[Federal Register Volume 77, Number 245 (Thursday, December 20, 2012)]
[Notices]
[Pages 75468-75487]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-30647]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68440; File No. SR-NYSEArca-2012-28]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Amendment No. 1 and Order Granting Accelerated Approval of a
Proposed Rule Change as Modified by Amendment No. 1 To List and Trade
Shares of the JPM XF Physical Copper Trust Pursuant to NYSE Arca
Equities Rule 8.201
December 14, 2012.
I. Introduction
On April 2, 2012, NYSE Arca, Inc. (``Exchange'' or ``NYSE Arca'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
list and trade shares (``Shares'') of JPM XF Physical Copper Trust
(``Trust'') pursuant to NYSE Arca Equities Rule 8.201. J.P. Morgan
Commodity ETF Services LLC is the sponsor of the Trust (``Sponsor'').
The proposed rule change was published for comment in the Federal
Register on April 20, 2012.\3\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 66816 (April 16, 2012),
77 FR 23772 (``Notice'').
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The Commission initially received one comment letter, which opposed
the proposed rule change.\4\ On May 30, 2012, the Commission extended
the time period for Commission action to July 19, 2012.\5\ On June 19,
2012, NYSE Arca submitted a letter in support of its proposal.\6\ On
July 13, 2012, V&F submitted a second comment letter opposing the
proposed rule change.\7\ On July 16, 2012, United States Senator Carl
Levin submitted a comment letter opposing the proposed rule change.\8\
Additionally, on July 19, 2012, the Commission received a comment
letter from another party opposing the proposed rule change.\9\
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\4\ See letter from Vandenberg & Feliu, LLP (``V&F''), received
May 9, 2012 (``V&F May 9 Letter''). Comment letters are available at
http://www.sec.gov/comments/sr-nysearca-2012-28/nysearca201228.shtml.
\5\ See Securities Exchange Act Release No. 67075, 77 FR 33258
(June 5, 2012).
\6\ See letter from Janet McGinness, General Counsel, NYSE
Markets, NYSE Euronext, to Elizabeth M. Murphy, Secretary,
Commission, dated June 19, 2012 (``Arca June 19 Letter'').
\7\ See letter from Robert B. Bernstein, V&F, to Elizabeth M.
Murphy, Secretary, Commission, dated July 13, 2012 (``V&F July 13
Letter'').
\8\ See letter from U.S. Senator Carl Levin, to Elizabeth M.
Murphy, Secretary, Commission, dated July 16, 2012 (``Levin
Letter'').
\9\ See Web comment from Suzanne H. Shatto (``Shatto Letter'').
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On July 19, 2012, the Commission instituted proceedings to
determine whether to approve or disapprove the proposed rule
change.\10\ The initial comments for the proceeding were due on August
24, 2012, and the Commission received four comment letters (another
letter from V&F, another letter from the Exchange, a letter on behalf
of the Sponsor, and a letter from several copper fabricators).\11\
Rebuttal comments to submissions made during the initial comment period
were due on September 10, 2012. The Commission received three more
comment letters (another letter from V&F and two more on behalf of the
Sponsor).\12\ On October 2, 2012, the Commission issued a notice of
designation of longer period for Commission action on proceedings to
determine whether to approve or disapprove the proposed rule
change.\13\ The Commission subsequently received six more comment
letters (two more letters from V&F, two letters from Americans for
Financial Reform, and two letters from Robert E. Rutkowski).\14\ On
November 30, 2012, the Exchange filed Amendment No. 1 to the proposed
rule change.\15\ On December 7, 2012, the
[[Page 75469]]
Commission received another comment letter opposing the proposed rule
change.\16\ The Commission is publishing this notice to solicit
comments on Amendment No. 1 to the proposed rule change from interested
persons, and is approving the proposed rule change, as modified by
Amendment No. 1, on an accelerated basis.\17\
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\10\ See Securities Exchange Act Release No. 67470, 77 FR 43620
(July 25, 2012) (``Order Instituting Proceedings'').
\11\ See letters from Janet McGinness, General Counsel, NYSE
Markets, NYSE Euronext, to Elizabeth M. Murphy, Secretary,
Commission, dated August 23, 2012 (``Arca August 23 Letter''); Joe
Williamson, Senior Vice President, Strategic Sourcing, Southwire
Company; Janet Sander, Vice President, Director of Purchasing,
Encore Wire Corporation; Ron Beal, Executive Vice President, Tubes
Division, Luvata; and Mark Woehnklar, President, Amrod Corp., to
Elizabeth M. Murphy, Secretary, Commission, dated August 23, 2012
(``Copper Fabricators Letter''); Robert B. Bernstein, V&F, to
Elizabeth M. Murphy, Secretary, Commission, dated August 24, 2012
(``V&F August 24 Letter''); and John G. Crowley, Davis Polk &
Wardwell LLP (``DP''), on behalf of the Sponsor, to Elizabeth M.
Murphy, Secretary, Commission, dated August 24, 2012 (``DP August 24
Letter''). In its August 24 Letter, V&F requested to make an oral
presentation in the proceeding. See V&F August 24 Letter at 1. The
Commission denied V&F's request. See letter from Kevin M. O'Neill,
Deputy Secretary, Commission, to Robert B. Bernstein, Eaton & Van
Winkle LLP (``EVW''), dated December 5, 2012, available at http://www.sec.gov/comments/sr-nysearca-2012-28/nysearca201228.shtml. By
letter dated November 29, 2012, Mr. Bernstein informed the
Commission that he had left V&F and would continue to represent
Southwire Company, Encore Wire Corporation, Luvata, and Amrod Corp.
(collectively, the ``Copper Fabricators'') and RK Capital LLC in
this proceeding.
\12\ See letters from Robert B. Bernstein, V&F, to Elizabeth M.
Murphy, Secretary, Commission, dated September 10, 2012 (``V&F
September 10 Letter''); John G. Crowley, DP, on behalf of the
Sponsor, to Elizabeth M. Murphy, Secretary, Commission, dated
September 10, 2012 (``DP September 10 Letter''); and John G.
Crowley, DP, on behalf of the Sponsor, to Elizabeth M. Murphy,
Secretary, Commission, dated September 12, 2012 (``DP September 12
Letter'').
\13\ See Securities Exchange Act Release No. 67965, 77 FR 61457
(October 9, 2012).
\14\ See letters from Robert B. Bernstein, V&F, to Elizabeth M.
Murphy, Secretary, Commission, dated October 23, 2012 (``V&F October
23 Letter''); Americans for Financial Reform (``AFR''), to Elizabeth
M. Murray [sic], Secretary, Commission, dated October 23, 2012
(``AFR October 23 Letter''); email from Robert E. Rutkowski, to Mary
Schapiro, Chair, Commission, dated October 24, 2012 (``Rutkowski
October 24 Letter''); Robert B. Bernstein, V&F, to Elizabeth M.
Murphy, Secretary, Commission, dated November 16, 2012 (``V&F
November 16 Letter''); AFR, to Elizabeth M. Murray [sic], Secretary,
Commission, dated November 16, 2012 (``AFR November 16 Letter'');
and email from Robert E. Rutkowski, to Mary Schapiro, Chair,
Commission, dated November 17, 2012 (``Rutkowski November 17
Letter'').
\15\ In Amendment No. 1, the Exchange represented that: (1) It
has obtained a representation from the Sponsor that the Sponsor is
affiliated with one or more broker-dealers and other entities, and
the Sponsor will implement a firewall with respect to such
affiliate(s) regarding access to material non-public information of
the Trust concerning the Trust and the Shares, and will be subject
to procedures designed to prevent the use and dissemination of
material non-public information of the Trust regarding the Trust and
the Shares; (2) it will obtain a representation from the Trust prior
to commencement of trading of the Shares that the net asset value
(``NAV'') of the Trust and the NAV per Share will be calculated
daily and made available to all market participants at the same
time; (3) if the First-Out IIV or the Liquidation IIV (terms defined
infra in note 42) is not being disseminated as required, the
Exchange may halt trading during the day in which the disruption
occurs; if the interruption persists past the day in which it
occurred, the Exchange will halt trading no later than the beginning
of the trading day following the interruption; (4) its comprehensive
surveillance sharing agreement with the London Metal Exchange
(``LME'') applies to trading in copper derivatives (as well as
copper); (5) it will require that a minimum of 100,000 Shares be
outstanding at the start of trading of the Shares; and (6) it can
obtain information regarding the activities of the Sponsor and its
affiliates under the Exchange's listing rules. Additionally, the
Exchange supplemented its description of surveillance applicable to
the Shares contained in the proposed rule change as originally
filed. Specifically, the Exchange represents that trading in the
Shares would be subject to the existing trading surveillances,
administered by the Financial Industry Regulatory Authority
(``FINRA'') on behalf of the Exchange, and that, in addition, FINRA
would augment those existing surveillances with a review specific to
the Shares that is designed to identify potential manipulative
trading activity through use of the creation and redemption process.
The Exchange represented that all those procedures would be
operational at the commencement of trading in the Shares on the
Exchange and that, on an ongoing basis, NYSE Regulation, Inc. (on
behalf of the Exchange) and FINRA would regularly monitor the
continued operation of those procedures. In addition, the Exchange
has represented that it will communicate as needed regarding trading
in the Shares with other markets that are members of ISG or with
which the Exchange has in place a comprehensive surveillance sharing
agreement.
\16\ See letter from Robert B. Bernstein, EVW, to Elizabeth M.
Murphy, Secretary, Commission, dated December 7, 2012 (``EVW
December 7 Letter'').
\17\ Similar to other exchange traded products that hold
physical metals, the Sponsor, the Trust, and persons or entities
engaging in transactions in Shares need to seek exemptions from, or
interpretative or no-action advice regarding, Rules 101 and 102 of
Regulation M under the Act to create or redeem Shares. See, e.g.,
letters from James A. Brigagliano, Assistant Director, Division of
Market Regulation, (i) to Kathleen Moriarty, Esq., Carter Ledyard &
Milburn, dated November 17, 2004, with respect to the trading of
StreetTRACKS Gold Trust, (ii) to David Yeres, dated January 27,
2005, with respect to the trading of the iShares COMEX Gold Trust,
and (iii) to David Yeres, dated April 27, 2006, with respect to the
trading of iShares Silver Trust. The Sponsor, on behalf of itself,
the Trust, and persons or entities engaging in transactions in
Shares, submitted a request to the Commission requesting that the
Commission grant exemptions from, or interpretative or no-action
guidance regarding, Rules 101 and 102 of Regulation M. Simultaneous
with the approval of the proposed rule change, the Commission, by
separate order, is granting the Trust, based on the representations
and facts presented in its letter and subject to the conditions
contained in that order, an exemption from the requirements of Rules
101 and 102 of Regulation M under the Act with respect to the Trust.
See Securities Exchange Act Release No. 68439 (December 14, 2012).
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II. Description of the Proposal
The Exchange proposes to list and trade the Shares under NYSE Arca
Equities Rule 8.201, which governs the listing and trading of
``Commodity-Based Trust Shares.'' \18\ The Trust's investment objective
is for the value of the Shares to reflect, at any given time, the value
of its copper, less the Trust's expenses and liabilities. The Trust
will invest in Grade A copper \19\ in physical form from a source
refinery that has had its brand registered with the LME (an
``Acceptable Delivery Brand'').\20\ The Exchange states that, although
the Shares are not the exact equivalent of an investment in copper,
they are designed to provide investors with an alternative that allows
a participation in the copper market through the securities market.\21\
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\18\ Commodity-Based Trust Shares are securities issued by a
trust that represent investors' discrete identifiable and undivided
interest in and ownership of the net assets of the trust.
\19\ According to the Exchange, the LME trades, promotes, and
maintains the standards of quality, shape, and weight of Grade A
Copper, a commonly accepted standardized form of copper cathode.
Grade A Copper currently must conform to the standard BS EN
1978:1998 (Cu-CATH-1), which specifies the allowed source, shape,
and chemical composition of the cathode. Most copper cathodes are
99.95% to 99.99% pure copper. The chemical composition, and
impurities, in the cathode depend largely on the source of the
copper and whether the metal has been processed from copper sulfide
ore or copper oxide ore. Copper oxide ore has a smaller number of
residual chemical elements in the cathode. See Notice, supra note 3,
77 FR at 23777.
\20\ Currently, there are 79 brands that are Acceptable Delivery
Brands. The LME may deregister brands from time to time. According
to the Exchange, generally, copper that is not of an Acceptable
Delivery Brand is worth less than copper that is of an Acceptable
Delivery Brand because of the perceived lower liquidity associated
with that brand of copper. See Notice, supra note 3, 77 FR at 23777-
78.
\21\ See id.
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A. Description of the Copper Market \22\
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\22\ See Notice, supra note 3, for a more detailed description
of the copper market.
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The following is a summary of the description of the copper market
that the Exchange included in its filing. The market participants in
the copper market include primary and secondary producers; fabricators,
manufacturers, and end-use consumers; physical traders and merchants,
who generally facilitate the domestic and international trade of copper
supplies along the value chain and support the distribution of supplies
to consumers; and the banking sector. Copper supply generally comes
from the extraction and processing of ore (``primary production'') and
the recovery of copper from existing stock (``secondary production'').
Primary production accounts for the majority of new global copper
supply.
Copper's physical, chemical, and aesthetic properties make it a
material of choice in a wide range of electrical, electronics and
communication, construction, transportation, industrial machinery and
equipment, and general consumer applications. From copper derived from
primary and secondary production, fabricators produce semi-fabricated
products, such as copper wire, copper alloys, tube products, rods,
bars, section, plate, sheets and strips, for various applications. The
location of copper relative to consumption demand is important given
the bulk and cost of transportation. The source of copper also is
important to fabricators and consumers and affects buying behavior.
Copper end-users will pay an additional locational premium to obtain
copper of a specific brand that is stored in a specific location.\23\
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\23\ See infra note 35.
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The global market in copper consists of: (i) Trading within the
physical copper market; and (ii) financial trading, through either (a)
the exchange-traded futures and options market or (b) the over-the-
counter (``OTC'') market. Each of these is described below in further
detail.
1. Physical Copper Market
The physical copper market is comprised of sales directly by
producers and refiners to end-users, and by sales transacted by
merchants, dealers, and trading banks. A major portion of annual copper
production and use is effected through transactions in the physical
copper market, often through renewable annual supply contracts.
2. Futures Exchanges
A majority of copper derivatives trading occurs on three exchanges:
The LME, the Commodity Exchange, Inc. (``COMEX'') (a division of CME
Group, Inc.), and the Shanghai Futures Exchange (``SHFE''). LME members
are regulated by the Financial Services Authority (``FSA''), the
regulator of the financial services industry in the United Kingdom.
COMEX is regulated by the U.S. Commodity Futures Trading Commission
(``CFTC'') under the Commodity Exchange Act (``CEA''). The SHFE is
regulated by the Chinese Securities Regulatory Commission (``CSRC'').
At present, Chinese regulations stipulate that only companies or
organizations organized and registered in China or Chinese citizens are
allowed to participate in trading on the SHFE.
Futures exchanges provide for the trading of futures and options on
futures contracts, which producers and consumers use to fix a price in
the future as a hedge against price variations. Producers and consumers
take long or short positions to manage price risk, which activity is
facilitated by investors who buy the price risk.
Only eligible organizations or members are able to participate
directly in trading on the LME. The LME publishes prices discovered as
a result of daily trading of exchange contracts on the LME. The LME
Settlement Price \24\ and forward prices serve as the global benchmark
prices of Grade A copper.\25\ The copper industry uses these prices as
the basis of price negotiations for the physical purchase and sale of
copper. All contracts registered with the LME are executed on the basis
of physical settlement: LME members deliver base metal against LME
futures contracts in the form of LME warrants.\26\ The seller
[[Page 75470]]
has the right to select the LME warrant delivered to the buyer.
Pertinent information about LME warrants is recorded in the LMEsword
system. The LME publishes the number of LME warrants and associated
tonnage (including canceled LME warrants for which copper has yet to be
delivered out of the relevant LME warehouse).
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\24\ See infra note 34 and accompanying text.
\25\ See infra note 34.
\26\ An ``LME warrant'' is a bearer document evidencing the
right of the holder to possession of a specified lot of metal at a
specified LME warehouse location. LME warrants are traded in the OTC
market. The holder of an LME warrant is responsible for rental
payments for storage of the underlying copper in an LME-approved
warehouse as well as any changes to the price of the underlying
copper and locational premium.
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3. OTC Market
Physical traders, merchants, and banks participate in OTC spot,
forward, option, and other derivative transactions for copper.\27\ The
terms of OTC contracts are not standardized and market participants
have the flexibility to negotiate all terms of the transaction,
including delivery specifications and settlement terms. The OTC market
facilitates long-term transactions, such as life-of-mine off-take
arrangements,\28\ which otherwise could be constrained by contract
terms on a futures exchange. Participants in OTC transactions are
subject to counter-party risk, including credit risk and contractual
obligations to perform. The OTC derivative market for copper remains
largely unregulated with respect to public disclosure of information by
the parties, thus providing confidentiality among principals.
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\27\ OTC contracts are principal-to-principal agreements traded
and negotiated privately between two principal parties, without
going through an exchange or other intermediary.
\28\ A life-of-mine off-take arrangement is an agreement between
a producer and a buyer to purchase/sell portions of the producer's
future production over the life of the operation. These agreements
are commonly negotiated prior to the construction of a project as
they can assist in obtaining financing by showing future revenue
streams.
