Federal Register, Volume 78 Issue 40 (Thursday, February 28, 2013)

[Federal Register Volume 78, Number 40 (Thursday, February 28, 2013)]
[Notices]
[Pages 13726-13742]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-04623]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68973; File No. SR-NYSEArca-2012-66]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Amendments No. 1 and No. 2 and Order Granting Accelerated Approval
of a Proposed Rule Change as Modified by Amendments No. 1 and No. 2 To
List and Trade Shares of the iShares Copper Trust Pursuant to NYSE Arca
Equities Rule 8.201

February 22, 2013.

I. Introduction

On June 19, 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 the iShares Copper Trust
(``Trust'' or ``iShares Trust'') pursuant to NYSE Arca Equities Rule
8.201. BlackRock Asset Management International Inc. is the sponsor of
the Trust (``Sponsor''). The proposed rule change was published for
comment in the Federal Register on June 27, 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. 67237 (June 22, 2012),
77 FR 38351 (``Notice'').
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The Commission initially received one comment letter, which opposed
the proposed rule change.\4\ On August 8, 2012, the Commission
instituted proceedings to determine whether to approve or disapprove
the proposed rule change.\5\ Subsequently, the Commission received
additional comments on the proposed rule change.\6\
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\4\ See letter from Robert B. Bernstein, Vandenberg & Feliu, LLP
(``V&F''), to Elizabeth M. Murphy, Secretary, Commission, dated July
18, 2012 (``V&F July 18 Letter''). Comment letters are available at
http://www.sec.gov/comments/sr-nysearca-2012-66/nysearca201266.shtml. This commenter states that he represents RK
Capital LLC, an international copper merchant, and four end-users of
copper: Southwire Company, Encore Wire Corporation, Luvata, and
AmRod Corp (collectively, the ``Copper Fabricators''). The commenter
states that these companies collectively comprise about 50% of the
copper fabricating capacity in the United States. See V&F July 18
Letter, supra, at 1.
\5\ See Securities Exchange Act Release No. 67616, 77 FR 48181
(August 13, 2012) (``Order Instituting Proceedings'').
\6\ See letters from Robert B. Bernstein, V&F, to Elizabeth M.
Murphy, Secretary, Commission, dated September 12, 2012 (``V&F
September 12 Letter''); Ira P. Shapiro, Managing Director, and Deepa
A. Damre, Director, Legal and Compliance, BlackRock, Inc., to
Elizabeth M. Murphy, Secretary, Commission, dated September 12, 2012
(``BlackRock Letter''); Janet McGinness, General Counsel, NYSE
Markets, NYSE Euronext, to Elizabeth M. Murphy, Secretary,
Commission, dated September 14, 2012 (``Arca September 14 Letter'');
Robert B. Bernstein, V&F, to Elizabeth M. Murphy, Secretary,
Commission, dated September 27, 2012 (``V&F September 27 Letter'');
Robert B. Bernstein, V&F, to Elizabeth M. Murphy, Secretary,
Commission, dated November 16, 2012 (``V&F November 16 Letter'');
Robert B. Bernstein, Partner, Eaton & Van Winkle LLP (``EVW''), to
Elizabeth M. Murphy, Secretary, Commission, dated December 7, 2012
(``EVW December 7 Letter''); and email from Janet Klein dated
January 7, 2013 (``Klein Email'').
In the V&F September 27 Letter, the commenter incorporated by
reference all of his prior comments in opposition to NYSE Arca's
proposal to list and trade shares of the JPM XF Physical Copper
Trust (``JPM Copper Trust'') (File No. SR-NYSEArca-2012-28). See V&F
September 27 Letter, supra, at 6. Responding to that proposed rule
change, the commenter submitted the following: Letters from V&F,
received May 9, 2012 (``V&F May 9 Letter''); Robert B. Bernstein,
V&F, to Elizabeth M. Murphy, Secretary, Commission, dated July 13,
2012 (``V&F July 13 Letter''); Robert B. Bernstein, V&F, to
Elizabeth M. Murphy, Secretary, Commission, dated August 24, 2012
(``V&F August 24 Letter''); and Robert B. Bernstein, V&F, to
Elizabeth M. Murphy, Secretary, Commission, dated September 10, 2012
(``V&F September 10 Letter''). The comment letters the commenter
incorporated by reference are available at http://www.sec.gov/comments/sr-nysearca-2012-66/nysearca201266.shtml. Additionally, the
commenter stated that he agrees with the arguments against that
proposal set forth in a letter from U.S. Senator Carl Levin, to
Elizabeth M. Murphy, Secretary, Commission, dated July 16, 2012
(``Levin Letter''), and attached the Levin Letter to the V&F July 18
Letter. See V&F July 18 Letter, supra, at 5. The Commission approved
NYSE Arca's proposal to list and trade shares of the JPM Copper
Trust on December 14, 2012, in an order that addressed these and
other comments. See Securities Exchange Act Release No. 68440
(December 14, 2012), 77 FR 75468, 75473-86 (December 20, 2012) (SR-
NYSEArca-2012-28) (``JPM Order'').
In the V&F September 12 Letter, the commenter requested to make
an oral presentation in the proceeding. The Commission denied the
commenter's request. See letter from Kevin M. O'Neill, Deputy
Secretary, Commission, to Robert B. Bernstein, EVW, dated December
5, 2012, available at http://www.sec.gov/comments/sr-nysearca-2012-66/nysearca201266.shtml. By letter dated November 29, 2012, Mr.
Bernstein informed the Commission that he had left V&F and would
continue to represent the Copper Fabricators and RK Capital LLC in
this proceeding.
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On December 12, 2012, the Exchange filed Amendment No. 1 to the
proposed rule change.\7\ On December 21, 2012, the Commission
designated February 22, 2013, as the date by which the Commission
should either approve or

[[Page 13727]]

disapprove the proposed rule change.\8\ On December 27, 2012, the
Exchange filed Amendment No. 2 to the proposed rule change.\9\
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\7\ In Amendment No. 1, the Exchange represented that it: (1)
Has obtained representations from the Sponsor that the Sponsor is
affiliated with one or more broker-dealers and other entities, that
the Sponsor will implement a fire wall with respect to such
affiliate(s) prohibiting access to material non-public information
of the Trust concerning the Trust and the Shares, and that the
Sponsor and such affiliate(s) 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; and (2)
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 represented that trading in the
Shares would be subject to the existing trading surveillances,
administered by Financial Industry Regulatory Authority, Inc.
(``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 Intermarket
Surveillance Group (``ISG'') or with which the Exchange has in place
a comprehensive surveillance sharing agreement. On December 13,
2012, the Exchange submitted a comment letter attaching Amendment
No. 1. See letter from Janet McGinness, General Counsel, NYSE
Markets, NYSE Euronext, to Elizabeth M. Murphy, Secretary,
Commission, dated December 13, 2012.
\8\ See Securities Exchange Act Release No. 68511, 77 FR 77151
(December 31, 2012).
\9\ In Amendment No. 2, the Exchange supplemented the
representations in the proposed rule change regarding Web site
disclosure and made clear that the Trust's Web site will provide
detailed information, updated on a daily basis, regarding the copper
lot holdings of the Trust, including warehouse locations, warehouse
identification numbers, lot numbers, weights, and brands.
Additionally, in Amendment No. 2, the Exchange represented that the
Trust's Web site will list the copper lots in the order in which
they will be delivered in a redemption pursuant to the applicable
algorithm. See infra text accompanying note 27.
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The Commission is publishing this notice to solicit comments from
interested persons, including whether Amendments No. 1 and No. 2 to the
proposed rule change are consistent with the Act, and is approving the
proposed rule change, as modified by Amendments No. 1 and No. 2, on an
accelerated basis.

