Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change To List and Trade Shares of the JPM XF Physical Copper Trust Pursuant to NYSE Arca Equities Rule 8.201, 23772-23788 [2012-9528]
Download as PDF
<![CDATA[
23772
Federal Register / Vol. 77, No. 77 / Friday, April 20, 2012 / Notices
The revised tiers also would continue
to yield the other benefits discussed in
the Original Proposal, including
simplifying the existing Rule by
reducing the number of minimum
quotation tiers from nine tiers to six
tiers and requiring a round lot of one
hundred shares for all securities priced
at or above $1.00.17
FINRA is proposing that the proposed
rule change be implemented for all OTC
Equity Securities displayed on an interdealer quotation system on a pilot basis
for a period of one year from the
effective date. The effective date of the
minimum quotation size pilot will be
120 days from Commission approval.
FINRA will provide the Commission
with trading data, as necessary, to
evaluate the impact of the pilot.
III. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change, as amended by Amendment No.
1, is consistent with the Act. Comments
may be submitted by any of the
following methods:
tkelley on DSK3SPTVN1PROD with NOTICES
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–FINRA–2011–058 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–FINRA–2011–058. 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 (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
17 A round lot of 100 shares applies to most
NASDAQ and NYSE listed securities. The
Commission notes that those OTC Equity Securities
priced at or above $175 are proposed to have a
minimum quotation size that would equal the
round lot size applicable to those securities, which
is one share.
VerDate Mar<15>2010
18:17 Apr 19, 2012
Jkt 226001
proposed rule change 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 a.m. and 3 p.m. Copies of such filing
also will be available for inspection and
copying at the principal office of
FINRA. 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–FINRA–2011–058 and
should be submitted on or before May
7, 2012.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.18
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–9593 Filed 4–19–12; 8:45 am]
BILLING CODE 8011–01–P
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to list and
trade shares of JPM XF Physical Copper
Trust (the ‘‘Trust’’) pursuant to NYSE
Arca Equities Rule 8.201. The text of the
proposed rule change is available at the
Exchange, the Commission’s Public
Reference Room, and www.nyse.com.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–66816; File No. SR–
NYSEArca–2012–28]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing of Proposed
Rule Change To List and Trade Shares
of the JPM XF Physical Copper Trust
Pursuant to NYSE Arca Equities Rule
8.201
April 16, 2012.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on April 2,
2012, NYSE Arca, Inc. (the ‘‘Exchange’’
or ‘‘NYSE Arca’’) filed with the
Securities and Exchange Commission
(the ‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the self-regulatory organization. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
18 17
CFR 200.30–3(a)(57).
U.S.C.78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
1 15
PO 00000
Frm 00115
Fmt 4703
Sfmt 4703
The Exchange proposes to list and
trade JPM XF Physical Copper Shares
(‘‘Shares’’) of the Trust under NYSE
Arca Equities Rule 8.201. Under NYSE
Arca Equities Rule 8.201, the Exchange
may propose to list and/or trade
pursuant to unlisted trading privileges
(‘‘UTP’’) ‘‘Commodity-Based Trust
Shares.’’ 4 The Commission has
previously approved listing on the
Exchange under NYSE Arca Equities
Rule 8.201 of other issues of
Commodity-Based Trust Shares. The
Commission has approved listing on the
Exchange of the streetTRACKS Gold
Trust and iShares COMEX Gold Trust.5
The Commission also has approved
listing of the iShares Silver Trust on the
Exchange 6 and, previously, listing of
the iShares Silver Trust on the
4 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.
5 See Securities Exchange Act Release No. 56224
(August 8, 2007), 72 FR 45850 (August 15, 2007)
(SR–NYSEArca–2007–76) (approving listing on the
Exchange of the streetTRACKS Gold Trust);
Securities Exchange Act Release No. 56041 (July 11,
2007), 72 FR 39114 (July 17, 2007) (SR–NYSEArca–
2007–43) (order approving listing on the Exchange
of iShares COMEX Gold Trust).
6 See Securities Exchange Act Release Nos. 58956
(November 14, 2008), 73 FR 71074 (November 24,
2008) (SR–NYSEArca–2008–124) (approving listing
on the Exchange of the iShares Silver Trust).
E:\FR\FM\20APN1.SGM
20APN1
Federal Register / Vol. 77, No. 77 / Friday, April 20, 2012 / Notices
tkelley on DSK3SPTVN1PROD with NOTICES
American Stock Exchange LLC.7 In
addition, the Commission has approved
listing on the Exchange of the following
issues of Commodity-Based Trust
Shares: ETFS Silver Trust, the ETFS
Gold Trust, the ETFS Platinum Trust,
the ETFS Palladium Trust, the ETFS
Precious Metals Basket Trust, the ETFS
White Metals Basket Trust, and the
ETFS Asian Gold Trust.8
The Trust will issue Shares
representing units of fractional
undivided interest in and ownership of
the net assets of the Trust. The objective
of the Trust is for the value of the
Trust’s Shares to reflect, at any given
time, the value of copper owned by the
Trust at that time, less the Trust’s
expenses and liabilities at that time. 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.9
J.P. Morgan Commodity ETF Services
LLC is the sponsor of the Trust
(‘‘Sponsor’’), J.P. Morgan Treasury
Securities Services, a division of
JPMorgan Chase Bank, National
Association, is the administrative agent
of the Trust (‘‘Administrative Agent’’),
Wilmington Trust Company is the
trustee of the Trust (‘‘Trustee’’), and the
Henry Bath Group is the warehousekeeper of the Trust (‘‘Warehousekeeper’’).10 The Trustee will delegate to
7 See Securities Exchange Act Release No. 53521
(March 20, 2006), 71 FR 14967 (March 24, 2006)
(SR–Amex–2005–72) (approving listing on the
American Stock Exchange LLC of the iShares Silver
Trust).
8 See Securities Exchange Act Release Nos. 59781
(April 17, 2009), 74 FR 18771 (April 24, 2009) (SR–
NYSEArrca[sic]–2009–28) (order approving listing
on the Exchange of ETFS Silver Trust); 59895 (May
8, 2009), 74 FR 22993 (May 15, 2009) (SR–
NYSEArca–2009–40) (order approving listing on the
Exchange of ETFS Gold Trust); 61219 (December
22, 2009), 74 FR 68886 (December 29, 2009) (SR–
NYSEArca–2009–95) (order approving listing on the
Exchange of ETFS Platinum Trust); 61220
(December 22, 2009), 74 FR 68895 (December 29,
2009) (SR–NYSEArca–2009–94) (order approving
listing on the Exchange of ETFS Palladium Trust);
62692 (August 11, 2010), 75 FR 50789 (August 17,
2010) (SR–NYSEArca–2010–56) (order approving
listing on the Exchange of ETFS Precious Metals
Basket Trust); 62875 (September 9, 2010), 75 FR
56156 (September 15, 2010) (SR–NYSEArca–2010–
71) (order approving listing on the Exchange of
ETFS White Metals Basket Trust); 63464 (December
8, 2010), 75 FR 77926 (December 14, 2010)
(SR–NYSEArca–2010–95) (order approving listing
on the Exchange of ETFS Asian Gold Trust).
9 See the registration statement for the J.P. Morgan
Physical Copper Trust on Amendment No. 5 to
Form S–1, filed with the Commission on July 12,
2011 (No. 333–170085) (‘‘Registration Statement’’).
The descriptions of the Trust, the Shares and the
copper market contained herein are based, in part,
on the Registration Statement.
10 Each of Henry Bath & Son Limited, Henry Bath
LLC, Henry Bath Singapore Pte Limited, Henry Bath
Italia Sr1 and Henry Bath BV is a member of the
Henry Bath Group of companies and a wholly
VerDate Mar<15>2010
18:17 Apr 19, 2012
Jkt 226001
the Sponsor its duty and authority to
administer the Trust, as defined and
limited by the terms of the Trust’s
‘‘Trust Agreement’’. The Trust’s
valuation agent (‘‘Valuation Agent’’) is
Metal Bulletin Ltd., an independent,
third-party valuation agent that is not
affiliated with the Sponsor. 11
The Exchange represents that the
Shares satisfy the requirements of NYSE
Arca Equities Rule 8.201 and thereby
qualify for listing on the Exchange.12
According to the Registration
Statement, the Shares are intended to
constitute a simple and cost-effective
means of making an investment similar
to an investment in copper. Although
the Shares are not the exact equivalent
of an investment in copper, they
provide investors with an alternative
that allows a level of participation in the
copper market through the securities
market.
Overview of the Copper Industry
The Registration Statement provides a
summary of the copper industry by
looking at some of the key participants
and detailing the primary sources of
supply and demand in the market. It
also provides a description of the
typical path copper and its alloys take
from the mine to the customer.13
Copper Basics
According to the Registration
Statement, one of the main industrial
usages for copper is for the production
of cable, wire and electrical products for
both the electrical and building
industries. In the current market,
approximately three-quarters of copper
demand is for electrical purposes,
including power transmission and
generation, telecommunications and
electrical and electronic consumer and
industrial products. The construction
industry accounts for copper’s second
owned subsidiary of J.P. Morgan Ventures Energy
Corporation, and is an affiliate of the Sponsor.
11 The Valuation Agent is responsible for
calculating, on each Business Day (as defined below
in note 18, infra), the locational premium for each
permitted warehouse location (as discussed below),
which is used to determine the net asset value
(‘‘NAV’’) of the Trust and to make other
calculations relating to the Trust’s operations. The
‘‘locational premium’’ for a permitted warehouse
location is calculated as an amount expressed in
U.S. dollars that is equal to the average value of
copper per metric ton in such location minus the
London Metal Exchange (‘‘LME’’) settlement price
of copper on such Business Day.
12 With respect to application of Rule 10A–3 (17
CFR 240.10A–3) under the Act (15 U.S.C. 78a), the
Trust relies on the exemption contained in Rule
10A–3(c)(7).
13 Unless otherwise indicated, all market data
herein was published in December 2011 by Brook
Hunt, a wholly owned subsidiary of Wood
Mackenzie that has provided such data to the
Sponsor for an annual subscription fee.
PO 00000
Frm 00116
Fmt 4703
Sfmt 4703
23773
largest usage demand in such areas as
pipes for plumbing, heating and
ventilating as well as building wire and
sheet metal facings. Alloyed with other
metals, such as zinc (to form brass),
aluminum or tin (to form bronzes), or
nickel, it can acquire new
characteristics for use in highly
specialized applications. Copper’s
physical, chemical and aesthetic
properties make it a material of choice
in a wide range of electrical, electronics
and communication, construction,
transportation, industrial machinery
and equipment and general consumer
applications, such as coins and keys.
Copper by-products from manufacturing
and obsolete copper products are
readily recycled and contribute
significantly to copper supply.
Market Participants
The participants in the world copper
market may be classified in the
following sectors: Primary and
secondary producers; fabricators,
manufacturers and end-use consumers;
the banking sector; and the investment
sector. A brief description of each
follows.
Primary and Secondary Producers.
Primary and secondary producers are
generally the market participants that
bring physical copper supplies to the
market. This sector is primarily
comprised of mining companies that
specialize in copper production, metal
processors, such as refiners and
smelters, and scrap recyclers.
Fabricators, Manufacturers and Enduse Consumers. Consumption of
extracted resources typically occurs in
two phases. Refined copper supplies in
various grades and forms are initially
demanded by fabricators that convert
unwrought metals to salable ‘‘semifabricated’’ products such as wire,
tubing and plates. These semi-fabricated
products are available for consumption
by other fabricators and/or
manufacturers to further upgrade the
copper product until the material is
ultimately converted into a final
saleable product (such as keys, coins
and air conditioning unit parts).
Banking Sector. Banks provide a
variety of services to the copper market
and its participants, thereby facilitating
interactions between other parties.
Services provided by the banking
community include traditional banking
products as well as mine financing (both
secured and unsecured), physical
copper purchases and sales, hedging
and risk management and inventory
management for industrial users and
consumers.
Investment Sector. The investment
sector includes professional and private
E:\FR\FM\20APN1.SGM
20APN1
23774
Federal Register / Vol. 77, No. 77 / Friday, April 20, 2012 / Notices
investors and speculators who are
involved in investment and trading
activities related to copper. Participants
range from large hedge funds and other
investment vehicles to day-traders on
futures exchanges.
Copper Supply Process
Copper supply generally comes from
two sources: (1) The extraction and
processing of copper ore (referred to as
‘‘primary production’’) and (2) the
recovery of copper from existing stock
(referred to as either ‘‘secondary
copper’’ or ‘‘copper scrap’’). Primary
production accounts for the majority of
new global copper supply. However, in
developed countries with significant
amounts of copper already in use or in
the supply chain, secondary copper
provides a significant portion of new
supply.
Primary Copper Production
According to data provided to the
Sponsor by Brook Hunt, primary mine
production in 2011 is expected to have
reached 16.279 million metric tons, a
modest 0.53% increase from 2010. That
primary production has grown only
modestly in spite of extremely high
copper prices may reflect, to some
degree, the entrenched inelasticity of
supply, as old mines continue to face
‘‘head grade’’ decline (i.e., a decreasing
percentage of copper content in copper
ores, due to factors such as good quality
copper sources already being exploited)
and new mine projects encounter
production delays. There appears,
however, to be no shortage of
underlying copper resources. For
example, the United States Geological
Service estimates that current reserves—
both proven and probable—amount to
around 690 million metric tons (source:
U.S. Geological Survey published as of
January 2012). In addition, measured or
inferred resources may become
economically viable for extraction to the
extent that financiers, geologists and
surveyors increase their estimate for
long-term copper prices.
According to the Registration
Statement and information provided by
the Sponsor, copper mine supply in
2005 to 2011 faced a number of
constraints. Many existing mines are
struggling to meet targets and, with only
a few notable exceptions, new projects
and project upgrades are subject to
delay, with geo-technical issues being a
major inhibiting factor. In addition to
disruptions to existing operations,
supply growth is dependent on further
exploitation of copper reserves
concentrated primarily in Africa and
Latin America. Latin American
production is dominated by Chile,
which is the world’s largest copper
producer and has the largest proven
reserve base of economically viable
copper deposits in the world (source:
U.S. Geological Survey). Reliable and
cost-effective power and clean water
availability represent two large hurdles
to new primary production in Chile.
Outside of Chile, Peru remains one of
South America’s prospective regions
and is affected by many of the same
inhibiting factors to new production as
Chile. In Africa, the two most
prospective countries are Zambia and
the Democratic Republic of Congo,
whose combined production is
approximately 86.6% of the continent’s
2011 copper mine supply. Both nations
have been inconsistent suppliers of
copper since the mid-1970s due to
political and social instability causing
supply risks, including sovereign risk,
threat of asset expropriation, ownership
disputes over certain large mines and
limited infrastructure.
Secondary Copper Production
Copper and copper alloys have been
recycled for hundreds of years and
secondary copper remains a major
source of supply in developed
economies. The copper and copper alloy
industries rely on the fact that copper
scrap is easily and economically used
and reused. Depending on its quality
and other factors, copper scrap can be
refined and converted back into cathode
form for further use, directly melted to
produce semi-fabricated products or
used in primary production as a cooling
additive during the smelting process.