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4. Copper Market Regulation
The CFTC is authorized under the CEA to monitor, investigate, and
take actions with respect to activities that may have a material impact
on the markets for physical commodities, commodity futures, commodity
options, and swaps in the United States. Specifically, the CFTC has
jurisdiction over manipulation and attempted manipulation of the cash
commodity markets.\29\ The CFTC also has broad authority over commodity
derivatives markets and participants in those markets, including the
COMEX.\30\ Commodity futures and options traded on the COMEX also are
subject to regulation by its parent, CME Group's Market Regulation
Oversight Committee (``MROC''), under CFTC rules. The MROC is a self-
regulatory body created in 2004 to ensure competitive and financially
sound trading activity on the Chicago Mercantile Exchange, Inc. and its
subsidiary exchanges.
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\29\ Section 9(a)(2) of the CEA, 7 U.S.C. 13(a)(2), provides
that it is a felony punishable by up to ten years' imprisonment or
up to a $1 million fine for ``[a]ny person to manipulate or attempt
to manipulate the price of any commodity in interstate commerce, * *
* or to corner or attempt to corner any such commodity.'' Section
6(c) of the CEA, 7 U.S.C. 9, authorizes the CFTC to assess treble
damage penalties for manipulation or attempted manipulation of the
price of any commodity in interstate commerce and to adopt rules to
prevent manipulative practices. CFTC Rule 180.1 prohibits fraud and
fraud-based manipulations, including any such attempts; CFTC Rule
180.2 addresses the elements of price-based manipulation and
attempted manipulation.
\30\ For example, 17 CFR 18.05 requires all traders that hold or
control a reportable futures or options positions to: (1) ``Keep
books and records showing all details concerning all positions and
transactions in the commodity'' on all reporting markets, OTC
transactions, exempt boards of trade, and foreign boards of trade;
(2) ``keep books and records showing all details concerning all
positions and transactions in the cash commodity, its products and
byproducts, and all commercial activities that the trader hedges in
the futures or option contract in which the trader is reportable'';
and (3) provide to the CFTC upon request ``pertinent information
concerning such positions, transactions, or activities.''
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The FSA is responsible for supervising the LME and regulating the
financial soundness and conduct of the business conducted by LME
members. The LME, a Recognised Investment Exchange by the FSA, is
required by statute to ensure that business on its markets is conducted
in an orderly and transparent manner, providing proper protection to
investors and persons looking to manage risk. Regulation of the market
is largely carried out by the LME. In addition to FSA oversight, the
LME and its members also are subject to regulatory controls and input
from various U.K. government bodies and offices, as well as directives
from the European Union Commission. In international trading, rules
applied by overseas regulatory bodies, such as the CFTC, are also taken
into account.
The SHFE is a self-regulatory body under the supervision and
governance of the CSRC. The SHFE is a day-to-day overseer of exchange
activity, and is expected to carry out regulation as per the laws
established by the CSRC. The CSRC serves as the final authority on
exchange regulation and policy development, and ultimately determines
the effectiveness of the SHFE as a regulatory entity. The CSRC has the
right to overturn or revoke the SHFE's regulatory privileges at any
time.
B. Description of the Proposed Rule Change and the Trust \31\
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\31\ See Notice, supra note 3, for a more detailed description.
Additional details regarding the Trust also are set forth in the
registration statement for the Trust, most recently amended on July
12, 2011 (No. 333-170085) (``Registration Statement'').
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The Exchange proposes to list and trade the Shares under NYSE Arca
Equities Rule 8.201. J.P. Morgan Treasury Securities Services, a
division of JPMorgan Chase Bank, National Association, is the
administrative agent of the Trust (``Administrative Agent'').
Wilmington Trust Company is the trustee of the Trust (``Trustee''). The
Henry Bath Group is the warehouse-keeper of the Trust (``Warehouse-
keeper'').\32\ Metal Bulletin Ltd., which is not affiliated with the
Sponsor, is the valuation agent of the Trust (``Valuation Agent'').
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\32\ Each of Henry Bath & Son Limited, Henry Bath LLC, Henry
Bath Singapore Pte Limited, Henry Bath Italia Sr1, and Henry Bath BV
is a member of the Henry Bath Group of companies and a wholly owned
subsidiary of J.P. Morgan Ventures Energy Corporation, and is an
affiliate of the Sponsor. See Notice, supra note 3, 77 FR at 23773
n.10.
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As mentioned above, the Trust will hold Grade A copper in physical
form, and the Trust's investment objective is for the value of the
Shares to reflect, at any given time, the value of the copper owned by
the Trust at that time, less the Trust's expenses and liabilities at
that time. The Trust will hold only copper and will not trade in copper
futures. The Trust will not be actively managed and will not engage in
any activities designed to obtain a profit from, or to prevent losses
caused by, changes in the price of copper.
The Administrative Agent will calculate the NAV of the Trust as
promptly as practicable after 4:00 p.m. EST on each Business Day.\33\
As part of this calculation, the Administrative Agent will determine
the value of the trust's copper using the LME Settlement Price \34\ and
locational premia/discount information provided by the Valuation
Agent.\35\
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\33\ A Business Day is a day that the Exchange is open for
regular trading and that is not a holiday in London, England. See
id. at 23775 n.18.
\34\ The ``LME Settlement Price'' is, with respect to any
Business Day, the official cash sellers price per metric ton of
Grade A Copper on the LME, stated in U.S. dollars, as determined by
the LME at the end of the morning's second ring session (12:35 p.m.
London time) for copper on each day that the LME is open for
trading. The LME Settlement Price is made publicly available in
real-time through third-party vendors such as Bloomberg and Reuters
(on Bloomberg, it is currently displayed on Bloomberg page ``LOCADY
''). It is also made publicly available on a delayed basis
on the LME's Web site at approximately 10:00 p.m. London time. See
id. at 23775 n.17.
\35\ The value of copper depends in part on its location, i.e.,
copper stored in a location that is low in supply and high in demand
carries a higher premium than copper that is stored in a location
where supply is high and demand is low. To assist in valuing the
Trust's copper, by 9:00 a.m. EST, the Valuation Agent will provide
the Administrative Agent the locational premia for the locations at
which the trust is permitted to hold copper. The locational premium
for a warehouse location for a Business Day will be calculated as an
amount expressed in U.S. dollars that is equal to the average value
of copper per metric ton in such location minus the LME Settlement
Price of copper on such Business Day. See id. at 23779.
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[[Page 75471]]
The Trust will store its copper in both LME-approved warehouses and
non-LME-approved warehouses that are maintained by the Warehouse-
keeper, but none of the copper held by the Trust will be on LME
warrant, and therefore will not be subject to regulation by the
LME.\36\ Initially, the permitted warehouse locations will be in the
Netherlands (Rotterdam), Singapore (Singapore), South Korea (Busan and
Gwangyang), China (Shanghai), and the United States (Baltimore,
Chicago, and New Orleans). Although the Trust may hold copper in
warehouses in any of these locations (or other locations that may be
determined by the Sponsor from time to time), the locations at which
copper actually is held will depend on the warehouse locations at which
authorized participants have actually delivered copper to the Trust and
the warehouse locations from which copper is or has been delivered
pursuant to the Trust's redemption procedures.
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\36\ See id. at 23778.
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Shares will be created when an authorized participant transfers
Grade A Copper of an Acceptable Delivery Brand and having a weight
equal to the Creation Unit Weight \37\ to one or more acceptable
warehouse locations of the Trust and the Trust, in return for the
copper, delivers a Creation Unit of Shares \38\ to the authorized
participant. In creating Shares, if the aggregate weight of the whole
lots transferred by the authorized participant falls short of or
exceeds the aggregate Creation Unit Weight, the Administrative Agent
will instruct the Warehouse-keeper to transfer ownership of copper
between the authorized participant's book-entry account (``Reserve
Account'') and the Warehouse-keeper's book-entry account (``Trust
Account'') to cover any such amount.
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\37\ The Creation Unit Weight for a particular day will be equal
to 25.0 metric tons multiplied by the Creation Unit Ratio in effect
for such day. The Creation Unit Ratio will initially be equal to
1.0, but will decline gradually over time to reflect the payment of
expenses by the Trust. As a result, the Creation Unit Weight will
decline gradually over time as well. The Creation Unit Weight and
the Creation Unit Ratio in effect on any Business Day will have been
calculated on the prior Business Day, after the calculation of the
Trust's NAV on such Business Day. For a discussion of how the
Administrative Agent will calculate the Creation Unit Ratio and the
Creation Unit Weight, See id. at 23784.
\38\ A Creation Unit of Shares is a block of 2,500 Shares. See
id. at 23781.
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Shares will be redeemed when an authorized participant transfers a
Creation Unit of Shares to the Trust and the Trust, in return for such
Shares, delivers copper having a weight equal to the Creation Unit
Weight to the authorized participant, in accordance with the Selection
Protocol.\39\ Following the transfer of whole lots of copper, the
Administrative Agent will instruct the Warehouse-keeper to adjust for
any redemption underweight by transferring ownership of copper from the
Trust Account to the relevant authorized participant's Reserve
Account.\40\ Because the copper held by the Trust in different
locations may vary in value based on the applicable locational premium,
the value of the copper actually received by the authorized participant
will depend on the location of the specific whole lot(s) and fractional
lots, if any, of the copper transferred to the authorized participant.
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\39\ According to NYSE Arca, the Selection Protocol is intended
to provide a consistent and transparent method of selecting lots, by
requiring the Administrative Agent to select lots in the following
manner: (1) Lots will be selected first from the warehouse where it
holds available copper that has the lowest locational premium at a
particular time (i.e., the ``cheapest-to-deliver location''), and
then from other warehouse locations successively based on a ranking
of their respective locational premia from lowest to highest; (2) if
there are multiple lots in the same warehouse location specified by
the first step, lots in such warehouse location will be selected
based on the date such lots were first delivered to the relevant
account, with the earliest delivered lot being selected first; and
(3) if there are multiple lots in the same warehouse location that
were first delivered to the relevant account on the same date, lots
will be selected based on the actual weight of the lot, with the lot
having the lowest actual weight being selected first. See id. at
23781-82.
\40\ According to NYSE Arca, when copper is redeemed in this
manner, the amount of copper received by the authorized participant
will equal a pro rata share of the copper held by the Trust based on
the weight of the Trust's aggregate copper holdings immediately
prior to the processing of redemptions. See id. at 23782.
---------------------------------------------------------------------------
Quotation and last-sale information for the Shares will be
available via the Consolidated Tape Association. The Exchange also will
make available via the Consolidated Tape trading volume, closing
prices, and NAV for the Shares from the previous day.\41\ In addition,
NYSE Arca will calculate and disseminate, approximately every 15
seconds during the Exchange's Core Trading Session, two different IIVs
for the Shares: The First-Out IIV and the Liquidation IIV.\42\
---------------------------------------------------------------------------
\41\ See id. at 23786.
\42\ The ``First-Out IIV'' is designed to facilitate arbitrage
activity by authorized participants by indicating whether the Shares
are trading at a discount or premium during the trading day. See id.
at 23785. It represents, as of the time of such calculation, the
hypothetical U.S. dollar value per Share of the copper that would
need to be transferred to or from the Trust to create or redeem one
Share included in a Creation Unit, assuming that copper in the
cheapest-to-deliver location was used for such creation or
redemption. See id. at 23783. The ``Liquidation IIV'' is an intraday
indicative value that represents, as of the time of the calculation,
the hypothetical U.S. dollar value per Share of all of the copper
owned by the Trust divided by the number of Shares then outstanding.
See id. For a description of how the Exchange will calculate the
First-Out IIV and the Liquidation IIV, See id. at 23784-86.
---------------------------------------------------------------------------
On each Business Day, as promptly as practicable after 4:00 p.m.
E.T., the Trust will publish the following on its Web site: (1) The
number of outstanding Shares as of the beginning of the Business Day;
(2) the NAV of the Trust; (3) the NAV per Share; (4) the locational
premium for each warehouse location, as calculated by the Valuation
Agent at 5:00 p.m. London time, quoted both in U.S. dollars and as a
percentage premium relative to the LME settlement price; (5) the price
per metric ton of copper in each warehouse location where the Trust is
permitted to hold copper; (6) the aggregate weight in metric tons of
all copper owned by the Trust; (7) the aggregate weight in metric tons
of the copper owned by the Trust in each warehouse location; (8) the
gross value in U.S. dollars of the copper owned by the Trust in each
warehouse location; (9) the Creation Unit Ratio; and (10) the Creation
Unit Weight.\43\ The Exchange will obtain a representation from the
Trust prior to the commencement of trading of the Shares that the NAV
will be calculated daily and made available to all market participants
at the same time.\44\
---------------------------------------------------------------------------
\43\ See id. at 23783.
\44\ See Amendment No. 1, supra note 15.
---------------------------------------------------------------------------
Additionally, as promptly as practicable after 4:00 p.m. E.T. on
each Business Day, the Trust will make available on its Web site a
downloadable file containing the following information relating to each
lot of copper owned by the Trust: (1) The unique identification number
of the lot; (2) the warehouse location in which the lot is held; (3)
the brand of the lot and, if such brand of copper is not an Acceptable
Delivery Brand, an indication that the lot consists of a brand of
copper that has been de-registered; (4) the weight in metric tons of
the lot; and (5) the date upon which the lot was delivered to the
Trust.\45\
---------------------------------------------------------------------------
\45\ See Notice, supra note 3, 77 FR at 23783.
---------------------------------------------------------------------------
The Exchange states that investors may obtain, almost on a 24-hour
basis, copper pricing information based on the spot price of copper
from various financial information service providers,
[[Page 75472]]
such as Reuters and Bloomberg.\46\ Reuters and Bloomberg provide at no
charge on their Web sites delayed information regarding the spot price
of copper and last-sale prices of copper futures, as well as
information and news about developments in the copper market.\47\
Reuters and Bloomberg also offer a professional service to subscribers
for a fee that provides information on copper prices directly from
market participants.\48\ There are a variety of public Web sites
providing information on copper, ranging from those specializing in
precious metals to sites maintained by major newspapers, such as The
Wall Street Journal.\49\ The Trust's Web site will provide ongoing
pricing information for copper spot prices and the Shares.\50\ The
Exchange will provide on its Web site (www.nyx.com) a link to the
Trust's Web site.\51\
---------------------------------------------------------------------------
\46\ See id. at 23786.
\47\ See id.
\48\ See id.
\49\ See id.
\50\ See id.
\51\ See id.
---------------------------------------------------------------------------
NYSE Arca will require that a minimum of 100,000 Shares be
outstanding at the start of trading,\52\ which represents 1,000 metric
tons of copper. The Trust seeks to initially register 6,180,000
Shares.\53\ NYSE Arca represents that the Shares satisfy the
requirements of NYSE Arca Equities Rule 8.201, which governs the
listing and trading of Commodity-Based Trust Shares, and thereby
qualify for listing and trading on the Exchange.\54\
---------------------------------------------------------------------------
\52\ See Amendment No. 1, supra note 15.
\53\ See Registration Statement, supra note 31.
\54\ With respect to application of Rule 10A-3 (17 CFR 240.10A-
3) under the Act (15 U.S.C. 78a), the Trust relies on the exemption
contained in Rule 10A-3(c)(7). See Notice, supra note 3, at 23773
n.12.
---------------------------------------------------------------------------
Under NYSE Arca Equities Rule 7.34(a)(5), if the Exchange becomes
aware that the NAV is not being disseminated to all market participants
at the same time, it must halt trading on the Exchange until such time
as the NAV is available to all market participants at the same time. If
the First-Out IIV or the Liquidation IIV is not being disseminated as
required, the Exchange may halt trading during the day in which the
disruption occurs; if the interruption persists past the day in which
it occurred, the Exchange will halt trading no later than the beginning
of the trading day following the interruption.\55\ Further, the
Exchange will consider suspension of trading pursuant to NYSE Arca Rule
8.201(e)(2) if, after the initial 12-month period following
commencement of trading: (1) The value of copper is no longer
calculated or available on at least a 15-second delayed basis from a
source unaffiliated with the Sponsor, Trust, or Custodian, or the
Exchange stops providing a hyperlink on its Web site to any such
unaffiliated source providing that value; or (2) if the Liquidation IIV
is no longer made available on at least a 15-second delayed basis. More
generally, with respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the Shares. Trading on the Exchange in the Shares may be
halted because of market conditions or for reasons that, in the view of
the Exchange, make trading in the Shares inadvisable. These may
include: (1) The extent to which conditions in the underlying copper
market have caused disruptions and/or lack of trading; or (2) whether
other unusual conditions or circumstances detrimental to the
maintenance of a fair and orderly market are present. Additionally,
trading in the Shares will be subject to trading halts caused by
extraordinary market volatility pursuant to the Exchange's circuit
breaker rule.\56\
---------------------------------------------------------------------------
\55\ See Amendment No. 1, supra note 15. NYSE Arca Equities Rule
8.201(e)(2) also provides that the Exchange may seek to delist the
Shares in the event the underlying commodity or the IIV is no longer
calculated or available as required.
\56\ See NYSE Arca Equities Rule 7.12.
---------------------------------------------------------------------------
NYSE Arca represents that its surveillance procedures are adequate
to properly monitor Exchange trading of the Shares in all trading
sessions and to deter and detect violations of NYSE Arca rules and
applicable federal securities laws.\57\ To support this, the Exchange
states that, pursuant to NYSE Arca Equities Rule 8.201(g), it is able
to obtain information regarding trading in the Shares, physical copper,
copper futures contracts, options on copper futures, or any other
copper derivative from ETP Holders acting as registered market makers,
in connection with their proprietary or customer trades. More
generally, NYSE Arca states that it has regulatory jurisdiction over
its ETP Holders and their associated persons, which include any person
or entity controlling an ETP Holder, as well as a subsidiary or
affiliate of an ETP Holder that is in the securities business.\58\ With
respect to a subsidiary or affiliate of an ETP Holder that does
business only in commodities or futures contracts, the Exchange states
that it can obtain information regarding the activities of such
subsidiary or affiliate through surveillance sharing agreements with
regulatory organizations of which such subsidiary or affiliate is a
member.\59\ Further, NYSE Arca states that it may obtain trading
information via the Intermarket Surveillance Group (``ISG'') from other
exchanges that are members of the ISG, including the COMEX,\60\ and
that it has entered into a comprehensive surveillance sharing agreement
with the LME that applies with respect to trading in copper and copper
derivatives.\61\
---------------------------------------------------------------------------
\57\ See Notice, supra note 3, 77 FR at 23787.