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.\10\ 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 create Shares only in
exchange for copper that: (1) Meets the requirements to be delivered in
settlement of copper futures contracts traded on the LME; and (2) is
eligible to be placed on London Metal Exchange (``LME'') warrant at the
time it is delivered to the Trust.\11\ 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.\12\
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\10\ 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.
\11\ See Notice, supra note 3, 77 FR at 38356.
\12\ See id. at 38352.
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A. Description of the Copper Market \13\
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\13\ 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. Copper is traded in the over-
the-counter (``OTC'') market and on commodities exchanges. There are
spot sales in the physical market, as well as forward contracts,
options contracts, and other derivative transactions. A major portion
of annual copper production and use is covered through physical
transactions, often through renewable annual supply contracts.
Participants in the copper market include primary and secondary
producers; fabricators; manufacturers and end-use consumers; physical
traders and merchants; the banking sector; and the investment
community. Physical traders and merchants generally facilitate the
domestic and international trade of copper supplies along the value
chain and support the distribution of supplies to consumers. Banking
institutions may provide market participants an assortment of services
to assist copper market transactions. This investment community is
composed of non-commercial market participants engaged in investment in
copper or speculation about copper prices. This may range from large-
scale institutional investors to hedge funds to small-scale retail
investors. In addition, the investment community includes sovereign
wealth funds as well as other governmental bodies that stockpile metal
for strategic purposes.
1. OTC Copper Market
Physical traders, merchants, and banks participate in OTC spot,
forward, option, and other derivative transactions for copper. OTC
contracts are principal-to-principal agreements traded and negotiated
privately between two principal parties, without going through an
exchange or other intermediary. As such, both participants in OTC
transactions are subject to counter-party risk, including credit and
contractual obligations to perform. The OTC derivative market remains
largely unregulated with respect to public disclosure of information by
the parties, thus providing confidentiality among principals.
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 agreements,\14\ which otherwise could be constrained by
contract terms on a futures exchange.
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\14\ A life-of-mine off-take agreement 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. Off-take
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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2. Copper Exchanges
According to the registration statement for the Trust
(``Registration Statement''),\15\ the LME is the longest standing
exchange trading copper futures, with the greatest number of open
copper futures and options contracts (open interest). The Commodity
Exchange, Inc. (``COMEX'') (a division of CME Group, Inc.), the
Shanghai Futures Exchange (``SHFE''), and the recently launched Multi
Commodity Exchange of India (``MCX'') also trade copper futures. At the
end of March 2012, the LME held roughly 64% of copper open interest
across the four futures exchanges with copper contracts (adjusted for
lot size).
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\15\ The Registration Statement was most recently amended on
September 2, 2011 (No. 333-170131).
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The LME falls under the jurisdiction of the United Kingdom
Financial Services Authority (``FSA''). The FSA is responsible for
ensuring the financial stability of the exchange member businesses,
whereas the LME is largely responsible for the oversight of day-to-day
exchange activities, including conducting arbitration proceedings under
the LME arbitration regulations.
The SHFE is a self-regulatory body under the supervision and
governance of the China Securities Regulatory Commission (``CSRC'').
The SHFE is the day-to-day overseer of exchange activities, 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. It has the right to overturn or revoke the
SHFE's regulatory privileges at any time.
Commodity futures and options traded on the COMEX are subject to
regulation by CME Group's Market Regulation Oversight Committee
(``MROCC''), under rules of the Commodity Futures Trading Commission
(``CFTC'').\16\ The MROCC is a self-regulatory body created in 2004 to
actively ensure competitive and financially sound trading activity on
the CME and its subsidiary exchanges.
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\16\ Copper is traded over two CME platforms: CME Globex and
Open Outcry. CME Globex, which offers electronic trading, operates
Sunday through Friday, 6:00 p.m., Eastern Time (``E.T.'') through
5:15 p.m. E.T. with a 45-minute break each day beginning at 5:15
p.m. E.T. The Open Outcry operates Monday through Friday 8:10 a.m.
E.T. through 1:00 p.m. E.T.
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Regulation of the MCX falls under the responsibility of the
Governing Board of the MCX and the Forward Markets Commission of India
pursuant to the Forward Contracts (Regulation) Act of 1952 and
amendments made thereafter.

[[Page 13728]]

B. Description of the Proposed Rule Change and the Trust \17\
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\17\ See Notice, supra note 3, for a more detailed description.
Additional details regarding the Trust also are set forth in the
Registration Statement, supra note 15.
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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. The Bank of New York Mellon is the
trustee of the Trust (``Trustee''). Metro International Trade Services
LLC is the custodian of the Trust (``Custodian'').
As mentioned above,\18\ the Trust will hold only copper that, at
the time it was delivered to the trust, (1) met the requirements to be
delivered in settlement of copper futures contracts traded on the LME;
and (2) was eligible to be placed on LME warrant. 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.\19\
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\18\ See supra text accompanying note 11.
\19\ See supra text accompanying note 12.
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The Custodian may keep the Trust's copper at locations within or
outside the United States that are agreed from time to time by the
Custodian and the Trustee. As of the date of the Registration
Statement, the Custodian is authorized to hold copper owned by the
Trust at warehouses located in: East Chicago, Indiana; Mobile, Alabama;
New Orleans, Louisiana; Saint Louis, Missouri; Hull, England;
Liverpool, England; Rotterdam, Netherlands; and Antwerp, Belgium
(collectively, ``Approved Warehouses''). Unless otherwise agreed in
writing by the Trustee, each of the warehouses where the Trust's copper
will be stored must be LME-approved at the time copper is delivered to
the Custodian for storage in such warehouse. Unless otherwise
instructed by the Trustee, no copper held by the Custodian on behalf of
the Trust may be on LME warrant.\20\
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\20\ See Notice, supra note 3, 77 FR at 38356 n.23.
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The Trustee will calculate the net asset value (``NAV'') of the
Trust as promptly as practicable after 4:00 p.m. EST on each business
day. The Trustee will value the Trust's copper at that day's announced
LME Bid Price.\21\ If there is no announced LME Bid Price on a business
day, the Trustee will be authorized to use the most recently announced
LME Bid Price unless the Sponsor determines that such price is
inappropriate as a basis for valuation.\22\ The Exchange will obtain a
representation from the Trust prior to the commencement of trading in
the Shares that the NAV per Share will be calculated daily and made
available to all market participants at the same time.\23\
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\21\ The ``LME Bid Price'' is announced by the LME at 1:20 p.m.
London Time and represents the price that a buyer is willing to pay
to receive a warrant in any warehouse within the LME system. See id.
at 38356 n.25. LME warrants, which are documents representing
possession, are used as the means of delivering metal or plastics
under LME contracts. See id. at 38355. The ownership of copper
represented by warrants is transferred through LMEsword, an
electronic transfer system for the purchase and sale of exchange
issued warrants that facilitates the reporting of inventories. See
id. Each warrant is invoiced at the contract weight, which is
permitted to vary +/-2% from the specified 25 tonne lot of copper.
Only registered LME copper brands are approved for delivery. See id.
\22\ See id. at 38358.
\23\ See id. at 38359.
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The Trust expects to create and redeem Shares on a continuous basis
but only with authorized participants in blocks of five or more baskets
of 2,500 Shares each (each basket of 2,500 Shares, a ``Basket'').\24\
In connection with the creation of Baskets, only copper that meets the
requirements to be delivered in settlement of copper futures contracts
traded on the LME and that is eligible to be placed on LME warrant at
the time of delivery to the Trust may be delivered to the Trust in
exchange for Shares.\25\ Upon deposit of the corresponding amount of
copper with the Custodian and the payment of applicable fees by an
authorized participant, the Trustee will deliver the appropriate number
of Baskets to the Depository Trust Company (``DTC'') account of the
authorized participant.\26\ Conversely, authorized participants may
redeem Shares by surrendering five or more Baskets, each in exchange
for the Basket Copper Amount announced by the Trustee on the first
business day on which the LME Bid Price is announced following the date
of receipt of the redemption order. Upon surrender of the Baskets and
payment of applicable fees, expenses, taxes, and charges, the Custodian
will transfer from the Trust's account to the authorized participant's
account the aggregate Basket Copper Amount corresponding to the Baskets
surrendered for redemption and will send written confirmation thereof
to the Trustee, which will then cancel all Shares so redeemed. The
specific copper to be transferred to the redeeming authorized
participant's account will be selected by the Custodian pursuant to an
algorithm that gives priority to the delivery of copper that no longer
meets LME requirements (e.g., is of a brand, or held at a location,
that is no longer LME approved) or is on LME warrant (in the rare
instances where some of the Trust's copper may be on LME warrant).\27\
Within each category, copper will be selected for transfer to redeeming
authorized participants on a last-in-first-out basis. If the copper
transferred to the redeeming authorized participant's account meets the
requirements of the LME to be placed on warrant, and the Custodian is
able to issue LME warrants at such time, promptly after a redemption,
the Custodian will issue to the redeeming authorized participant one or
more LME warrants representing as much copper transferred to the
authorized participant's account as may be placed on LME warrant in
compliance with the LME rules and without the Custodian having to break
apart any specific parcel of copper so transferred pursuant to the
algorithm referred to above.\28\
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\24\ See id. at 38356.
\25\ See id.
\26\ In exchange for each Basket purchased, an authorized
participant must deposit the Basket Copper Amount announced by the
Trustee on the first business day on which the LME Bid Price is
announced following the date of receipt of the purchase order. See
id. at 38356. The ``Basket Copper Amount'' is the amount of copper
(measured in tonnes and fractions thereof), determined on each
business day by the Trustee, which authorized participants must
transfer to the Trust in exchange for a Basket, or are entitled to
receive in exchange for each Basket surrendered for redemption. See
id. at 38356 n.24.
\27\ Generally, authorized participants desiring to create with
copper on warrant will be required to take such copper off warrant
prior to delivery to the Custodian. See id. at 38357 n.29. See also
id. at 38356 n.23 (``Unless otherwise instructed by the Trustee, no
copper held by the Custodian on behalf of the Trust may be on
Warrant.'').
\28\ In the normal course of the Trust's operations, it is
anticipated that authorized participants will receive LME warrants
(not warehouse receipts) following a redemption transaction. See id.
at 38358. If it is not possible for the Custodian to issue LME
warrants in connection with a redemption of Shares, the Custodian
will deliver to the redeeming authorized participant one or more
negotiable warehouse receipts representing the copper transferred to
the authorized participant's account in connection with such
redemption. See id. at 38357-58.
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To facilitate the issuance of Baskets,\29\ the Sponsor has arranged
for J. Aron & Company (``J. Aron''), an international commodities
dealer and subsidiary of The Goldman Sachs Group, Inc. (which owns the
Custodian), to stand ready to: (i) Make available for sale to eligible
authorized participants any fractional amounts of copper needed to meet
the obligation to transfer to the Trust the exact Basket Copper Amount
in exchange for each Basket purchased from the Trust; and (ii) to the
extent the lots of copper an eligible authorized

