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Jefferies Bache Securities, LLC is a member of FINRA and SIPC.  Futures accounts are not afforded SIPC protection. All other services are provided by Jefferies Bache Financial Services, Bache Asset Management, LLC and Jefferies Bache, LLC and/or affiliates in accordance with appropriate local legislation and regulation. In accordance with the SEC Customer Protection Rules, Jefferies Bache Securities, LLC may use free-credit balances in your securities account in the operations of their business. Such balances are payable to you upon demand and, although properly accounted for on their records, are not segregated.

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Officers and directors of Jefferies may have positions in futures and or options-on-futures referred to herein and may sell any futures or options-on-futures contracts mentioned herein. Jefferies from time to time issues futures reports based on fundamentals, such as expected trends in supply and demand, as well as reports based on technical factors, such as price and volume movements. Since such reports rely upon different criteria, there may be instances when their conclusions are not in concert. Additional information on futures and options-on-futures is available upon request.

Jefferies Bache Limited is registered in England No. 00512397. Jefferies Bache Limited is authorised and regulated by the Financial Services Authority.

Basel II Pillar 3 Disclosures
1. Overview

1. Introduction
   The Capital Requirements Directive (CRD) came into effect on 1 January 2007, and is the framework for implementing Basel II in the European Union. Basel II is an international initiative aimed at implementing a more risk sensitive framework for the calculation of regulatory capital.
   
   The CRD consists of three "pillars":- Pillar 1 of the new standards sets out the minimum capital requirements entities will be required to meet for credit, market and operational risk. For Pillar 2 firms and supervisors have to take a view on whether a firm should hold additional capital against risks not covered in Pillar 1 and to take action accordingly within the Internal Capital Adequacy Assessment Process (ICAAP). Pillar 3 complements the minimum capital requirements (Pillar 1) and the supervisory review process (Pillar 2) with the aim of improving market discipline by requiring firms to publish certain details of their risks capital and risk management.
   
   In the United Kingdom, the Financial Services Authority (FSA) has introduced Pillar 3 by duplicating the CRD articles and annexes to create Chapter 11 - Disclosure (Pillar 3) of the Prudential Sourcebook for Banks, Building Societies and Investment Firms (BIPRU).
   
2. Basis of disclosures
   In accordance with the requirements of Chapter 11 of BIPRU, the disclosures included in this document relate to Bache Commodities Limited only. The disclosures cover both the qualitative (e.g. processes and procedures) and quantitative (e.g. actual numbers) requirements.
   
3. Frequency of disclosures
   The disclosures are required to be made on an annual basis at a minimum and if appropriate some disclosures will be made more frequently. Bache Commodities Limited has an Accounting Reference Date 31 December, and disclosures will be made as soon as practical after publication of the Annual Report and Accounts, however unless otherwise stated, these initial disclosures are made as at 31 December 2010.
4. Verification, media and location
   These disclosures have been put together to explain the basis of preparation and disclosure of certain capital requirements and provide information about the management of certain risks and for no other purposes. They do not constitute any form of audited financial statement and have been produced solely for the purposes of Pillar 3.

2. Risk Management Framework
Bache Commodities Limited believes that active and effective risk management is a business imperative and it is regarded as a core competence by clients, consultants, regulators, counterparties and other interested parties.

Key Principles of the Governance Risk Framework

• Authority to manage the business including internal controls and risk is delegated from the Board to the committees as well as the support functions of the Company.
  
• Significant risk and control issues are reported to the Directors of Bache Commodities Limited either by the relevant business head or the relevant control groups.
  

Risk Committee
The Bache Commodities Limited Risk and Audit Committee (RAC) assists the Directors of the Company in discharging their responsibility for the risk and controls framework within the Company and the independent monitoring and reporting of risk and controls.

The RAC reviews and monitors the adequacy and effectiveness of the process for the identification, assessment, mitigation, monitoring and management of all risks faced by the Company in achieving its business objectives.

The RAC is also supported by the independent monitoring and advice provided by the Internal Audit and Compliance departments.

3. Risk management systems and techniques used

Risk Assessment and Identification
Change in every aspect of our business and the external environment we operate within, is a key driver of risk. Change may impact the potential occurrence or potential magnitude of events relating to existing risks or may result in new or emerging risks. Different approaches may be used for the assessment of risk depending on the type of risk faced and the evidence available to assess the risk. These approaches may be used in combination or isolation and include qualitative and quantitative assessments.