\58\ See Amendment No. 1, supra note 15.
\59\ See id.
\60\ See Notice, supra note 3, 77 FR at 23787.
\61\ See Amendment No. 1, supra note 15.
---------------------------------------------------------------------------
Prior to the commencement of trading, the Exchange represents that
it will inform its ETP Holders in an Information Bulletin of the
special characteristics and risks associated with trading the Shares.
Specifically, the Information Bulletin will discuss the following: (a)
The procedures for purchases and redemptions of Shares in the Creation
Unit (including noting that Shares are not individually redeemable);
(b) NYSE Arca Equities Rule 9.2(a), which imposes a duty of due
diligence on its ETP Holders to learn the essential facts relating to
every customer prior to trading the Shares; (c) how information
regarding the IIV is disseminated; (d) the requirement that ETP Holders
deliver a prospectus to investors purchasing newly issued Shares prior
to or concurrently with the confirmation of a transaction; (e) the
possibility that trading spreads and the resulting premium or discount
on the Shares may widen as a result of reduced liquidity of physical
copper trading during the Core and Late Trading Sessions after the
close of the major world copper markets; and (f) trading information.
The Notice and the Registration Statement include additional
information about: The Trust; the Shares; the Trust's investment
objectives, strategies, policies, and restrictions; fees and expenses;
creation and redemption of Shares; the physical copper market;
availability of information; trading rules and halts; and surveillance
procedures.\62\
---------------------------------------------------------------------------
\62\ See Notice and the Registration Statement, supra notes 3
and 31, respectively.
---------------------------------------------------------------------------
III. Discussion and Commission Findings
After careful review and for the reasons discussed below, the
Commission finds that the proposed rule change is consistent with the
requirements of the Act, including Section 6 of the Act,\63\ and the
rules and regulations thereunder applicable to a national securities
exchange. In particular, the Commission finds that the proposed rule
change is consistent
[[Page 75473]]
with Section 6(b)(5) of the Act,\64\ which requires, among other
things, that the rules of a national securities exchange be designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to foster cooperation and
coordination with persons engaged in facilitating transactions in
securities, and to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest. In addition, the Commission
finds that the proposed rule change is consistent with Section 6(b)(8)
of the Act,\65\ which requires that the rules of a national securities
exchange not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act. The Commission
also finds that the proposed rule change is consistent with Section
11A(a)(1)(C)(iii) of the Act,\66\ which sets forth Congress's finding
that it is in the public interest and appropriate for the protection of
investors to assure the availability to brokers, dealers, and investors
of information with respect to quotations for and transactions in
securities. Further, pursuant to Section 3(f) of the Act, the
Commission has considered whether the proposed rule change will promote
efficiency, competition, and capital formation.
---------------------------------------------------------------------------
\63\ 15 U.S.C. 78f.
\64\ 15 U.S.C. 78f(b)(5).
\65\ 15 U.S.C. 78f(b)(8).
\66\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
---------------------------------------------------------------------------
Six commenters submitted fourteen comment letters to explain their
opposition to the proposed rule change.\67\ Generally, the opposing
commenters assert that the proposed rule change is inconsistent with
Section 6(b)(5) of the Act.\68\ V&F (and EVW), the Copper Fabricators,
Senator Levin, and AFR (collectively, ``Opposing Commenters'') assert
that the issuance by the Trust of all of the Shares covered by the
Registration Statement within a short period of time would result in a
substantial reduction in the supply of global copper available for
immediate delivery.\69\ The Opposing Commenters assert that this
reduction in short-term supply would increase both the price of copper
and volatility in the copper market, which would in turn significantly
harm the U.S. economy.\70\ They further state that the predicted
decrease in copper available for immediate delivery would make the
physical copper market more susceptible to manipulation.\71\
---------------------------------------------------------------------------
\67\ See V&F May 9 Letter, supra note 4; V&F July 13 Letter,
supra note 7; Levin Letter, supra note 8; Shatto Letter, supra note
9; Copper Fabricators Letter, supra note 11; V&F August 24 Letter,
supra note 11; V&F September 10 Letter, supra note 12; V&F October
23 Letter, supra note 14; AFR October 23 Letter, supra note 14;
Rutkowski October 24 Letter, supra note 14; V&F November 16 Letter,
supra note 14; AFR November 16 Letter, supra note 14; Rutkowski
November 17 Letter, supra note 14; and EVW December 7 Letter, supra
note 16. V&F, and subsequently EVW, identified themselves as law
firms that represent RK Capital LLC, an international copper
merchant, and the Copper Fabricators. See V&F July 13 Letter, supra
note 7, at 1; and EVW December 7 Letter, supra note 16, at 1. See
also supra note 16 (explaining the change in representation). The
Copper Fabricators state that they collectively comprise about 50%
of the copper fabricating capacity of the United States. See Copper
Fabricators Letter, supra note 11, at 1. AFR identifies itself as a
coalition of over 250 groups who advocate for reform of the
financial industry. See AFR October 23 Letter, supra note 14, at 1.
\68\ Ms. Shatto does not tie her objections to any particular
provision of the Act. First, she believes that ``jp morgan'' does
not need another derivative product. This principle is not relevant
to consideration of the proposed rule change under the Act. Second,
she questions whether ``jp morgan,'' which she says ``already trades
a lot in the commodities market,'' may be able to ``manipulate the
market,'' a concern shared by other commenters. She asserts that
``jp morgan gets inside information by using their warehouses to buy
and sell copper which maximizes profits to the detriment of
commercial interests who have to buy copper.'' Concerns regarding
the potential for manipulation are addressed in Section III.D and
III.E. Third, she asserts that derivatives often allow short
selling, which affects many equities at one time, making the
equities market extremely volatile. Ms. Shatto does not provide
further information to explain why this concern is relevant to the
proposed rule change. Concerns regarding the potential for increased
volatility in the copper market are addressed in Section III.C.
Fourth, she states: ``banks should be banks, not business
conglomerations.'' This principle is not relevant to consideration
of the proposed rule change under the Act. Finally, she recommends
that the Commission not enable short sellers or options traders. The
proposed rule change does not address short selling or approve the
listing and trading of options on the Shares. Mr. Rutkowski requests
that the Commission deny the proposed rule change for the reasons
articulated by AFR.
\69\ See V&F May 9 Letter, supra note 4, at 3, 6; Levin Letter,
supra note 8, at 1, 4; Copper Fabricators Letter, supra note 11, at
3; and AFR October 23 Letter, supra note 14, at 2.
\70\ See V&F May 9 Letter, supra note 4, at 5-7; Levin Letter,
supra note 8, at 1, 7; Copper Fabricators Letter, supra note 11, at
4-5; and AFR October 23 Letter, supra note 14, at 2.
\71\ See V&F May 9 Letter, supra note 4, at 1, 10; Levin Letter,
supra note 8, at 7; AFR October 23 Letter, supra note 14, at 4-5;
Copper Fabricators Letter, supra note 11, at 5-6; and AFR October 23
Letter, supra note 14, at 4-5.
---------------------------------------------------------------------------
In response, the Exchange and the Sponsor generally state that the
Trust would serve as a transparent and accessible alternative by which
participants in the copper market can access or offload physical copper
inventory and associated price risk.\72\ The Sponsor believes that the
Trust would move copper from one type of liquid stock to another type
of liquid stock, rather than removing inventory from the market, and
would track, rather than drive, copper prices.\73\ The Exchange and the
Sponsor believe the structure of the Trust and the regulatory regime
for the Shares and copper derivatives (including non-securities)
suggest approval of the proposed rule change would not render the
copper market more susceptible to manipulation.\74\
---------------------------------------------------------------------------
\72\ See DP August 24 Letter, supra note 11, at 7; and Arca June
19 Letter, supra note 6, at 5.
\73\ See DP August 24 Letter, supra note 11, at 11, 13.
\74\ See id. at 4-5; and Arca June 19 Letter, supra note 6, at
5-6.
---------------------------------------------------------------------------
Given the concerns expressed by the commenters that the Trust would
remove a substantial amount of the supply of copper available for
immediate delivery over a short period of time, which would render the
physical copper market more susceptible to manipulation, and that the
Trust therefore would provide market participants an effective means to
manipulate the price of copper and thereby the price of the Shares,\75\
the Commission analyzes the comments to examine, among other things,
the extent to which the listing and trading of the Shares may (1)
impact the supply of copper available for immediate delivery and the
ability of market participants to manipulate the price of copper, and
(2) be susceptible to manipulation. The sections below summarize and
respond to the comments received.
---------------------------------------------------------------------------
\75\ See V&F May 9 Letter, supra note 4, at 1, 10.
---------------------------------------------------------------------------
A. The Trust's Impact on the Supply of Copper Available for Immediate
Delivery
The Opposing Commenters believe that the issuance by the Trust of
all of the Shares covered by the Registration Statement within a short
period of time would result in the withdrawal of substantial quantities
of copper from LME and COMEX warehouses, thus negatively impacting the
supply of copper available for immediate delivery.\76\ As discussed
below, this belief assumes that: (1) Copper held by the Trust would not
be available for immediate delivery; (2) the global supply of copper
available for immediate delivery that could be used to create Shares
consists almost exclusively of copper already under LME or COMEX
warrant, and therefore the Shares would be created primarily using
copper already under LME or COMEX warrant; and (3) the Trust would
acquire a substantial amount of copper within a short period of time,
such that copper suppliers would not be able to adjust production to
replace the copper removed from the market by the
[[Page 75474]]
Trust. The Commission believes that the record does not support each of
the contentions, and thus, for the reasons discussed below, the
Commission does not believe that the listing and trading of the Shares
is likely to disrupt the supply of copper available for immediate
delivery.
---------------------------------------------------------------------------
\76\ See id. at 3-4; Levin Letter, supra note 8, at 4-5; Copper
Fabricators Letter, supra note 11, at 5; and AFR October 23 Letter,
supra note 14, at 3.
---------------------------------------------------------------------------
1. Availability of the Trust's Copper
Opposing Commenters assert that copper held by the Trust would not
be available for immediate delivery, and therefore copper deposited
into the Trust would be removed from the market and would be
unavailable to end-users.\77\ In response, the Sponsor asserts that the
Trust would not remove immediately available copper inventory from the
market.\78\ The Sponsor points out that a report cited by one of the
commenters defines inventories held in exchange-traded funds as
``liquid stocks.'' \79\ The Sponsor asserts that, in effect, the Trust
would move copper from one type of liquid stock (warrants) to another
type of liquid stock (Shares).\80\
---------------------------------------------------------------------------
\77\ See V&F May 9 Letter, supra note 4, at 1; Levin Letter,
supra note 8, at 7; Copper Fabricators Letter, supra note 11, at 3,
and AFR October 23 Letter supra note 14, at 3.
\78\ See, e.g., DP August 24 Letter, supra note 11, at 13.
\79\ See DP August 24 Letter, supra note 11, at 13; and DP
September 10 Letter, supra note 12, at 5 n.11.
\80\ See DP August 24 Letter, supra note 11, at 13.
---------------------------------------------------------------------------
The Commission agrees with the Sponsor that copper held by the
Trust will remain available to consumers and other participants in the
physical copper market because: (1) The Trust will not consume copper;
\81\ (2) Shares are redeemable (in size) for copper on every Business
Day; \82\ and (3) redeeming authorized participants will receive the
right to obtain their copper within three business days.\83\
Additionally, as the Sponsor explains, the copper received in exchange
for redeemed Shares could be: (1) Sold in the OTC market for cash; (2)
swapped in the OTC market for copper in a different location or for a
different brand; and/or (3) removed from the warehouse and
consumed.\84\ The Sponsor states that these three types of transactions
are commonplace in the copper market.\85\ Further, copper delivered
from the Trust (in exchange for Shares) could be placed under LME
warrant if required by LME market participants.\86\ Given the structure
of the Trust, the Commission believes that the amount of copper
accessible to industrial users will not meaningfully change as a result
of the listing and trading of the Shares. Accordingly, the Commission
believes that the proposed rule change will not burden capital
formation for users who acquire copper for industrial and other
purposes.
---------------------------------------------------------------------------
\81\ See id. at 22.
\82\ See Notice, supra note 3, 77 FR at 23782.
\83\ See DP August 24 Letter, supra note 11, at 7. The record is
unclear whether authorized participants that are redeeming the
Shares will be able to physically remove copper from the warehouse
in which it is stored within three business days, or whether this
reference is to three business days in addition to the existing time
it takes to remove copper from the warehouses. The Registration
Statement provides: ``Redemption orders will be settled by delivery
of copper on the third Trading Day following the redemption order
date, provided that, by 3:00 p.m. New York City time on the date
such settlement is to take place, the Administrative Agent confirms
in writing to the Warehouse-keeper that (x) the Administrative
Agent's DTC account has been credited with the Creation Units to be
redeemed and (ii) the Authorized Participant has paid the
Administrative Agent the applicable transaction fee for such
redemption order.'' Registration Statement, supra note 31 (emphasis
in original). One of the Opposing Commenters acknowledged, however,
that taking copper off LME warrant, which the commenter considers to
be copper available for immediate delivery, takes time; according to
that commenter: (1) The amount of time it takes to take copper off
LME warrant depends ``on the length of the loading out queue'' at
the LME warehouse; and (2) queues ``are currently ranging from 275
working days Vlissingen, Netherlands, 91 working days (4.5 months)
in New Orleans, 51 working days (2.5 months) in Johor, Malaysia to
under one month in Korea and Rotterdam, Netherlands.'' V&F August 24
Letter, supra note 11, at 14.
This commenter expresses further concern in its latest comment
letter about an increasing length of time that it takes to withdraw
metal, including copper, from LME warehouses. The commenter argues
that this ``troubling new development'' may, together with the
proposed listing and trading of the Shares, jeopardize the ability
of United States copper consumers to obtain the physical copper they
need in a timely manner. See generally EVW December 7 Letter, supra
note 16. By its December 7 submission, the commenter appears to be
updating information previously provided about the length of queues,
but does not assert any new reason for disapproving the listing and
trading of the Shares that is distinct from its original assertion,
responded to in the text above, that listing and trading of the
Shares will reduce the supply of copper available for immediate
delivery.
For purposes of analyzing this proposed rule change, the
Commission assumes that copper will be transferred to an authorized
participant's book-entry account within three days, and that an
authorized participant taking delivery of copper from an LME
warehouse will then have to wait in the queues described by this
Opposing Commenter, just like other owners withdrawing metal from
that warehouse. The Commission believes that waiting up to an extra
three business days beyond the time required to take copper off of
LME warrant is not a significant enough delay to consider the copper
delivered from the Trust unavailable for immediate delivery. In this
regard, the Commission notes that the commenter, who acknowledges
that taking copper off of LME warrant takes time, considers copper
on LME warrant to be available for immediate delivery. See, e.g.,
V&F July 13 Letter, supra note 7, at 1 (stating its view that there
are no substantial sources of copper available for immediate
delivery available to the Trust other than warranted copper in LME
warehouses). Further, as noted above, the Trust's copper may be held
in both LME-approved warehouses and non-LME-approved warehouses, and
there is nothing in the record concerning the existence of unloading
queues in non-LME warehouses. The Commission also notes that the LME
appears to be attempting to address the unloading queue issue, see
London Metal Exchange, Consultation on Changes to LME Policy for
Approval of Warehouses in Relation to Delivery Out Rates, Notice 12/
296: A295: W152 (November 15, 2012), available at http://www.lme.com/downloads/notices/12_296_A295_W152_Consultation_on_Changes_to_LME_Policy_for_Approval_of_Warehouses_in_Relation_to_Delivery_Out_Rates.pdf, which applies to LME
warehoused aluminum and zinc, not just copper. See also EVW December
7 Letter, supra note 16, at 3.
\84\ See DP August 24 Letter, supra note 11, at 7.
\85\ See id. at 8.
\86\ See id.
---------------------------------------------------------------------------
The Commission recognizes that one group of end users state that
they would not acquire Shares for the purpose of redeeming them to
acquire copper because the copper they would receive in exchange for
Shares might be in a location far from their plants or might be of
brands that are not acceptable to their plants.\87\ Regardless of the
preferences of these consumers, authorized participants may redeem
Shares for copper and the record does not contain any evidence that
these or any other consumers of copper could not use the Shares to
obtain copper through an authorized participant. Further, the record
supports that the same logistical issues exist and are regularly
addressed by end-users of copper holding LME warrants. Currently, a
purchaser of an LME warrant does not know the location or brand of the
underlying copper, and therefore warrant holders sometimes need to swap
the warrants to acquire copper of a preferred brand in a convenient
location.\88\ The end user commenters explain that, because not all
available brands of copper held at LME and COMEX warehouses are
acceptable for the efficient operation of their fabricating plants,
they currently rely on copper merchants to obtain their desired brands
of copper by aggregating the lots from copper on warrant at LME and
COMEX warehouses.\89\ Nothing in the record indicates that copper
merchants will not be able to perform the same function in connection
with copper delivered in connection with Share redemptions. As
discussed above,\90\ on a daily basis, the Trust will publish
information on the location and brand of copper that will be delivered
to the next redeeming authorized participant, and this may assist end
[[Page 75475]]
users of copper and copper merchants to locate suitable copper.
---------------------------------------------------------------------------
\87\ See Copper Fabricators Letter, supra note 11, at 7. See
also V&F September 10 Letter, supra note 12, at 4; and V&F July 13
Letter, supra note 7, at 7.