[[Page 13729]]

participant intends to use in connection with an issuance of a Basket
exceed the corresponding Basket Copper Amount, purchase any amount of
such copper from such authorized participant.\30\
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\29\ The Exchange states that because copper usually trades in
lots of 25 tonnes, with plus or minus 2% deviations being accepted
in the industry, an authorized participant may not find readily
available in the market the exact Basket Copper Amount needed in
connection with the issuance of a new Basket. See id. at 38356.
\30\ The Goldman Sachs Group, Inc. and its affiliates (``GS
Entities'') have represented to the Sponsor that they maintain
policies that are reasonably designed to prevent misuse or improper
dissemination of nonpublic information, including a ``need-to-know''
standard that states that confidential information may be shared
only with persons who have a need to know the information to perform
their duties and to carry out the purpose(s) for which the
information was provided. See id. at 38357 n.26. In addition, GS
Entities have represented to the Sponsor that they maintain specific
policies and procedures that are reasonably designed to protect
confidential and commercially sensitive information associated with
the Custodian's business from being shared with GS Entity
individuals engaged in commodity sales and trading activities. See
id.
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Quotation and last-sale information for the Shares will be
available via the Consolidated Tape Association.\31\ The Exchange also
will make available via the Consolidated Tape trading volume, closing
prices, and the NAV for the Shares from the previous day.\32\ The
intraday indicative value (``IIV'') per Share,\33\ updated at least
every 15 seconds, as calculated by the Exchange or a third-party
financial data provider, will be widely disseminated by one or more
major market data vendors during the Core Trading Session on the
Exchange (9:30 a.m. to 4:00 p.m. E.T.).\34\
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\31\ See id. at 38358.
\32\ See id. at 38359.
\33\ The IIV will be calculated by multiplying the indicative
spot price of copper (the three-month LME copper contract) by the
quantity of copper backing each Share as of the last calculation
date. See id.
\34\ See id.
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The Trust's Web site will contain the following information, on a
per-Share basis, for the Trust: (a) The NAV as of the close of the
prior business day and the mid-point of the bid-ask price at the close
of trading in relation to such NAV (``Bid/Ask Price''), and a
calculation of the premium or discount of such price against such NAV;
and (b) data in chart format displaying the frequency distribution of
discounts and premiums of the Bid/Ask Price against the NAV, within
appropriate ranges, for each of the four previous calendar
quarters.\35\ The Trust's Web site also will disclose the list of
copper held by the Trust, updated on a daily basis, and display the
following information: The Basket Copper Amount; the Trust's
prospectus; the two most recent reports to stockholders; and the last
sale price of the Shares as traded in the U.S. market.\36\
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\35\ See id.
\36\ See id. See also Amendment No. 2, supra note 9 (providing
more details regarding the information about the Trust's copper
holdings that will be available on the Trust's Web site).
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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, such as Reuters
and Bloomberg.\37\ 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.\38\ Reuters and Bloomberg also
offer a professional service to subscribers for a fee that provides
information on copper prices directly from market participants.\39\
Moreover, 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.\40\
The Exchange will provide on its Web site (www.nyx.com) a link to the
Trust's Web site.\41\
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\37\ See Notice, supra note 3, 77 FR at 38359.
\38\ See id.
\39\ See id.
\40\ See id. For example, the LME publishes LME official price
information on its Web site with a one-day delay; LME official price
information also is published on Basemetals.com and Metal-Page.com
with a one day delay; COMEX publishes on its Web site delayed
futures and options information on current and past trading sessions
and market news free of charge. See id. The Exchange also states
that the current day's LME official prices (such as the LME Bid
Price used to calculate the NAV of the Shares) are available from
major market data vendors for a fee. See id.
\41\ See id.
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NYSE Arca will require that a minimum of 100,000 Shares be
outstanding at the start of trading,\42\ which represents 1,000 metric
tons of copper. The Trust seeks to register 12,120,000 Shares.\43\
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\42\ See id.
\43\ See Registration Statement, supra note 15.
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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 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.\44\ 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 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.\45\ 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.\46\ 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.\47\ Additionally, trading in the Shares will be subject to
trading halts caused by extraordinary market volatility pursuant to the
Exchange's circuit breaker rule, NYSE Arca Equities Rule 7.12.\48\
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\44\ See Notice, supra note 3, 77 FR at 38359.
\45\ See id.
\46\ See id.
\47\ See id.
\48\ See id.
---------------------------------------------------------------------------

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.\49\ The Exchange states that its
existing trading surveillances, which are administered by FINRA,
generally focus on detecting securities trading outside their normal
patterns, which could be indicative of manipulative or other violative
activity.\50\ NYSE Arca states that, in addition to those
surveillances, FINRA will implement a product-specific review designed
to identify potential manipulative trading activity through the use of
the creation and redemption process, and that NYSE Regulation, Inc., on
behalf of the Exchange, will monitor to ensure that these procedures
continue to be operational.\51\
---------------------------------------------------------------------------

\49\ See id.
\50\ See Amendment No. 1, supra note 7.
\51\ See id.
---------------------------------------------------------------------------

The Exchange also 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

[[Page 13730]]

copper derivative from Equity Trading Permit holders (``ETP Holders'')
acting as registered market makers, in connection with their
proprietary or customer trades.\52\ 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.\53\ 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.\54\ Further, NYSE Arca states
that it may obtain trading information via the ISG from other exchanges
that are members of the ISG, including CME Group, Inc., which includes
COMEX, 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.\55\
---------------------------------------------------------------------------

\52\ See Notice, supra note 3, 77 FR at 38359.
\53\ See Amendment No. 1, supra note 7.
\54\ See id.
\55\ See Notice, supra note 3, 77 FR at 38360. The Exchange will
communicate as needed regarding trading in the Shares with other
markets that are members of the ISG or with which the Exchange has
in place a comprehensive surveillance sharing agreement. See
Amendment No. 1, supra note 7.
---------------------------------------------------------------------------

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 Baskets (including
noting that Shares are not individually redeemable); (b) NYSE Arca
Equities Rule 9.2(a), which imposes a duty of due diligence on 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; \56\ and (f) trading information.\57\
---------------------------------------------------------------------------

\56\ The Exchange's Core Trading Session is between 9:30 a.m. to
4:00 p.m. E.T. See Notice, supra note 3, 77 FR at 38359. The
Exchange's Late Trading Session begins after the end of the Core
Trading Session and concludes at 8:00 p.m. E.T. See NYSE Arca
Equities Rule 7.34(a)(3).
\57\ See Notice, supra note 3, 77 FR at 38360.
---------------------------------------------------------------------------

The Notice and the Registration Statement include additional
information regarding: 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.\58\
---------------------------------------------------------------------------

\58\ See Notice and Registration Statement, supra notes 3 and
15, 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,\59\ and the
rules and regulations thereunder applicable to a national securities
exchange. In particular, the Commission finds that the proposed rule
change is consistent with Section 6(b)(5) of the Act,\60\ 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,\61\ 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,\62\ 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,\63\ the Commission has considered whether the
proposed rule change will promote efficiency, competition, and capital
formation.
---------------------------------------------------------------------------

\59\ 15 U.S.C. 78f.
\60\ 15 U.S.C. 78f(b)(5).
\61\ 15 U.S.C. 78f(b)(8).
\62\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
\63\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

One commenter submitted five comment letters to explain its
opposition to the proposed rule change.\64\ Generally, the opposing
commenter asserts that the proposed rule change is inconsistent with
Section 6(b)(5) of the Act.\65\ The commenter asserts 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, and
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.\66\ The commenter further states
that the predicted decrease in copper available for immediate delivery
would make the physical copper market more susceptible to
manipulation.\67\
---------------------------------------------------------------------------

\64\ See V&F July 18 Letter, supra note 4; V&F September 12
Letter, supra note 6; V&F September 27 Letter, supra note 6; V&F
November 16 Letter, supra note 6; and EVW December 7 Letter, supra
note 6. As discussed above, the commenter also attached to his
letters other comment letters, or incorporated other comment letters
by reference. See supra note 6 (citing V&F September 27 Letter).
This commenter is referred to as ``the commenter,'' although the
Commission also received an email from another commenter who opposes
the proposed rule change. Ms. Janet Klein asserted that approval of
the proposed rule change: (1) Would be ``contrary to rational
oversight of wise practice,'' without explaining the basis for her
judgment; (2) would not contribute to the economy; and (3) would
promote ``speculative swings of a commodity price not related to
supply/demand,'' again without explaining the basis for her
conclusion. See Klein Email, supra note 6. The impact of the
proposed rule change on the price of copper is discussed below in
Section III.B.
\65\ 15 U.S.C. 78f(b)(5).
\66\ See V&F May 9 Letter, supra note 6, at 5-7.
\67\ See id. at 1, 10.
---------------------------------------------------------------------------

In response, the Sponsor generally states the Trust will provide a
more liquid and cost-effective vehicle for investment in the physical
copper market.\68\ The Sponsor expects that much of the initial demand
for the Shares will represent a reallocation of current investments in
physical copper by professional copper market participants rather than
new incremental demand.\69\ The Sponsor does not anticipate that
creation of the Trust will impact copper prices,\70\ and disagrees with
the notion that the Trust will render the copper market more
susceptible to manipulation.\71\
---------------------------------------------------------------------------

\68\ See BlackRock Letter, supra note 6, at 1.
\69\ See id. at 4.
\70\ See id. at 5.
\71\ See id. at 6.