Copper Consumption
As highlighted above, copper has
many uses. From copper derived from
primary and secondary production,
fabricators produce semi-fabricated
products, such as copper wire, copper
alloys, tube products, rods, bars,
section, plate, sheets and strips, for
various applications. For example, tube
products have many applications,
including plumbing, heating,
vacuuming and air conditioning. Copper
wire accounted for 55% of total copper
fabrication in 2011.
Global copper consumption in 2011 is
estimated to have measured 19.931
million metric tons, an increase of
approximately 3.5% from 2010. By
market sector, copper is equally exposed
to construction and electrical and
electronic applications (each 33% of
total demand in 2010). In 2010,
significant other sources of demand
included industrial machinery (13%),
transportation (13%) and consumer
products (8%).
The combination of a Western
economic recovery and ongoing robust
demand in emerging markets is
expected to result in growth of global
copper demand of close to 3.7% in
2012. According to projections by Brook
Hunt, copper demand is likely to
measure 20.67 million metric tons in
2012 (excluding the direct use of
secondary copper by semi-fabricators).
Current projections for total copper
consumption in 2012 are at about 25.8
million metric tons, a number inclusive
of refined copper from primary and
secondary production and the direct use
of secondary copper in the fabrication
sector.
World Copper Production and
Consumption 2000–2011 (in Metric
Tons)
The following table sets forth a
summary of world copper production
and consumption from 2000 to 2011.14
2000
tkelley on DSK3SPTVN1PROD with NOTICES
Production15
Electro-Refined Copper
...............
SX/EW Production16 .........................................
Refined Copper Production ...............................
Europe Consumption ........................................
Americas Consumption .....................................
China Consumption ...........................................
Japan Consumption ..........................................
Other Consumption ...........................................
Refined Copper Consumption (1) .....................
Refined Metal Balance ......................................
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
12552
2291
14844
4584
3281
1850
1349
4096
15160
¥316
13118
2538
15656
4539
2859
2230
1145
4010
14783
873
12733
2619
15351
4437
2644
2425
1164
4224
14894
457
12601
2676
15277
4498
2497
3020
1202
4358
15575
¥298
13277
2658
15935
4736
2712
3565
1279
4729
17021
¥1086
13951
2644
16595
4607
2549
3815
1256
4730
16957
¥362
14540
2755
17296
5023
2395
3967
1307
4792
17484
¥188
15035
2990
18025
4787
2307
4670
1268
4949
17981
44
15189
3071
18260
4482
2188
5100
1199
4960
17929
331
15017
3289
18306
3536
1764
6375
876
4750
17301
1005
15703
3309
19012
3861
1897
7204
1060
5242
19264
¥252
16293
3401
19694
3994
1957
7780
1038
5162
19931
¥237
14 Please note that the figures may not add up to
equal the totals listed due to independent rounding.
VerDate Mar<15>2010
18:17 Apr 19, 2012
Jkt 226001
PO 00000
Frm 00117
Fmt 4703
Sfmt 4703
E:\FR\FM\20APN1.SGM
20APN1
Federal Register / Vol. 77, No. 77 / Friday, April 20, 2012 / Notices
The Global Copper Market
Theglobal market in copper consists
of (i) trading within the physical copper
market and (ii) financial trading,
through either (a) the exchange-traded
futures and options market or (b) the
over-the-counter (‘‘OTC’’) market. Each
of these is described below in further
detail.
tkelley on DSK3SPTVN1PROD with NOTICES
The Physical Copper Market
Copper, like any other good or
merchandise, is traded between
producers (such as mining companies
and refiners), consumers (such as
fabricators and manufacturers) and/or
merchants. Mining companies sell their
present or future production to refiners
and smelters that transform the metal
into shapes or alloys, so that fabricators
and manufacturers can then transform
these into different end-use products.
Copper is used in many different
industrial processes, which makes its
location relative to consumption
demand important, especially given its
bulk and the cost of transportation. The
source of copper (i.e., mine location and
smelters/refineries) is also actively
tracked by buyers, including fabricators
and consumers, and affects buying
behavior. Buyers may require copper
from very specific sources because both
the physical shape and chemical
composition must match the setup of
their respective production facilities or
fabrication needs. Copper supply chains
need to be actively managed on a
continuous basis because of fluctuating
demand in the market.
Depending on the timing of physical
delivery, the price of copper is usually
either a function of the cash price
(specifically, the settlement price, plus
15 Copper is extracted from copper sulfide ores
using a multi-step production process. First, a
‘‘mine production’’ process is used to extract the
metal. Then, the metal ore is separated from the
waste. The ore is subsequently crushed and placed
in flotation cells with chemical reagents, and, using
a process called froth flotation, a material
commonly known as ‘‘copper in concentrate’’ is
extracted. Copper in concentrate is a mixture of
about 25–35% copper (the rest being various other
metals and impurities). The copper in concentrate
then undergoes a ‘‘smelter production,’’ through
which the copper is processed under high heat (or
‘‘smelted’’) to remove impurities, such as iron,
sulfur and oxygen. Finally, the copper is chemically
leached through an electro-refining process
(‘‘electro-refined copper production’’), whereby
copper is placed into a bath of sulfuric acid and
then an electric current is used to move the copper
out of the solution onto a stainless steel sheet (an
‘‘anode’’). This is repeated until the steel sheets are
covered in copper in cathode form.
16 Copper is extracted from copper oxide ores
using a chemical leaching process called solvent
extraction and electrowinning (‘‘SX/EW
production’’), a process which involves dissolving
copper into a soluble liquid such as acid, from
which the copper is later recovered as copper plates
(‘‘cathodes’’).
VerDate Mar<15>2010
18:17 Apr 19, 2012
Jkt 226001
any contractually agreed upon
locational premium, if applicable) for
the present day or the relevant forward
price for future days. The settlement
price is the price utilized in a trade for
physical delivery of copper assuming
that delivery occurs two business days
after the price is agreed upon, while a
forward price is employed when the
delivery is agreed to take place at a
specific time in the future. The LME
provides the global benchmark prices
for the settlement price and forward
prices of Grade A Copper. The LME
settlement price and three-month
forward price of Grade A Copper are the
most widely used benchmarks for daily
prices of physical copper held in
bonded, customs and duties free zones
and traded in the international physical
copper market, and are published by
various financial information sources.
Unless otherwise specified, the term
‘‘copper,’’ as used in the Registration
Statement, always refers to Grade A
Copper and the ‘‘settlement price’’ or
‘‘LME settlement price’’ of copper 17
always refers to the official cash sellers
price per metric ton in U.S. dollars of
Grade A Copper as quoted on the LME
for a particular Business Day.18
According to the Registration
Statement, in addition to the settlement
price or forward prices, in order to
obtain copper of a specific brand that is
stored at a specific location, consumers
are prepared to pay an additional
locational premium. As discussed
further in ‘‘Locational Premia for
Copper’’ below, these locational premia
17 The ‘‘LME settlement price’’ or ‘‘settlement
price’’ is, with respect to any Business Day, the
official cash sellers price per metric ton of Grade
A Copper on the LME, stated in U.S. dollars, as
determined by the LME at the end of the morning’s
second ring session (12:35 p.m. London time) for
copper on each day that the LME is open for
trading. The LME settlement price is made publicly
available in real-time through third-party vendors
such as Bloomberg and Reuters (on Bloomberg, it
is currently displayed on Bloomberg page
‘‘LOCADY <comdty>’’). It is also made publicly
available on a delayed basis on the LME’s Web site
at approximately 10 p.m. London time.
18 With respect to the submission of creation and
redemption orders and the processing of such
orders, and the calculation of NAV, a ‘‘Business
Day’’ is a day that the Exchange is open for regular
trading and that is not a holiday in London,
England. With respect to the delivery of Creation
Units of Shares in connection with creations or
redemptions, a ‘‘Business Day’’ is a day that the
Exchange is open for regular trading, without regard
to London holidays. For example, if in a particular
week Tuesday is a London holiday but not an
Exchange holiday, a creation or redemption order
that is placed on Monday will require Shares to be
delivered on Thursday. If in a particular week
Tuesday is an Exchange holiday but not a London
holiday, a creation or redemption order that is
placed on Monday will require Shares to be
delivered on Friday. In either case, creation and
redemption orders would not be accepted on
Tuesday.
PO 00000
Frm 00118
Fmt 4703
Sfmt 4703
23775
are based on various supply and
demand factors, for example, freight
rates, time to transport and relative
pricing power of the producers versus
consumers, which in turn is reflective of
available sources of copper. A location
that is low in supply and high in
demand will generally carry a higher
locational premium than a location
where supply is high and demand is
low. Supply contracts between physical
market participants are generally annual
contracts under which the locational
premium is fixed for the period of the
contract while the spot or forward price
is floating and only fixed at the point of
delivery. This approach ensures that the
physical aspects of the contract are fixed
in order to provide both producers and
consumers certainty but leaves both
parties exposed to price risk. This price
risk is managed independently by both
producers and consumers through
positions either on futures exchanges or
in OTC markets.
The Sponsor represents that,
according to the Valuation Agent, on
December 30, 2011, the average
locational premium per metric ton in
the physical copper market in the
permitted warehouse locations (as
discussed in ‘‘Description of the Trust’’
below) ranged from approximately
$10.00 to $120.54 over an LME
settlement price of $7,554.00; in
percentage terms, the average premium
ranged from 0.1203% to 1.4308% of the
LME settlement price.
Futures Exchanges
The role of a commodity futures
exchange is to facilitate and make
transparent the process of determining
commodity prices. According to the
Registration Statement, a majority of
copper trading occurs on three
commodity exchanges: The LME,
COMEX (a division of CME Group, Inc.)
and the Shanghai Futures Exchange
(‘‘SHFE’’).19 LME members are regulated
by the Financial Services Authority
(‘‘FSA’’), the regulator of the financial
services industry in the UK (as
discussed below under ‘‘The London
Metal Exchange’’). COMEX is regulated
19 According to data sourced from Bloomberg,
copper futures volume on COMEX for 2011 was
10,222,548 contracts. As of December 30, 2011,
COMEX open interest for copper was 120,988
contracts. Copper futures volume on SHFE for 2011
was 40,833,743 contracts. As of December 30, 2011,
SHFE open interest for copper was 429,582
contracts. Copper futures volume on LME for 2011
was 34,503,680 contracts. As of December 30, 2011,
LME open interest for copper was 448,161
contracts. Turnover (described as the number of
contracts traded in a year multiplied by the number
of metric tons per contract) in the calendar year of
2011 for the LME, COMEX and SHFE was 863
million metric tons, 141.4 million metric tons and
204 million metric tons, respectively.
E:\FR\FM\20APN1.SGM
20APN1
23776
Federal Register / Vol. 77, No. 77 / Friday, April 20, 2012 / Notices
by the U.S. Commodity Futures Trading
Commission (‘‘CFTC’’) under the
Commodity Exchange Act.20 The SHFE
is regulated by the Chinese Securities
Regulatory Commission.
Futures prices are settled by bid and
offer, reflecting the market’s perception
of supply and demand of a commodity
on a particular day. On the LME, copper
is traded in 25 metric ton lots and
quoted in U.S. dollars per metric ton.
On COMEX, copper is traded in lots of
25,000 pounds and quoted in U.S. cents
per pound. On the SHFE, copper is
traded in lots of five metric tons and
quoted in Chinese renminbi per metric
ton. At present, Chinese regulations
stipulate that only companies or
organizations organized and registered
in China or Chinese citizens are allowed
to participate in trading on the SHFE.
Exchanges provide for the trading of
futures and options contracts. These
contracts allow producers and
consumers to fix a price in the future,
thus providing the consumers a hedge
against price variations. Producers and
consumers often seek to manage their
price risk by taking long or short
positions on the futures exchange. The
participation of investors, who are ready
to buy the risk of price variation in
exchange for potential monetary reward,
increases liquidity in the market. A
futures or options contract defines the
standard of the product, the size of the
lot, delivery dates and other aspects
related to the trading process. Contracts
are unique for each exchange. The
existence of futures contracts also
allows producers and their clients to
agree on different price settling
arrangements to accommodate different
interests.
Over-the-Counter Contracts
tkelley on DSK3SPTVN1PROD with NOTICES
OTC contracts are principal-toprincipal agreements traded and
negotiated privately between two
principal parties, without going through
an exchange or intermediary. Unlike
exchange contracts, OTC contracts can
be customized to the counterparty’s
individual exposures (e.g., through
changes to the standardized contract
terms in areas such as settlement dates,
settlement process, strike, spot or
averaging settlement calculations,
underlying currency exposures and
contract size).21 OTC contracts can also
20 7
U.S.C. 1 et seq.
to the Registration Statement, the
Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010, passed [sic] on July 21,
2010, will impose mandatory clearing, exchangetrading, margin and disclosure requirements on
many derivatives transactions for certain
participants in the U.S. market, including formerly
unregulated OTC derivatives. The Commission, the
21 According
VerDate Mar<15>2010
18:17 Apr 19, 2012
Jkt 226001
be structured similarly to exchange
contracts such that they are ‘‘lookalikes’’ to underlying exchange
contracts. In other words, OTC contracts
can contain the same economic terms as
exchange contracts, although they are
not registered with an exchange and are
settled bilaterally between the parties to
the contract. At present, a central
clearing counterparty does not stand
between OTC counterparties for the
purpose of insulating counterparties
from default losses. The underlying
price risk of OTC contracts is
determined bilaterally, between a dealer
or a market maker, acting as a
counterparty, and another trading
counterparty, which may be a
consumer, producer or another dealer.
Such OTC transactions can be
documented using negotiated terms and
references that suit the parties to the
contract. These can be the same as the
terms and references of exchange
contracts (the ‘‘terms of business’’) or
documentation provided by the
International Swaps and Derivatives
Association, Inc.
The London Metal Exchange
According to the Registration
Statement, the most significant copper
futures exchange is the LME. The LME
was founded to trade copper in 1877
and later added the trading of additional
metals. The LME is a principal-toprincipal market where only eligible
organizations or ‘‘members’’ are able to
participate directly in trading. Through
its members, the LME offers its clients,
who represent all aspects of the physical
industry, the opportunity to ‘‘hedge’’
their price risk and therefore gain
protection from future adverse price
movements. Within the membership
structure, there are a number of
categories of membership, and each
category provides for a different level of
activity. For example, the trading and
clearing members can provide their
clients with access to the market, its risk
management tools and the LME’s
delivery mechanism.
Trading between members takes place
across three trading platforms: Through
open-outcry trading in the ‘‘Ring,’’
through an inter-office telephone market
and through LMEselect, the LME’s
electronic trading platform. The LME is
a member-owned organization, and
membership is open to all companies
that meet the relevant criteria as
described in the LME’s rules and
regulations. Membership categories are
CFTC, the Federal Reserve and other regulators are
currently engaged in rulemaking to determine and
clarify the details of these requirements.
PO 00000
Frm 00119
Fmt 4703
Sfmt 4703
generally divided between broker
members and trade members.