\88\ See DP August 24 Letter, supra note 11, at 8.
\89\ See Copper Fabricators Letter, supra note 11, at 3.
\90\ See supra text accompanying note 45.
---------------------------------------------------------------------------
One of the Opposing Commenters also expresses concern that
investors who hold the Shares would not sell them, and therefore Shares
would not be readily available for redemption.\91\ This claim is
unsupported. There is no evidence in the record to suggest that
investors holding the Shares will be unwilling to sell them,
particularly in response to market movements or changes in investor
needs.
---------------------------------------------------------------------------
\91\ See V&F September 10 Letter, supra note 12, at 3.
---------------------------------------------------------------------------
The Commission believes that the listing and trading of the Shares,
as proposed, could provide another way for market participants and
investors to trade in copper, and could enhance competition among
trading venues. Further, the Commission believes that the listing and
trading of the Shares will provide investors another investment
alternative, which could enhance a well-diversified portfolio. By
broadening the securities investment alternatives available to
investors, the Commission believes that trading in the Shares could
increase competition among financial products and the efficiency of
financial investment.
2. Source of Copper Used To Create Shares
The Opposing Commenters believe that the global supply of copper
available for immediate delivery, and eligible to be used to create
Shares, consists almost exclusively of copper already under LME or
COMEX warrant, and therefore they believe that Shares would be created
primarily using copper already under LME or COMEX warrant.\92\ One of
the Opposing Commenters states that the size of the market for copper
available for immediate delivery is small relative to the size it
expects the Trust to attain, asserting that there is only 230,000
metric tons available on the LME, with an additional 60,000 metric tons
available on the COMEX, and projects that the Trust would remove as
much as 61,800 metric tons from the market, which would be about 21.3%
of the copper available for immediate delivery.\93\ The Opposing
Commenters also assert that the Trust would be funded with copper under
warrant in the United States, which would result in a shortage of
copper in the United States.\94\ These Opposing Commenters urge the
Commission to consider collectively the supply impacts of the Trust and
the iShares Copper Trust,\95\ the shares of which the Exchange also is
proposing to list and trade.\96\
---------------------------------------------------------------------------
\92\ See Levin Letter, supra note 8, at 4-5; Copper Fabricators
Letter, supra note 11, at 3 (``The market for copper available for
immediate delivery consists of copper on warrant in LME and Comex
warehouses. If there is any other copper available for us to
purchase and be delivered within a week or two, we are generally not
aware of it.''); V&F July 13 Letter, supra note 7, at 2-4; and AFR
October 23 Letter, supra note 14, at 2.
\93\ See V&F July 13 Letter, supra note 7, at 8. How opposing
commenters measure the projected size of the Trust is discussed
infra in Section III.A.3. Another Opposing Commenter states that, in
2011, total global copper stocks were 3.515 million metric tons, of
which it believes only 808,000 metric tons were considered to be
``liquid.'' Levin Letter, supra note 8, at 4. The commenter then
goes on to assert that: (1) Of those liquid stocks, most actually
are unavailable for purchase; (2) most of that liquid copper that is
available for immediate delivery is under LME or COMEX warrant; and
(3) as of August 2011, the LME and COMEX had only 537,500 metric
tons under warrant. See id. at 4-5. That commenter estimates that
the Trust, which he expects would hold up to 61,800 metric tons of
copper, and the iShares Copper Trust (see infra note 95), which
would hold up to 121,200 metric tons of copper, collectively would
hold approximately 34% of the copper available for immediate
delivery. See Levin Letter, supra note 8, at 5. The Commission is
not addressing the iShares Copper Trust proposed rule change in this
order.
\94\ See Levin Letter, supra note 8, at 6; V&F May 9 Letter,
supra note 4, at 4; V&F July 13 Letter, supra note 7, at 9; Copper
Fabricators Letter, supra note 11, at 4-5; and AFR October 23
Letter, supra note 14, at 2.
\95\ See Securities Exchange Act Release No. 67237 (June 22,
2012), 77 FR 38351 (June 27, 2012) (SR-NYSEArca-2012-66) (notice of
proposal to list and trade shares of the iShares Copper Trust).
\96\ See Levin Letter, supra note 8, at 5, 6; Copper Fabricators
Letter, supra note 11, at 3-4; and V&F May 9 Letter, supra note 4,
at 6. 10.
---------------------------------------------------------------------------
In contrast, the Sponsor believes that there are very substantial
copper inventories available outside of the LME and COMEX that are
deliverable on a short-term basis that could be used to fund the Trust.
Specifically, the Sponsor states that, even according to the data
provided by one of the Opposing Commenters, there are substantial
sources of liquid copper stock inventory outside of the LME and other
exchanges, and that most liquid copper stock inventory is non-LME or
exchange inventory.\97\ The Sponsor provided data that it says shows
that liquid global copper inventories that are considered LME-branded
are estimated at approximately 1.4 million metric tons as of July 31,
2012, and that approximately 70% of these inventories are not under
warrant with the LME, COMEX, or any other exchange.\98\ Additionally,
the Sponsor asserts that authorized participants would not deposit into
the Trust copper exclusively or disproportionately from the U.S.;
according to the Sponsor, five of the initial permitted warehouses are
located outside of the U.S. and, based on current conditions, the
Sponsor states that Shanghai, South Korea, and Singapore are the most
likely locations at which copper would be delivered to the Trust.\99\
---------------------------------------------------------------------------
\97\ See DP August 24 Letter, supra note 11, at 13.
\98\ See DP September 10 Letter, supra note 12, at 2. The
Sponsor cites a report by Metal Bulletin Research indicating there
are 4.09 million metric tonnes of refined copper stocks worldwide,
1.78 million metric tonnes of which can be considered to be liquid.
See DP August 24 Letter, supra note 11, at Annex C-5 at 7, 10
(citing Metal Bulletin Research, ``Independent Assessment of Global
Copper Stocks,'' August 22, 2012). According to the Sponsor, Metal
Bulletin Research is the research arm of Metal Bulletin Ltd., the
Trust's Valuation Agent. See id. at 15 n.44. Metal Bulletin Research
estimates that 1.36 million metric tonnes of the 1.78 million metric
tonnes considered to be liquid are in the form of LME brands. See
id. at Annex C-5 at 7. Metal Bulletin Research further estimates
that 249,000 metric tonnes are on LME warrant and 136,000 metric
tonnes are LME-branded but located on other exchanges, leaving
approximately 70% (or 975,000 metric tonnes) of liquid copper stocks
that are eligible to be placed on LME warrant. See id. at Annex C-5
at 10.
\99\ See DP September 10 Letter, supra note 12, at 8 n.32; and
DP August 24 Letter, supra note 11, at 26.
---------------------------------------------------------------------------
The Commission believes that there is significant uncertainty about
the locations from which copper will be purchased to create Shares.
Based on the description of the Trust in the proposed rule change,
authorized participants and their customers will choose what eligible
copper to deposit with the Trust. Further, the Commission understands,
based on information submitted by the Sponsor, that premia in different
locations have fluctuated historically relative to one another and will
continue to change over time, and that a region with the highest
locational premia at a given time may have the lowest locational premia
at a later date.\100\
---------------------------------------------------------------------------
\100\ The Sponsor provided the following information provided by
the Valuation Agent regarding locational premia: (1) In the United
States, the average locational premium as a percentage of average
physical price was 1.4217% for the year ended December 31, 2010;
1.1377% between January 1 and March 31, 2011, and 1.1590% between
April 1 and June 15, 2011; (2) in Europe, the average locational
premium as a percentage of average physical price was .9426% for the
year ended December 31, 2010; .7035% between January 1 and March 31,
2011, and .7327% between April 1 and June 15, 2011; (3) in Shanghai,
China, the average locational premium as a percentage of average
physical price was 1.3500% for the year ended December 31, 2010;
.3982% between January 1 and March 31, 2011, and .4640% between
April 1 and June 15, 2011; and in Singapore, the average locational
premium as a percentage of average physical price was 1.1259% for
the year ended December 31, 2010; .7117% between January 1 and March
31, 2011, and .4964% between April 1 and June 15, 2011. See DP
August 24 Letter, supra note 11, at C-3. The Sponsor states that
this data provided in Annex C-3 demonstrates that locational premia
vary over time and, as a result, ``a region with the highest premia
in one interval of time may have the lowest premia at a later date,
and vice versa.'' See id. at 32.
---------------------------------------------------------------------------
The Commission also believes that the record supports the view that
there are sufficient copper stockpiles such that up
[[Page 75476]]
to 61,800 metric tons of copper could be deposited into the Trust
without authorized participants taking copper off of either LME or
COMEX warrant. For example, the Valuation Agent \101\ estimates liquid
global copper inventories that are considered LME-branded to be
approximately 1.4 million metric tons as of July 31, 2012, and
approximately 70% of these inventories are not under warrant with the
LME, COMEX, or any other exchange.\102\ One of the Opposing Commenters
argues that this supply of non-warranted copper belongs to producers,
consumers, and/or merchants and traders and is not otherwise in the
supply pipeline, and that the only copper available for immediate
delivery is in LME and COMEX warehouses.\103\ The Commission believes,
however, that it is more plausible that a sufficient portion of the
estimated 1.4 million metric tons of copper inventories cited by
commenters currently is available for authorized participants to use to
create Shares.
---------------------------------------------------------------------------
\101\ The Exchange states that the Valuation Agent is an
independent, third-party valuation agent that is not affiliated with
the Sponsor. See Notice, supra note 3, 77 FR at 23773.
\102\ See DP September 10 Letter, supra note 12, at 2.
\103\ See V&F September 10 Letter, supra note 12, at 2.
---------------------------------------------------------------------------
For example, an Opposing Commenter states that there is estimated
to be between 500,000 and 600,000 metric tons of bonded copper
inventory in Shanghai and Guangzhou, China, and that up to 10% of this
stockpile is not deliverable because it has not been kept under
cover.\104\ In the Commission's view, this leaves between 450,000 and
540,000 tons of copper that may be deliverable to the Trust. The
Sponsor says that ``Metal Bulletin'' estimates that 80% of these bonded
stocks are LME acceptable metal given the imported status of such metal
and arbitrage activity between the LME and SHFE.\105\ One of the
Opposing Commenters argues that the Commission should not include
copper located in China as inventory available for immediate delivery,
noting that China is one of the largest copper-consuming countries in
the world, leading the commenter to conclude that China would not
export copper.\106\ That commenter does not provide any empirical
support for this view. That commenter also suggests that copper in
China is unavailable because ``a substantial percentage of the
inventory in bonded warehouses in China is being held in financing
structures,'' \107\ but the commenter admits that it does not know
either how much of the copper is so encumbered under financing
arrangements or how long such copper would be restricted.\108\ Further,
even if the commenter is correct that, as a practical matter, such
copper may be unavailable to U.S. copper consumers, that does not
preclude copper in Shanghai from being deposited into the Trust (if it
is otherwise eligible), as one of the Trust's initial permitted
warehouse locations is Shanghai.
---------------------------------------------------------------------------
\104\ See V&F August 24 Letter, supra note 11, at 9-10. In
contrast, the Sponsor states that there is estimated to be 550,000
metric tons of copper in bonded warehouses in Shanghai alone. See DP
August 24 Letter, supra note 11, at 33.
\105\ See DP August 24 Letter, supra note 11, at 30.
\106\ See V&F September 10 Letter, supra note 12, at 5.
\107\ V&F August 24 Letter, supra note 11, at 9.
\108\ See id.
---------------------------------------------------------------------------
Even assuming that authorized participants will need to remove
copper from LME warrant to deposit the copper into the Trust, as
discussed above, the Commission believes that the Trust's copper will
remain available for immediate delivery to consumers and participants
in the physical markets.\109\ Accordingly, the Commission does not
believe that the listing and trading of the Shares is likely to disrupt
the supply of copper available for immediate delivery.
---------------------------------------------------------------------------
\109\ See supra Section III.A.1.
---------------------------------------------------------------------------
3. Growth of the Trust
One of the Opposing Commenters believes it is reasonable to expect
that the Trust would sell all of the Shares covered by the Registration
Statement in the three months after the registration becomes effective
because of: (1) ``the stated desire to have the Trust remove enough
copper from the market each month to move prices upward to cover the
costs of storage''; (2) the very limited quantity of copper available
for immediate delivery to accomplish the Trust's objective; and (3) the
increase in copper prices in the three months following October 2010,
when the Trust, iShares Copper Trust, and ETFS Physical Copper were
announced.\110\ That commenter also asserts that the copper supply is
inelastic and that supply, therefore, is unlikely to increase fast
enough to account for the increased demand that the commenter believes
would be unleashed by the creation and growth of the Trust.\111\
Opposing commenters state that the Trust would hold approximately
61,800 metric tons of copper if the Sponsor sells all of the 6,180,000
Shares covered by its Registration Statement.\112\
---------------------------------------------------------------------------
\110\ See V&F August 24 Letter, supra note 11, at 20. ETFS
Physical Copper is a trust that holds copper under LME warrant and
its shares are traded on the London Stock Exchange and Deutsche
B[ouml]rse. See http://www.etfsecurities.com/en/updates/document_pdfs/ETFS_Physical_Industrial_Copper_Fact_Sheet.pdf. A
discussion of the effect of ETFS Physical Copper on the price of
copper is included below. See infra Section III.B.
\111\ See V&F May 9 Letter, supra note 4, at 5. That commenter
states that, in the longer term, copper miners are likely to respond
to price signals and increase production. See V&F August 24 Letter,
supra note 11, at 28. Another Opposing Commenter generally asserted
that the Trust actually would change ``supply and demand
relationships.'' AFR October 23 Letter, supra note 14, at 4. That
commenter offered neither an explanation for nor quantitative data
to support its belief. As discussed below, the Commission believes
that the Opposing Commenters have not supported their prediction
that the assets of the Trust will grow so quickly, and that copper
supply is sufficiently inelastic, such that copper prices would be
impacted. See infra text following note 118.
\112\ See V&F May 9 Letter, supra note 4, at 3; Levin Letter,
supra note 8, at 5.
---------------------------------------------------------------------------
The Sponsor states that it does not expect to sell all registered
Shares within three months after the Registration Statement becomes
effective, and states: ``[l]ike all other physical metal ETVs, the
Trust would register significantly more Shares than it initially
intends to sell so that it is able to meet any such demand.'' \113\ The
Sponsor predicts that, in connection with the initial offering of
Shares, the Trust would hold 9,893 metric tons of copper.\114\
---------------------------------------------------------------------------
\113\ DP August 24 Letter, supra note 11, at 41.
\114\ See id.
---------------------------------------------------------------------------
As a preliminary matter, the Opposing Commenters appear to conflate
the amount of copper held by the Trust with the number of Shares
issued. When Commodity-Based Trusts redeem shares, those redeemed
shares do not get put ``back on the shelf''; once securities are
redeemed, the issuer cannot resell securities of the same amount unless
there is either sufficient capacity left on the registration statement
(i.e., enough registered securities to cover the new issuance of shares
by the issuer) or unless a new registration statement is filed to
register the offer and sale of the securities.\115\ Accordingly,
6,180,000 issued Shares will correspond with 61,800 metric tons of
copper held by the Trust only if authorized participants do not redeem
any Shares. Based on the existence of the arbitrage mechanism of the
Trust,\116\ which is common to many exchange-traded vehicles, the
Commission believes it is very unlikely that no Shares will be
redeemed.
---------------------------------------------------------------------------
\115\ See Sections 5 and 6 of the Securities Act, 15 U.S.C. 77e
and 15 U.S.C. 77f, respectively.
\116\ The Trust's arbitrage mechanism allows authorized
participants to create and redeem Shares, and is designed to align
the secondary market price per Share to the NAV per Share. See
Notice, supra note 3, 77 FR at 23780.
---------------------------------------------------------------------------
The Commission believes that the amount of copper held by the Trust
will
[[Page 75477]]
depend on investor demand for the Shares and the extent to which
authorized participants fulfill such demand by buying Creation Units
and not redeeming issued Shares. Investor demand for the Shares is
currently unknown. The Commission notes that ETFS Physical Copper,
shares of which are listed and traded on the London Stock Exchange and
Deutsche B[ouml]rse, has not grown to a substantial size since its
inception.\117\
---------------------------------------------------------------------------
\117\ According to one Opposing Commenter, on December 17, 2010
(one week after the product was launched), ETFS Physical Copper held
1,445.4 metric tons of copper, and on August 3, 2012, it held
1,763.7 metric tons of copper, although there have been periods
where ETFS Physical Copper has held greater quantities of copper,
reaching as high as 7,072.9 metric tons of copper in March and April
of 2012. See V&F August 24 Letter, supra note 11, at 15.
---------------------------------------------------------------------------
As discussed above, the Commission believes that copper held by the
Trust will be available for immediate delivery.\118\ However, even
assuming that the Trust's copper will be unavailable for immediate
delivery, the Commission believes that the Opposing Commenters have not
supported their prediction that the Trust would grow so quickly that it
would significantly disrupt the supply of copper available for
immediate delivery.
---------------------------------------------------------------------------
\118\ See supra Section III.A.1.
---------------------------------------------------------------------------
4. Other Physical Commodity Trusts
Opposing commenters admit that the introduction of Commodity-Based
Trusts that hold other metals had virtually no impact on the available
supply, but they assert that these other metals--gold, silver,
platinum, and palladium--are fundamentally different because they have
traditionally been held for investment purposes, currently are used as
currency, and that, as a result, there were ample stored sources
available to fund Commodity-Based Trusts overlying those metals.\119\
They assert that copper, in contrast, generally is not held as an
investment, but rather is used exclusively for industrial purposes,
with the annual demand generally exceeding the available supply, and
they therefore believe that the introduction of the Trust would impact
supply.\120\
---------------------------------------------------------------------------
\119\ See V&F May 9 Letter, supra note 4, at 2; and Levin
Letter, supra note 8, at 6.