---------------------------------------------------------------------------

[[Page 13731]]

Given the concerns expressed by the commenter 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,\72\
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.
---------------------------------------------------------------------------

\72\ See V&F May 9 Letter, supra note 6, at 1, 10.
---------------------------------------------------------------------------

A. The Trust's Impact on the Supply of Copper Available for Immediate
Delivery

The commenter believes 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.\73\ 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 Trust. The Commission
believes the record does not support the commenter's conclusions, which
are based on his 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.
---------------------------------------------------------------------------

\73\ See V&F July 18 Letter, supra note 4, at 1-2.
---------------------------------------------------------------------------

1. Availability of the Trust's Copper
The commenter asserts 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.\74\ In response, the Sponsor asserts that the Trust would
not remove immediately available copper inventory from the market.\75\
The Sponsor predicts that demand for the Shares is most likely to come
from current metals dealers and others who already hold physical copper
inventory or investments, and that the creation of Shares by these
entities will not affect available supply.\76\ The Sponsor also notes
that Shares can be redeemed as well as created, thus allowing the
Trust's copper to be withdrawn by authorized participants.\77\
---------------------------------------------------------------------------

\74\ See id. at 5.
\75\ See BlackRock Letter, supra note 6, at 3-4. See also V&F
September 12 Letter, supra note 6, at 2 (``Copper backed ETFs will
also not affect the aggregate inventory of copper. But the ETF will
move the inventory that resides within the LME outside of the
LME.'').
\76\ See BlackRock Letter, supra note 6, at 4.
\77\ See id. at 3.
---------------------------------------------------------------------------

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;
(2) Shares are redeemable (in size) for copper on every business day;
and (3) provided certain conditions are met, on the third business day
after the day on which the LME Bid Price is announced following the
placement of a redemption order, the Custodian will transfer from the
Trust's account to the redeeming authorized participant's account the
parcels of copper identified pursuant to the Trustee's algorithm and
corresponding to the number of Baskets surrendered, and promptly
thereafter, the Custodian will issue either (a) one or more LME
warrants, if the copper transferred can then be placed on LME warrant
and the Custodian is able to issue LME warrants, or (b) negotiable
warehouse receipts, if the copper transferred cannot be placed on LME
warrant or if the Custodian cannot issue LME warrants.\78\ Accordingly,
in the normal course of the Trust's operations, redeeming authorized
participants will receive copper that the commenter acknowledges is
available for immediate delivery (i.e., copper on LME warrant).\79\
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.
---------------------------------------------------------------------------

\78\ See Registration Statement, supra note 15. The Exchange
states that, in the normal course of the Trust's operations, it is
anticipated that authorized participants will receive LME warrants
following a redemption transaction and that, in the event that its
copper is no longer warrantable, the Trust will have operational
procedures in place to put such metal on LME warrant when possible.
See Notice, supra note 3, 77 FR at 38357-58.
\79\ See, e.g., V&F July 18 Letter, supra note 4, at 1 (``[T]he
copper in the LME and [COMEX] warehouses is the only refined copper
generally available for immediate delivery.''). The Commission
believes that the wait time discussed above to receive a LME
warrant--or in some cases a negotiable warehouse receipt--is not a
significant enough delay to consider the copper held by the Trust
unavailable for immediate delivery because, as mentioned above, on
the third business day after the day on which the LME Bid Price is
announced following the placement of a redemption order, the
Custodian will transfer from the Trust's account to the redeeming
authorized participant's account the parcels of copper identified
pursuant to the Trustee's algorithm and corresponding to the number
of Baskets surrendered, and promptly thereafter, the Custodian will
issue to the authorized participant either one or more LME warrants,
which will be delivered whenever possible, or negotiable warehouse
receipts.
The commenter expresses further concern in the EVW December 7
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 6. The commenter previously acknowledged, however, that taking
copper off LME warrant takes time; according to the 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 (more than
one year) in 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 6, at 14. By his December 7 letter, 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 his 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. The Commission 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 6, at 3.
---------------------------------------------------------------------------

The commenter states that end users 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.\80\ Regardless

[[Page 13732]]

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 currently exist and are
addressed by market participants holding LME warrants. For example, it
is the Commission's understanding that when a market participant buys a
long-dated copper futures contract on the LME and settles for a
warrant, or when an LME member buys a cash futures contract in ring
trading,\81\ these market participants do not know the location or
brand of the underlying copper. Accordingly, LME warrant holders
sometimes swap warrants to acquire copper of a preferred brand in a
convenient location,\82\ and nothing in the record indicates that
redeeming authorized participants would not be able to swap LME
warrants received in connection with Share redemptions for other LME
warrants for more suitable copper.
---------------------------------------------------------------------------

\80\ See V&F September 10 Letter, supra note 6, at 4; V&F July
13 Letter, supra note 6, at 7.
\81\ Open outcry trading includes, for each metal traded on the
exchange, four five-minute sessions taking place around the ring of
the exchange (each such session, a ``ring''). See Notice, supra note
3, 77 FR at 38355.
\82\ See V&F September 12 Letter, supra note 6, at 5.
---------------------------------------------------------------------------

The commenter also expresses concern that investors who hold the
Shares would not sell them, and therefore Shares would not be readily
available for redemption.\83\ 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.\84\
---------------------------------------------------------------------------

\83\ See V&F September 10 Letter, supra note 6, at 3. See also
V&F September 12 Letter, supra note 6, at 4.
\84\ The commenter provides a chart that it says shows the
number of shares outstanding for the SPDR Gold Trust and the iShares
Silver Trust, and states that ``[i]n spite of price volatility in
the market there has been very little volatility in the aggregate
number of shares listed.'' See V&F September 12 Letter, supra note
6, at 4. The commenter asserts that if the same occurs in relation
to the Shares, it would pose ``a substantial risk to the unit
redemption process.'' See id. The Commission does not believe this
chart supports the commenter's claim that Shares would be
unavailable for redemption. Rather, the Commission believes the
chart reveals that redemptions of shares of those other trusts did
occur, as evidenced by the data showing that the number of shares
outstanding in those trusts has increased and decreased over time.
Accordingly, the Commission believes that this data does not show
investors will not redeem their Shares, as the commenter claims.
---------------------------------------------------------------------------

The Commission believes that the listing and trading of the Shares,
as proposed, could provide another way for market participants and
investors to trade 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 commenter asserts 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 the commenter believes that Shares would be
created primarily using copper already under LME or COMEX warrant.\85\
The commenter states that the size of the market for copper available
for immediate delivery is small relative to the size the commenter
expects the Trust to attain, asserting that there are only 240,000
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 121,200 metric tons from the market of copper available for
immediate delivery.\86\ The commenter also asserts that the Trust would
be funded with copper on warrant in the United States, which would
result in a shortage of copper in the United States.\87\ The commenter
further urges that the Commission consider collectively the supply
impacts of the iShares Trust and the JPM Copper Trust.\88\
---------------------------------------------------------------------------

\85\ See V&F July 18 Letter, supra note 4, at 2; and V&F
September 27 Letter, supra note 6, at 2.
\86\ See V&F July 18 Letter, supra note 4, at 1. How the
commenter measures the projected size of the Trust is discussed
infra in Section III.A.3.
\87\ See V&F July 18 Letter, supra note 4, at 4.
\88\ The commenter asserts that the collective impact of the
iShares Trust and the JPM Copper Trust could result in the removal
of 183,000 metric tons of copper from the market, or 63% of the
copper available in LME and COMEX warehouses. See id. at 1. For the
reasons discussed in Section III.A, 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. The Commission
also notes that, in approving the listing and trading of shares of
the JPM Copper Trust, the Commission explained why it does not
believe that the listing and trading of those shares is likely to
disrupt the supply of copper available for immediate delivery. See
JPM Order, supra note 6, 77 FR 75468, 75473-77. Similarly, the
Commission does not believe that the trusts, considered
collectively, are likely to disrupt the supply of copper available
for immediate delivery.
---------------------------------------------------------------------------

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 and that could be used to fund the
Trust.\89\ The Sponsor states that the Trust will accept creations
using both copper already held in, as well as warrantable copper newly
delivered to, LME-approved warehouses of the Custodian.\90\
---------------------------------------------------------------------------

\89\ See BlackRock Letter, supra note 6, at 2. The Sponsor
asserts that ``[d]uring years when the refined copper market is in a
deficit copper fabricators and other end users can consume supplies
from warehouses [sic] stocks held by producers, consumers, merchants
and traders, governments, and exchange warehouses.'' See BlackRock
Letter, supra note 6, at Exhibit B. But see V&F September 12 Letter,
supra note 6, at 3 (``The only other theoretical source of ETF
feedstock copper is current off-warrant stock held by investors,
assuming such stock even exists. It is possible that hoarding of
copper outside of China has been taking place to the possible
benefit of such holders upon commencement of physically backed
copper ETF unit creation. We are however unaware of any such
inventory.'')
\90\ See BlackRock Letter, supra note 6, at 2. Not all of the
approved warehouses are in the United States. See Notice, supra note
3, 77 FR at 38356 n.23.
---------------------------------------------------------------------------

