failure to Receive Timely and Accurate Market Data from Third Party Vendors Schad Commodity s strategies are dependent to a significant degree on the receipt of timely and accurate market data from third party vendors. Accordingly, the failure to receive such data in a timely manner or the receipt of inaccurate data, whether due to the acts or omissions of such third party vendors or otherwise, could disrupt trading to the detriment of a client s account or make trading impossible until such failure or inaccuracy is remedied. Any such failure or inaccuracy could, in certain market conditions, cause a client s account to experience significant trading losses, effect trades in a manner which it otherwise would not have done, or miss opportunities for profitable trading. For example, the receipt of inaccurate market data may cause Schad Commodity to establish (or exit), or fail to establish (or exit) a position which it otherwise would SCHAD COMMODITY FUTURES & OPTIONS TRADING CORPORATION 17

18 have established (or exited), and any subsequent correction of such inaccurate data may cause Schad Commodity to reverse such action or inaction, all of which may ultimately be to the detriment of a client s account. Fees May be Characterized as Investment Advisory Fees The Internal Revenue Code 1986, as amended, provides that investment advisory fees are to be aggregated with unreimbursed employee business expenses and other expenses of producing income, collectively aggregate investment expenses, and the aggregate amount of such expenses will be deductible only to the extent that such amount exceeds 2% of a taxpayer s adjusted gross income. In addition, aggregate investment expenses in excess of the 2% threshold, when combined with certain other deductions, are subject to a reduction generally equal to 3% of the taxpayer s adjusted gross income in excess of a threshold amount. Such limitation could substantially reduce the deductibility for federal income tax purposes of any amount deemed to constitute investment advisory fees. The management and incentive fees payable to Schad Commodity may be characterized as investment advisory fees subject to the above limitation. Each client, therefore, may pay tax on more than the net profits generated in their account; each prospective client must consult and must depend on their own tax adviser regarding the federal, state, local and foreign tax consequences of participation in the Schad Commodity Diversified Agricultural Trading Programs. Proprietary Trading 8. CONFLICTS OF INTEREST Schad Commodity and Mr. Schad may trade or continue to trade their own proprietary accounts. Although Schad Commodity will generally trade in parallel with customer accounts, due to differences in leverage, performance may differ significantly from customer performance. Moreover, from time to time, Schad Commodity s and/or Mr. Schad s trades for their own accounts may be held in varying duration or opposite of those held by the client account(s). Neither Schad Commodity nor its principal will intentionally favor a proprietary account over a client account, nor will either Schad Commodity or its principal knowingly permit a proprietary account to trade ahead of a client account. Schad Commodity and Mr. Schad s proprietary trading records will not be available to clients for review. Trading Multiple Accounts Because of price volatility, occasional variations in liquidity and differences in order execution, it is impossible for Schad Commodity to obtain identical trade execution for all its clients. Such variations and differences may produce differences in performance among client accounts over time. Accordingly, order entry may be done by means of a block order, which may include positions for unrelated client account(s), as well as the account(s) of Schad Commodity and its sole principal, Mr. Schad. In an effort to treat its clients fairly when block orders for client s accounts are filled at different prices, Schad Commodity assigns trades on a systematic basis and in a nonpreferential manner in accordance with NFA rules and advisories concerning block order allocation procedures. SCHAD COMMODITY FUTURES & OPTIONS TRADING CORPORATION 18