\120\ See V&F May 9 Letter, supra note 4, at 2-3; and Levin
Letter, supra note 8, at 7. Senator Levin states that because copper
is very expensive to store and difficult to transport, relative to
precious metals, copper is not currently held for investment
purposes, and predicts that holding copper for investment purposes
will have a significantly greater impact on the copper market than
the precious metals Commodity-Based Trusts had on their markets and
the broader economy. See Levin Letter, supra note 8, at 7.
---------------------------------------------------------------------------
In response, the Sponsor states that the majority of the market for
silver, platinum, and palladium is industrial in nature.\121\ The
Sponsor has provided statistics from Thomson Reuters GFMS, a provider
of information about the international metals industries, showing that
in 2011, industrial use accounted for 84% of global palladium demand,
66% of global platinum demand, and 53% of global silver demand.\122\
The Sponsor also states its belief that any holding of physical copper
inventories, or of a financial replicating position, is implicitly an
investment in copper.\123\
---------------------------------------------------------------------------
\121\ See DP August 24 Letter, supra note 11, at 39. Similarly,
the Exchange states that the Trust would not be the first Commodity-
Based Trust to hold a metal that is used primarily for industrial
purposes. See Arca June 19 Letter, supra note 6, at 6.
\122\ See DP August 24 Letter, supra note 11, at 39. No other
commenter provided comparable statistics regarding the industrial
use of palladium, platinum, or silver.
\123\ See id. at 17, 19. The Sponsor believes copper held for
investment purposes would include copper inventories on the LME,
SHFE, and COMEX (453,464 metric tons as of July 31, 2012); copper
inventories held through exchange-traded vehicles (2,356 metric tons
as of July 31, 2012); and non-exchange-registered copper stocks (3.6
million metric tons as of July 31, 2012, 100,000 metric tons of
which were held by hedge funds and private investors in private
warehousing arrangements). See id. at 17-18.
---------------------------------------------------------------------------
Given the industrial usage of silver, platinum, and palladium as
compared to copper,\124\ the Commission believes that it is reasonable
to project that any impact of the listing and trading of the Shares
will not be meaningfully different than that of the listing and trading
of shares of these other Commodity-Based Trusts due solely to the
nature of the underlying commodity markets. In any event, the
Commission's analyses above in Sections III.A.1-3 are the primary bases
for our belief that the listing and trading of the Shares is not likely
to disrupt the supply of copper available for immediate delivery. The
non-impact of those other trusts on the supplies in the underlying
precious metals markets is consistent with this view, but it is not a
significant factor underlying it.
---------------------------------------------------------------------------
\124\ As mentioned above, the Sponsor provided statistics
showing that in 2011, industrial use accounted for 84% of global
palladium demand, 66% of global platinum demand, and 53% of global
silver demand. See supra text accompanying note 122.
---------------------------------------------------------------------------
B. The Trust's Impact on the Price of Copper
The Opposing Commenters assert that, due to the rapid growth of the
Trust, which they believe would occur and would remove a substantial
portion of the supply of immediately available LME-warranted
copper,\125\ the price of copper would be driven up.\126\ As noted
above, one of the Opposing Commenters estimates that the Trust, which
would hold up to 61,800 metric tons of copper, and the iShares Copper
Trust,\127\ which would hold up to 121,200 metric tons of copper,
collectively would hold approximately 34% of the copper available for
immediate delivery.\128\ That commenter concludes that, ``[i]f the
supply of copper available for immediate delivery drops by about 34%,
it naturally follows that the price of copper will rise.'' \129\
Another of the Opposing Commenters states: ``[t]he LME settlement price
is axiomatically affected by the quantity of copper on warrant * * *
because the quantity on warrant defines how much copper is eligible to
be delivered against a cash contract, i.e., it is the total supply that
is available when setting the settlement price.'' \130\ That commenter
also asserts that the launch of the UK-listed ETFS Physical Copper
security and announcements about the proposed copper trusts in the
United States were part of the cause of a copper price run up,\131\ and
predicts that the price increases for copper would be especially
dramatic in the U.S., where copper currently is relatively
inexpensive.\132\ Another Opposing Commenter asserts that the value of
copper is based on ``consumption rather than intrinsic value,'' and the
creation of the Trust would introduce a financial element to copper
pricing.\133\
---------------------------------------------------------------------------
\125\ See supra Section III.A.1.
\126\ See V&F May 9 Letter, supra note 4, at 5; Copper
Fabricators Letter, supra note 11, at 4-5; Levin Letter, supra note
8, at 5; and AFR October 23 Letter, supra note 14, at 2, 3.
\127\ See Levin Letter, supra note 8, at 5. The Commission is
not addressing the iShares Copper Trust proposed rule change in this
order.
\128\ See id.
\129\ See id. Similarly, the Copper Fabricators state that the
removal of 183,000 metric tons of copper from LME warehouses, which
they believe is virtually all of the copper available for immediate
delivery worldwide, would result in prices moving up very sharply.
See Copper Fabricators Letter, supra note 11, at 5.
\130\ See V&F August 24 Letter, supra note 11, at 7.
\131\ See id. at 16.
\132\ See V&F May 9 Letter, supra note 4, at 4-5.
\133\ AFR October 23 Letter supra note 14, at 2. This commenter
does not fully explain why the ``financialization'' of copper would
result in higher copper prices. The commenter appears to make the
same argument as other commenters: Namely, that the Trust will drive
up the price of copper by removing it from the market, an activity
that the commenter characterizes as ``hoarding.'' See id. at 3.
Indeed, the commenter incorporates by reference the Levin Letter.
See id. at 2.
---------------------------------------------------------------------------
In contrast, the Sponsor asserts that copper cash prices are not
determined only by changes in on-warrant LME copper stocks.\134\ The
Sponsor believes
[[Page 75478]]
that supply and demand fundamentals, independent of the Trust, drive
the price of copper.\135\ According to the Sponsor, the main
determinants of price in the copper market are production and demand
fundamentals such as: Demand expectations; mine and refinery capacity;
marginal costs of production (in particular, the change in marginal
costs of production at different production levels); global and
regional industrial growth patterns; cost of financing; and inventory
levels.\136\ The Sponsor states that: (1) Prices have reached the
highest level and been among the lowest levels both in a ``normal''
regime and a low-stocks environment; and (2) copper inventories and
prices do not always have an inverse relationship.\137\ In response to
questions posed by the Commission about the impact of LME inventories
on the LME Settlement Price, the Sponsor states that 5-day changes in
the supply of LME inventories of 10,000 metric tons or more are not
that uncommon, and that inventory builds or withdrawals equivalent to
the amount of copper required for the initial creation unit of Shares
currently occur at the LME at least one quarter of the time.\138\ The
Sponsor and the Exchange also state that, due to the Trust's creation/
redemption mechanism and the related ability of authorized participants
to exchange Shares for physical copper, Shares--like shares of other
physical commodity backed trusts--would track rather than drive the
price of the commodity it holds.\139\
---------------------------------------------------------------------------
\134\ See DP August 24 Letter, supra note 11, at 11.
\135\ See id. at 10. See also AFR November 16 Letter, supra note
14, at 6-7 (``It is true that if all other factors were equal, the
removal of supply from the market through hoarding would increase
prices, leading to a positive correlation between inventory and
prices. But other supply and demand factors will frequently
introduce exactly the opposite relationship between inventory and
price.'' (footnote omitted)).
\136\ See DP August 24 Letter, supra note 11, at 10.
\137\ See id. at 24.
\138\ Id.
\139\ See id. at 25; and Arca June 19 Letter, supra note 6, at
4.
---------------------------------------------------------------------------
As discussed above,\140\ the Commission does not believe that the
listing and trading of the Shares is likely to disrupt the supply of
copper available for immediate delivery, which is what the Opposing
Commenters predict would increase the price of copper. However, even if
the supply of copper under LME warrant would decrease because
previously warranted copper were transferred to the Trust, for the
reasons discussed below, the Commission does not believe that lower LME
inventory level by itself will increase the LME Settlement Price (or
any other price of copper).
---------------------------------------------------------------------------
\140\ See supra Section III.A.
---------------------------------------------------------------------------
To analyze the potential impact of changes in the LME inventory
level on changes in the LME Settlement Price, Commission staff
performed two regression analyses.\141\ The first analysis was a linear
regression of daily copper price changes, using five years of daily
data from 2007-2012, against the following explanatory variables: The
change in LME copper inventory from the previous day (i.e., the lagged
change in LME copper inventory), and the changes in spot prices of
nickel, tin, gold, silver, platinum, and palladium, and the S&P 500,
VIX index, and the China A-Shares index returns. The results indicate
that LME copper inventories do not appear to have any independent
statistical effect on prices.\142\
---------------------------------------------------------------------------
\141\ See Memorandum to File, dated November 6, 2012, from the
Division of Risk, Strategy, and Financial Innovation (``RF
Analysis''). The RF Analysis was designed to look for evidence of
price impact related to changes in copper inventory levels and fund
flows.
\142\ See id. at 10.
---------------------------------------------------------------------------
Commission staff also performed a similar regression analysis using
monthly data from January 2000 until June 2012 obtained from the
International Copper Study Group (``ICSG'') to determine whether a
relation between copper prices and LME inventories exists over a longer
time horizon.\143\ The second analysis was a linear regression of
monthly copper price changes against the following explanatory
variables: The previous month's change in LME copper inventory, total
exchange copper inventory (i.e., combined inventory from LME, COMEX,
and SHFE), non-exchange copper inventory (i.e., inventory from
merchants, producers, and consumers), and spot price changes for
nickel, tin, and platinum. This analysis again indicates that LME
inventories specifically do not appear to have any independent
statistical effect on prices.\144\
---------------------------------------------------------------------------
\143\ The Sponsor suggests that some of the inventory data
published by the ICSG may be incomplete, but the Sponsor did not
question the ICSG LME copper inventory data that was used in the
Staff's analysis. See DP August 24 Letter, supra note 11, at 19.
\144\ See RF Analysis, supra note 141, at 11.
---------------------------------------------------------------------------
Based on these analyses, even if the listing and trading of Shares
of the Trust were to result in the removal of copper on warrant from
LME inventories, the Commission does not believe that such a supply
reduction will by itself directly impact the LME Settlement Price (or
any other price of copper). Although total exchange inventories, in
contrast to LME inventories, appear to have some effect on monthly
copper prices in this linear regression analysis, the coefficient
estimate associated with total exchange inventories indicates that
copper prices should decrease when copper is taken off-exchange.\145\
---------------------------------------------------------------------------
\145\ See id.
---------------------------------------------------------------------------
Commission staff also performed Granger causality analyses \146\ to
test the causal effect the holdings of other Commodity-Based Trusts
historically have had on the prices of their underlying commodities.
Specifically, to evaluate whether the introduction of the SPDR Gold
Trust, iShares Silver Trust, ETFS Platinum Trust, ETFS Physical
Palladium Shares, and ETFS Physical Copper trust had an impact on the
return of the metals underlying those trusts, using monthly data from
their inceptions until September 2012, Commission staff examined flows
into these funds and subsequent changes in underlying prices over
time.\147\ This analysis revealed no observable relation between the
flow of assets and subsequent price changes of the underlying metal
prices.\148\ Commission staff repeated this analysis on a daily
frequency for iShares Silver Trust, ETFS Platinum Trust, ETFS Physical
Palladium Shares, and ETFS Physical Copper.\149\ Again, Commission
staff found no evidence that fund flows were statistically related to
subsequent changes in the underlying metals prices. Given the
industrial usage of silver, platinum, and palladium as compared to
copper,\150\ the Commission believes that it is reasonable to project
that any impact of the listing and trading of the Shares will not be
meaningfully different than that of the listing and trading of shares
of other Commodity-Based Trusts due solely to the nature of the
underlying commodity markets.
---------------------------------------------------------------------------
\146\ Granger causality is a statistical concept of causality
that is based on prediction. If a signal X ``Granger-causes'' a
signal Y, past values of X should contain information that helps
predict Y above and beyond the information contained in past values
of Y alone. See id. at 3, n.9.
\147\ See id. at 2-9. Because ETFS Physical Copper is small
relative to the potential size of the Trust--holding only
approximately 2,000 metric tons of copper as of August 2012--
Commission staff augmented its analysis by comparing asset growth of
SPDR Gold Trust, iShares Silver Trust, ETFS Platinum Trust, and ETFS
Physical Palladium Shares with changes in spot prices for the
underlying metals.
\148\ See id. at 4.
\149\ Daily asset data was not available for the SPDR Gold Trust
within the Commission's existing data sources.
\150\ As mentioned above, the Sponsor provided statistics
showing that in 2011, industrial use accounted for 84% of global
palladium demand, 66% of global platinum demand, and 53% of global
silver demand. See supra note 122 and accompanying text.
---------------------------------------------------------------------------
[[Page 75479]]
The Commission received three comment letters regarding the
Commission staff's analysis.\151\ These letters include comments on
both the substantive conclusions reached as well as the methodology
used.\152\ As described further below, the Commission believes the
staff's analysis reasonably evaluates whether historical price impacts
are associated with changes in copper supply, one of the Opposing
Commenters' contentions.
---------------------------------------------------------------------------
\151\ See AFR November 16 Letter, supra note 14; V&F November 16
Letter, supra note 14; and Rutkowski November 17 Letter, supra note
14. Mr. Rutkowski urges that the Commission afford the AFR November
16 Letter the attention Mr. Rutkowski believes it deserves. See
Rutkowski November 17 Letter, supra note 14. The Commission
discusses both the AFR November 16 Letter and the V&F November 16
Letter below.
\152\ AFR states that ``[t]he detailed regression data, models
(including computer code), and full results used in [the RF
Analysis] should be released to the public.'' See AFR November 16
Letter, supra note 14, at 3. The Commission does not believe it is
necessary to release this information because the RF Analysis
includes sufficient data and information to permit commenters to
evaluate the staff's analyses.
---------------------------------------------------------------------------
One of the Opposing Commenters states that the results in Table 4
in the RF Analysis appear to contradict the staff's conclusion that
there is no statistically significant relationship between copper
inventories and copper prices as the results show a strong positive
relationship between total exchange inventories and copper prices.\153\
The Commission believes that the aforementioned linear regression
analysis conducted by staff indicates that LME copper inventories do
not appear to have any independent statistical effect on copper prices.
Further, we recognize that the linear regression analysis summarized in
Table 4 also indicates that total exchange inventory has a positive
relation to copper prices. Specifically, this linear regression
analysis indicates that removal of copper from exchanges would lead to
a decrease in the price of copper, thus benefiting market participants
who use copper as an input.\154\
---------------------------------------------------------------------------
\153\ See id. at 2. The commenter's concern appears to be based
on its belief that supply changes ``on the margin'' influence price
and that, if supply hoarding increases prices, the key determinant
of price levels will be inventories for the source of supply for the
marginal unit of copper. The commenter sets forth reasons why it
believes the LME inventory no longer represents the marginal unit of
copper, and its belief that total exchange inventory (or potentially
off-exchange inventory) is the type of inventory most likely to
include the marginal unit of copper inventory on the world market.
AFR states that in recent years, inventories have been moving from
the LME toward other exchanges, and that since 2008, most inventory
flow has been to non-LME exchanges. AFR also argues that LME lending
rules would make it illogical to use LME-warranted copper to
influence market prices. In addition, AFR asserts that total
exchange inventories may be a better guide to price impact since the
Trust would hold copper that is not on LME warrant. See id. at 4.
AFR also states that because the Commission staff's analysis
``does not properly report the units in which these regression
variables are measured in, and does not provide standardized
coefficients, it is not possible to fully assess the economic (as
opposed to statistical) significance of'' total exchange inventories
and compare it to other coefficients. See id. at 4 n.4. While the
Commission acknowledges this comment, the RF Analysis does not rely
on the magnitude of coefficient estimates, but rather on the
statistical significance of those estimates.
\154\ In contrast, the Opposing Commenters argue that the
removal from the market of a substantial portion of copper available
for immediate delivery would drive up the price of copper. See supra
notes 125-132 and accompanying text.
---------------------------------------------------------------------------
This Opposing Commenter also states that the Commission staff's
decision to use the inventory of LME-warranted copper, total exchange
copper inventory, and total non-exchange inventory as independent
variables makes it difficult to interpret any single coefficient.\155\
The commenter states that because LME copper inventory makes up a
significant portion of total exchange inventory, the two variables are
obviously highly correlated, creating the problem of collinearity
between regressors.\156\ As a response to these comments, the
Commission notes that its staff conducted a separate analysis, in which
COMEX and SHFE copper inventory were substituted for total exchange
copper inventory (i.e., the inventory of LME-warranted copper was
removed from total exchange copper inventory). Consistent with the
findings in the RF Analysis, this separate analysis shows that, even
when replacing total exchange inventories with non-LME exchange
inventories, LME inventories specifically do not appear to have any
independent statistical effect on copper prices.\157\
---------------------------------------------------------------------------
\155\ See AFR November 16 Letter, supra note 14, at 4. Another
commenter asserts that Commission staff ``included likely
heteroskedastic variables of other LME and LBMA metals prices in the
regression, which may in the least, have undermined the cogency of
the coefficient pertaining to LME copper inventory levels.'' See V&F
November 16 Letter, supra note 14, at 1-2. There is no evidence in
the record of the existence of heteroskedasticity in these variables
that would affect the results of the RF Analysis.
\156\ See AFR November 16 Letter, supra note 14, at 4. This
commenter did not identify which independent variables Commission
staff should have used and did not provide its own regression
analysis for Commission to consider.