The Commission believes that there is significant uncertainty about
the locations from which copper will be purchased to create Shares.\91\
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. As discussed further

[[Page 13733]]

below,\92\ the Commission also believes that the amount of copper that
the Trust will hold is uncertain.\93\
---------------------------------------------------------------------------

\91\ The Sponsor provided data estimating that total worldwide
warrantable copper supply was 2.926 million tons as of July 2012, of
which 1.358 million tons were considered to be ``liquid''; and of
the 1.358 million tons of ``liquid'' stock, 434,105 tons are held in
LME, COMEX, and SHFE warehouses. See BlackRock Letter, supra note 6,
at 2 (citing Metal Bulletin Research, ``Independent Assessment of
Global Copper Stocks,'' August 22, 2012). This leaves 923,895 tons
of liquid stock that is not held in LME, COMEX, or SHFE warehouses.
The data provided by the Sponsor is substantially similar to data
referenced in the JPM Order. See JPM Order, supra note 6, 77 FR at
75475. The differences between the sets of data appear to be a
function of rounding and the inclusion of copper held in SHFE
warehouses as part of the liquid stock held in exchanges in the data
provided by the Sponsor of the iShares Trust.
The Sponsor asserts that ``[t]he large size of the total copper
market as compared to exchange inventories belies the assertion that
only exchange inventories will be available for creations into the
Trust.'' See id. In contrast, the commenter states that ``[e]xcept
for copper that may be stored in bonded warehouses in China, all
such copper is, as far as we know, subject to long-term supply
contracts and is `liquid,' only in the sense that it is en route to
fabricators around the world.'' V&F September 27 Letter, supra note
6, at 2. The Commission believes that it is plausible that some
portion of the estimated 923,895 metric tons of liquid copper
inventory identified by the Sponsor currently would be available for
authorized participants to use to create Shares.
\92\ See infra Section III.A.3.
\93\ The Commission drew the same conclusion regarding the size
of the JPM Copper Trust. See JPM Order, supra note 6, 77 FR 75468,
75476-77.
---------------------------------------------------------------------------

However, 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.\94\ 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.
---------------------------------------------------------------------------

\94\ See supra Section III.A.1.
---------------------------------------------------------------------------

3. Growth of the Trust
The commenter states 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) What the commenter characterizes as the Sponsor's stated desire to
remove enough copper from the market for copper available for immediate
delivery to cause an artificial rise in price and cover the monthly
costs of storage; (2) the commenter's view that there is a 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 iShares Trust, JPM Copper
Trust, and ETFS Physical Copper were announced.\95\ The 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.\96\ The commenter asserts that the Trust would
hold as much as 121,200 metric tons of copper if the Sponsor sells all
of the Shares it seeks to register pursuant to the Registration
Statement.\97\
---------------------------------------------------------------------------

\95\ See V&F August 24 Letter, supra note 6, at 20. ETFS
Physical Copper is a trust that holds copper under LME warrant; 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.
\96\ See V&F May 9 Letter, supra note 6, at 5. See also V&F
September 12 Letter, supra note 6, at 2 (``In the short term, any
resulting price appreciation from copper-backed ETF share owners
will not affect mine production and may minutely benefit refined
production, to the extent that higher copper prices encourage
additional scrap recovery and processing. The copper ETF is unlikely
to affect the supply of copper from copper refineries in a 0-12
month timeframe.''). The 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 6, at 28.
\97\ See V&F July 18 Letter, supra note 4, at 1.
---------------------------------------------------------------------------

The Sponsor argues that it is not possible to extrapolate the
ultimate size of the Trust from the number of Shares initially
registered because the Trust may not issue any Shares if it is
unsuccessful, or the Trust may need to file additional registration
statements if it is very successful.\98\ The Sponsor also argues that
prior experience of other existing commodity-based trusts contradicts
the commenter's assertions; \99\ specifically, the Sponsor states that
it took over two years to sell the shares initially registered for the
SPDR Gold Trust and ETFS Physical Platinum and one year to sell the
shares initially registered for the iShares Silver Trust.\100\
---------------------------------------------------------------------------

\98\ See BlackRock Letter, supra note 6, at 3.
\99\ See id.
\100\ See id. The Sponsor also notes that ETFS Physical
Palladium has yet to deplete the shares initially registered in
December 2009. See id.
---------------------------------------------------------------------------

As a preliminary matter, as the Sponsor pointed out, the commenter
appears 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.\101\ Accordingly, 12,120,000 issued Shares will correspond
to 121,200 metric tons of copper held by the Trust only if authorized
participants do not redeem any Shares.\102\ Based on the existence of
the arbitrage mechanism of the Trust,\103\ which is common to many
exchange-traded vehicles, the Commission believes it is very unlikely
that no Shares will be redeemed.
---------------------------------------------------------------------------

\101\ See Sections 5 and 6 of the Securities Act, 15 U.S.C. 77e
and 15 U.S.C. 77f, respectively.
\102\ The Commission drew a similar conclusion regarding the
size of the JPM Copper Trust. See JPM Order, supra note 6, 77 FR
75468, 75476 (``6,180,000 issued Shares will correspond with 61,800
metric tons of copper held by the [JPM Copper Trust] only if
authorized participants do not redeem any Shares'').
\103\ The 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, e.g., BlackRock
Letter, supra note 6, at 7 n.32.
---------------------------------------------------------------------------

The Commission believes that the amount of copper held by the Trust
will depend on investor demand for the Shares and the extent to which
authorized participants fulfill such demand by exchanging copper for
Baskets of Shares and do not redeem issued Shares. Investor demand for
the Shares is currently unknown. The Commission notes that ETFS
Physical Copper has not grown to a substantial size since its
inception.\104\
---------------------------------------------------------------------------

\104\ According to the 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 6, at 15.
---------------------------------------------------------------------------

The commenter also predicts that copper supply will not increase
fast enough to accommodate what he views as the new demand that will be
created by the Trust. The Commission believes that the commenter has
not provided evidence to support this projection. Data submitted by the
commenter provides that the global supply of refined copper has
increased every year since 2000--except 2002 and 2003--and in those
years where supply increased, in all but one year (2009), it increased
by more than the amount of copper that the commenter predicts the
iShares Trust and the JPM Copper Trust will hold collectively.\105\
Further, data provided by the commenter project that production will
increase through 2016 in amounts that also exceed--and in most years
greatly exceed--the amount of copper that the commenter predicts the
iShares Trust and the JPM Copper Trust will hold collectively.\106\
---------------------------------------------------------------------------

\105\ See id. at 2.
\106\ See id. (providing data indicating that global refined
copper production is projected to increase by 519,000 metric tons in
2012; 1,603,000 metric tons in 2013; 1,195,000 metric tons in 2014;
1,091,000 metric tons in 2015; and 375,000 metric tons in 2016).
---------------------------------------------------------------------------

As discussed above, the Commission believes that copper held by the
Trust will be available for immediate delivery.\107\ However, even
assuming that the Trust's copper will be unavailable for immediate
delivery, the Commission believes that the commenter has not supported
his predictions that the Trust will grow so quickly, and that the
supply of copper will not increase sufficiently, such that that the
Trust will significantly disrupt the supply of copper available for
immediate delivery.
---------------------------------------------------------------------------

\107\ See supra Section III.A.1.

---------------------------------------------------------------------------

[[Page 13734]]

4. Other Physical Commodity Trusts
The commenter admits that the introduction of commodity-based
trusts that hold other metals had virtually no impact on the available
supply, but asserts that these other metals--gold, silver, platinum,
and palladium--are fundamentally different because they have
traditionally been held for investment purposes and currently are used
as currency, and that, as a result, there were ample stored sources
available to fund commodity-based trusts overlying those metals.\108\
The commenter asserts 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, therefore, believes that the introduction of the Trust
would impact supply.\109\
---------------------------------------------------------------------------

\108\ See V&F May 9 Letter, supra note 6, at 2.
\109\ See V&F May 9 Letter, supra note 6, at 2-3. The Levin
Letter, which the commenter attached to the V&F July 18 Letter,
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
6, at 7.
---------------------------------------------------------------------------

In response, the Sponsor states that while gold is used primarily
as a currency equivalent and perhaps silver is as well, ``there is
little plausible reason to regard platinum and palladium as currency
equivalents in a manner that copper is not;'' \110\ the Sponsor states
that silver, platinum, and palladium are used primarily for industrial
purposes.\111\ The Sponsor also asserts that copper trading on the OTC
market and futures exchanges ``clearly demonstrates that copper is
utilized for investment purposes and is viewed by the investment
community as an investable asset.'' \112\
---------------------------------------------------------------------------

\110\ See BlackRock Letter, supra note 6, at 7.
\111\ See id. at 7-8.
\112\ See id. at 8. For example, the Sponsor cites data showing
that non-commercial market participants trading copper futures on
the COMEX accounted for, on average, 40% of total reported copper
positions in the first half of 2012, which the Sponsor suggests is
similar to the non-commercial market participation in the precious
metals markets. See id. at 8 n.35.
---------------------------------------------------------------------------