Category 1 members are ‘‘Ring Dealing
Members,’’ currently including twelve
entities, which are entitled to trade in
the Ring, on LMEselect and by
telephone. They may operate a 24-hour
market by trading through the interoffice telephone market. All Ring
Dealing Members are also members of
LCH.Clearnet and hence are entitled to
clear all transactions with other
LCH.Clearnet members through the
independent clearing house. The twelve
Ring Dealing members of the LME are:
Amalgamated Metal Trading Limited,
Barclays Capital, ED & F Man
Commodity Advisers Limited, INTL
FCStone (Europe) Ltd., J.P. Morgan
Securities Ltd., MAREX Financial
Limited, Metdist Trading Ltd, Natixis
Commodity Markets Limited, Newedge
´ ´ ´ ´
Group (U.K. Branch), Societe Generale,
Sucden Financial Limited, and Triland
Metals Ltd.
Category 2 members are ‘‘Associate
Broker Clearing Members,’’ currently
including 26 entities, which have all the
trading rights of the Ring Dealing
Members, except that they may not
trade in the Ring. As members of
LCH.Clearnet, they also have the
capacity to clear all transactions with
other LCH.Clearnet members through
the independent clearing house.
Category 3 members are ‘‘Associate
Trade Clearing Members,’’ currently
including two entities, which cannot
issue client contracts or trade in the
Ring. They are typically industrial users
of the market that are able to clear their
own transactions through LCH.Clearnet.
Category 4 members are ‘‘Associate
Broker Members,’’ currently including
seven entities, which can issue
exchange contracts but are not members
of LCH.Clearnet and hence cannot make
use of its clearing services. They may
not trade in the Ring, nor directly on
LMEselect, and instead trade through
the 24-hour inter-office telephone
market.
Category 5 members, ‘‘Associate
Trade Members,’’ have no trading rights
on the LME except as clients. Associate
Trade Members are typically industrial
and financial companies with an
interest in the base metals market.
According to the Registration
Statement, the LME provides a
transparent forum for the trading of
exchange contracts. As a result of this
daily trading, prices are ‘‘discovered’’
and published by the LME. The prices
are then used by the international
physical industry as the basis of price
negotiations for the physical purchase
or sale of base metals. As discussed
above, the LME provides global
E:\FR\FM\20APN1.SGM
20APN1
tkelley on DSK3SPTVN1PROD with NOTICES
Federal Register / Vol. 77, No. 77 / Friday, April 20, 2012 / Notices
benchmark prices by publishing the
settlement price and three-month
forward price of Grade A Copper. Price
discovery (i.e., the process of
establishing these official prices), as
well as a significant portion of the
trading volume on the LME, is
conducted during regular London
trading hours by open-outcry among the
twelve Ring Dealing Members in the
Ring, a circular area in which the LME
Ring Dealing Members trade.
Open outcry is the oldest and most
popular way of trading on the LME and
consists of a morning session and an
afternoon session, in which each of the
different metal contracts traded on the
LME is traded in a five-minute ring
session for each contract, and after a
five-minute interval break, the series is
repeated. The second ring session in the
morning session is integral to setting the
cash buyer price, the cash seller price
(i.e., the settlement price) and threemonth seller price (which is a threemonth forward price) for Grade A
Copper. At the end of this ring session,
the LME determines official prices for
these contracts from the last bid and
offer prices, before the bell is sounded
to signal the session’s end. Ring prices
are disseminated around the world in
real time.
According to the Registration
Statement, the LME is required by
statute to ensure that business on its
markets is conducted in an orderly and
transparent manner, providing proper
protection to investors and persons
looking to manage risk. Regulation of
the market is largely carried out by the
LME, while the FSA, the regulator of the
financial services industry in the United
Kingdom, is responsible for regulating
the financial soundness and conduct of
the business conducted by LME
members. The FSA was given rulemaking, enforcement, and regulatory
powers by the Financial Services and
Markets Act 2000 (the ‘‘FSM Act’’). The
FSA was granted this authority to fulfill
four statutory objectives: (1) Market
confidence, (2) financial stability, (3)
consumer protection, and (4) reduction
of financial crime. The LME is approved
as a Recognised Investment Exchange,
and, in conformance with U.K. and
other international regulatory
requirements, the LME offers, through
price, volume transparency and audit
trails, a forum for the trading of base
metals, including by providing rules for
arbitration proceedings. LME members
also operate in a strict regulatory
environment overseen by the FSA.
The LME and its members are also
subject to regulatory controls and input
from various U.K. government bodies
and offices, as well as directives from
VerDate Mar<15>2010
18:17 Apr 19, 2012
Jkt 226001
the European Union Commission. In
international trading, rules applied by
overseas regulatory bodies, such as the
CFTC, are also taken into account.
LME Warrants
According to the Registration
Statement, all contracts registered with
the LME are executed on the basis of
physical settlement by delivery. In order
to effectuate such physical delivery, the
LME members are obligated to deliver
base metal against LME futures
contracts in the form of LME warrants.
An ‘‘LME warrant’’ is a bearer document
evidencing the right of the holder to
possession of a specified lot of metal at
a specified LME warehouse location. It
is the right of the seller of the futures
contract to select the LME warrant it
will deliver to the buyer of the futures
contract. LME warrants are tradable in
their own right in the OTC market. The
holder of each LME warrant bears the
rental payments for storage of the
underlying copper in an LME-approved
warehouse location, as well as the risk
of any changes to the value of the LME
warrant due to the physical variance of
the underlying copper and any changes
in the locational premium or rent. The
system for recording all pertinent
information regarding LME warrants is
called LME Sword and is controlled by
the LME as part of its custody and
clearing operations. The LME publishes,
as a matter of public record (in the form
of daily stock reports), the number of,
and tonnage associated with, LME
warrants (including cancelled LME
warrants for which copper has yet to be
delivered out of the relevant LME
warehouse), as well as other relevant
information, such as holding reports.
The LME has become a primary source
of information regarding the physical
demand and supply for specific metals,
such as copper. This is because of the
perception that it is a ‘‘market of last
resort’’ for participants to sell excess
stock in times of oversupply or as a
source of material in times of extreme
shortage.
Physical Variance of Copper
The LME trades, promotes and
maintains the standards of quality,
shape and weight of Grade A Copper, a
commonly accepted standardized form
of copper cathode. Grade A Copper
currently must conform to the standard
BS EN 1978:1998 (Cu-CATH-1). This
standard specifies the allowed source,
shape and chemical composition of the
cathode. Most copper cathodes are
99.95% to 99.99% pure copper. The
chemical composition, and impurities,
in the cathode depend largely on the
source of the copper and whether the
PO 00000
Frm 00120
Fmt 4703
Sfmt 4703
23777
metal has been processed from copper
sulfide ore or copper oxide ore. Copper
oxides have a smaller number of
residual chemical elements in the
cathode.
As discussed further below, all copper
delivered to the LME that underlies an
LME warrant must be of an acceptable
weight (with each LME warrant
representing one lot of copper),
Acceptable Delivery Brand (as defined
below) and acceptable chemical
composition (i.e., Grade A Copper) and
must be stored in an LME-approved
warehouse.
Each cathode varies in size and
weight, depending on the refining
process. Cathodes are aggregated into
‘‘lots’’ of 25 metric tons each, which is
the standard weight of the physical
metal underlying each LME futures
contract traded through the LME
clearing system and futures market.
Each LME futures contract provides for
the delivery of one lot of copper (i.e., 25
metric tons), and upon the settlement of
an LME futures contract, a person can
satisfy the futures contract’s physical
delivery requirement with the delivery
of one LME warrant representing one lot
of copper. Because all physical
substances vary in weight, the LME
Rules and Regulations (the ‘‘LME
Rules’’) provide for a tolerance of plus
or minus 2% in the weight of a lot of
copper as represented by an LME
warrant.
Similarly, the physical copper market
also trades most copper based on a 25
metric ton lot and has also adopted the
standard tolerance of plus or minus 2%
in the weight of a lot of copper as set
by the LME Rules. In practice, this
means that one lot of copper in the
physical market generally uses tolerance
levels similar to the levels applied by
the LME of plus or minus 2% in weight.
Therefore, any transaction in physical
copper, including a transaction by the
Trust, will need to account for such
physical tolerances.
Acceptable Delivery Brands and Good
Delivery Standards
Each lot of physical copper has a
specific brand that is specific to one
refiner. A lot of copper always has a
single brand, and there is no
commingling of brands within an
individual lot.
The LME oversees the registration
process for each refinery seeking to
register its brand of copper as an
acceptable delivery brand for LME
registered transactions. Copper cannot
be represented by LME warrants unless
the source refinery has had its brand
registered with the LME (an
‘‘Acceptable Delivery Brand’’).
E:\FR\FM\20APN1.SGM
20APN1
tkelley on DSK3SPTVN1PROD with NOTICES
23778
Federal Register / Vol. 77, No. 77 / Friday, April 20, 2012 / Notices
Currently, there are 79 brands that are
Acceptable Delivery Brands. Some
refineries have more than one smelting
and refining process, so a refinery may
register more than one brand, reflecting,
among other factors, the different
chemical composition, size, origins and
bundling of the copper cathodes. The
country with the largest number of
Acceptable Delivery Brands is Chile,
which has 22 Acceptable Delivery
Brands, followed by Japan, which has 9
Acceptable Delivery Brands.
The LME has the authority to deregister brands from the LME from time
to time. This decision is generally made
by the LME, on the recommendation of
the LME’s Copper Committee, when an
Acceptable Delivery Brand ceases to
have a proper tradable market, for
example upon a merger of the refiner
that causes the brand to be subsumed
into the surviving entity’s product line,
upon closure of the refinery or specific
mining source or due to other
commercial reasons. An Acceptable
Delivery Brand may be de-registered
after the issuance of a notice to LME
members and other market participants
indicating that (i) no further deliveries
of such brand will be accepted for LME
warranting as of a stated effective date
and (ii) once the stocks of such brand in
the LME system are exhausted, the
brand will be delisted and such copper
will no longer constitute good delivery
against LME Grade A Copper contracts.
The LME attempts to make this process
occur in an orderly fashion with
sufficient notice to the market.
Acceptable Delivery Brands, deregistered brands and unregistered
brands of copper are traded actively in
the physical copper market. If a deregistered or unregistered brand has a
relationship to an Acceptable Delivery
Brand (e.g., a brand is de-registered and
phased out due to the merger of the
refiner, whose copper product is now
registered under a different Acceptable
Delivery Brand) it is generally traded in
the physical copper market at a slight
discount to the LME price. Generally,
copper that is not of an Acceptable
Delivery Brand is worth less than
copper that is of an Acceptable Delivery
Brand because of the perceived lower
liquidity associated with that brand of
metal.
The Trust will accept only copper of
an Acceptable Delivery Brand in
connection with the creation of Shares.
Warehousing of Copper
The warehousing of copper can
generally be divided into two primary
systems: the LME-approved
warehousing system (i.e., for LME
warrants) and the warehousing of
VerDate Mar<15>2010
18:17 Apr 19, 2012
Jkt 226001
copper for the physical market (i.e., any
copper delivered outside of systems or
exchanges like the LME).
Copper represented by an LME
warrant may be stored only in an LMEapproved warehouse. Each LMEapproved warehouse must comply with
the LME Rules related to road, rail and
water access to the specific warehouse.
LME-approved warehouses are required
to be in bonded, customs- and dutiesfree zones within a jurisdiction and the
LME Rules set certain requirements,
such as mandatory inspections carried
out by the LME, to ensure that LMEregistered metal is accepted, processed
and stored in accordance with the LME
Rules. The LME sets the maximum
storage and delivery fees a warehouse
can charge for the delivery of LMEregistered metal into or out of an LMEapproved warehouse. Additionally, the
LME sets a maximum daily rent charge
(per metric ton) and the rental payment
schedule for LME-registered metal
stored in an LME-approved warehouse.
Warehouse rental rates as of April 2012
will range from 39 to 41 cents per metric
ton per day, with annual payment in
advance due on March 31 of each
calendar year. As a result, LME
Warrants generally trade in between
these payment dates, inclusive of
accrued rent. Warehouse rental charges
are typically revised annually, generally
in April or May of each calendar year.
According to the Registration
Statement, in contrast to the LMEapproved warehousing system,
warehousing in the physical copper
market is not subject to regulations like
the LME Rules, although it has
developed links, locations and standard
practices similar to those used by LMEapproved warehouses. These
warehouses can be established in
bonded, customs- and duties-free zones
within a country (as with LMEapproved warehouses), or alternatively
located in jurisdictions where the
movement of metal is subject to customs
and duties charges. Rental rates for the
storage of non-LME registered copper
are agreed upon on a bilateral basis
between the warehouse-keeper and the
contracting party.
An LME-approved warehouse can
reside within the same location as a
non-LME-approved warehouse. In
addition, LME-approved warehouses
may hold copper that is not registered
with the LME (i.e., not underlying the
issuance of an LME warrant), although
the relevant warehouse is obligated to
identify, record and store copper not
registered with the LME separately from
any copper registered with the LME.
Such metal is not subject to LME
supervision or the LME Rules. Copper
PO 00000
Frm 00121
Fmt 4703
Sfmt 4703
held by the Trust can be stored by the
Warehouse-keeper in both LMEapproved and non-LME-approved
warehouses and is not subject to
regulation by the LME. All warehouse
locations for the Trust will be in
bonded, customs- and duties-free zones.
For the avoidance of doubt, the Trust
will only hold physical copper, not LME
warrants.
Locational Premia for Copper
As noted above, copper is bulky
relative to precious metals such as gold,
silver, platinum and palladium. Copper
is used in many different industrial
processes, which makes its location
relative to the place of consumption
important, especially given its bulk
relative to its monetary value. The
settlement price of copper determined
on the LME is based on a theoretical
‘‘cheapest-to-deliver’’ LME warrant of
copper in the LME system (that is, the
LME warrant of copper with the lowest
locational premium) because
determining which copper will be
delivered is the right of the seller. In
other words, the settlement price is
determined by the Ring Dealing
Members relative to a theoretical
‘‘cheapest-to-deliver’’ lot because each
transaction requires only the delivery of
an LME warrant representing a lot of
copper in any LME-approved
warehouse. By virtue of market forces,
any LME dealer required to deliver
copper will always, if possible, deliver
the LME warrant representing the
‘‘cheapest-to-deliver’’ LME warrant of
copper it owns.
LME warrants in the OTC market (i.e.,
not used for the settlement of LME
registered transactions) may trade at a
price that is different from the LME
settlement price. Depending on the
location and the brand associated with
a particular LME warrant, the relevant
premium will differ in amount,
reflecting the supply and demand
dynamics of the specific location and
brand of copper underlying that LME
warrant.