\157\ In this alternative regression specification, the
coefficient for non-LME exchange inventories is estimated to be
positive and statistically significant, like the coefficient for
total exchange inventory in Table 4 of the RF Analysis. This result
again implies that taking inventory off these exchanges may result
in a decrease in copper prices, as opposed to an increase in prices
as predicted by the Opposing Commenters.
---------------------------------------------------------------------------
Further, this Opposing Commenter states: ``There are growing doubts
about the utility of not just LME inventories but any established
exchange inventories in representing the true global inventory stocks
of copper.'' \158\ The commenter asserts that, if there are large
global inventories of copper that are not being measured, the utility
of any of the models in the Commission staff's analysis is highly
doubtful.\159\ As discussed above, the Commission believes that there
are sufficient copper stockpiles such that up to 61,800 metric tons of
copper could be deposited into the Trust without authorized
participants taking copper off of either LME or COMEX warrant.\160\
This may, as the commenter suggests, limit the utility of the RF
Analysis regarding the relation between LME inventories and prices.
However, other Opposing Commenters have argued that the price of copper
will increase precisely because authorized participants will create
Shares by taking copper off of LME and/or COMEX warrant, and the RF
Analysis addresses this concern.\161\ Moreover, the Commission believes
that if there are large global inventories of copper that are not being
measured, it is less likely that the listing and trading of the Shares
will by itself increase the price of copper compared with the scenario
suggested by other commenters who assert that LME inventories drive
prices.
---------------------------------------------------------------------------
\158\ See AFR November 16 Letter, supra note 14, at 8. AFR
states: ``Table 4 does include a variable for the off-exchange
inventory. The coefficient is large but not statistically
significant. It is difficult to assess this finding given the
collinearity issue and the lack of detail on how the off-exchange
inventory variable is calculated.'' See id. at 4 n.8. The Commission
does not believe that the magnitude of the coefficient for off-
exchange inventory in Table 4 of the RF Analysis is relevant as the
p-value is statistically insignificant.
\159\ See id. at 9.
\160\ See supra Section III.A.2.
\161\ See supra notes 125-132 and accompanying text.
---------------------------------------------------------------------------
This Opposing Commenter also argues that the Commission staff's
analysis ignores key ``institutional factors'' in the copper
market.\162\ The commenter asserts that price determination in any
market is highly dependent on the rules that govern that market, and
that for an industrial commodity, factors concerning the practical use
of the commodity are important.\163\ According to the commenter, the
most important institutional factor is the LME's requirement ``that any
holder of 50 percent or more of LME warrants in any metal must lend its
inventory on demand at rates designed to prevent any
[[Page 75480]]
profit from the dominant position.'' \164\ The commenter asserts that
the findings in the RF Analysis are based on analyses of exchange-
traded funds backed by LME warrants, and asserts that the findings of
that analysis likely do not accurately reflect the likely price impact
of the Trust as the assets of the Trust would not be backed by LME
warrants.\165\ As discussed above,\166\ however, Commission staff
evaluated whether the introduction of the SPDR Gold Trust, iShares
Silver Trust, ETFS Platinum Trust, ETFS Physical Palladium Shares, and
ETFS Physical Copper had an impact on the return of the metals
underlying those trusts. Only ETFS Physical Copper holds LME warrants;
the SPDR Gold Trust, iShares Silver Trust, ETFS Platinum Trust, and
ETFS Physical Palladium Shares all hold physical gold, silver,
platinum, and palladium, respectively, not warrants on those metals.
Accordingly, the Commission believes the staff's analysis considers the
institutional factor cited by the commenter.
---------------------------------------------------------------------------
\162\ See AFR November 16 Letter, supra note 14, at 8.
\163\ See id.
\164\ See id.
\165\ See id. See also supra text accompanying note 147.
\166\ See supra note 147 and accompanying text.
---------------------------------------------------------------------------
Further, one of the Opposing Commenters asserts that the Commission
staff's analysis ignores endogeneity problems.\167\ The commenter
argues that the Commission staff's Granger causality analyses \168\ are
inappropriate because they look for a statistical relationship between
variables that are simultaneously determined--specifically, asset flows
into Commodity-Based Trusts and metals prices.\169\ In addition, this
commenter argues that the Commission staff's regression analyses,
performed to determine whether a relationship exists between copper
prices and LME inventories,\170\ are subject to endogeneity bias.\171\
The commenter asserts that the Commission staff's analysis ``attempts
to retrieve the causal impact of supply hoarding on prices through
regressing price on quantity in the market generally.'' \172\ According
to the commenter, although, ``if all other factors were equal, the
removal of supply from the market through hoarding would increase
prices, leading to a positive correlation between inventory and
prices,'' other supply and demand factors, such as an inventory buildup
in connection with a decline in prices caused by decreased market
demand, can lead to a negative correlation between inventory level and
prices.\173\ Thus, according to the commenter, a correlation between
inventory levels and price will not isolate the effect of supply
hoarding.\174\
---------------------------------------------------------------------------
\167\ See AFR November 16 Letter, supra note 14, at 5. AFR
states that endogeneity refers to the simultaneous determination of
quantity and price in supply-demand systems and ``involves a causal
loop between the dependent and independent variable such that the
causal impact of the independent variable cannot be isolated.'' See
id.
\168\ See supra notes 146-150 and accompanying text.
\169\ See AFR November 16 Letter, supra note 14, at 5.
\170\ See supra notes 141-144 and accompanying text.
\171\ See AFR November 16 Letter, supra note 14, at 6.
\172\ See id.
\173\ See id. at 6-7.
\174\ See id. at 7.
---------------------------------------------------------------------------
The Commission does not believe that endogeneity biases are
problematic with regard to the linear regression analyses and the
Granger causality analyses Commission staff conducted because the
analyses examine the relation between lagged inventory changes (in case
of the regression analyses) or lagged flows (in the case of the Granger
causality analyses) and subsequent price changes. For this reason, the
inventory and flow variables are determined prior to the price
variables being determined, and are not determined simultaneously with
prices.\175\
---------------------------------------------------------------------------
\175\ The commenter asserts: ``The most preferred method [to
address endogeneity issues] is to use an instrumental variables
approach that isolates factors that affect market supply but are
unrelated to other causal factors.'' Id. This commenter, however,
did not submit for Commission consideration the analysis it asserts
is necessary, nor did the commenter provide any examples of
instrumental variables it asserted would rectify the analysis.
---------------------------------------------------------------------------
Another of the Opposing Commenters states that the Granger
causality analyses appear on their face to be incongruous.\176\ This
commenter states its belief that Commission staff appears to be
comparing assets under management to the respective price of the
commodity held by the trust, and provides a chart that the commenter
purports to show that there is a 92% correlation between the rolling
monthly change in NAV of the iShares Silver Trust and the silver
price.\177\ The Granger causality analysis from Tables 1 and 2 of the
RF Analysis examines the relation between dollar flows into the funds
and subsequent changes in the prices of the underlying metals. It does
not examine the relation between changes in assets under management,
which are driven by both flows and returns of the underlying, and the
concurrent change in the prices of the underlying metals. Therefore,
the Commission believes that the relation between the change in NAV for
these funds and the concurrent change in the prices of the underlying
metal is irrelevant for the purposes of the cited analysis.
---------------------------------------------------------------------------
\176\ See V&F November 16 Letter, supra note 14, at 6.
\177\ See id. at 6-7.
---------------------------------------------------------------------------
Two of the Opposing Commenters question the time periods used in
the Commission staff's analysis. One of these Opposing Commenters
states that Commission staff failed to account for the term structure
of prices (e.g., whether, and the extent to which, the market is in
contango or backwardation).\178\ This commenter states: ``[t]he correct
lag period to test for price impacts on copper consumers depends upon
the delivery times and production lead times, which also affect the
price impacts of deep backwardation on consumer access to supplies.''
\179\ While this commenter suggests that the Commission staff did not
use the correct lag period in its analysis, the commenter did not
provide any specific time intervals that should be used from the many
possible alternatives, nor did it explain what time intervals would
have been more appropriate than those used by Commission staff. The
Commission believes the daily periods used in the RF Analysis were
reasonable and appropriate because evidence of the relationship between
inventories and prices would likely be seen at daily intervals.\180\
---------------------------------------------------------------------------
\178\ See AFR November 16 Letter, supra note 14, at 9.
\179\ See id.
\180\ In particular, LME inventory data for the previous day is
released on the morning of each trading day so that prices are able
to react over the course of that day. Moreover, the use of the
monthly lag period confirmed the results of the daily analysis and
allowed for the examination of the effect of non-exchange copper
inventories for which only monthly data were available within the
Commission's existing data sources.
---------------------------------------------------------------------------
Another of the Opposing Commenters suggests that Commission staff
should have examined the cash to three month time spread and provides
its own analysis, which the commenter concludes demonstrates a strong
relationship between LME inventory changes and the cash to three month
time spread.\181\ This commenter states that if the Trust and the
iShares Copper Trust were to sell all of the shares registered through
their respective registration statements, the cash to three month time
spread ``would blow out to a massive backwardation, potentially
approaching record levels, making it impossible for copper consumers to
finance their inventory.'' \182\ The
[[Page 75481]]
analysis provided by this commenter, however, does not provide the
significance level of any test statistics associated with these
findings, which would provide an assessment of the likelihood that
relations were observed in the data by statistical chance. Without an
assessment of statistical significance, it is difficult to conclude
whether observed relations in the commenter's data are systematic or
anecdotal. In addition, this commenter's analyses appear to analyze
inventory changes against concurrent price changes. The Commission does
not believe that such a concurrent analysis can isolate the effect of
inventory changes on prices because such an analysis cannot distinguish
whether price changes lead inventory changes or vice versa.
---------------------------------------------------------------------------
\181\ See V&F November 16 Letter, supra note 14, at 3.
\182\ See id. The commenter further states that the mechanics of
unit creation for Commodity-Based Trusts backed by precious metals
are fundamentally different than those for Commodity-Based Trusts
backed by industrial metals, citing the lack of copper in
unallocated accounts that could be used in creating Shares.
According to the commenter, neither producers nor consumers are
carrying meaningful inventories of copper, which would require
authorized participants to acquire copper from LME and COMEX
inventories to create Shares. The commenter asserts that a
backwardation would be necessary to trigger the movement of copper
to authorized participants, and that consumers would have to compete
for this metal or lend to authorized participants. See id. at 4. As
discussed above, the Commission believes that the record supports
the view that there are sufficient copper stockpiles such that up to
61,800 metric tons of copper could be deposited into the Trust
without authorized participants taking copper off of either LME or
COMEX warrant. See supra Section II.A.2.
---------------------------------------------------------------------------
Further, as discussed above, the Commission does not believe that
the listing and trading of the Shares is likely to disrupt the supply
of copper available for immediate delivery,\183\ and believes that the
Opposing Commenters have not supported their prediction that the Trust
would grow so quickly that it would significantly disrupt the supply of
copper available for immediate delivery.\184\
---------------------------------------------------------------------------
\183\ See supra Section III.A.
\184\ See supra Section III.A.3.
---------------------------------------------------------------------------
This Opposing Commenter also asserts that Commission staff erred by
using lagged daily LME stock data. This commenter asserts that because
there are ``many consecutive and non-consecutive days that LME stock
levels and LME traded metals do not change while LME prices do * * *,
running a daily LME stock series through a regression analysis will
yield statistically weak results in most cases.'' \185\ The commenter
states that LME inventory data for the prior day is released at 9:00
a.m. in the London trading day, thereby giving the market a full
trading day to digest the data.\186\ The lagged daily LME inventory
change used in the RF Analysis in fact was regressed against the change
in copper prices for the day on which this information was released at
9:00 a.m.\187\
---------------------------------------------------------------------------
\185\ See V&F November 16 Letter, supra note 14, at 2.
\186\ See id. at 5-6.
\187\ To confirm this, Commission staff reconciled a sample of
historical LME stock data from the LME Web site (http://www.lme.com/dataprices.asp) and the Bloomberg LME stock data used in the RF
Analysis. Additional reconciliation was done against historical LME
copper warehouse stock data found at http://www.metalprices.com/historical/database/copper/lme-copper-warehouse-stocks.
---------------------------------------------------------------------------
In addition, this Opposing Commenter asserts that there is not a
strong statistical relationship between lagged copper inventories and
contemporaneous copper prices because the LME represents the copper
market's ``warehouse of last resort.'' \188\ According to this
commenter, when LME stocks are drawn down or added to, market
participants ``should have already fully discounted the fundamental
information contained within that particular stock move.'' \189\ This
assertion seems consistent with a hypothesis that price changes precede
inventory changes, which is contrary to Opposing Commenters' assertions
that inventory changes precede price changes.\190\ The Commission
believes that this argument provides further weight to the Commission
staff's finding that the LME copper inventory changes do not appear to
precede price changes.
---------------------------------------------------------------------------
\188\ See V&F November 16 Letter, supra note 14, at 6.
\189\ See id. at 6 (stating that LME stocks are drawn down by
consumers because neither producers nor traders have material to
sell to consumers and consumers are willing to go through the
logistical hassle of being long LME warrants, swapping the warrants
for their preferred brands, and transporting the copper to their
individual plant, and that ``[i]t is nonsensical to assume that the
trading community has not already discounted this information into
the LME price''). But see id. at 2 (``Intuitively it doesn't make
sense to argue that in a physically settled exchange system that
fungible stock levels don't exert some statistically robust
influence on metals prices.'').
\190\ See supra note 154 and accompanying text.
---------------------------------------------------------------------------
This Opposing Commenter suggests that, instead of looking at lagged
daily LME stock data, the Commission staff should have looked at the 30
largest quarter-to-quarter LME inventory declines against changes in
the LME cash price over the same time periods. The commenter asserts
that such analysis, which the commenter submitted, shows that for the
30 largest observations, the median stock decline was 28.6%, and that
the LME cash price rose in 25 out of 30 observations, for a median
increase of 10.5%.\191\ The commenter states that these findings
suggest that if LME and COMEX inventories were to decline by more than
50%, which the commenter asserts could happen if the Trust and the
iShares Copper Trust were to sell all of the shares registered through
their respective registration statements, prices could increase 20-60%
in the quarter that the LME and COMEX inventory decline occurs.\192\
---------------------------------------------------------------------------
\191\ See V&F November 16 Letter, supra note 14, at 2.
\192\ See id. at 2.
---------------------------------------------------------------------------
The analysis provided by this commenter, however, does not provide
the significance level of any test statistics associated with these
findings.\193\ In addition, this commenter's analysis appears to
analyze inventory changes against concurrent price changes. The
Commission does not believe that such a concurrent analysis can isolate
the effect of inventory changes on prices.\194\ Further, as discussed
above, the Commission does not believe that the listing and trading of
the Shares is likely to disrupt the supply of copper available for
immediate delivery,\195\ and believes that the Opposing Commenters have
not supported their prediction that the Trust would grow so quickly
that it would significantly disrupt the supply of copper available for
immediate delivery.\196\
---------------------------------------------------------------------------
\193\ See supra text following note 182.
\194\ See supra text following note 182.
\195\ See supra Section III.A.
\196\ See supra Section III.A.3.
---------------------------------------------------------------------------
One of the Opposing Commenters states that Commission staff should
have considered the impact on locational premia.\197\ This commenter
asserts that the relationship between COMEX inventory and locational
premia in the U.S. is strong, and provides data that the commenter
suggests shows that when COMEX inventories are at anemic levels,
locational premia can be very high (above $200 per metric ton).\198\
Thus, the commenter argues that if the Trust results in the removal of
inventory from LME and COMEX warehouses, the associated market impact
will be much higher locational premia.\199\ The analysis provided by
this commenter, however, does not provide the significance level of any
test statistics associated with these findings.\200\ In addition, this
commenter's analysis appears to analyze inventory changes against
concurrent price changes. The Commission does not believe that such
[[Page 75482]]
a concurrent analysis can isolate the effect of inventory changes on
prices, as discussed previously.\201\ In addition, according to data
provided by commenters, locational premia typically appear to be no
greater than 2%. Therefore, the Commission believes the degree to which
such premia can be influenced is limited. Further, even assuming that
copper was taken off LME warrant to be deposited into the Trust, the
Commission believes that the Trust's copper will remain available for
immediate delivery to consumers and participants in the physical
markets,\202\ which will limit the possible effect on locational
premia.
---------------------------------------------------------------------------
\197\ See V&F November 16 Letter, supra note 14, at 3, 5. This
commenter refers to ``physical'' premia in describing the manner in
which the Trust will value its copper holdings: ``Another market
price that the SEC could have done well to look into is the physical
premia, especially in light of the [Trust's] implied objective to
value metal * * * on an in-situ basis, taking into account regional
physical price variations.'' See id. at 5. Consistent with this
description, the Commission refers to locational premia rather than
physical premia.
\198\ See id.
\199\ See id.
\200\ See supra text following note 182.
\201\ See supra text following note 182.
\202\ See supra text accompanying note 109.
---------------------------------------------------------------------------
Finally, this Opposing Commenter asserts that the listing and
trading of the Shares could change the fundamental structure of the
copper market, and that Commission staff should ``ponder'' such a
structural change in the copper market.\203\ This commenter states that
the ex-post implications for copper outright prices in a market that
involves listing and trading of the Shares cannot be accurately
inferred from what this commenter characterizes as ``an overly-
simplistic ex-ante statistical analysis of LME/global inventories and
LME settlement prices.'' \204\ According to this commenter, never
before has it been possible for financial players to ``lock up''
significant amounts of LME and COMEX inventory in a short period of
time and remove that copper from the market.\205\ Further, while this
commenter indicates that ``[o]verall historically the level of LME
inventories has been generally indicative of the trading environment,
not a driver of the metal price per se,'' creation of the Trust could
change the role of LME inventories from being a function of the
fundamentals to being a fundamental, and ``arguably THE fundamental, as
has become the case in precious metals.'' \206\
---------------------------------------------------------------------------
\203\ See V&F November 16 Letter, supra note 14, at 3-4.