19 Schad Commodity may receive higher fees from some accounts than others. However, Schad Commodity trades all of its accounts in a substantially similar manner, given the differences in size and timing of the capital additions and withdrawals. In addition, Schad Commodity may find that futures positions established for the benefit of a particular account, when aggregated with positions in other accounts managed by Schad Commodity, approach the speculative position limits in a particular market. Schad Commodity may decide to address this situation either by liquidating positions in that futures contract and reapportioning the portfolio in other contracts, or by trading in other markets, which do not have restrictive limits. In the event that Schad Commodity were required to liquidate positions as the result of speculative position limits, such liquidation would be done an a pro rata basis across all accounts under management. Trading Errors Though Schad Commodity will attempt to correct trading errors as soon as they are discovered, it will not be responsible for poor executions or trading errors committed by brokers or Schad Commodity. All errors, except those resulting from willful misconduct or fraud, will be considered a cost of doing business. Other Business Activities Mr. Schad has been the publisher of Schad s Diversified Agricultural Futures Daily Trading Program that, at times, may correlate with the offered programs. The publication is a non-member NFA entity left to the discretion of the individual subscriber to trade as they deem appropriate, however, Mr. Schad will still be receiving the subscription fee from those subscribers. Incentive Fees Schad Commodity is compensated on an incentive fee basis for any new profits of the accounts. This may present a conflict of interest in that Schad Commodity may enter riskier trades than normal in order to produce greater profits for a client. The Advisor may pay fully registered persons or firms who introduce accounts to it a portion of the fees it receives from such accounts. As a result, persons or firms who introduce your account to this Advisor may have an incentive to do so based on the payments they will receive. This fee would be a part of the maximum incentive, management and/or commission fee disclosed in the document. Other than the statements above, the Advisor has no soft dollar arrangements, fee sharing or discount agreements with any FCM s or IB s or their principals. While these conflicts do exist, Schad Commodity and its principal do not intend to trade client accounts in any manner inconsistent with the trading programs set forth in this Disclosure Document. 9. FEES AND EXPENSES Definition of Net Assets and New Trading Profits Net Assets or Net Asset Value of a client s account as of any date shall mean (i) the total assets as of such client s account including all cash and cash equivalents, the market value of all open SCHAD COMMODITY FUTURES & OPTIONS TRADING CORPORATION 19

20 commodity futures positions, accrued interest, plus capital committed by a client but not actually deposited in the account, minus (ii) all accrued liabilities (including brokerage fees, management, and incentive fees) if any, of the client s account as of such date. The market value of a commodity future shall be that price quoted on the exchange on which such future is traded as of the close of each trading day, or if any such future is not so traded, the fair market value of each future, as determined by Schad Commodity. New Net Profits with regard to the Net Assets in a client s account will mean the appreciation in the Net Assets relating to such client s account (i) after deducting additions and adding back withdrawals made by the client, if any, relating to such Net Assets, (ii) after deduction of Schad Commodity s management and before incentive fees, if any, relating to such Net Assets. The term New Net Profits shall include interest income earned or accrued on such Net Assets. Net New Profits will be determined from the end of the last calendar month in which an incentive fee was earned by Schad Commodity, or if no incentive fee has been earned by previously by Schad Commodity with respect to that account, from the date that the account began to receive trading advice from Schad Commodity. Management Fees Schad Commodity Futures & Options Trading Corporation will receive a monthly management fee of 1/12th of 2% (2% annually) of an account s Net Asset Value (as defined above) as of the end of each day, determined in accordance with the United States generally accepted accounting principles, including all cash and cash equivalents, accrued interest income, capital committed by a client but not actually deposited in the account and the market value of all open futures interest contract positions (less accrued brokerage commissions). The management fee will be accrued monthly and charged monthly. An account s total assets will be reduced by any management fee or incentive fee accrued since the previous month-end. Where an account is partially-funded, the monthly management fee shall be taken as a percentage of the account s nominal size, defined as the dollar amount that Schad Commodity and its clients have agreed in writing will determine the level of trading in an account regardless of the actual assets on deposit with the FCM. Therefore partial funding increases the fees and commissions as a percentage of actual funds but does not increase the dollar amount of those fees. The Nominal Account Size agreed upon shall be increased to reflect profits and decreased to reflect losses. Cash additions and cash withdrawals to/from the account will have no impact on Nominal Account Size. Therefore, cash additions and cash withdrawals will increase or decrease the amount of Notional Funds by the amount added or subtracted respectively, but not the Nominal Account Size. In addition, management fees are determined, in the case of partially funded accounts, as a percentage of the nominal account size (i.e.: the total actual funds which would be required were the account fully funded). Notwithstanding the foregoing, Schad Commodity expressly reserves the right to adjust this management fee at its sole discretion. Incentive Fees At the end of each calendar month, Schad Commodity Futures & Options Trading Corporation will receive an incentive fee of 20% of the Net New Profits (as defined above) earned by each client s account during such month (or shorter period beginning on the date of account opening and ending SCHAD COMMODITY FUTURES & OPTIONS TRADING CORPORATION 20