Within the physical copper market,
there is a similar dynamic, with the
result that copper trades at a locational
premium (or discount) to the settlement
price, depending on the grade, brand
and location of the copper and the terms
of delivery (which are often based on
the International Commercial Terms, an
internationally recognized standard
used in contracts for the sale of goods
also referred to as the Incoterms®). All
other pricing variables being equal (if
copper is consistently the same grade
(e.g., Grade A Copper), the same brand
(e.g., an Acceptable Delivery Brand) and
delivered under the same International
E:\FR\FM\20APN1.SGM
20APN1
Federal Register / Vol. 77, No. 77 / Friday, April 20, 2012 / Notices
tkelley on DSK3SPTVN1PROD with NOTICES
Commercial Terms (e.g., same inwarehouse insurance, transportation
and/or delivery costs paid, as well as
similar pre-entry customs, duties and
taxes)), differences in locational premia
can reflect various supply and demand
factors, such as the relative pricing
power of the producers versus the
consumers. Currently, warehouse
locations in Asia, such as Singapore,
Malaysia and South Korea, due to their
proximity to China, carry the highest
locational premia over the LME
settlement price. Fundamentally, copper
that is stored in a location that is low
in supply and high in demand will carry
a higher premium than copper that is
stored in a location where supply is
generally high and demand is low.
The Trust will hold only copper and
will not trade in copper futures
contracts on the LME, COMEX, the
SHFE or any other futures exchange.
The Trust will not buy, sell or hold LME
Warrants. Rather, the Trust will take
delivery of copper in the form of Grade
A Copper. According to the Registration
Statement, the Trust will not be
regulated by the CFTC under the
Commodity Exchange Act as a
‘‘commodity pool,’’ and the Sponsor is
not subject to regulation by the CFTC as
a commodity pool operator or a
commodity trading advisor. Investors in
the Trust will not receive the regulatory
protections afforded to investors in
regulated commodity pools, nor may the
LME, COMEX, the SHFE or any futures
exchange enforce its rules with respect
to the Trust’s activities.
Description of the Trust
The Trust will invest in Grade A
copper in physical form. All copper
owned by the Trust will be of an
Acceptable Delivery Brand at the time
such copper enters the Trust. The Trust
will store copper in warehouses that are
maintained by the Warehouse-keeper.
Initially, the permitted warehouse
locations are in the Netherlands
(Rotterdam), Singapore (Singapore),
South Korea (Busan and Gwangyang),
China (Shanghai) and the United States
(Baltimore, Chicago and New Orleans).
Although the Trust may hold copper in
warehouses in any of these locations (or
other locations that may be determined
from time to time), the locations at
which copper is actually held will
depend on (i) the warehouse locations at
which Authorized Participants have
actually delivered copper to the Trust
and (ii) the warehouse locations from
which copper is or has been delivered
pursuant to the Trust’s redemption
procedures.
As discussed in ‘‘The Physical Copper
Market’’ above, copper at different
VerDate Mar<15>2010
18:17 Apr 19, 2012
Jkt 226001
warehouse locations will trade with
different locational premia, based on
supply and demand factors (for
example, freight rates, insurance costs,
time to transport and the relative pricing
power of the producers versus
consumers). The Trust’s Selection
Protocol, which is described in
‘‘Selection Protocol’’ below, is designed
to ensure that the Trust will always
deliver copper first from the warehouse
where it holds available copper that has
the lowest locational premium at a
particular time, referred to in the
Registration Statement as the ‘‘cheapestto-deliver location.’’ The cheapest-todeliver location is determined on each
Business Day of the Trust by the
Valuation Agent independently in its
sole discretion, using the same
procedure applied by the Valuation
Agent to determine the locational
premium of each warehouse location
where the Trust holds copper.
The Valuation Agent will be
responsible for (i) calculating the
locational premia used to calculate the
Trust’s NAV and in certain other
calculations by the Administrative
Agent and (ii) determining whether the
cheapest-to-deliver location has
changed. The locational premium for a
warehouse location for a Business Day
will be calculated as an amount
expressed in U.S. dollars that is equal to
the average value of copper per metric
ton in such location minus the LME
settlement price of copper on such
Business Day.
The Valuation Agent will calculate
the average value of copper per metric
ton in a location through a combination
of (i) a weighted calculation (based on
tonnage) of actual transactions and (ii)
the indicative prices of market makers.
Data will be collected primarily by
phone, but also by email and by direct
submission. In order to avoid any actual
or potential conflict of interest, or
perception of a conflict, the Valuation
Agent will exclude any information
provided by any JPMorgan-affiliated
entity when calculating the locational
premium of copper in any permitted
warehouse location. The Valuation
Agent will record details regarding its
contacts for reference and internal audit
purposes.
When the Valuation Agent collects
information on actual transactions for
use in calculating locational premia, the
Valuation Agent will generally request
full details regarding such transactions,
including price, material specifications,
transaction size, delivery point and
terms, payment details and other
factors, all of which may inform the
Valuation Agent’s assessment of the
value of the underlying transaction. If a
PO 00000
Frm 00122
Fmt 4703
Sfmt 4703
23779
particular transaction involves a
significantly higher or lower price than
other comparable transactions, the
Valuation Agent may request proof of
the transaction price, and if such
information is not provided, the price
may be excluded from the assessment.
Where possible, the Valuation Agent
will seek to confirm details with the
parties on both sides of a transaction.
The Valuation Agent is expected to
conduct its polling process for each
permitted warehouse location of the
Trust for each day that is a regular
Business Day in such location; if a day
is not a regular Business Day in a
permitted warehouse location, the last
calculated locational premium will be
used. The Valuation Agent will use a
combination of actual and indicative
transaction prices from market
participants. The number of market
participants that provide information
will vary.
In calculating the locational premia,
the Valuation Agent will determine in
its discretion the relative weights that it
will give to actual transactions as
compared to indicative prices. The
Valuation Agent may vary the relative
weights of the components based on the
level of physical activity on a particular
Business Day as well as other factors.
The use of both actual transaction
information and indicative pricing
information is intended to allow
continuity of pricing and up-to-date
market quotes for periods when
physical activity has declined.
Pursuant to the Valuation Agreement,
the Valuation Agent has made
numerous commitments to ensure the
integrity and objectivity of the
locational premia:
• The Valuation Agent will not make
any locational premia publicly available
prior to the time such information is
provided to the Trust, the Sponsor and
the Administrative Agent on any
Business Day.
• The Valuation Agent will maintain
books and records relating to its
valuations for at least ten years from the
end of the period to which they relate,
and will allow an independent third
party to inspect such books and records
upon reasonable notice.
• The Valuation Agent will at all
times maintain written policies and
procedures reasonably designed to:
(i) Prevent any violation of applicable
law, including without limitation the
Securities Act, the Exchange Act and
the Commodity Exchange Act, in
connection with its provision of services
under the Valuation Agreement; and
(ii) Ensure the Valuation Agent’s
compliance with, and prevent violations
of, the Valuation Agreement.
E:\FR\FM\20APN1.SGM
20APN1
tkelley on DSK3SPTVN1PROD with NOTICES
23780
Federal Register / Vol. 77, No. 77 / Friday, April 20, 2012 / Notices
• The Valuation Agent will designate
a chief compliance officer who is
responsible for administering the
Compliance Policies and Procedures.
The chief compliance officer must:
(i) Review on an ongoing basis the
adequacy of the Compliance Policies
and Procedures and the effectiveness of
their implementation;
(ii) Provide a report to the Sponsor, at
least annually, on the adequacy of the
Compliance Policies and Procedures
and the effectiveness of their
implementation; and
(iii) Report promptly to the Sponsor
(A) any violation of the Compliance
Policies and Procedures and (B) any
material weakness or inadequacy in the
Compliance Policies and Procedures
and the steps taken or to be taken to
remedy any such weakness.
• The Valuation Agent must provide
to the Sponsor:
(i) For each fiscal year of the Trust,
within 30 days of the end of such fiscal
year, a certification that (A) during such
fiscal year the Valuation Agent has
complied with the terms and conditions
of the Valuation Agreement and its
valuation methodology and (B) the
Valuation Agent’s representations and
warranties in the Valuation Agreement
continue to be materially true and
correct;
(ii) For each calendar quarter, reports
or certifications requested by the
Sponsor relating to the valuation data,
valuation methodology and related
services; and
(iii) Such other reports or
certifications at such other times as the
Sponsor may reasonably request from
time to time in response to an
articulated, identifiable concern,
including reports or certifications
required to be delivered to a
governmental agency or regulatory
body.
• The Valuation Agent may not
purchase or sell, and must instruct its
officers, directors, employees and agents
not to purchase or sell, any securities of
the Trust or futures, options or other
derivative instruments on securities of
the Trust, and must maintain
compliance policies and procedures
reasonably designed to promote and
monitor compliance with such
instruction by the foregoing persons.
• The Valuation Agent must take
specific security measures when
collecting, storing, processing, archiving
and disposing of information used to
derive locational premia.
The Sponsor has represented that it
believes that the Valuation Agent’s
independence, valuation methodology
and other commitments will ensure the
integrity and objectivity of the pricing
VerDate Mar<15>2010
18:17 Apr 19, 2012
Jkt 226001
information, and that such pricing
information, together with the
procedures for transparency and public
availability of information set forth
below, will produce a robust arbitrage
mechanism that will (i) align the
secondary market price per Share to the
NAV per Share and (ii) facilitate having
creation and redemptions occur at a
value close to the NAV per Share.
The Sponsor has further represented
that, because the Trust will create and
redeem Shares based solely on a weight
of copper, rather than a price of copper
(as described below), the locational
premia will be used primarily for (i)
informational purposes, such as
calculating intraday indicative values
that are published in order to facilitate
arbitrage activity, and (ii) making other
determinations, such as whether and
when copper will be sold in order to
pay the Trust’s expenses, that bear little
relationship to creation and redemption
activity.
Daily Operations of the Trust
According to the Registration
Statement, on each Business Day, after
4 p.m. Eastern Time (‘‘E.T.’’) (unless
otherwise indicated below), the
following activities, each of which is
described in more detail below, will be
taken by or on behalf of the Trust, in the
order indicated:
• First, if the Valuation Agent has
determined and informed the
Administrative Agent by 5 p.m. London
time on any such Business Day, that the
cheapest-to-deliver location has
changed, the Administrative Agent and
the Warehouse-keeper will follow the
procedures described in the Registration
Statement relating to a change in the
cheapest-to-deliver location.
• Second, the Administrative Agent
will (A) process any creation orders
successively, in the order that they were
submitted in completed form to the
Administrative Agent, (B) instruct the
Warehouse-keeper to give effect to
changes in the ownership of copper as
a result of processing any such creation
orders and (C) cause the Trust to create
Shares to effect any such creation
orders.
• Third, the Administrative Agent
will (A) process any redemption orders
successively, in the order that they were
submitted in completed form to the
Administrative Agent, (B) instruct the
Warehouse-keeper to give effect to
changes in the ownership of copper as
a result of processing any such
redemption orders and (C) cause the
Trust to redeem Shares to effect any
such redemption orders.
• Fourth, the Administrative Agent
will calculate the Trust’s NAV, NAV per
PO 00000
Frm 00123
Fmt 4703
Sfmt 4703
Share, Creation Unit Ratio and Creation
Unit Weight effective for the next
Business Day.
• Fifth, if the Trust’s procedure for
paying the Sponsor’s fee (as described
in the Registration Statement) requires
copper to be transferred on such
Business Day, the Administrative Agent
will instruct the Warehouse-keeper to
effectuate a book-entry transfer of the
ownership of such copper to the
Sponsor for payment of any accrued
unpaid Sponsor’s fee.
• Sixth, if the Trust’s procedure for
paying Other Expenses 22 (as discussed
in the Registration Statement) requires
copper to be transferred on such
Business Day, the Administrative Agent
will instruct the Warehouse-keeper to
effectuate the book-entry transfer of
such copper from the Trust to the
Sponsor for sale and the application of
the proceeds toward payment of accrued
unpaid Other Expenses.
Creations and Redemptions of Shares
Shares of the Trust are created when
an Authorized Participant transfers
copper having a weight equal to the
Creation Unit Weight (as described
below) to the Trust and the Trust, in
return for such copper, delivers a
Creation Unit of Shares to the
Authorized Participant.23 Shares of the
Trust are redeemed when an Authorized
Participant transfers a Creation Unit of
Shares to the Trust and the Trust, in
return for such Shares, delivers copper
having a weight equal to the Creation
22 ‘‘Other Expenses’’ are expenses of the Trust
other than the Sponsor’s fee.
23 To be an Authorized Participant, a person
must: (i) Be a registered broker-dealer or other
securities market participant such as a bank or other
financial institution that is not required to register
as a broker-dealer to engage in securities
transactions; (ii) be a participant in DTC; (iii) have
entered into, or had its agent enter into on its
behalf, an Authorized Participant Warehouse
Agreement with the Warehouse-keeper establishing
the Authorized Participant’s Reserve Account and
Private Account; (iv) have entered into an
Authorized Participant Agreement with the Sponsor
on behalf of the Trust, which among other things
grants express authority to the Administrative
Agent to instruct the Warehouse-keeper to transfer
whole lots and/or fractional lots of copper
(including creation overweight and creation
underweight amounts of copper associated with any
creation order and redemption underweight
amounts of copper associated with any redemption
order) between the Trust Account and such
Authorized Participant’s Private Account and
Reserve Account; and (v) have delivered at least
25.0 metric tons of copper to the Warehouse-keeper
at a permitted warehouse location of the Trust to
establish its Reserve Account (and thereafter
maintain at least 15.0 metric tons of copper in its
Reserve Account at any permitted warehouse
location of the Trust). In general, in order to create
Shares, an Authorized Participant must own copper
that is held in a permitted warehouse location of
the Warehouse-keeper prior to the submission of a
creation order.
E:\FR\FM\20APN1.SGM
20APN1
Federal Register / Vol. 77, No. 77 / Friday, April 20, 2012 / Notices
Unit Weight to the Authorized
Participant.24
A Creation Unit of Shares is a block
of 2,500 Shares. The Creation Unit
Weight for a particular day is equal to
25.0 metric tons multiplied by the
Creation Unit Ratio in effect for such
day. The Creation Unit Ratio is initially
equal to 1.0, but declines gradually over
time, reflecting the payment of expenses
by the Trust. As a result, the Creation
Unit Weight will decline gradually over
time as well. The Creation Unit Weight
and Creation Unit Ratio in effect on any
Business Day will have been calculated
on the prior Business Day, after the
calculation of the Trust’s NAV on such
Business Day.25
Holding and Transferring Copper in
Whole Lots and Fractional Lots
tkelley on DSK3SPTVN1PROD with NOTICES
In connection with a creation order or
a redemption order, an Authorized
Participant must transfer to the Trust, or
the Trust must transfer to the
Authorized Participant, as applicable,
copper having an aggregate weight equal
to the number of Creation Units being
created or redeemed, multiplied by the
Creation Unit Weight in effect for such
day. The copper that the Trust holds
normally trades in standardized lots,
each of which weighs between 24.5
metric tons and 25.5 metric tons. These
lots (referred to in the Registration
Statement as ‘‘whole lots’’) will not be
physically divisible in connection with
the Trust’s activities, and consequently
the exact weight of copper required for
a creation or a redemption generally
24 Creation orders submitted to the
Administrative Agent must contain the following
information: (i) The number of Creation Units
expected to be created; (ii) the amount of the
transaction fee due for such creation order; (iii) the
warehouse location for each whole lot proposed to
be transferred to the Trust; (iv) the specific
identification number for each whole lot proposed
to be transferred to the Trust; (v) the exact weight,
expressed in metric tons, of each whole lot
proposed to be transferred to the Trust; and (vi) the
brand of each whole lot to be transferred to the
Trust, which must be an Acceptable Delivery
Brand. Creation orders will be given effect in the
order accepted by the Administrative Agent, after
the implementation of any change in the cheapestto-deliver location on a particular Business Day, but
before giving effect to any redemptions or the
payment of any accrued unpaid Sponsor’s fee or
accrued unpaid Other Expenses on such Business
Day. The amount of copper required to be
transferred from the Authorized Participant to the
Trust Account will be determined using the
Creation Unit Ratio calculated on the immediately
prior Business Day. All weights will be calculated
to the nearest 0.001 metric ton.