\204\ See id. at 4.
\205\ See id. at 3-4, 8.
\206\ See id. at 6 (emphasis in original). The commenter states
that exchange-traded vehicles backed by silver, platinum, and
palladium have become the largest single holder of those metals in a
remarkably short period of time (less than eight years) and that
exchange-traded vehicles backed by gold are eclipsed at a national
level only by the U.S. and Germany. According to the commenter,
while the cumulative impact of exchange-traded vehicles on prices
has dissipated as these products have matured, ``the reality is that
they have become a key fundamental in terms of analyzing the
precious metals markets,'' and have become the main asset class. The
commenter asserts that it is not certain, and that it should not be
assumed, that potential investors in the Trust will ``be as sticky
as they have been in gold and silver, and to a lesser degree in
platinum and palladium.'' Id. at 7. The commenters ``stickiness''
argument has been addressed above. See supra Section III.A.1.
---------------------------------------------------------------------------
The Commission believes that such assertions are speculative and
unsupported by the record. As discussed in detail throughout this
order, the Commission does not believe that the listing and trading of
the Shares is likely to alter the supply and demand fundamentals of the
copper market. Further, as discussed above, the Commission does not
believe that the listing and trading of the Shares is likely to disrupt
the supply of copper available for immediate delivery \207\ and, even
assuming that copper was taken off LME warrant to be deposited into the
Trust, the Commission believes that the Trust's copper will remain
available for immediate delivery to consumers and participants in the
physical markets.\208\
---------------------------------------------------------------------------
\207\ See supra Section III.A. Even assuming that the Trust's
copper will be unavailable for immediate delivery, the Commission
believes that the Opposing Commenters have not supported their
prediction that the Trust would grow so quickly that it would
significantly disrupt the supply of copper available for immediate
delivery. See supra Section III.A.3.
\208\ See supra text accompanying note 109.
---------------------------------------------------------------------------
Lastly, one of the Opposing Commenters cites a study that
``examines the hedging activity of sponsors using futures as hedges for
the total return swaps'' entered into as part of commodity index
funds.\209\ According to the commenter, the sponsor of a commodity
index fund must replace expiring futures contracts with later-maturing
futures on a continuous basis (referred to as the ``roll'').\210\ The
commenter states that the Frenk & Turbeville Study ``found an extremely
strong and significant correlation'' over a multi-year period between
the five-day roll period for hedges of the Goldman Sachs Commodity
Futures Index in each month with a movement in the forward price curve
toward higher prices in the future.\211\ The commenter believes that
suppliers hold onto more of the underlying commodity to take advantage
of the rising prices signaled by the movement in the forward price
curve (although no fundamental market forces have signaled such higher
prices), which in turn increases spot prices to attract supply that
otherwise could be hoarded.\212\ The commenter believes that the
proposed trust will have a more direct effect on the copper market as
withdrawal of supply in rising-price markets (and flooding of supply in
decreasing-price markets) constitutes an actual change in supply and
demand relationships.\213\
---------------------------------------------------------------------------
\209\ AFR October 23 Letter, supra note 14, at 4 (citing David
Frenk & Wallace Turbeville, Commodity Index Traders and the Boom/
Bust Cycle in Commodities Prices (October 2011), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1945570 (``Frenk &
Turbeville Study'')). The commenter states that these total return
swaps do not reference a single commodity, but rather are valued
based on indices comprised of a basket of commodity futures. See id.
at 3.
\210\ See id. at 4.
\211\ See id.
\212\ See id.
\213\ Id.
---------------------------------------------------------------------------
The Commission is not persuaded that the conclusions of a study on
correlations between the roll periods of futures indexes and
commodities prices should be extrapolated to predict the impact of the
Trust, which will hold physical copper (not copper derivatives), on the
price of copper. As discussed above, the Commission believes that
copper delivered into and held by the Trust will remain available for
immediate delivery and, even if it is ``removed from the market'' as
commenters have suggested, the supply of copper available for immediate
delivery is sufficient such that the creation and quick growth of the
Trust alone is not expected to impact the price of copper.\214\
---------------------------------------------------------------------------
\214\ See supra Sections III.A.1 and A.3.
---------------------------------------------------------------------------
Because the Commission does not believe that the listing and
trading of the Shares, by itself, will increase the price of copper,
the Commission also believes that approval of the proposed rule change
will not have an adverse effect on the efficiency of copper allocation
for industrial uses and will also not have an adverse effect on capital
formation for industrial uses of copper.
C. The Trust's Impact on Copper Price Volatility
The Opposing Commenters assert that the successful creation and
growth of the Trust would make the price of copper, which one of those
commenters states already is volatile,\215\ even more volatile.
Specifically, they assert that the successful creation and growth of
the Trust, which would in their view substantially restrict supply and
increase copper prices, would create a boom and bust cycle in copper
prices.\216\ For example, the Copper Fabricators predict that: (1) The
Trust would remove copper from the market, and thus would drive the
price of copper higher, which in turn would
[[Page 75483]]
drive the price of the Shares higher; (2) at some point, the
anticipated incremental increase in price would either be insufficient
to cover the increasing costs of storage or would not be enough to
generate a profit; and (3) that when that expected outcome occurs,
Share holders would sell their Shares and authorized participants would
redeem them, returning the copper held in the Trust to the physical
market.\217\ The Opposing Commenters predict that this ultimate sell-
off would be quick, and predict that the expected ``dumping'' of
thousands of metric tons of copper back onto the market would depress
the price of copper and negatively impact the world economy at
large.\218\
---------------------------------------------------------------------------
\215\ See V&F May 9 Letter, supra note 4, at 5.
\216\ See id. at 5; Levin Letter, supra note 8, at 5; Copper
Fabricators Letter, supra note 11, at 5-6; and AFR October 23
Letter, supra note 14, at 2. But see V&F November 16 Letter, supra
note 14, at 8 (stating that if Commission staff were to analyze
whether the discrete flow of ounces in and out of exchange-traded
vehicles drives underlying metals price, it would likely show that
volatility in precious metals is not solely a function of net metal
flow in and out of the exchange-traded vehicles).
\217\ See Copper Fabricators Letter, supra note 11, at 5-6.
\218\ See, e.g., Levin Letter, supra note 8, at 6. More
specifically, V&F states that, because of this predicted boom and
bust, mines will go bust and resources will be needlessly
misallocated. See V&F August 24 Letter, supra note 11, at 28.
---------------------------------------------------------------------------
In contrast, NYSE Arca and the Sponsor assert that the Trust would
not increase copper price volatility in this manner and in fact may
reduce it. The Exchange states that, because of the arbitrage mechanism
common to all exchange-traded vehicles, share prices of physical
commodity-backed exchange-traded vehicles generally follow rather than
drive the price of the underlying assets.\219\ The Sponsor asserts that
volatility in prices results when there is a major change in prevailing
expectations about fundamental market parameters, and the Trust would
not affect any of the fundamental parameters that drive supply and
demand.\220\ Further, the Sponsor states that the Trust may reduce
copper price volatility because, if holders of the Shares act according
to their incentives--namely, to sell into rallies and buy on price
dips--their actions may tend to reduce peaks and valleys in pricing,
and help to reduce volatility.\221\
---------------------------------------------------------------------------
\219\ See Arca June 19 Letter, supra at 6, at 4.
\220\ See DP August 24 Letter, supra note 11, at 11. The Sponsor
also states: (1) Changes in realized volatility of physical copper
prices and prices of copper derivatives based on changes in global
copper supply are not constants; (2) LME prices and price volatility
do not increase or decrease based solely on LME copper stocks or on-
warrant LME copper stocks; and (3) in general, realized volatility
of copper prices tends to be higher in a lower stocks environment,
as strong physical demand draws production and distribution systems
to full capacity utilization. See id. at 24-25.
\221\ See id. at 11.
---------------------------------------------------------------------------
The Opposing Commenters' prediction that the listing and trading of
the Shares would cause a boom and bust is premised upon both the supply
and price impacts they predict. As discussed above, the Commission does
not believe that the listing and trading of the Shares is likely to
disrupt the supply of copper available for immediate delivery \222\ or
increase the price of copper.\223\ In addition, this boom and bust
prediction is unsupported by any empirical evidence. As a result, the
Commission does not believe that the proposed listing and trading of
the Shares will impact copper volatility in the manner that Opposing
Commenters suggest. Further, the Commission does not believe that
approval of the proposed rule change will impede the use of copper
because the listing and trading of the Shares is not expected to, as
discussed above, result in heightened volatility. Therefore, the
Commission does not believe that the listing and trading of the Shares
will have an adverse effect on the efficiency of copper allocation and
capital formation.
---------------------------------------------------------------------------
\222\ See supra Section III.A.
\223\ See supra Section III.B.
---------------------------------------------------------------------------
D. The Trust's Impact on the Potential To Manipulate the Price of
Copper
The Opposing Commenters set forth a number of arguments about why
the Trust would increase the potential for manipulation of the copper
market. One of the Opposing Commenters asserts that the Trust, in
effect, would introduce so much transparency into the copper market
that it would allow the Trust to manipulate, or alternatively provide
market participants an effective means to manipulate, the price of
copper and thereby the price of the Shares. According to that
commenter, investors in the Trust would be able to measure how much
impact their collective removal of copper from the supply available for
immediate delivery would have on copper prices each day, and could
adjust their purchasing strategies accordingly.\224\ Therefore, that
commenter believes that the increased market transparency, which the
Exchange asserts would result from the formation and operation of the
Trust, would not be in the public interest.\225\ Instead, the commenter
believes the transparency of the Trust's holdings would provide market
participants with critical information about ``how much copper needs to
be removed on any given day in order to artificially inflate [copper]
prices and thus the price of the Trust's shares.'' \226\
---------------------------------------------------------------------------
\224\ See V&F May 9 Letter, supra note 4, at 9.
\225\ See id. at 10.
\226\ V&F July 13 Letter, supra note 7, at 10.
---------------------------------------------------------------------------
Due to their view of the Trust's impact on the supply of copper
available for immediate delivery, Opposing Commenters predict that the
Trust would make the copper market more susceptible to squeezes and
corners.\227\ According to an Opposing Commenter, after a substantial
portion of the copper market is deposited in one or more physical
copper trusts, the costs of acquiring the remaining inventory would be
relatively inexpensive, thus reducing a hurdle to engineering a corner
or squeeze.\228\ According to another commenter, such manipulative
activities could go undetected by the LME because trusts that hold
physical commodities are not subject to any form of commodity
regulations; by holding physical copper rather than LME warrants, the
Trust would be able to control more of the available supply of copper
without triggering LME reporting or rules.\229\
---------------------------------------------------------------------------
\227\ See V&F May 9 Letter, supra note 4, at 1, 10; Levin
Letter, supra note 8, at 7; and AFR October 23 Letter, supra note
14, at 4-5. One of the Opposing Commenters describes a squeeze on
the copper market as occurring ``when a lack of supply and excess
demand forces the price upward, and a corner is when one party
acquires enough copper to be able to manipulate its price.'' Levin
Letter, supra note 8, at 7.
\228\ See V&F September 10 Letter, supra note 12, at 7. Senator
Levin asserts that the Trust will make the copper market more
susceptible to squeezes because it could be used by market
participants to remove copper from the available supply in order to
artificially inflate the price. See Levin Letter, supra note 8, at
7.
\229\ See Levin Letter, supra note 8, at 7.
---------------------------------------------------------------------------
In response, the Exchange states that the Trust instead may reduce
the potential for fraud or manipulation in the physical copper market
because: (1) The Trust may hold copper in multiple global locations,
which is intended to provide a larger, more liquid supply of copper
than would be available if creations and redemptions were only
permitted using copper held in a single location; (2) the Trust and
transactions in the Shares would be transparent, publishing information
about its holdings and operations through its Web site; (3) the Trust
would utilize a consistent, transparent, non-discretionary, rules-
based, and fully disclosed selection protocol for redemptions; and (4)
the Trust's copper would be valued by a recognized, independent
valuation agent.\230\
---------------------------------------------------------------------------
\230\ See Arca June 19 Letter, supra note 6, at 5-6.
---------------------------------------------------------------------------
The Sponsor also claims that the Trust may reduce the potential for
fraud or manipulation in the physical copper market,\231\ which would
have an impact on any potential manipulation of the
[[Page 75484]]
Shares as well. Specifically, the Sponsor asserts that the Trust
already has introduced greater transparency into the copper
market.\232\ According to the Sponsor, prior to July 16, 2011,
locational premia (i.e., prices) for physical copper were reported
infrequently, available only by subscription, and available only for
certain broad regions.\233\ Since then, in anticipation of the Trust's
potential launch, the Valuation Agent has calculated the locational
premium for physical copper in each of the Trust's approved warehouses
on a daily basis, and published the locational premia on a weekly
basis.\234\ The Sponsor expects that transparency would increase
through the listing of the Shares because when trading of the Shares
commences: (1) The Trust would post on its Web site these locational
premia on a daily basis; (2) the Exchange would continuously
disseminate pricing information as part of its required intraday
indicative value (``IIV'') reporting; (3) the Sponsor believes that
Shares would be created using previously unreported non-exchange-
registered stocks, and thus copper market participants would have more
information about supply; and (4) the Trust would furnish complete
visibility into creation and redemption activity by certain authorized
participants.\235\
---------------------------------------------------------------------------
\231\ See DP August 24 Letter, supra note 11, at 4. The Sponsor
also states that neither it nor the Trust could deliberately
influence copper prices even if it sought to because the Trust is
not managed--it does not take positions or buy and sell copper, and
it cannot place large orders that could affect the market. See id.
at 12.
\232\ See id. at 4-5.
\233\ See id.
\234\ See id.
\235\ See id.
---------------------------------------------------------------------------
The Sponsor also argues that the underlying copper market is
subject to extensive and explicit regulatory authority, and the
increased transparency furnished by the Trust would enhance regulators'
ability to oversee the copper market and enforce applicable laws and
rules. Specifically, the Sponsor states: (1) The CFTC has explicit
anti-fraud and anti-manipulation authority under the CEA that extends
over the U.S. physical commodity markets; (2) the Department of Justice
has the ability to pursue antitrust violations, such as concerted
buying and selling involving commodities, under the federal antitrust
laws; and (3) the LME has broad rights to obtain information relating
to the activities of LME members and their affiliates if the LME has
cause to suspect undesirable or improper trading that affects the
copper markets, including the markets for both LME-warranted and non-
warranted copper, and therefore the LME can obtain information about
both LME and non-LME metal trading activities from J.P. Morgan
Securities plc, an affiliate of the Sponsor that is a ring-dealing
member of the LME, as well as from the Sponsor.\236\ The Sponsor also
asserts that there has been no increased manipulative behavior due to
the reduction of copper available for immediate delivery that resulted
from the prior years' deficits in copper production versus copper
consumption, and that the creation of commodity backed trusts holding
gold, silver, platinum, and/or palladium has not led to manipulation of
the markets for those precious metals.\237\
---------------------------------------------------------------------------
\236\ See id. at 5.
\237\ See id. at 45, 46.
---------------------------------------------------------------------------
The Commission does not believe that the listing and trading of the
Shares is likely to increase the likelihood of manipulation of the
copper market and, correspondingly, of the price of the Shares.
Generally, the Commission believes that increased transparency helps
mitigate risks of manipulation. For example, in approving the listing
and trading of shares of the iShares Silver Trust, the Commission
stated that the dissemination of information about the silver shares
would ``facilitate transparency with respect to the Silver Shares and
diminish the risk of manipulation or unfair informational advantage.''
\238\ In this case, the Commission believes the transparency that the
Trust will provide with respect to its holdings, the locational premium
for and price per metric ton of the copper in each warehouse location
of the Trust, and creation and redemption activity, including the
locations of creations and redemptions, as well as the dissemination of
quotations for and last-sale prices of transactions in the Shares and
the IIV and NAV of the Trust,\239\ all are expected to help reduce the
ability of market participants to manipulate the physical copper market
or the price of Shares.\240\ Also, the Commission believes that the
listing and trading of the Shares on the Exchange (and any other
national securities exchange that trades the Shares pursuant to
unlisted trading privileges) \241\ may serve to make the overall copper
market more transparent if OTC trading of unreported warehouse receipts
shifts to trading Shares on exchanges.\242\ In particular, additional
information regarding the supply of copper will be disseminated, which
will enable users of copper to make better-informed decisions. Over the
long term, this additional transparency could enhance efficiency in the
market for copper and capital formation for participants in this
market. In addition, the Commission believes that the listing and
delisting criteria for the Shares are expected to help to maintain a
minimum level of liquidity and therefore minimize the potential for
manipulation of the Shares.\243\
---------------------------------------------------------------------------
\238\ See Securities Exchange Act Release No. 53521 (March 20,
2006), 71 FR 14967, 14975 (March 24, 2006).
\239\ See DP August 24 Letter, supra note 11, at 43-45, and
supra text accompanying notes 43 and 45.
\240\ Further, the Trust is a passive vehicle, and therefore
V&F's concerns about manipulation by the Trust itself are misplaced.
\241\ When a national securities exchange extends ``unlisted
trading privileges'' to a security, it allows the trading of a
security that is not listed and registered on that exchange. See
Securities Exchange Act Release No. 35323 (February 2, 1995), 60 FR
7718, 7718 (February 9, 1995) (proposing rules to reduce the period
that exchanges have to wait before extending unlisted trading
privileges to any listed initial public offering security). A number
of national securities exchanges have rules that allow the extension
of unlisted trading privileges to issues such as the Shares. See,
e.g., Securities Exchange Act Release No. 57806 (May 9, 2008), 73 FR
28541 (May 16, 2008) (SR-Phlx-2008-34); Securities Exchange Act
Release No. 58623 (September 23, 2008), 73 FR 57169 (October 1,
2008) (SR-BATS-2008-004).