Given the industrial usage of silver, platinum, and palladium as
compared to copper,\113\ 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 the Commission's 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.
---------------------------------------------------------------------------

\113\ In the Order Instituting Proceedings, the Commission asked
for comment regarding how much gold, silver, platinum, and palladium
has been used for investment and industrial purposes in each of the
last 10 years. See Order Instituting Proceedings, supra note 5, 77
FR 48181, 48187. In response, the Sponsor stated that silver,
platinum, and palladium are used ``primarily for industrial
purposes.'' BlackRock Letter, supra note 6, at 7-8. The Sponsor also
provided data to support its contention that the investment
community regards copper--like gold, silver, platinum, and
palladium--as an investable asset. See id. While declining to
provide data regarding the industrial usage of silver, the commenter
presented evidence that gold, platinum, and palladium are put to
industrial use. See V&F August 24 Letter, supra note 6, at 18-19.
Further, in approving the listing and trading of shares of the JPM
Copper Trust, the Commission similarly noted the industrial use of
silver, platinum, and palladium. See JPM Order, supra note 6, 77 FR
75468, 75477.
---------------------------------------------------------------------------

B. The Trust's Impact on the Price of Copper

Due to what he predicts will be a rapid growth of the Trust, the
commenter believes a substantial portion of the supply of immediately
available LME-warranted copper would be removed from the market,\114\
which would drive up the price of copper.\115\ As noted above, the
commenter estimates that the iShares Trust, which would hold up to
121,200 metric tons of copper, and the JPM Copper Trust, which would
hold up to 61,800 metric tons of copper, collectively would hold
approximately 63% of the copper available in LME and COMEX warehouses,
which the commenter asserts is the only refined copper generally
available for immediate delivery.\116\ The commenter concludes that the
removal of so much copper from LME and COMEX warehouses will lead to
artificially inflated prices.\117\ The commenter also 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.'' \118\ The commenter further 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,\119\ and predicts that the price increases for
copper would be especially dramatic in the U.S., where copper currently
is relatively inexpensive.\120\ The commenter further argues that the
listing and trading of the Shares would ``risk endangering the price
discovery functions of the LME and [COMEX].'' \121\
---------------------------------------------------------------------------

\114\ See supra Section III.A.1.
\115\ See V&F May 9 Letter, supra note 6, at 5. See also V&F
September 12 Letter, supra note 6, at 4.
\116\ See V&F July 18 Letter, supra note 4, at 1.
\117\ See id. at 1-2.
\118\ See V&F August 24 Letter, supra note 6, at 7.
\119\ See id. at 16.
\120\ See V&F July 18 Letter, supra note 4, at 4.
\121\ See id. The commenter does not explain why he believes the
listing and trading of the Shares would endanger the price discovery
functions of the LME and COMEX.
---------------------------------------------------------------------------

In contrast, the Sponsor asserts that copper prices are a function
of demand and supply, as well as other factors, and that it would be
difficult to predict the impact of the introduction of an exchange-
traded vehicle backed by physical copper on copper prices given the
many variables that exist.\122\ The Sponsor argues that it is
impossible to predict demand for the Shares; the future behavior of
investors and copper market participants; the supply and demand
dynamics of the copper market outside of the Trust; or fundamental
economic factors that impact demand for copper.\123\ In addition, the
Sponsor asserts that data show that there is a weak correlation between
LME copper prices and global supply and demand balances.\124\ The
Sponsor also states its disagreement with contentions that any increase
in copper prices that results from the listing and trading in the
Shares will be especially dramatic in the U.S.\125\ According to the
Sponsor, ``[t]here exists widespread lack of consensus in the
marketplace regarding where authorized participants will have the most
ready access to copper and where an authorized participant will be
economically incentivized to deliver copper in connection with a
creation of Shares of the Trust.'' \126\
---------------------------------------------------------------------------

\122\ See BlackRock Letter, supra note 6, at 5.
\123\ See id.
\124\ See id. The Sponsor provided charts showing correlation
coefficients between monthly and annual changes in copper prices and
copper supply/demand balance. As discussed below, Commission staff
performed its own analyses to look for evidence of price impact
related to changes in copper inventory levels and fund flows. See
infra note 128.
\125\ See BlackRock Letter, supra note 6, at 5 n.26. See also
supra notes 91-93 and accompanying text (stating the Commission's
belief that there is significant uncertainty about the locations
from which copper will be purchased to create Shares).
\126\ See BlackRock Letter, supra note 6, at 5 n.26.
---------------------------------------------------------------------------

As discussed above,\127\ the Commission does not believe that the
listing and trading of the Shares is likely

[[Page 13735]]

to disrupt the supply of copper available for immediate delivery, which
is what the commenter predicts 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 Bid Price (or any
other price of copper).
---------------------------------------------------------------------------

\127\ See supra Section III.A.
---------------------------------------------------------------------------

To analyze the potential impact of changes in the LME inventory
level on changes in the LME Bid Price, Commission staff performed two
regression analyses.\128\ 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.\129\
---------------------------------------------------------------------------

\128\ 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.
\129\ 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. 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.\130\
---------------------------------------------------------------------------

\130\ See id. at 11.
---------------------------------------------------------------------------

Based on these analyses, even if the listing and trading of Shares
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 Bid 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.\131\
---------------------------------------------------------------------------

\131\ See id. The 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 6, 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.
---------------------------------------------------------------------------

Commission staff also performed Granger causality analyses\132\ 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 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.\133\
This analysis revealed no observable relation between the flow of
assets and subsequent price changes of the underlying metal
prices.\134\ Commission staff repeated this analysis on a daily
frequency for iShares Silver Trust, ETFS Platinum Trust, ETFS Physical
Palladium Shares, and ETFS Physical Copper.\135\ 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,\136\ 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 from that of the listing and trading of shares
of other commodity-based trusts due solely to the nature of the
underlying commodity markets.
---------------------------------------------------------------------------

\132\ 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 RF Analysis, supra note 128, at 3 n.9.
\133\ 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.
\134\ See id. at 4.
\135\ Daily asset data was not available for the SPDR Gold Trust
within the Commission's existing data sources.
\136\ See supra note 113.
---------------------------------------------------------------------------

In connection with the proposed rule change, the Commission
received one comment letter regarding the Commission staff's
analysis.\137\ This letter includes comments on both the substantive
conclusions reached as well as the methodology used. 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 commenter's contentions.
---------------------------------------------------------------------------

\137\ See V&F November 16 Letter, supra note 6.
---------------------------------------------------------------------------

The commenter states that the Granger causality analyses appear on
their face to be incongruous.\138\ The commenter asserts 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.\139\ 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.
---------------------------------------------------------------------------

\138\ See id.
\139\ See id. at 6-7.
---------------------------------------------------------------------------

The commenter also asserts that the Commission staff should have
examined alternative price variables in its analysis. The commenter
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.\140\ The commenter
states that if the iShares Trust and the JPM Copper Trust were to sell
all of the

[[Page 13736]]

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.'' \141\ The
analysis provided by the 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. Furthermore, an assessment of the statistical significance
of these results is not possible without knowing which alternative
tests of the hypothesis were also examined and reported. The commenter
did not provide any information about which alternative tests were
examined, if any. In addition, the 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 because such an analysis
cannot distinguish whether price changes lead to inventory changes or
vice versa.
---------------------------------------------------------------------------

\140\ See id. at 3.
\141\ 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 carry
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.
---------------------------------------------------------------------------

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,\142\ and believes that the
commenter has not supported its prediction that the Trust would grow so
quickly that it would significantly disrupt the supply of copper
available for immediate delivery.\143\
---------------------------------------------------------------------------

\142\ See supra Section III.A.
\143\ See supra Section III.A.3.
---------------------------------------------------------------------------

The commenter also states that Commission staff should have
considered the impact on locational premia.\144\ The 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).\145\ 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.\146\ The analysis provided by the commenter,
however, does not provide the significance level of any test statistics
associated with these findings.\147\ In addition, the 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, as
discussed previously.\148\ In addition, according to data provided by
the commenter, locational premia typically appear to be no greater than
2%.\149\ 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,\150\ which will limit the possible effect on locational
premia.
---------------------------------------------------------------------------

\144\ See V&F November 16 Letter, supra note 6, at 3, 5. The
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. The Trust will value its copper using the LME Bid
Price, and unlike the JPM Copper Trust, will not take into account
locational premia. See infra note 216.
\145\ See V&F November 16 Letter, supra note 6, at 3, 5.
\146\ See id.
\147\ See supra text following note 141.
\148\ See supra text following note 141.
\149\ See V&F August 24 Letter, supra note 6, at 11-12. The data
provided relates to locational premia for warehouses that would be
used to store copper held in the JPM Copper Trust, which are
different from the warehouses that would be used by the iShares
Trust. As the locational premia provided do not reflect all of the
cities in which the iShares Trust's warehouses will be located, the
Commission evaluated the data only to understand the significance of
locational premia as compared to copper prices.
\150\ See supra text accompanying note 94.
---------------------------------------------------------------------------

The commenter also believes that Commission staff erred by using
lagged daily LME stock data. The 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.'' \151\ 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.\152\ 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.\153\
---------------------------------------------------------------------------

\151\ See V&F November 16 Letter, supra note 6, at 2.
\152\ See id. at 5-6.
\153\ 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, the 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.'' \154\ According to the
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.'' \155\ This
assertion seems consistent with a hypothesis that price changes precede
inventory changes, which is contrary to the commenter's assertions that
inventory changes precede price changes.\156\ 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. In sum, 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.\157\
---------------------------------------------------------------------------

\154\ See V&F November 16 Letter, supra note 6, at 6.
\155\ See id. (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.'').
\156\ See supra notes 115-120 and accompanying text.
\157\ 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.