25 References in the Registration Statement to the
‘‘weight’’ of copper refer to the net weight of copper
in metric tons. This means, with respect to any lot,
the weight of the actual copper in the lot and does
not include the weight of any bindings, straps,
wooden platforms (pallets), or of any temporary or
permanent storage mechanisms.
VerDate Mar<15>2010
18:17 Apr 19, 2012
Jkt 226001
cannot be transferred using only whole
lots.
As a result, the creation and
redemption of shares in the manner
contemplated by the Trust’s operations
requires a means of owning and
transferring not only whole lots of
copper, but also ‘‘fractional lots,’’ i.e.,
interests that represent a fractional
portion of a whole lot, in order to
resolve any overweight amounts or
underweight amounts.
Therefore, the Warehouse-keeper will
establish and utilize a book-entry
procedure to record ownership by the
Trust, the Sponsor or an Authorized
Participant of specific whole and
fractional lots of copper held in the
warehouse locations. The Warehousekeeper’s book-entry system will use
three different types of accounts,
referred to in the Registration Statement
as the Trust Account,26 the Reserve
Accounts 27 and the Private Accounts.28
26 The Warehouse-keeper will maintain a bookentry account at each warehouse location to record
all of the copper that is owned by the Trust.
Collectively, such book-entry accounts are referred
to as the ‘‘Trust Account.’’ The Trust’s ownership
of whole lots and fractional lots of copper will be
recorded in the Trust Account. Copper that is
transferred to the Trust in connection with creation
orders will be recorded by the Warehouse-keeper,
upon instruction from the Administrative Agent, as
an addition to the Trust Account, and copper that
is transferred from the Trust in connection with
redemption orders or the payment of Trust
expenses will be recorded by the Warehousekeeper, upon instruction from the Administrative
Agent, as a removal from the Trust Account. In
consideration for its Sponsor’s Fee, the Sponsor
will pay all expenses associated with the storage of
copper owned by the Trust and recorded in the
Trust Account, including both whole and fractional
lots.
27 The Warehouse-keeper will maintain at each
warehouse location a book-entry account to record
the private ownership interest in copper held by an
Authorized Participant at such warehouse location.
These book-entry accounts with respect to an
Authorized Participant are collectively referred to
herein as the ‘‘Reserve Account’’ of such
Authorized Participant. A Reserve Account serves
two primary purposes. First, in order to reduce the
risk that creation orders will fail as a result of an
insufficient amount of copper being transferred
from an Authorized Participant’s Private Account
(as discussed below) to the Trust in connection
with a creation order, each Authorized Participant
will be required to hold an excess amount of copper
that meets a minimum requirement in order to
satisfy any underweight amounts remaining from a
creation order. This copper will be held in the
Reserve Account so that it is separately identifiable
from the copper owned by the same Authorized
Participant through its Private Account. Second, a
Reserve Account will be used to record any
fractional lot of copper that an Authorized
Participant may hold at a warehouse location as a
result of the processing of creation or redemption
orders. A fractional lot can be created when the
weight of copper needed to create or redeem a
Creation Unit of Shares is more or less than the
weight of the whole lots of copper delivered.
28 The Warehouse-keeper will maintain at each
warehouse location book-entry accounts to record
the private ownership interest in copper held by
each of the Sponsor and each Authorized
PO 00000
Frm 00124
Fmt 4703
Sfmt 4703
23781
The Warehouse-keeper will record in
these accounts the warehouse receipts it
issues representing the ownership of
specific whole and fractional lots of
copper by the Trust, the Sponsor and
each Authorized Participant. An
overview of each of these types of
accounts and the operation of the
accounts in connection with creations
and redemptions of Creation Units is
described further in the Registration
Statement.
Selection Protocol
The operation of the Trust requires
the Administrative Agent to follow a
prescribed procedure to identify specific
lots of copper to be used for (i) the
reconciliation of any creation
overweight and creation underweight
amounts when the Trust issues Creation
Units of Shares; (ii) the satisfaction of
any redemption orders accepted on any
Business Day; (iii) the reconciliation of
any redemption underweight amounts
when the Trust redeems Creation Units
of Shares; (iv) the calculation and
payment of Trust expenses; and (v) the
reallocation of ownership interests in
copper to the extent required in
connection with a change in the
cheapest-to-deliver location, as
described in the Registration Statement.
The ‘‘Selection Protocol’’ is the
procedure used by the Administrative
Agent whenever it needs to select lots
for these purposes.
The Selection Protocol is intended to
provide a consistent and transparent
method of selecting lots, by requiring
the Administrative Agent to select lots
in the following manner:
• Lots will be selected first from the
cheapest-to-deliver location, and then
from other warehouse locations
successively based on a ranking of their
respective locational premia from
lowest to highest.
• If there are multiple lots in the same
warehouse location specified by the first
step, lots in such warehouse location
will be selected based on the date such
lots were first delivered to the relevant
account, with the earliest delivered lot
being selected first.
• If there are multiple lots in the same
warehouse location that were first
delivered to the relevant account on the
Participant, as applicable. These book-entry
accounts of the Sponsor or an Authorized
Participant, as applicable, are collectively referred
to herein for any single owner as the ‘‘Private
Account’’ of such owner. As part of a creation or
redemption, an Authorized Participant will use its
Private Account to facilitate movements of copper
between itself and the Trust. Each Authorized
Participant or the Sponsor can add or remove
copper from its respective Private Account by
adding copper to, or removing copper from, a
warehouse location.
E:\FR\FM\20APN1.SGM
20APN1
23782
Federal Register / Vol. 77, No. 77 / Friday, April 20, 2012 / Notices
same date, lots will be selected based on
the actual weight of the lot, with the lot
having the lowest actual weight being
selected first.
The Sponsor represents that, in
addition to providing an objective
selection protocol, these selection
methods make it more likely that
‘‘older’’ lots of copper will be redeemed
and potentially used for industrial
purposes rather than held indefinitely
by the Trust.
Creation of Shares
In connection with any creation order
on any Business Day, an Authorized
Participant will be required to transfer
to the Trust copper having an aggregate
weight equal to the number of Creation
Units being created multiplied by the
Creation Unit Weight in effect for such
Business Day. When an Authorized
Participant submits a creation order it
must specify, among other things, the
specific whole lot(s) in its Private
Account to be transferred to the Trust
Account for such creation order (using
the unique identification number(s) of
such lot(s)), as well as the warehouse
location and weight of each such lot
(calculated to the nearest 0.001 metric
ton).29 In order to assure that the exact
required amount of copper is transferred
to the Trust Account, in connection
with any creation order, the
Administrative Agent will calculate the
amount by which the aggregate actual
weight of the whole lots to be
transferred by the Authorized
Participant falls short of (a ‘‘creation
underweight’’) or exceeds (a ‘‘creation
overweight’’) the aggregate Creation
Unit Weight for such creation order, and
will instruct the Warehouse-keeper to
adjust for any such overweight or
underweight amount for such creation
order by transferring ownership of
copper between the Authorized
Participant’s Reserve Account and the
Trust Account, pursuant to specific
procedures set forth in the Registration
Statement.
tkelley on DSK3SPTVN1PROD with NOTICES
29 The
Authorized Participant chooses the
location from which whole lots of metal will be
transferred to the Trust for a creation. This can
include the potential that whole lots specified in a
creation order will be from more than one location.
This provides Authorized Participants with greater
flexibility in order to fulfill a creation order. In
addition, the Trust does not know at all times
where an Authorized Participant will have
sufficient stock available for creations at any given
time. Although the Authorized Participant will
choose which location(s) to which to deliver, the
metal must be Grade A Copper of an acceptable
LME brand (at such time) and the location(s) must
be acceptable warehouse locations for the Trust (at
such time).
VerDate Mar<15>2010
18:17 Apr 19, 2012
Jkt 226001
Redemption of Shares
In connection with any redemption
order on any Business Day, the Trust
will be required to transfer to the
redeeming Authorized Participant
copper having an aggregate weight equal
to the number of Creation Units being
redeemed multiplied by the Creation
Unit Weight in effect for such Business
Day (calculated to the nearest 0.001
metric ton). In order to assure that the
exact required amount of copper is
delivered from the Trust to the
redeeming Authorized Participant in
connection with any redemption order,
the Administrative Agent will select, in
accordance with the Selection Protocol,
specific whole lots to be transferred
from the Trust to the redeeming
Authorized Participant, and will
instruct the Warehouse-keeper to
transfer such selected whole lots to such
Authorized Participant’s Private
Account, until the aggregate weight of
whole lots transferred in connection
with the redemption order is less than
the aggregate Creation Unit Weight of
such redemption order and the
remaining weight of copper needed to
satisfy the redemption order is less than
the weight of the next whole lot that
would be selected pursuant to the
Selection Protocol.
The remaining weight by which the
aggregate weight of the transferred
whole lots (calculated to the nearest
0.001 metric ton) falls short of the
aggregate weight of the copper required
to be transferred from the Trust to the
Authorized Participant is the
‘‘redemption underweight.’’ Following
the transfer of whole lots of copper, the
Administrative Agent will instruct the
Warehouse-keeper to adjust for any
redemption underweight by transferring
ownership of copper recorded in the
Trust Account to the relevant
Authorized Participant’s Reserve
Account, pursuant to specific
procedures set forth in the Registration
Statement.
When copper is redeemed in the
foregoing manner, the amount of copper
received by the Authorized Participant
will equal a pro rata share of the copper
held by the Trust based on the weight
of the Trust’s aggregate copper holdings
immediately prior to the processing of
redemptions. However, because the
copper held by the Trust in different
locations may vary in value based on
the applicable locational premium, the
value of the copper actually received by
the Authorized Participant will depend
on the location of the specific whole
lot(s) and fractional lots, if any, of
copper that were transferred to the
Authorized Participant.
PO 00000
Frm 00125
Fmt 4703
Sfmt 4703
The cut-off time for placing creation
orders or redemption orders for a
Business Day is 4 p.m. E.T. Creation
orders and redemption orders will be
processed on each Business Day after 4
p.m., in the order that such orders have
been received in satisfactory form by the
Administrative Agent. Redemption
orders will be processed individually
following the processing of all creation
orders on such day but prior to the
calculation of the Trust’s NAV and any
payment of accrued expenses on such
day.
The Valuation Agent will generally be
responsible for (i) calculating the
locational premia used in connection
with the determination of the NAV, the
NAV per Share, the Creation Unit Ratio
and other calculations by the
Administrative Agent, and (ii)
determining whether the cheapest-todeliver location has changed.
The Warehouse-Keeper’s Role
The Warehouse-keeper is responsible
for the day-to-day storage of the copper
held by the Authorized Participants and
the Trust and the accurate
recordkeeping of these inventories of
copper.30 The Warehouse-keeper’s
principal responsibilities include:
(a) Facilitating the delivery of copper
in and out of each Authorized
Participant’s Private Account and
Reserve Account;
(b) Storing the copper of the Trust, the
Authorized Participants and the
Sponsor in its warehouse locations;
(c) Effectuating the transfers or
allocations of copper between the Trust
Account and each Authorized
Participant’s Private Account and
Reserve Account;
(d) Effectuating the transfers or
allocations of copper between the Trust
Account and the Sponsor’s Private
Account;
(e) Confirming the executability of
creation orders and redemption orders
and cooperating with the
Administrative Agent to resolve any
discrepancies, errors or any other issues
affecting a creation order or redemption
30 According to the Registration Statement, The
Henry Bath Group, the Warehouse-keeper, is a
warehousing services provider specializing in the
storage and shipping of exchange-traded metals and
soft commodities around the world. The Henry Bath
Group operates a global platform of exchangeapproved storage warehouses for holding, making
and taking delivery of physical commodity
products and is licensed by the LME, the London
International Financial Futures and Options
Exchange, the COMEX (a division of the CME
Group), the Intercontinental Exchange and the
Dubai Copper & Commodities Exchange to store and
issue exchange-traded warrants for various
commodities including copper, aluminum, zinc,
lead, nickel, tin, aluminum alloy, steel billets,
cocoa, robusta coffee, arabica coffee and plastics.
E:\FR\FM\20APN1.SGM
20APN1
Federal Register / Vol. 77, No. 77 / Friday, April 20, 2012 / Notices
order prior to acceptance or rejection;
and
(f) Electing sub-contractors for
warehousing.
The Henry Bath Group warehouse
locations utilized by the Trust will
consist of both LME-approved and nonLME-approved warehouses. With
respect to LME-approved warehouses,
the LME sets minimum security
standards for all such member
warehouse facilities, including but not
limited to scheduled inspections of
premises, visual inspection of all metal
in storage, quarterly inspection of all
weighing equipment by an institution
unaffiliated with the warehouse and
review of all records and supporting
documentation.
tkelley on DSK3SPTVN1PROD with NOTICES
Reporting and Valuation
According to the Registration
Statement, on each Business Day, as
promptly as practicable after 4 p.m.
E.T., the following will be published on
the Trust’s Web site:
• The number of outstanding Shares
of the Trust as of the beginning of the
Business Day;
• The Trust’s NAV;
• The NAV per Share;
• The locational premium for each
warehouse location, as calculated by the
Valuation Agent at 5 p.m. London time,
quoted both in U.S. dollars and as a
percentage premium relative to the LME
settlement price;
• The price per metric ton of copper
in each warehouse location where the
Trust is permitted to hold copper;
• The aggregate weight in metric tons
of all copper owned by the Trust;
• The aggregate weight in metric tons
of the copper owned by the Trust in
each warehouse location;
• The gross value in U.S. dollars of
the copper owned by the Trust in each
warehouse location;
• The Creation Unit Ratio; and
• The Creation Unit Weight.
On each Business Day, as promptly as
practicable after 4 p.m. E.T., a
downloadable file will be made
available on the Trust’s Web site with
the following information relating to
each lot of copper owned by the Trust:
• The unique identification number
of such lot;
• The warehouse location in which
such lot is held;
• The brand of such lot and, if such
brand of copper is not an Acceptable
Delivery Brand, an indication that such
lot consists of a brand of copper that has
been de-registered;
• The weight in metric tons of such
lot; and
• The date upon which such lot was
delivered to the Trust.