\242\ Market participants that acquire a large percentage of the
Shares must identify themselves to the Commission by filing
Schedules 13D or 13G. See 17 CFR 240.13d-1. Specifically, Section
13(d) of the Act, 15 U.S.C. 78m(d), and the rules thereunder require
that a person file with the Commission, within ten days after
acquiring, directly or indirectly, beneficial ownership of more than
five percent of a class of equity securities, a disclosure statement
on Schedule 13D, subject to certain exceptions. See 17 CFR 240.13d-
1. Section 13(g) and the rules thereunder enable certain persons who
are the beneficial owners of more than five percent of a class of
certain equity securities to instead file a short form Schedule 13G,
assuming certain conditions have been met. Beneficial owners are
also required to report changes in the information filed.
In addition, Section 13(f)(1) of the Act and Rule 13f-1
thereunder require every ``institutional investment manager,'' as
defined in Section 13(f)(5)(A) of the Act, that exercises investment
discretion with respect to ``section 13(f) securities,'' as defined
in Rule 13f-1, having an aggregate fair market value of at least
$100 million (``Reportable Securities''), to file with the
Commission quarterly reports on Form 13F setting forth each
Reportable Security's name, CUSIP number, the number of shares held,
and the market value of the position.
\243\ For example, under NYSE Arca Equities Rule
8.201(e)(2)(ii), the Exchange will consider suspending trading in
the Shares or delisting the Shares if, following the initial 12-
month period following commencement of trading, there are fewer than
50,000 Shares issued and outstanding.
---------------------------------------------------------------------------
The Opposing Commenters assert serious disruptions in the supply of
copper would make corners and squeezes more likely.\244\ As discussed
above, the Commission does not believe that the listing and trading of
the Shares is likely to disrupt the supply of copper available for
immediate delivery.\245\ Depending on the size of the Trust though, it
is possible that copper holdings may be dispersed across an additional
market--i.e., less copper may be held under LME and/or COMEX
[[Page 75485]]
warrant and more copper may be held by the Trust. However, the
availability of inter-market arbitrage is expected to help mitigate any
potential increase in the ability of market participants to engage in
corners or squeezes as a result of any dispersion of copper holdings
across markets (as distinguished from a reduction in the copper
supply). For example, if the Trust grows large relative to the market
for warrants on the LME, LME market participants faced with a potential
corner or squeeze may acquire Shares, redeem them (through an
authorized participant) for LME warrantable copper, put the copper on
LME warrant, and deliver the warrants.\246\ Further, although the
Exchange currently provides for the listing and trading of shares of
Commodity-Based Trusts backed by physical gold, silver, platinum, and
palladium, none of the commenters has identified any evidence that the
trading of shares of these Commodity-Based Trusts has led to
manipulation of the gold, silver, platinum, or palladium markets.
---------------------------------------------------------------------------
\244\ See supra notes 227-229 and accompanying text.
\245\ See supra Section III.A.
\246\ See supra note 85.
---------------------------------------------------------------------------
For the reasons discussed above, the Commission does not believe
that the proposed listing and trading of the Shares is likely to render
the copper market or the price of Shares more susceptible to
manipulation. Correspondingly, the Commission does not believe that
approval of the proposed rule change will impose any burden on
competition between participants in the market for copper as it will
not provide market participants a greater opportunity to achieve an
unfair competitive advantage.
E. Surveillance
One of the Opposing Commenters questions whether NYSE Arca's
surveillance procedures are adequate to prevent fraudulent and
manipulative trading in the Shares. According to that commenter, NYSE
Arca's surveillance procedures are not adequate because they are the
kind of garden-variety measures that are always in place to prevent
collusion and other forms of manipulation by traders.\247\ Two other
Opposing Commenters assert that the Sponsor would be in a privileged
informational position and could improperly trade on that non-public
information.\248\ One of those commenters asserts that the Sponsor
participates in other, non-security copper derivatives markets (namely
futures and swaps), and states that the Sponsor has an extensive
commodities trading operation and ``owns copper warehousing capacity in
the United States giving it access to physical supply.'' \249\ The
commenter also expresses concern that, if the Sponsor ``knows
information regarding ETF inflows and outflows and understands the
volatility consequences of changes in the holdings of the ETF,'' it can
take advantage of that asymmetrical information and could ``be a
potential source of disruption to the markets.'' \250\
---------------------------------------------------------------------------
\247\ See V&F May 9 Letter, supra note 4, at 10.
\248\ See Shatto Letter, supra note 9; and AFR October 23
Letter, supra note 14, at 2.
\249\ See AFR October 23 Letter supra note 14, at 4.
\250\ Id. Similarly, another opposing commenter asserts that
``jp morgan gets inside information by using their warehouses to buy
and sell copper which maximizes profits to the detriment of
commercial interests who have to buy copper.'' Shatto Letter, supra
note 9.
---------------------------------------------------------------------------
NYSE Arca asserts that the statements about its surveillance are
unsubstantiated,\251\ and states that its surveillance procedures are
adequate to properly monitor Exchange trading of the Shares in all
trading sessions and to deter and detect violations of Exchange rules
and applicable federal securities laws.\252\ In particular, the
Exchange represents the following:
---------------------------------------------------------------------------
\251\ See Arca August 23 Letter, supra note 11, at 1.
\252\ See Notice, supra note 3, 77 FR at 23787. The Exchange
also states that its existing surveillances will be augmented with a
product-specific review designed to identify potential manipulative
trading activity through the use of the creation and redemption
process. See Amendment No. 1, supra note 15.
---------------------------------------------------------------------------
Pursuant to NYSE Arca Equities Rule 8.201(g), an ETP
Holder acting as a registered Market Maker in Commodity-Based Trust
Shares must file with the Exchange and keep current a list identifying
all accounts for trading in an underlying commodity, related commodity
futures or options on commodity futures, or any other related commodity
derivatives, which the Market Maker may have or over which it may
exercise investment discretion. No Market Maker shall trade in an
underlying commodity, related commodity futures or options on commodity
futures, or any other related commodity derivatives, in an account in
which a Market Maker, directly or indirectly, controls trading
activities, or has a direct interest in the profits or losses thereof,
which has not been reported to the Exchange as required by NYSE Arca
Equities Rule 8.201.
In addition, pursuant to NYSE Arca Equities Rule 8.201(g),
the Exchange is able to obtain information regarding trading in the
Shares, physical copper, copper futures contracts, options on copper
futures, or any other copper derivative from ETP Holders acting as
registered market makers, in connection with their proprietary or
customer trades.\253\
---------------------------------------------------------------------------
\253\ See Notice, supra note 3, 77 FR at 23787. See also Arca
August 23 Letter, supra note 11, at 2-3.
---------------------------------------------------------------------------
NYSE Arca has regulatory jurisdiction over its ETP Holders
and their associated persons, which include any person or entity
controlling an ETP Holder, as well as a subsidiary or affiliate of an
ETP Holder that is in the securities business.\254\
---------------------------------------------------------------------------
\254\ See Amendment No. 1, supra note 15.
---------------------------------------------------------------------------
With respect to a subsidiary or affiliate of an ETP Holder
that does business only in commodities or futures contracts, the
Exchange can obtain information regarding the activities of such
subsidiary or affiliate through surveillance sharing agreements with
regulatory organizations of which such subsidiary or affiliate is a
member.\255\
---------------------------------------------------------------------------
\255\ See id. See also infra text accompanying notes 257-258.
---------------------------------------------------------------------------
Commentary .04 of NYSE Arca Equities Rule 6.3 requires an
ETP Holder acting as a registered Market Maker in the Shares, and its
affiliates, to establish, maintain and enforce written policies and
procedures reasonably designed to prevent the misuse of any material
nonpublic information with respect to such products, any components of
the related products, any physical asset or commodity underlying the
product, applicable currencies, underlying indexes, related futures or
options on futures, and any related derivative instruments (including
the Shares).\256\
---------------------------------------------------------------------------
\256\ See Notice, supra note 3, 77 FR at 23786. See also Arca
August 23 Letter, supra note 11, at 3.
---------------------------------------------------------------------------
NYSE Arca may obtain trading information via ISG from
other exchanges that are members of the ISG, including the COMEX.\257\
The Exchange also states that it has entered into a comprehensive
surveillance sharing agreement with LME that applies to trading in
copper and copper derivatives.\258\
---------------------------------------------------------------------------
\257\ See Notice, supra note 3, 77 FR at 23787. See also Arca
August 23 Letter, supra note 11, at 3.
\258\ See Amendment No. 1, supra note 15.
Further, in the context of preventing fraudulent and manipulative acts,
the Exchange discusses its authority to halt trading in the Shares in
the interest of promoting a fair and orderly market and protecting the
interests of investors.\259\
---------------------------------------------------------------------------
\259\ See Arca August 23 Letter, supra note 11, at 3 (``As
stated in the Notice, the Exchange may consider all relevant factors
in exercising its discretion to halt or suspend trading in the
Shares, and trading on the Exchange in the Shares may be halted
because of market conditions or for reasons that, in the view of the
Exchange, make trading in the Shares inadvisable.'').
---------------------------------------------------------------------------
According to the Exchange, the Valuation Agent will exclude any
information provided by any JPMorgan-
[[Page 75486]]
affiliated entity when calculating the locational premium of copper in
any permitted warehouse location.\260\ In addition, NYSE Arca has
obtained a representation from the Sponsor that it will (i) implement a
firewall with respect to its affiliates regarding access to material
non-public information of the Trust concerning the Trust and the
Shares, and (ii) will be subject to procedures designed to prevent the
use and dissemination of material non-public information of the Trust
regarding the Trust and the Shares.\261\ The Commission believes the
firewall that the Exchange will require the Sponsor to erect is a
reasonable measure to help prevent the flow of non-public information
to the Sponsor's affiliates.\262\
---------------------------------------------------------------------------
\260\ Notice, supra note 3, 77 FR at 23783.
\261\ See Amendment No. 1, supra note 15.
\262\ Further, NYSE Arca represents that it can obtain
information about the activities of the Sponsor and its affiliates
under the Exchange's listing rules.
---------------------------------------------------------------------------
More generally, based on the Exchange's representations, the
Commission believes that the Exchange's surveillance procedures appear
to be reasonably designed to permit the Exchange to monitor for,
detect, and deter violations of Exchange rules and applicable federal
securities laws and rules.\263\ In addition to all of the same
surveillance procedures employed with respect to the trading of all
other Commodity-Based Trust Shares, NYSE Arca states that a new product
specific review will be employed to monitor trading in the Shares to
identify potential manipulative trading activity through the use of the
creation and redemption process.\264\ The commenters have not
identified any specific deficiency in the proposed procedures or
provided any evidence that the Exchange's surveillance program has been
ineffective with respect to trading in other Commodity-Based Trust
Shares.
---------------------------------------------------------------------------
\263\ The Commission has discussed above in Section III.D other
reasons why it believes that the listing and trading of the Shares
as proposed is unlikely increase the likelihood of manipulation of
the copper market and, correspondingly, of the price of the Shares.
\264\ See Amendment No. 1, supra note 15.
---------------------------------------------------------------------------
F. Dissemination of Information About the Shares and Copper
The Commission believes the proposal is reasonably designed to
promote sufficient disclosure of information that may be necessary to
price the Shares appropriately. Specifically, the Commission believes
that dissemination of the NAV, IIV, and copper holdings information, as
discussed above, will facilitate transparency with respect to the
Shares and diminish the risk of manipulation or unfair informational
advantage.\265\ Further, as noted above, quotation and last-sale
information for the Shares will be available via the Consolidated Tape
Association, and the Exchange will make available via the Consolidated
Tape trading volume, closing prices, and NAV for the Shares from the
previous day.\266\ Additionally, as discussed above, the Exchange has
identified numerous sources of copper price information unconnected
with the Exchange that are readily available to investors.\267\ The
Commission therefore believes that sufficient venues for obtaining
reliable copper pricing information exist to allow investors in the
Shares to adequately monitor the price of copper and compare it to the
NAV of the Shares.
---------------------------------------------------------------------------
\265\ See supra notes 238-242, and accompanying text.
\266\ See supra text accompanying note 41.
\267\ See Notice, supra note 3, 77 FR at 23786.
---------------------------------------------------------------------------
G. Listing and Trading of the Shares
The Commission believes that the Exchange's proposed rules and
procedures for the listing and trading of the Shares are consistent
with the Act. For example, the Commission believes that the proposal is
reasonably designed to prevent trading when a reasonable degree of
transparency cannot be assured. As detailed above, NYSE Arca Equities
Rules 7.34(a)(5) and 8.201(e)(2) respectively provide that: (1) If the
Exchange becomes aware that the NAV is not being disseminated to all
market participants at the same time, it must halt trading on the NYSE
Marketplace until such time as the NAV is available to all market
participants; and (2) the Exchange will consider suspension of trading
if, after the initial 12-month period following commencement of
trading: (a) The value of copper is no longer calculated or available
on at least a 15-second delayed basis from a source unaffiliated with
the Sponsor, Trust, or Custodian, or the Exchange stops providing a
hyperlink on its Web site to any such unaffiliated source providing
that value; or (b) if the Liquidation IIV is no longer made available
on at least a 15-second delayed basis.\268\ In addition, the Exchange's
general authority to halt trading because of market conditions or for
reasons that, in the view of the Exchange, make trading in the Shares
inadvisable, also will advance this objective. Further, trading in the
Shares will be subject to NYSE Arca Equities Rule 7.12, the Exchange's
circuit breaker rule, which governs trading halts caused by
extraordinary market volatility.
---------------------------------------------------------------------------
\268\ Additionally, if the First-Out IIV or the Liquidation IIV
is not being disseminated as required, the Exchange may halt trading
during the day in which the disruption occurs; if the interruption
persists past the day in which it occurred, the Exchange will halt
trading no later than the beginning of the trading day following the
interruption. See Amendment No. 1, supra note 15.
---------------------------------------------------------------------------
Further, the Shares will be subject to Exchange rules governing the
responsibilities of market makers and customer suitability
requirements. In addition, the Shares will be subject to Exchange Rule
8.201 for initial and continued listing of Shares.\269\ As discussed
above,\270\ the Commission believes that the listing and delisting
criteria for the Shares are expected to maintain a minimum level of
liquidity and therefore minimize the potential for manipulation of the
Shares. The Commission also believes that the Information Bulletin will
adequately inform members and member organizations about the terms,
characteristics, and risks of trading the Shares.
---------------------------------------------------------------------------
\269\ See Notice, supra note 3, 77 FR at 23786.
\270\ See supra text accompanying note 243.
---------------------------------------------------------------------------
H. Commission Findings
After careful review, and for the reasons discussed in Sections
III.A-G above, the Commission finds that the proposed rule change is
consistent with the requirements of the Act, including Section 6 of the
Act,\271\ and the rules and regulations thereunder applicable to a
national securities exchange.\272\ In particular, the Commission finds
that the proposed rule change is consistent with Section 6(b)(5) of the
Act,\273\ which requires, among other things, that the rules of a
national securities exchange be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in facilitating transactions in securities, and to
remove impediments to and perfect the mechanism of a free and open
market and a national market system, and, in general, to protect
investors and the public interest; with Section 6(b)(8) of the
Act,\274\ which requires that the rules of a national securities
exchange not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act; and with Section
11A(a)(1)(C)(iii) of the Act,\275\ which sets forth Congress's finding
that it is in the public interest and appropriate for
[[Page 75487]]
the protection of investors to assure the availability to brokers,
dealers, and investors of information with respect to quotations for
and transactions in securities.\276\
---------------------------------------------------------------------------
\271\ 15 U.S.C. 78f.
\272\ This approval order is based on all of the Exchange's
representations.
\273\ 15 U.S.C. 78f(b)(5).
\274\ 15 U.S.C. 78f(b)(8).
\275\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
\276\ As noted above (see supra Section II.B), quotation and
last-sale information for the Shares will be available via the
Consolidated Tape Association, and the Exchange will make available
via the Consolidated Tape trading volume, closing prices, and NAV
for the Shares from the previous day. See supra text accompanying
note 41.
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether Amendment No.1 to
the proposed rule change is consistent with the Act. Comments may be
submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NYSEArca-2012-28 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEArca-2012-28. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submissions, all subsequent amendments, all
written statements with respect to the proposed rule changes that are
filed with the Commission, and all written communications relating to
the proposed rule changes between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filings also will be available
for inspection and copying at the principal offices of the Exchanges.
All comments received will be posted without change; the Commission
does not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly. All submissions should refer to File Number SR-NYSEArca-2012-
28 and should be submitted on or before January 10, 2013.
V. Accelerated Approval of Proposed Rule Change As Modified by
Amendment No. 1
As discussed above, the Exchange submitted Amendment No. 1 to make
additional representations regarding trading in the Shares,
availability of information, and the Exchange's surveillance
program.\277\ The Commission believes these additional representations
are useful to, among other things, help: (1) Assure adequate liquidity
in the Shares; (2) assure adequate availability of information to
investors to support the arbitrage mechanism; (3) assure adequate
information available to the Exchange to support its monitoring of
Exchange trading of the Shares in all trading sessions; and (4) the
Exchange deter and detect violations of NYSE Arca rules and applicable
federal securities laws. Accordingly, the Commission finds good cause,
pursuant to Section 19(b)(2) of the Act,\278\ for approving the
proposed rule change, as modified by Amendment No. 1, prior to the 30th
day after the date of publication of notice in the Federal Register.
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\277\ See supra note 15.
\278\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\279\ that the proposed rule change (SR-NYSEArca-2012-28), as
modified by Amendment No. 1, be, and hereby is, approved on an
accelerated basis.
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\279\ 15 U.S.C. 78s(b)(2).
By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-30647 Filed 12-19-12; 8:45 am]
BILLING CODE 8011-01-P