---------------------------------------------------------------------------

[[Page 13737]]

The 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%.\158\ 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 iShares Trust and the JPM 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.\159\
---------------------------------------------------------------------------

\158\ See V&F November 16 Letter, supra note 6, at 2.
\159\ See id.
---------------------------------------------------------------------------

The analysis provided by the commenter, however, does not provide
the significance level of any test statistics associated with these
findings.\160\ In addition, the 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.\161\ 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,\162\ and believes that the commenter has not supported his
prediction that the Trust would grow so quickly that it would
significantly disrupt the supply of copper available for immediate
delivery.\163\
---------------------------------------------------------------------------

\160\ See supra text following note 141.
\161\ See supra text following note 141.
\162\ See supra Section III.A.
\163\ See supra Section III.A.3.
---------------------------------------------------------------------------

Finally, the 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.\164\ The 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 the
commenter characterizes as ``an overly-simplistic ex-ante statistical
analysis of LME/global inventories and LME settlement prices.'' \165\
According to the 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.\166\ Further, while the 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,''
the commenter believes 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.'' \167\
---------------------------------------------------------------------------

\164\ See V&F November 16 Letter, supra note 6, at 3-4.
\165\ See id. at 4.
\166\ See id. at 3-4, 8.
\167\ 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. See
id. at 7. 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.'' See id. The commenter's
``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 \168\ 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.\169\
---------------------------------------------------------------------------

\168\ See supra Section III.A. Even assuming that the Trust's
copper will be unavailable for immediate delivery, the Commission
believes that the commenter has not supported his 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.
\169\ See supra text accompanying note 94.
---------------------------------------------------------------------------

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 commenter asserts that the successful creation and growth of
the Trust would make the price of copper, which the commenter states
already is volatile, even more volatile.\170\ Specifically, the
commenter asserts that the successful creation and growth of the Trust,
which the commenter believes would substantially restrict supply and
increase copper prices, would create a boom and bust cycle in copper
prices.\171\ The commenter predicts that this ultimate sell-off would
be quick, and 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.\172\
---------------------------------------------------------------------------

\170\ See V&F May 9 Letter, supra note 6, at 5.
\171\ See id. But see V&F November 16 Letter, supra note 6, 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). The commenter cites to a
statement in the Registration Statement to argue that the Sponsor
admits that this boom and bust cycle may occur. See V&F July 18
Letter, supra note 4, at 4 (citing Registration Statement, supra
note 15, at 10).
\172\ More specifically, the commenter 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 6,
at 28.
---------------------------------------------------------------------------

In contrast, the Sponsor asserts that it would be difficult to
predict the impact of the introduction of an exchange-traded vehicle
backed by physical copper on price volatility given that many variables
exist.\173\ The Sponsor asserts that the arguments presented in the
Levin Letter based on research reports and hearing testimony related to
futures and other derivative-based instruments do not demonstrate that
an exchange-traded vehicle backed by physical copper would contribute
to price volatility.\174\ Further, the Sponsor believes that ``the
physical-backed nature of the Trust may in fact reduce price volatility
as the Trust may take up excess supply during times when the market is
oversupplied and provide an inventory of metal ready for delivery

[[Page 13738]]

during times when the market is in a shortage.'' \175\
---------------------------------------------------------------------------

\173\ See BlackRock Letter, supra note 6, at 5. See also supra
text accompanying note 123 (discussing the Sponsor's view of the
variables that can impact price volatility).
\174\ See BlackRock Letter, supra note 6, at 5-6.
\175\ See id. at 6.
---------------------------------------------------------------------------

The commenter's prediction that the listing and trading of the
Shares would cause a boom and bust is premised upon both the supply and
price impacts he predicts. 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 \176\ or increase
the price of copper.\177\ 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 the commenter suggests.
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.
---------------------------------------------------------------------------

\176\ See supra Section III.A.
\177\ See supra Section III.B.
---------------------------------------------------------------------------

D. The Trust's Impact on the Potential to Manipulate the Price of
Copper

The commenter sets forth a number of arguments about why the Trust
would increase the potential for manipulation of the copper market. The
commenter 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.\178\ According to the 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.\179\ Therefore, the commenter argues that the increased
market transparency would not be in the public interest.\180\ 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.''
\181\
---------------------------------------------------------------------------

\178\ See V&F May 9 Letter, supra note 6, at 9-10.
\179\ See id. at 9.
\180\ See id. at 10.
\181\ See V&F July 13 Letter, supra note 6, at 10. The commenter
also states that anyone who knows that market participants are
buying LME warrants to create Shares could front-run the creation by
buying Shares on the Exchange and profit thereby. See V&F September
12 Letter, supra note 6, at 9. The profitability of such action
appears premised upon the commenter's belief that the creation of
Shares will cause the LME Bid Price, and correspondingly the price
of the Shares, to increase. 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, which
is what the commenter predicts would cause the price of copper to
increase. See supra Section III.B. With respect to other types of
front-running, the Exchange's surveillance program for the Trust,
which is designed in part to identify and deter manipulative
activity, is described in Section III.E.
---------------------------------------------------------------------------

The commenter also predicts that the Trust would make the copper
market more susceptible to squeezes and corners by reducing the supply
of copper available for immediate delivery.\182\ According to the
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.\183\ The Levin Letter,
which the commenter attached to the V&F July 18 Letter, also states
that 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.\184\
---------------------------------------------------------------------------

\182\ See V&F May 9 Letter, supra note 6, at 1, 10. The Levin
Letter, which the commenter attached to the V&F July 18 Letter,
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 6, 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 id. at 7.
\183\ See V&F September 10 Letter, supra note 6, at 7. The
commenter also suggests that mere launch of the Trust could create a
corner and squeeze given the relatively small amount of copper on
LME warrant.
\184\ See Levin Letter, supra note 6, at 7.
---------------------------------------------------------------------------

The Sponsor does not believe that the presence of the Trust would
increase the likelihood of market squeezes because in the Sponsor's
view: (1) market squeezes have been occurring in the markets since long
before the introduction of commodity-based trusts; (2) no evidence has
been presented to show that the introduction of the Trust will
contribute to a market squeeze; (3) current investors in the physical
copper markets, which the Sponsor expects will be the most likely
investors in the Trust, are not ```speculators in the guise of
purchasers' seeking to create a squeeze on the copper market;'' (4)
incremental demand from new investors will broaden the investor base in
copper, which could reduce the possibility of collusion among market
participants to manipulate the copper market; and (5) trading in the
Shares would be overseen by the Exchange and the Commission, while the
CFTC would police for manipulation in the underlying copper
market.\185\
---------------------------------------------------------------------------

\185\ See BlackRock Letter, supra note 6, at 6.
---------------------------------------------------------------------------

The Sponsor also identifies a number of features of the Trust
designed to meet the requirements of Section 6(b)(5) of the Act.\186\
Specifically, the Sponsor states that ``[t]he Trust offers complete
transparency through its Web site, where information on the Trust's
copper holdings as well as additional detailed data regarding the Trust
will be available.'' \187\ In addition, the Trust will provide daily
valuations of the Trust's copper based on that day's announced LME Bid
Price.\188\ The Sponsor also expects the Trust's arbitrage mechanism
will facilitate the correction between the Share price and the price of
the Trust's copper.\189\
---------------------------------------------------------------------------

\186\ 15 U.S.C. 78f(b)(5).
\187\ See BlackRock Letter, supra note 6, at 9. More
specifically, the Trust will disclose on its Web site: (1) for each
copper lot held by the Trust, the warehouse location, warehouse
identification number, lot number, net weight, and brand; and (2)
the order in which lots will be delivered to redeeming authorized
participants pursuant to the algorithm. See Amendment No. 2, supra
note 9. See also notes 27-28 and accompanying text (describing the
Trust's redemption procedure).
\188\ See BlackRock Letter, supra note 6, at 10.
\189\ See id.
---------------------------------------------------------------------------

The Sponsor also argues ``that the physical copper market is no
more susceptible to manipulation than other existing commodity markets,
particularly given the[] many layers of regulatory oversight.'' \190\
The Sponsor states that (1) trading in the Shares would be subject to
the oversight of both NYSE Arca and the Commission, and (2)
manipulation of physical copper would be subject to the oversight
jurisdiction and enforcement authority of the CFTC.\191\ The Sponsor
also asserts the introduction of exchange-traded vehicles backed by
other metals ``has not led to any credible evidence of an increase in
manipulation of the markets for their underlying metals.'' \192\
---------------------------------------------------------------------------

\190\ See id. at 6.
\191\ See id.
\192\ See id. While the commenter states that ``traders and
investors have sought to manipulate silver on at least two
occasions,'' the commenter does not identify any instances of
manipulation tied to exchange-trade vehicles. Nonetheless, the
commenter asserts that ``[f]undamentally the copper market is much
easier to manipulate'' based on its reasoning, discussed above. See
V&F September 12 Letter, supra note 6, at 8.