VerDate Mar<15>2010
18:17 Apr 19, 2012
Jkt 226001
In addition, during the NYSE Arca
Core Trading Session from 9:30 a.m. to
4 p.m. E.T., NYSE Arca will calculate
and publish:
• The ‘‘First-Out IIV,’’ an intraday
indicative value per Share disseminated
approximately every 15 seconds that
represents, as of the time of such
calculation, the hypothetical U.S. dollar
value per Share of the copper that
would need to be transferred to or from
the Trust to create or redeem one Share
included in a Creation Unit, assuming
that copper in cheapest-to-deliver
location was used for such creation or
redemption; and
• The ‘‘Liquidation IIV,’’ an intraday
indicative value per Share disseminated
approximately every 15 seconds that
represents, as of the time of such
calculation, the hypothetical U.S. dollar
value per Share of all of the copper
owned by the Trust divided by the
number of Shares then outstanding.31
The Valuation Agent will calculate
the average value of copper per metric
ton in a location through a combination
of (i) a weighted calculation (based on
tonnage) of actual transactions and (ii)
the indicative prices of market makers.
Data will be collected primarily by
phone, but also by email and by direct
submission. In order to avoid any actual
or potential conflict of interest, or
perception of a conflict, the Valuation
Agent will exclude any information
provided by any JPMorgan-affiliated
entity when calculating the locational
premium of copper in any permitted
warehouse location. The Valuation
Agent will record details regarding its
contacts for reference and internal audit
purposes.
When the Valuation Agent collects
information on actual transactions for
use in calculating locational premia, the
Valuation Agent will generally request
full details regarding such transactions,
including price, material specifications,
transaction size, delivery point and
terms, payment details and other
factors, all of which may inform the
Valuation Agent’s assessment of the
value of the underlying transaction. If a
particular transaction involves a
significantly higher or lower price than
other comparable transactions, the
Valuation Agent may request proof of
the transaction price, and if such
information is not provided, the price
may be excluded from the assessment.
Where possible, the Valuation Agent
will seek to confirm details with the
parties on both sides of a transaction.
31 The Liquidation IIV is the Indicative Trust
Value for purposes of NYSE Arca Equities Rule
8.201(e)(2)(v).
PO 00000
Frm 00126
Fmt 4703
Sfmt 4703
23783
The tonnage weighting of copper for
indicative prices will be set at the
equivalent of 10 lots, or approximately
250 metric tons, of copper.
In calculating the locational premia,
the Valuation Agent will determine in
its discretion the relative weights that it
will give to actual transactions as
compared to indicative prices. The
Valuation Agent may vary the relative
weights of the components based on the
level of physical activity on a particular
Business Day, as well as other factors.
The use of both actual transaction
information and indicative pricing
information is intended to allow
continuity of pricing and up-to-date
market quotes when physical activity
falls.
In conducting its valuation process,
the Valuation Agent generally aims to
speak to market participants from both
sides of the market. The Valuation
Agent seeks to maintain an open process
that allows any participants who are
conducting business in a market to
contribute information to the Valuation
Agent. The Valuation Agent may,
however, disregard data that it believes
is incorrect or unrepresentative of the
market. There is no set parameter to
decide whether a particular data point
will be excluded as an outlier, as such
a determination will depend
significantly on prevailing market
conditions.
On each Business Day, the Valuation
Agent will provide locational premia to
the Administrative Agent at or before 5
p.m. London time.
Net Asset Value
The Administrative Agent will
calculate the NAV of the Trust on each
Business Day as promptly as practicable
after 4 p.m. E.T.
To calculate the NAV of the Trust, the
Administrative Agent will first calculate
the Trust’s gross asset value. The Trust’s
gross asset value, with respect to any
Business Day, will be equal to the
aggregate value in U.S. dollars of all
whole lots and fractional lots of copper
held by the Trust in each warehouse
location, calculated using the LME
settlement price as of such Business Day
plus the applicable locational premia,
after giving effect to, as applicable, (i)
any change in the cheapest-to-deliver
location (as discussed below), (ii) any
creation orders and (iii) any redemption
orders, but before the selection of lots of
copper for the purpose of paying any
accrued unpaid Trust expenses on such
Business Day.
After the Administrative Agent
calculates the gross asset value, the
Administrative Agent will calculate the
Trust’s NAV, with respect to any
E:\FR\FM\20APN1.SGM
20APN1
23784
Federal Register / Vol. 77, No. 77 / Friday, April 20, 2012 / Notices
Business Day, as an amount equal to (x)
the gross asset value of the Trust as of
such Business Day minus (y) the Trust’s
accrued unpaid expenses (i.e., the total
amount of any accrued unpaid
Sponsor’s fee and accrued unpaid Other
Expenses) as of such Business Day.
tkelley on DSK3SPTVN1PROD with NOTICES
NAV Per Share
On any Business Day, as promptly as
practicable following the calculation of
the Trust’s NAV as set forth above, the
Administrative Agent will calculate the
NAV per Share by dividing (x) the
Trust’s NAV for such Business Day by
(y) the number of Shares of the Trust
outstanding on such Business Day, after
accounting for any creations or
redemptions of Shares for such Business
Day.
Creation Unit Ratio and Creation Unit
Weight
On each Business Day, as promptly as
practicable after 4 p.m. E.T., the
Administrative Agent will calculate the
Creation Unit Ratio that will be effective
for the next Business Day. The
Administrative Agent will use the
Creation Unit Ratio to determine the
Creation Unit Weight, which is the
weight of copper that an Authorized
Participant or the Trust is obligated to
transfer in connection with a creation or
redemption, as applicable, of a Creation
Unit of Shares for the applicable
Business Day.
The Creation Unit Ratio will be
determined by the Administrative Agent
as follows:
• First, the Administrative Agent will
calculate the aggregate weight in metric
tons of all the copper owned by the
Trust, after giving effect to (i) any
creation orders and (ii) any redemption
orders, but before the selection of any
lots of copper for the purpose of paying
accrued unpaid Trust expenses on such
Business Day.
• Second, the Administrative Agent
will calculate the accrued unpaid
Sponsor’s fee, expressed in metric tons,
owed by the Trust. The Administrative
Agent will do so by (i) first, calculating
the accrued unpaid Sponsor’s fee in
U.S. dollars, (ii) second, selecting
pursuant to the Selection Protocol (from
a population of whole lots available in
the Trust Account) and taking into
account their value (including any
locational premia), the lots that would
need to be transferred to pay such
accrued unpaid Sponsor’s fee in full
(including any portion of a whole lot, as
applicable) and (iii) third, calculating
the aggregate weight in metric tons of
such lots identified in (ii).
• Third, the Administrative Agent
will calculate all accrued unpaid Other
VerDate Mar<15>2010
18:17 Apr 19, 2012
Jkt 226001
Expenses, expressed in metric tons,
owed by the Trust. The Administrative
Agent will proceed in so doing by (i)
first, calculating the accrued unpaid
Other Expenses in U.S. dollars, (ii)
second, selecting pursuant to the
Selection Protocol (from a population of
whole lots available in the Trust
Account, excluding for such purposes
any lots used, either in whole or in part,
in the calculation described in step two
above) and taking into account their
value (including any locational premia),
the lots that would need to be
transferred or sold to pay such accrued
unpaid Other Expenses in full
(including any portion of a whole lot, as
applicable) and (iii) third, calculating
the aggregate weight in metric tons of
such lots identified in (ii).
• Fourth, the Administrative Agent
will subtract the weights determined
pursuant to the second and third steps
above from the aggregate weight in
metric tons of all of the Trust’s copper
(i.e., the amount determined in the first
step above). This process represents a
calculation of the Trust’s NAV, but
expressed in metric tons of copper
instead of U.S. dollars.
• Finally, the Administrative Agent
will calculate the Creation Unit Ratio by
dividing (x) the weight derived pursuant
to the fourth step above by (y) onehundredth (1/100) multiplied by the
number of Shares of the Trust then
outstanding. (The divisor in this step
reflects the fact that each Share of the
Trust included in the initial Creation
Unit will have, a value equal to onehundredth (1/100) of one metric ton of
copper, because the initial Creation Unit
of Shares will be issued in exchange for
25 metric tons of copper and a Creation
Unit will consist of 2,500 Shares of the
Trust.)
On each Business Day, as soon as
practicable following the calculation of
the Creation Unit Ratio, the
Administrative Agent will calculate the
Creation Unit Weight that will be
effective for the next Business Day. The
Creation Unit Weight for any Business
Day will be equal to 25.0 metric tons of
copper multiplied by the Creation Unit
Ratio in effect for the next Business Day,
as calculated pursuant to the process
described above. The Creation Unit
Weight is the weight of copper that an
Authorized Participant or the Trust
would be obligated to transfer in
connection with a creation order or a
redemption order in respect of one
Creation Unit on such Business Day.
Intraday Indicative Values
The Administrative Agent will
calculate the NAV of the Trust and the
NAV per Share only once each day. In
PO 00000
Frm 00127
Fmt 4703
Sfmt 4703
order to provide market participants
with an indication of the underlying
value of the Trust’s Shares during the
during the [sic] trading day, on each day
on which NYSE Arca is open for
business, NYSE Arca will disseminate,
approximately every 15 seconds, two
different intraday indicative values for
the Trust’s Shares, referred to in the
Registration Statement as the ‘‘First-Out
IIV’’ and the ‘‘Liquidation IIV.’’ Both the
First-Out IIV and the Liquidation IIV
will incorporate the price of copper as
well as the previous day’s locational
premia, as discussed further below.
The objective is that the First-Out IIV
and the Liquidation IIV reflect the
intraday cash settlement price of copper
throughout the day. The First-Out IIV
and the Liquidation IIV can incorporate
one of two values: (1) The ‘‘Last
Traded’’ price from LMEselect of the
cash price of copper at such point; or (2)
the ‘‘Last Traded’’ price from LMEselect
of the three-month copper price at such
point, and using the previous day’s
cash-to-three month spread fixed at the
auction, convert the intraday threemonth price of copper to an indicative
intraday cash equivalent.32
First-Out IIV
The Sponsor expects that, because of
the Selection Protocol, Authorized
Participants generally will expect to
receive copper from the cheapest-todeliver location whenever they redeem
Creation Units of Shares. The Sponsor
also expects that, because an Authorized
Participant will not expect that the
copper it will receive upon redeeming a
Creation Unit will be more valuable
(i.e., have a higher locational premium)
than the copper it delivers to the Trust
when creating a Creation Unit of Shares,
the Authorized Participant will tend to
deliver copper in exchange for Creation
Units of Shares only from the cheapest32 Currently the three-month copper contract is
the most liquid intraday contract, with live ticking
prices every second. It is therefore the most
accurate reflection of intraday price activity and,
hence, the current best method to derive an IIV
price for copper. At some point in the future, the
intraday activity for the cash price of copper (i.e.,
copper to be settled two days from trade date) might
become a deeper and more liquid market. This
would allow the Exchange to switch from using the
three-month copper price plus a cash-to-three
month spread conversion to simply applying the
intraday cash price traded. If the Sponsor instructs
the Exchange to make the change described above
to the method of deriving the IIV price for copper,
the Sponsor will notify the market of such change
by causing the Trust to make a public filing to that
effect (i.e., a press release that would be filed on
Form 8–K and, if required, an amendment to the
Trust’s Registration Statement). See email from
Michael Cavalier, Chief Counsel, NYSE Euronext, to
Christopher W. Chow, Special Counsel, and Brian
J. Baltz, Attorney-Advisor, Commission, dated April
11, 2012.
E:\FR\FM\20APN1.SGM
20APN1
Federal Register / Vol. 77, No. 77 / Friday, April 20, 2012 / Notices
tkelley on DSK3SPTVN1PROD with NOTICES
to-deliver location at which the
Authorized Participant holds copper.
Because of the foregoing dynamic and
the arbitrage mechanism described
below, the Sponsor expects that the
Shares will trade with a market price
that is within a limited range, with the
lower end of that range approximating
the value of copper in the cheapest-todeliver location and the higher end of
that range approximating the value of
copper in the cheapest-to-deliver
location at which the Authorized
Participants have copper available.
The ‘‘First-Out IIV’’ is an intraday
indicative value disseminated every 15
seconds during the Exchange trading
day that represents, as of the time of
such calculation, the hypothetical U.S.
dollar value per Share of the copper that
would need to be transferred to or from
the Trust to create or redeem one Share
included in a Creation Unit, assuming
that copper in the cheapest-to-deliver
location was used for such creation or
redemption. The First-Out IIV will be
calculated and published by NYSE
Arca.
The Exchange will calculate the FirstOut IIV as follows:
• First, NYSE Arca will calculate an
indicative price per metric ton of copper
in the cheapest-to-deliver location,
which will be the sum of (x) a deemed
intraday indicative cash price per metric
ton of copper in U.S. dollars based on
either a live cash price or a combination
of basis swaps and live intraday futures
prices, as of the time of such First-Out
IIV calculation, derived by methods and
means established by the Exchange, and
(y) the last available locational premium
calculated by the Valuation Agent for
copper in the cheapest-to-deliver
location on such Business Day (which
will have been provided to Arca by the
Administrative Agent); 33
• Second, NYSE Arca will calculate
an indicative value for a Creation Unit
Weight of copper in the cheapest-todeliver location, by multiplying the
value calculated in the first step by the
Creation Unit Weight in effect for such
Business Day (which will have been
provided to NYSE Arca by the
Administrative Agent). The calculation
in this step represents an indicative
value in U.S. dollars, as of the time of
calculation, of the amount of copper in
the cheapest-to-deliver location that
33 The locational premia will not change in the
generation of the IIV associated with the pricing for
such day. These published locational premia will
be published by the Valuation Agent in U.S. dollars
per metric ton. These levels will be converted into
a Share equivalent as a function of the Creation
Unit Weight applicable on such day for a Creation
Unit of Shares and the number of Shares within a
Creation Unit.
VerDate Mar<15>2010
18:17 Apr 19, 2012
Jkt 226001
would need to be delivered by an
Authorized Participant for a Creation
Unit of Shares; and
• Third, NYSE Arca will convert the
value obtained in the second step to a
U.S. dollar value per Share by dividing
the value obtained in the second step by
2,500 (the number of Shares in a
Creation Unit). The result of this
calculation is the First-Out IIV.
The First-Out IIV is intended to
facilitate arbitrage activity by
Authorized Participants by serving as an
indicator of whether the Trust’s Shares
are trading at a discount or premium
during the Exchange trading day. If an
Authorized Participant views the FirstOut IIV as an estimate of the underlying
value of copper per Share in U.S. dollars
of the Shares it could create or redeem
on any Business Day, an Authorized
Participant may seek to create Shares
when the market price exceeds the FirstOut IIV (if the Authorized Participant
has copper lots available for delivery to
the Trust in the cheapest-to-deliver
location), and may seek to redeem
Shares when the market price is less
than the First-Out IIV, because:
• If the market price per Share is
greater than the underlying value of
copper per Share in U.S. dollars, an
Authorized Participant could create a
Creation Unit of Shares by delivering
the Creation Unit Weight of copper in
the cheapest-to-deliver location to the
Trust, and may be able to sell such
Shares on the NYSE Arca for an
aggregate amount that is greater than the
value of the copper used to create the
Shares; and
• If the underlying value per Share in
U.S. dollars is greater than the market
price per Share, an Authorized
Participant could redeem a Creation
Unit of Shares by delivering the
Creation Unit to the Trust and receiving
a Creation Unit Weight of copper in the
cheapest-to-deliver location, and may be
able to sell the copper for an aggregate
amount that is greater than [sic] amount
it paid to acquire the Shares.