Risk Mitigation
Like any successful business we are exposed to a range of risks. Our focus is on managing risk rather than eliminating it. Others, like regulatory and compliance risk, are risks that we seek actively to minimise. There are a variety of techniques that can be used to mitigate risks, which may be used in isolation or in combination depending on the nature of the risk. These techniques include use of controls outsourcing, contingency planning, insurance and capital allocation.

Risk Monitoring and Reporting
Risks are managed in a variety of different ways, depending on the nature of the risk and the areas potentially affected, to ensure that wherever appropriate their impacts are mitigated.

Internal Capital Adequacy Assessment Process (ICAAP)
On an annual basis, or more frequently if there is a fundamental change to our business or the environment within which we operate, the ICAAP is reviewed. This assessment draws on the results of existing risk management techniques and reporting, in particular the semi-annual assessment noted above, scenario analysis and stress testing is performed to assess Bache Commodities Limited’s exposure to extreme events and ensure that appropriate mitigating factors are in place. Any residual risk is then mitigated by setting aside capital to meet the worst case potential impact that has been calculated.

Capital resources

Tier 1 capital
Tier 1 capital is the highest ranking form of capital. Eligible Tier 1 capital consists of ordinary share capital and also included in Tier 1 capital are audited retained profits and other reserves.

Tier 2 capital
Tier 2 capital is a firm's supplementary capital and consists of revaluation reserves, general provisions. As at 31 December 2010, the Company held revaluation reserves consisting of unrealised gains of $2,954,000 in respect of the fair valuation of equities held in the available-for-sale financial assets category, which is classified as Tier 2 capital.

Tier 3 capital
Tier 3 brings together shorter term debt capital and less permanent reserves and may only be used to meet regulatory capital requirement arising from market risk in the trading book. As at 31 December 2010, the Company held Tier 3 capital of $22,198,000, representing net interim trading book profit and loss.

As at 31 December 2010 the capital resources of Bache Commodities Limited were as follows:

Capital adequacy

As part of the assessment of the adequacy of its capital, the Company considers its risk appetite, the key risks facing the Company and the management strategies in place for dealing with such risks. This is included within the Company's Internal Capital Adequacy Assessment Process which is reviewed by the Company's Board. The capital adequacy at an individual company level is also reviewed periodically.

It is the Company's policy that it has sufficient capital to:

• meet regulatory requirements;
  
• keep an appropriate credit standing with counterparties; and
  
• maintain sufficient liquid funds to meet peak working capital requirements

Calculation of the Company's capital resources requirement
The capital resources requirement of the Company for regulatory reporting purposes is the sum of the credit risk, market risk and operational risk capital requirements.

Credit risk
The Company has elected to adopt the standardised approach for credit risk to calculate the minimum credit risk capital requirement under Pillar 1 of the Capital Requirements Directive. Under the standardised approach firms must calculate the minimum credit risk capital requirement as 8% of the total of their risk weighted exposures.

Market risk
The Company has adopted the commodity extended maturity ladder approach for calculating the commodity position risk requirement as per BIPRU 7.4.31.

As at 31 December 2010, there were no material FX position risks within the Company. The foreign currency position risk requirement has been calculated as per BIPRU 7.5.19.

Operational risk
The Company has adopted the basic indicator approach for calculating the Pillar 1 capital requirements for operational risk therefore the operational risk capital requirement is calculated as the three year average of gross revenues per the consolidated income statement, multiplied by a beta factor of 15%.

As at 31 December, the total consolidated capital resources requirement for the Company under Pillar 1 was $157.1mn.

The Standardised approach to credit risk

The External Credit Assessment Institution (ECAI) used by the Company is Standards & Poor (S&P). S&P Ratings are recognised by the Financial Services Authority (FSA) as an eligible ECAI and are used to assess the credit quality of all exposure classes, where applicable, using the credit quality assessment scale that is set out by the FSA in BIPRU3 - the standardised approach to credit risk.

The Company currently use S&P to rate exposure classes for Institutions and Sovereigns and daily alerts of rating changes from S&P are used to update existing ratings as appropriate.

Additional information is disclosed in note 2 in the Company's financial statements.