---------------------------------------------------------------------------

[[Page 13739]]

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.''
\193\ In this case, the Commission believes the transparency that the
Trust will provide with respect to its holdings,\194\ 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,\195\ all are expected to
help reduce the ability of market participants to manipulate the
physical copper market or the price of Shares.\196\ 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) \197\ may serve to make
the overall copper market more transparent if OTC trading of unreported
warehouse receipts shifts to trading Shares on exchanges.\198\ 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.\199\
---------------------------------------------------------------------------

\193\ See Securities Exchange Act Release No. 53521 (March 20,
2006), 71 FR 14967, 14975 (March 24, 2006) (approving the listing
and trading of shares of the iShares Silver Trust).
\194\ See supra note 187 and accompanying text.
\195\ See supra notes 31-36 and accompanying text.
\196\ Further, the Trust is a passive vehicle, and therefore the
commenter's concerns about manipulation by the Trust itself are
misplaced.
\197\ 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. 35637 (April 24, 1995), 60 FR
20891, 20891-92 (April 28, 1995) (adopting 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).
\198\ 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.
\199\ 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 commenter asserts that serious disruptions in the supply of
copper would make corners and squeezes more likely.\200\ 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.\201\ 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 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 warrants, and deliver the warrants.\202\ 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, the commenter has not 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.
---------------------------------------------------------------------------

\200\ See supra notes 182-184 and accompanying text.
\201\ See supra Section III.A. Similarly, the Commission has
recently stated that it does not believe that the listing and
trading of shares of the JPM Copper Trust is likely to disrupt the
supply of copper available for immediate delivery. See JPM Order,
supra note 6, 77 FR 75468, 75474.
\202\ See supra notes 80-82 and accompanying text.
---------------------------------------------------------------------------

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 the 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

The commenter questions whether NYSE Arca's surveillance procedures
are adequate to prevent fraudulent and manipulative trading in the
Shares. According to the 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.\203\
---------------------------------------------------------------------------

\203\ See V&F May 9 Letter, supra note 6, at 10.
---------------------------------------------------------------------------

NYSE Arca states that its surveillance procedures will be 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.\204\ In particular, the Exchange
represents the following:
---------------------------------------------------------------------------

\204\ See Notice, supra note 3, 77 FR at 38360. 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 7.
---------------------------------------------------------------------------

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

[[Page 13740]]

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 and the underlying copper, copper futures contracts, options on
copper futures, or any other copper derivative, through ETP Holders
acting as registered Market Makers, in connection with their
proprietary or customer trades that they effect on any relevant
market.\205\
---------------------------------------------------------------------------

\205\ See Notice, supra note 3, 77 FR at 38360. See also Arca
September 14 Letter, supra note 6, 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.\206\
---------------------------------------------------------------------------

\206\ See Amendment No. 1, supra note 7.
---------------------------------------------------------------------------

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.\207\
---------------------------------------------------------------------------

\207\ See id.
---------------------------------------------------------------------------

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).\208\
---------------------------------------------------------------------------

\208\ See Notice, supra note 3, 77 FR at 38360. See also Arca
September 14 Letter, supra note 6, at 3.
---------------------------------------------------------------------------

NYSE Arca may obtain trading information via ISG from
other exchanges that are members of the ISG, including the COMEX.\209\
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.\210\
---------------------------------------------------------------------------

\209\ See Notice, supra note 3, 77 FR at 38360.
\210\ See id.

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.\211\
---------------------------------------------------------------------------

\211\ See Arca September 14 Letter, supra note 6, 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.'').
---------------------------------------------------------------------------

In addition, NYSE Arca has obtained a representation from the
Sponsor that it will: (1) 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 (2) 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.\212\ 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.\213\
---------------------------------------------------------------------------

\212\ See Amendment No. 1, supra note 7.
\213\ Further, NYSE Arca represents that it can obtain
information about the activities of the Sponsor and its affiliates
under the Exchange's listing rules. See Amendment No. 1, supra note
7.
---------------------------------------------------------------------------

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.\214\ 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.\215\ 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.
---------------------------------------------------------------------------

\214\ 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 to increase the likelihood of manipulation
of the copper market and, correspondingly, of the price of the
Shares.
\215\ See Amendment No. 1, supra note 7.
---------------------------------------------------------------------------

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.\216\
---------------------------------------------------------------------------

\216\ See supra notes 193-198 and accompanying text. The
commenter asserts that, because the Trust will be valued using the
LME Bid Price without taking into account locational premia, under
certain circumstances, the NAV of the Trust may not be accurate. See
V&F September 12 Letter, supra note 6, at 7-8. The commenter asserts
that the values of LME-traded industrial metals are determined by
their location, and that the LME Bid Price is the value of copper at
the cheapest-to-deliver location. See id. The commenter predicts
that, if the Trust accumulates all of the metal from LME warehouses
in the cheapest-to-deliver location, then the cheapest-to-deliver
location will change, and correspondingly the LME Bid Price will be
based on a new location. See id. In that circumstance, the commenter
argues, there may be a significant divergence between the NAV of the
Trust and the actual value of the Trust's copper. See id. at 7-8.
The Sponsor states that the Trust does not assign locational
premia because any warrant, regardless of location, can be delivered
at the LME Bid Price, and further asserts that this valuation method
will allow an authorized participant to effectively reconcile its
position in copper. See BlackRock Letter, supra note 6, at 9.
The Commission believes that the use of the LME Bid Price to
value the Trust's copper may lead to a divergence between the NAV of
the Trust and the market value of the Trust's copper because the LME
Bid Price is used to value the Trust's copper and the Trust's copper
may not be in the cheapest-to-deliver location. The Commission does
not expect any possible divergence to cause any problems with
respect to trading in the Shares, and notes that the commenter did
not assert it would. The Commission believes that the degree of
divergence will be limited to the difference in the price of copper
held by the Trust and the price of copper at the cheapest-to-deliver
location. The Commission notes that the Trust will disclose on its
Web site the location, warehouse identification number, lot number,
net weight of the lot, and brand of each lot of copper it holds, as
well as the order in which all lots will be delivered to redeeming
authorized participants. See Amendment No. 2, supra note 9.
---------------------------------------------------------------------------

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.\217\ Additionally, as discussed above, the Exchange has identified
numerous sources of copper price information unconnected with the
Exchange that are readily available to

[[Page 13741]]

investors.\218\ 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.
---------------------------------------------------------------------------

\217\ See supra text accompanying notes 31-32.
\218\ See Notice, supra note 3, 77 FR at 38358-59.
---------------------------------------------------------------------------

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 will halt trading on the NYSE
Marketplace until such time as the NAV is available to all market
participants; \219\ 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 IIV is no longer made available on at least a
15-second delayed basis.\220\ 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.
---------------------------------------------------------------------------

\219\ See id. at 38359.
\220\ Additionally, the Exchange represents that it may halt
trading during the day in which an interruption to the dissemination
of the IIV occurs. If the interruption persists past the trading day
in which it occurred, the Exchange will halt trading no later than
the beginning of the of the trading day following the interruption.
See id.
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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.\221\ As discussed
above,\222\ 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.
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\221\ See id.
\222\ See supra note 199 and accompanying text.
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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,\223\ and the rules and regulations thereunder applicable to a
national securities exchange.\224\ In particular, the Commission finds
that the proposed rule change is consistent with Section 6(b)(5) of the
Act,\225\ 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,\226\ 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,\227\ 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.\228\
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\223\ 15 U.S.C. 78f.
\224\ This approval order is based on all of the Exchange's
representations.
\225\ 15 U.S.C. 78f(b)(5).
\226\ 15 U.S.C. 78f(b)(8).
\227\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
\228\ 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. See supra text accompanying notes 31-32.
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IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether Amendments No.1
and No. 2 to the proposed rule change are 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-2012-66 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-2012-66. 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-
66 and should be submitted on or before March 21, 2013.

V. Accelerated Approval of Proposed Rule Change as Modified by
Amendments No. 1 and No. 2

As discussed above, the Exchange submitted Amendment No. 1 to make
additional representations regarding the Exchange's surveillance
program,\229\ and

[[Page 13742]]

submitted Amendment No. 2 to supplement representations regarding Web
site disclosure of the Trust's copper holdings.\230\ The Commission
believes these additional representations are, among other things,
useful to help assure adequate information is available to the Exchange
to support its monitoring of Exchange trading of the Shares in all
trading sessions; to help the Exchange deter and detect violations of
NYSE Arca rules and applicable federal securities laws; and to help
assure adequate availability of information to support the arbitrage
mechanism. Accordingly, the Commission finds good cause, pursuant to
Section 19(b)(2) of the Act,\231\ for approving the proposed rule
change, as modified by Amendments No. 1 and No. 2, prior to the 30th
day after the date of publication of notice in the Federal Register.
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\229\ See supra note 7.
\230\ See supra note 9.
\231\ 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,\232\ that the proposed rule change (SR-NYSEArca-2012-66), as
modified by Amendments No. 1 and No. 2, be, and hereby is, approved on
an accelerated basis.
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\232\ 15 U.S.C. 78s(b)(2).

By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-04623 Filed 2-27-13; 8:45 am]
BILLING CODE 8011-01-P