Liquidation IIV
The ‘‘Liquidation IIV’’ is an intraday
indicative value disseminated every 15
seconds during the NYSE Arca Core
Trading Session that represents, as of
the time of the calculation, the
hypothetical U.S. dollar value per Share
of all of the copper owned by the Trust
divided by the number of Shares then
outstanding.34
The Exchange will calculate the
Liquidation IIV as follows:
34 As noted above, the Liquidation IIV is the
Indicative Trust Value for purposes of NYSE Arca
Equities Rule 8.201(e)(2)(v).
PO 00000
Frm 00128
Fmt 4703
Sfmt 4703
23785
• First, NYSE Arca will determine an
indicative price per metric ton of copper
reflecting the weighted average price of
copper held in the Trust, calculated as
the sum of (a) a deemed intraday
indicative cash price per metric ton of
copper in U.S. dollars based on either a
live cash price or a combination of basis
swaps and live intraday futures prices,
as of the time of such Liquidation IIV
calculation, derived by methods and
means established by the Exchange, and
(b) the weighted average locational
premium per metric ton, calculated
using the locational premium calculated
by the Valuation Agent for each
warehouse location in effect for such
time for such Business Day, and the
number of metric tons of copper held by
the Trust at each warehouse location on
such Business Day (which will have
been provided to the NYSE Arca by the
Administrative Agent);
• Second, NYSE Arca will calculate
an indicative value for a Creation Unit
Weight of copper in the Trust by
multiplying the value calculated in the
first step by the Creation Unit Weight in
effect for such Business Day (which will
have been provided to NYSE Arca by
the Administrative Agent). The
calculation in this step represents an
indicative average value in U.S. dollars,
as of the time of calculation, of the
amount of copper in the Trust
(including both whole and fractional
lots of copper) corresponding to a
Creation Unit of Shares; and
• Third, NYSE Arca will convert the
value obtained in the second step to a
U.S. dollar value per Share by dividing
the value obtained in the second step by
2,500 (the number of Shares in a
Creation Unit). The result of this
calculation is the Liquidation IIV.
Additional Information Relating to the
Trust
While 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, the Shares may trade in the
secondary market on NYSE Arca at
prices that are lower or higher than the
NAV per Share. The amount of the
discount or premium in the trading
price relative to the NAV per Share may
be influenced by, among other things,
non-concurrent trading hours between
NYSE Arca and the LME. While the
Shares will trade on NYSE Arca until
the market closes (generally 4 p.m. E.T.),
liquidity in the global copper market
will be reduced after the close of copper
trading on the LME (generally 4:55 p.m.
London time, or 11:55 a.m. E.T.). As a
result, during the time after the close of
E:\FR\FM\20APN1.SGM
20APN1
23786
Federal Register / Vol. 77, No. 77 / Friday, April 20, 2012 / Notices
tkelley on DSK3SPTVN1PROD with NOTICES
trading on the LME, trading spreads,
and the resulting premium or discount
on the Shares, may widen. In addition,
the NAV per Share includes a locational
premium for the Trust’s copper in each
warehouse location, which will not be
reflected in the price of copper that is
traded on the LME. Creations and
redemptions of Creation Units are not
executed at the NAV per Share, but
rather occur based on a specified weight
of copper required to create or redeem
Shares on a particular day, which may
contribute to disparities between the
NAV per Share and the secondary
market price of Shares.
Additional information regarding the
world copper market, the Shares and the
operation of the Trust, including
termination events, risks, Trust
expenses, Sponsor fees, and creation
and redemption procedures, are
described in the Registration Statement.
Availability of Information Regarding
Copper Prices
Currently, the Consolidated Tape Plan
does not provide for dissemination of
the spot price of a commodity, such as
copper, over the Consolidated Tape.
However, there will be disseminated
over the Consolidated Tape the last sale
price for the Shares, as is the case for
all equity securities traded on the
Exchange (including exchange-traded
funds). In addition, there is a
considerable amount of copper price
and copper market information
available on public Web sites and
through professional and subscription
services.
Investors may obtain almost on a 24hour basis copper pricing information
based on the spot price for an ounce of
copper from various financial
information service providers, such as
Reuters and Bloomberg. 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 about news and
developments in the copper market.
Reuters and Bloomberg also offer a
professional service to subscribers for a
fee that provides information on copper
prices directly from market participants.
Complete real-time data for copper
futures and options prices traded on the
COMEX are available by subscription
from Reuters and Bloomberg. The
COMEX also provides delayed futures
and options information on current and
past trading sessions and market news
free of charge on its Web site
(www.cmegroup.com). There are a
variety of other public Web sites
providing information on copper,
ranging from those specializing in
VerDate Mar<15>2010
18:17 Apr 19, 2012
Jkt 226001
precious metals to sites maintained by
major newspapers, such as The Wall
Street Journal.
The locational premia will be
available on the Trust’s Web site and
from various financial information
service providers, such as Reuters and
Bloomberg. While the Valuation Agent
is the only entity that will provide
locational premia information for each
location, other information vendors
provide periodic information relating to
copper pricing in various warehouses.
For example, FastMarkets Ltd. provides
weekly premium reports for all primary
base metals, including copper, on an inwarehouse and cost-insurance-freight
(‘‘CIF’’) basis, based on information
collected directly from a large number
of market participants on all sides of the
physical market. In addition, Platts, a
division of The McGraw-Hill
Companies, Inc., provides weekly prices
for all primary base metals in the
weekly ‘‘Platts Metal Week’’
publications.35 It is not expected that
the weekly price in the FastMarkets Ltd.
and Platts publications generally will
differ significantly from the daily price
provided by the Valuation Agent. The
LME settlement price will be available
from Bloomberg.36
The Trust’s Web site
(www.jpmxf.com) will provide ongoing
pricing information for copper spot
prices and the Shares. Market prices for
the Shares will be available from a
variety of sources including brokerage
firms, information Web sites and other
information service providers. The Net
Asset Value will be published by the
Sponsor on each Warehouse Business
Day and will be posted on the Trust’s
Web site. The Exchange will provide on
its Web site (www.nyx.com) a link to the
Trust’s Web site.37 In addition, the
Exchange will make available over the
Consolidated Tape quotation
information, trading volume, closing
prices and NAV for the Shares from the
previous day.
Criteria for Initial and Continued Listing
The Trust will be subject to the
criteria in Rule 8.201(e) for initial and
continued listing of the Shares.
It is anticipated that a minimum of
100,000 Shares will be required to be
outstanding at the start of trading. The
35 FastMarkets Ltd. and Platts may not publish
prices based on exactly the same warehouse
locations as the Valuation Agent.
36 See note 17, supra.
37 NYSE Arca Equities Rule 8.201(e)(2)(iv)
provides that the Exchange will consider the
suspension or removal from listing of an issue of
Commodity-Based Trust Shares if the Exchange
stops providing a hyperlink on its Web site to the
value of the underlying commodity from a source
unaffiliated with the sponsor for such issue.
PO 00000
Frm 00129
Fmt 4703
Sfmt 4703
minimum number of Shares required to
be outstanding is comparable to
requirements that have been applied to
previously listed Shares of the
streetTRACKS Gold Trust, the iShares
Gold Trust, the iShares Silver Trust and
exchange-traded funds. The Exchange
believes that the anticipated minimum
number of Shares outstanding at the
start of trading is sufficient to provide
adequate market liquidity.
Trading Rules
The Exchange deems the Shares to be
equity securities, thus rendering trading
in the Fund subject to the Exchange’s
existing rules governing the trading of
equity securities. Trading in the Shares
on the Exchange will occur in
accordance with NYSE Arca Equities
Rule 7.34(a). The Exchange has
appropriate rules to facilitate
transactions in the Shares during all
trading sessions. As provided in NYSE
Arca Equities Rule 7.6, Commentary .03,
the minimum price variation (‘‘MPV’’)
for quoting and entry of orders in equity
securities traded on the NYSE Arca
Marketplace is $0.01, with the exception
of securities that are priced less than
$1.00 for which the MPV for order entry
is $0.0001.
Further, NYSE Arca Equities Rule
8.201 sets forth certain restrictions on
ETP Holders acting as registered Market
Makers in the Shares to facilitate
surveillance. Pursuant to NYSE Arca
Equities Rule 8.201(g), an ETP Holder
acting as a registered Market Maker in
the Shares is required to provide the
Exchange with information relating to
its trading in the underlying copper,
related futures or options on futures, or
any other related derivatives.
Commentary .04 of NYSE Arca Equities
Rule 6.3 requires an ETP Holder acting
as a registered Market Maker, and its
affiliates, in the Shares 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).
As a general matter, the Exchange 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. A
subsidiary or affiliate of an ETP Holder
that does business only in commodities
or futures contracts would not be
E:\FR\FM\20APN1.SGM
20APN1
Federal Register / Vol. 77, No. 77 / Friday, April 20, 2012 / Notices
subject to Exchange jurisdiction, but the
Exchange could 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.
With respect to trading halts, the
Exchange may consider all relevant
factors in exercising its discretion to
halt or suspend trading in the Shares.
Trading on the Exchange in the Shares
may be halted because of market
conditions or for reasons that, in the
view of the Exchange, make trading in
the Shares inadvisable. These may
include: (1) The extent to which
conditions in the underlying copper
market have caused disruptions and/or
lack of trading, or (2) whether other
unusual conditions or circumstances
detrimental to the maintenance of a fair
and orderly market are present. In
addition, trading in Shares will be
subject to trading halts caused by
extraordinary market volatility pursuant
to the Exchange’s ‘‘circuit breaker’’
rule.38
tkelley on DSK3SPTVN1PROD with NOTICES
Surveillance
The Exchange intends to utilize its
existing surveillance procedures
applicable to derivative products
(including Commodity-Based Trust
Shares) to monitor trading in the Shares.
The Exchange represents that these
procedures are adequate to properly
monitor Exchange trading of the Shares
in all trading sessions and to deter and
detect violations of Exchange rules and
applicable federal securities laws.
The Exchange’s current trading
surveillance focuses on detecting
securities trading outside their normal
patterns. When such situations are
detected, surveillance analysis follows
and investigations are opened, where
appropriate, to review the behavior of
all relevant parties for all relevant
trading violations. Also, 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 such ETP
Holders’ proprietary or customer trades
through ETP Holders which they effect
on any relevant market. In addition, the
Exchange may obtain trading
information via the Intermarket
Surveillance Group (‘‘ISG’’) from other
exchanges who are members of the
38 See
NYSE Arca Equities Rule 7.12.
VerDate Mar<15>2010
18:17 Apr 19, 2012
Jkt 226001
ISG,39 including COMEX. In addition,
the Exchange has entered into a
comprehensive surveillance sharing
agreement with LME that applies with
respect to trading in copper.
Information Bulletin
Prior to the commencement of
trading, the Exchange 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: (1) The
procedures for purchases and
redemptions of Shares in the Creation
Unit (including noting that Shares are
not individually redeemable); (2) NYSE
Arca Equities Rule 9.2(a), which
imposes a duty of due diligence on its
ETP Holders to learn the essential facts
relating to every customer prior to
trading the Shares; (3) how information
regarding the IIV is disseminated; (4) the
requirement that ETP Holders deliver a
prospectus to investors purchasing
newly issued Shares prior to or
concurrently with the confirmation of a
transaction; (5) the possibility that
trading spreads and the resulting
premium or discount on the Shares may
widen as a result of reduced liquidity of
physical copper trading during the Core
and Late Trading Sessions after the
close of the major world copper
markets; and (6) trading information.
For example, the Information Bulletin
will advise ETP Holders, prior to the
commencement of trading, of the
prospectus delivery requirements
applicable to the Trust. The Exchange
notes that investors purchasing Shares
directly from the Trust (by delivery of
the Creation Deposit) will receive a
prospectus. ETP Holders purchasing
Shares from the Trust for resale to
investors will deliver a prospectus to
such investors.
In addition, the Information Bulletin
will reference that the Trust is subject
to various fees and expenses described
in the Registration Statement. The
Information Bulletin will also reference
the fact that there is no regulated source
of last sale information regarding
physical copper, that the Commission
has no jurisdiction over the trading of
copper as a physical commodity, and
that the CFTC has regulatory
jurisdiction over the trading of copper
futures contracts and options on copper
futures contracts.
The Information Bulletin will also
discuss any relief, if granted, by the
39 A list of ISG members is available at https://
www.isgportal.org. The Exchange does not have
access to information regarding copper-related OTC
transactions in spot, forwards, options or other
derivatives.
PO 00000
Frm 00130
Fmt 4703
Sfmt 4703
23787
Commission or the staff from any rules
under the Act.
2. Statutory Basis
The basis under the Act for this
proposed rule change is the requirement
under Section 6(b)(5) 40 that an
exchange have rules that are designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to remove
impediments to, and perfect the
mechanism of a free and open market
and, in general, to protect investors and
the public interest.
The Exchange believes that the
proposed rule change is designed to
prevent fraudulent and manipulative
acts and practices in that the Shares will
be listed and traded on the Exchange
pursuant to the initial and continued
listing criteria in NYSE Arca Equities
Rule 8.201. The Exchange has in place
surveillance procedures that are
adequate to properly monitor trading in
the Shares in all trading sessions and to
deter and detect violations of Exchange
rules and applicable federal securities
laws. The Exchange may obtain
information via ISG from other
exchanges that are members of ISG,
including COMEX. In addition, the
Exchange has entered into a
comprehensive surveillance sharing
agreement with LME that applies with
respect to trading in copper. On each
day on which NYSE Arca is open for
business, the last sale price for the
Shares will be disseminated over the
Consolidated Tape. In addition, there is
a considerable amount of copper price
and copper market information
available on public Web sites and
through professional and subscription
services. Investors may obtain almost on
a 24-hour basis copper pricing
information based on the spot price for
an ounce of copper from various
financial information service providers.
NYSE Arca will disseminate,
approximately every 15 seconds, two
different intraday indicative values for
the Trust’s Shares—the First-Out IIV
and the Liquidation IIV. The Trust’s
Web site will provide ongoing pricing
information for copper spot prices and
the Shares. Complete real-time data for
copper futures and options prices traded
on the COMEX are available by
subscription from Reuters and
Bloomberg. The COMEX also provides
delayed futures and options information
on current and past trading sessions and
market news free of charge on its Web
site. Market prices for the Shares will be
available from a variety of sources
including brokerage firms, information
40 15
E:\FR\FM\20APN1.SGM
U.S.C. 78f(b)(5).
20APN1
tkelley on DSK3SPTVN1PROD with NOTICES
23788
Federal Register / Vol. 77, No. 77 / Friday, April 20, 2012 / Notices
Web sites and other information service
providers. The NAV will be published
by the Sponsor on each Warehouse
Business Day and will be posted on the
Trust’s Web site. The Exchange will
provide on its Web site a link to the
Trust’s Web site. In addition, the
Exchange will make available over the
Consolidated Tape quotation
information, trading volume, closing
prices and NAV for the Shares from the
previous day.
The proposed rule change is designed
to promote just and equitable principles
of trade and to protect investors and the
public interest in that a large amount of
information is publicly available
regarding the Trust and the Shares,
thereby promoting market transparency.
