Under options/video options menu. You can choose from 0 (I think) to 100%

It adjusts the density of the particles…

No seriously, this is my guess (since I can't find anything on it in the manual):

It will probably affect the quantity and/or quality of things like smoke, explosions, seamen sneezing etc.

It also affects the amount of spray thrown by your boat and other vessels. If you have a Nvidia vid card your bow spray will obliterate the UZO view making it useless unless you turn off particles. In the first patch they made Ctrl-P key combo to toggle particles on/off as a work around for the bug.

I suppose it also has an effect on frame rates?

Yeah it does. My rig fall somewhere between minimal and optimal specs for SH3 (well, more towards the minimal specs, really) and I had to set the particle system to 50% to make the game playable.

The particle system is responsible for the spray, the smoke and the explosions. Setting it lower makes those effects less dense, so smoke stacks from convoys are less outspoken (and to me, somewhat more life like).

It still looks beautiful, though.