The Trust’s Web site will provide
ongoing pricing information for copper
spot prices and the Shares. Investors
may obtain almost on a 24-hour basis
copper pricing information based on the
spot price for an ounce of copper from
various financial information service
providers. NYSE Arca will disseminate,
approximately every 15 seconds, two
different intraday indicative values for
the Trust’s Shares—the First-Out IIV
and the Liquidation IIV. Market prices
for the Shares will be available from a
variety of sources including brokerage
firms, information Web sites and other
information service providers. The NAV
will be published by the Sponsor on
each warehouse Business Day and will
be posted on the Trust’s Web site. The
Exchange will provide on its Web site
a link to the Trust’s Web site. In
addition, the Exchange will make
available over the Consolidated Tape
quotation information, trading volume,
closing prices and NAV for the Shares
from the previous day. Trading in
Shares of the Trust will be halted if the
circuit breaker parameters in NYSE Arca
Equities Rule 7.12 have been reached or
because of market conditions or for
reasons that, in the view of the
Exchange, make trading in the Shares
inadvisable. Moreover, prior to the
commencement of trading, the Exchange
will inform its ETP Holders in an
Information Bulletin of the special
characteristics and risks associated with
trading the Shares.
The proposed rule change is designed
to perfect the mechanism of a free and
open market and, in general, to protect
investors and the public interest in that
it will facilitate the listing and trading
of an additional type of CommodityBased Trust Shares that will enhance
competition among market participants,
to the benefit of investors and the
marketplace. As noted above, the
Exchange has in place surveillance
procedures relating to trading in the
VerDate Mar<15>2010
18:17 Apr 19, 2012
Jkt 226001
Shares and may obtain information via
ISG from other exchanges that are
members of ISG or with which the
Exchange has entered into a
comprehensive surveillance sharing
agreement.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) By order approve or disapprove
such proposed rule change, or
(B) Institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–NYSEArca–2012–28 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–NYSEArca–2012–28. This
Frm 00131
Fmt 4703
Sfmt 4703
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.41
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–9528 Filed 4–19–12; 8:45 am]
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
PO 00000
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
(https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change 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 a.m. and 3 p.m. Copies of such filing
also will be available for inspection and
copying at the principal office of the
Exchange. All comments received will
be posted without change; the
Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–
NYSEArca–2012–28, and should be
submitted on or before May 11, 2012.
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–66817; File No. SR–
NASDAQ–2012–050]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change Relating to
Routing Fees
April 16, 2012.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on April 11,
2012, The NASDAQ Stock Market LLC
(‘‘NASDAQ’’ or ‘‘Exchange’’) filed with
the Securities and Exchange
41 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
E:\FR\FM\20APN1.SGM
20APN1
]]>Agencies
[Federal Register Volume 77, Number 77 (Friday, April 20, 2012)]
[Notices]
[Pages 23772-23788]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-9528]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-66816; File No. SR-NYSEArca-2012-28]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change To List and Trade Shares of the JPM XF Physical
Copper Trust Pursuant to NYSE Arca Equities Rule 8.201
April 16, 2012.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on April 2, 2012, NYSE Arca, Inc. (the ``Exchange'' or
``NYSE Arca'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I and II
below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C.78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to list and trade shares of JPM XF Physical
Copper Trust (the ``Trust'') pursuant to NYSE Arca Equities Rule 8.201.
The text of the proposed rule change is available at the Exchange, the
Commission's Public Reference Room, and www.nyse.com.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to list and trade JPM XF Physical Copper
Shares (``Shares'') of the Trust under NYSE Arca Equities Rule 8.201.
Under NYSE Arca Equities Rule 8.201, the Exchange may propose to list
and/or trade pursuant to unlisted trading privileges (``UTP'')
``Commodity-Based Trust Shares.'' \4\ The Commission has previously
approved listing on the Exchange under NYSE Arca Equities Rule 8.201 of
other issues of Commodity-Based Trust Shares. The Commission has
approved listing on the Exchange of the streetTRACKS Gold Trust and
iShares COMEX Gold Trust.\5\ The Commission also has approved listing
of the iShares Silver Trust on the Exchange \6\ and, previously,
listing of the iShares Silver Trust on the
[[Page 23773]]
American Stock Exchange LLC.\7\ In addition, the Commission has
approved listing on the Exchange of the following issues of Commodity-
Based Trust Shares: ETFS Silver Trust, the ETFS Gold Trust, the ETFS
Platinum Trust, the ETFS Palladium Trust, the ETFS Precious Metals
Basket Trust, the ETFS White Metals Basket Trust, and the ETFS Asian
Gold Trust.\8\
---------------------------------------------------------------------------
\4\ 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.
\5\ See Securities Exchange Act Release No. 56224 (August 8,
2007), 72 FR 45850 (August 15, 2007) (SR-NYSEArca-2007-76)
(approving listing on the Exchange of the streetTRACKS Gold Trust);
Securities Exchange Act Release No. 56041 (July 11, 2007), 72 FR
39114 (July 17, 2007) (SR-NYSEArca-2007-43) (order approving listing
on the Exchange of iShares COMEX Gold Trust).
\6\ See Securities Exchange Act Release Nos. 58956 (November 14,
2008), 73 FR 71074 (November 24, 2008) (SR-NYSEArca-2008-124)
(approving listing on the Exchange of the iShares Silver Trust).
\7\ See Securities Exchange Act Release No. 53521 (March 20,
2006), 71 FR 14967 (March 24, 2006) (SR-Amex-2005-72) (approving
listing on the American Stock Exchange LLC of the iShares Silver
Trust).
\8\ See Securities Exchange Act Release Nos. 59781 (April 17,
2009), 74 FR 18771 (April 24, 2009) (SR-NYSEArrca[sic]-2009-28)
(order approving listing on the Exchange of ETFS Silver Trust);
59895 (May 8, 2009), 74 FR 22993 (May 15, 2009) (SR-NYSEArca-2009-
40) (order approving listing on the Exchange of ETFS Gold Trust);
61219 (December 22, 2009), 74 FR 68886 (December 29, 2009) (SR-
NYSEArca-2009-95) (order approving listing on the Exchange of ETFS
Platinum Trust); 61220 (December 22, 2009), 74 FR 68895 (December
29, 2009) (SR-NYSEArca-2009-94) (order approving listing on the
Exchange of ETFS Palladium Trust); 62692 (August 11, 2010), 75 FR
50789 (August 17, 2010) (SR-NYSEArca-2010-56) (order approving
listing on the Exchange of ETFS Precious Metals Basket Trust); 62875
(September 9, 2010), 75 FR 56156 (September 15, 2010) (SR-NYSEArca-
2010-71) (order approving listing on the Exchange of ETFS White
Metals Basket Trust); 63464 (December 8, 2010), 75 FR 77926
(December 14, 2010) (SR-NYSEArca-2010-95) (order approving listing
on the Exchange of ETFS Asian Gold Trust).
---------------------------------------------------------------------------
The Trust will issue Shares representing units of fractional
undivided interest in and ownership of the net assets of the Trust. The
objective of the Trust is for the value of the Trust's Shares to
reflect, at any given time, the value of copper owned by the Trust at
that time, less the Trust's expenses and liabilities at that time. 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.\9\
---------------------------------------------------------------------------
\9\ See the registration statement for the J.P. Morgan Physical
Copper Trust on Amendment No. 5 to Form S-1, filed with the
Commission on July 12, 2011 (No. 333-170085) (``Registration
Statement''). The descriptions of the Trust, the Shares and the
copper market contained herein are based, in part, on the
Registration Statement.
---------------------------------------------------------------------------
J.P. Morgan Commodity ETF Services LLC is the sponsor of the Trust
(``Sponsor''), J.P. Morgan Treasury Securities Services, a division of
JPMorgan Chase Bank, National Association, is the administrative agent
of the Trust (``Administrative Agent''), Wilmington Trust Company is
the trustee of the Trust (``Trustee''), and the Henry Bath Group is the
warehouse-keeper of the Trust (``Warehouse-keeper'').\10\ The Trustee
will delegate to the Sponsor its duty and authority to administer the
Trust, as defined and limited by the terms of the Trust's ``Trust
Agreement''. The Trust's valuation agent (``Valuation Agent'') is Metal
Bulletin Ltd., an independent, third-party valuation agent that is not
affiliated with the Sponsor. \11\
---------------------------------------------------------------------------
\10\ Each of Henry Bath & Son Limited, Henry Bath LLC, Henry
Bath Singapore Pte Limited, Henry Bath Italia Sr1 and Henry Bath BV
is a member of the Henry Bath Group of companies and a wholly owned
subsidiary of J.P. Morgan Ventures Energy Corporation, and is an
affiliate of the Sponsor.
\11\ The Valuation Agent is responsible for calculating, on each
Business Day (as defined below in note 18, infra), the locational
premium for each permitted warehouse location (as discussed below),
which is used to determine the net asset value (``NAV'') of the
Trust and to make other calculations relating to the Trust's
operations. The ``locational premium'' for a permitted warehouse
location is calculated as an amount expressed in U.S. dollars that
is equal to the average value of copper per metric ton in such
location minus the London Metal Exchange (``LME'') settlement price
of copper on such Business Day.
---------------------------------------------------------------------------
The Exchange represents that the Shares satisfy the requirements of
NYSE Arca Equities Rule 8.201 and thereby qualify for listing on the
Exchange.\12\
---------------------------------------------------------------------------
\12\ With respect to application of Rule 10A-3 (17 CFR 240.10A-
3) under the Act (15 U.S.C. 78a), the Trust relies on the exemption
contained in Rule 10A-3(c)(7).
---------------------------------------------------------------------------
According to the Registration Statement, the Shares are intended to
constitute a simple and cost-effective means of making an investment
similar to an investment in copper. Although the Shares are not the
exact equivalent of an investment in copper, they provide investors
with an alternative that allows a level of participation in the copper
market through the securities market.
Overview of the Copper Industry
The Registration Statement provides a summary of the copper
industry by looking at some of the key participants and detailing the
primary sources of supply and demand in the market. It also provides a
description of the typical path copper and its alloys take from the
mine to the customer.\13\
---------------------------------------------------------------------------
\13\ Unless otherwise indicated, all market data herein was
published in December 2011 by Brook Hunt, a wholly owned subsidiary
of Wood Mackenzie that has provided such data to the Sponsor for an
annual subscription fee.
---------------------------------------------------------------------------
Copper Basics
According to the Registration Statement, one of the main industrial
usages for copper is for the production of cable, wire and electrical
products for both the electrical and building industries. In the
current market, approximately three-quarters of copper demand is for
electrical purposes, including power transmission and generation,
telecommunications and electrical and electronic consumer and
industrial products. The construction industry accounts for copper's
second largest usage demand in such areas as pipes for plumbing,
heating and ventilating as well as building wire and sheet metal
facings. Alloyed with other metals, such as zinc (to form brass),
aluminum or tin (to form bronzes), or nickel, it can acquire new
characteristics for use in highly specialized applications. Copper's
physical, chemical and aesthetic properties make it a material of
choice in a wide range of electrical, electronics and communication,
construction, transportation, industrial machinery and equipment and
general consumer applications, such as coins and keys. Copper by-
products from manufacturing and obsolete copper products are readily
recycled and contribute significantly to copper supply.
Market Participants
The participants in the world copper market may be classified in
the following sectors: Primary and secondary producers; fabricators,
manufacturers and end-use consumers; the banking sector; and the
investment sector. A brief description of each follows.
Primary and Secondary Producers. Primary and secondary producers
are generally the market participants that bring physical copper
supplies to the market. This sector is primarily comprised of mining
companies that specialize in copper production, metal processors, such
as refiners and smelters, and scrap recyclers.
Fabricators, Manufacturers and End-use Consumers. Consumption of
extracted resources typically occurs in two phases. Refined copper
supplies in various grades and forms are initially demanded by
fabricators that convert unwrought metals to salable ``semi-
fabricated'' products such as wire, tubing and plates. These semi-
fabricated products are available for consumption by other fabricators
and/or manufacturers to further upgrade the copper product until the
material is ultimately converted into a final saleable product (such as
keys, coins and air conditioning unit parts).
Banking Sector. Banks provide a variety of services to the copper
market and its participants, thereby facilitating interactions between
other parties. Services provided by the banking community include
traditional banking products as well as mine financing (both secured
and unsecured), physical copper purchases and sales, hedging and risk
management and inventory management for industrial users and consumers.
Investment Sector. The investment sector includes professional and
private
[[Page 23774]]
investors and speculators who are involved in investment and trading
activities related to copper. Participants range from large hedge funds
and other investment vehicles to day-traders on futures exchanges.
Copper Supply Process
Copper supply generally comes from two sources: (1) The extraction
and processing of copper ore (referred to as ``primary production'')
and (2) the recovery of copper from existing stock (referred to as
either ``secondary copper'' or ``copper scrap''). Primary production
accounts for the majority of new global copper supply. However, in
developed countries with significant amounts of copper already in use
or in the supply chain, secondary copper provides a significant portion
of new supply.
Primary Copper Production
According to data provided to the Sponsor by Brook Hunt, primary
mine production in 2011 is expected to have reached 16.279 million
metric tons, a modest 0.53% increase from 2010. That primary production
has grown only modestly in spite of extremely high copper prices may
reflect, to some degree, the entrenched inelasticity of supply, as old
mines continue to face ``head grade'' decline (i.e., a decreasing
percentage of copper content in copper ores, due to factors such as
good quality copper sources already being exploited) and new mine
projects encounter production delays. There appears, however, to be no
shortage of underlying copper resources. For example, the United States
Geological Service estimates that current reserves--both proven and
probable--amount to around 690 million metric tons (source: U.S.
Geological Survey published as of January 2012). In addition, measured
or inferred resources may become economically viable for extraction to
the extent that financiers, geologists and surveyors increase their
estimate for long-term copper prices.
According to the Registration Statement and information provided by
the Sponsor, copper mine supply in 2005 to 2011 faced a number of
constraints. Many existing mines are struggling to meet targets and,
with only a few notable exceptions, new projects and project upgrades
are subject to delay, with geo-technical issues being a major
inhibiting factor. In addition to disruptions to existing operations,
supply growth is dependent on further exploitation of copper reserves
concentrated primarily in Africa and Latin America. Latin American
production is dominated by Chile, which is the world's largest copper
producer and has the largest proven reserve base of economically viable
copper deposits in the world (source: U.S. Geological Survey). Reliable
and cost-effective power and clean water availability represent two
large hurdles to new primary production in Chile. Outside of Chile,
Peru remains one of South America's prospective regions and is affected
by many of the same inhibiting factors to new production as Chile. In
Africa, the two most prospective countries are Zambia and the
Democratic Republic of Congo, whose combined production is
approximately 86.6% of the continent's 2011 copper mine supply. Both
nations have been inconsistent suppliers of copper since the mid-1970s
due to political and social instability causing supply risks, including
sovereign risk, threat of asset expropriation, ownership disputes over
certain large mines and limited infrastructure.
Secondary Copper Production
Copper and copper alloys have been recycled for hundreds of years
and secondary copper remains a major source of supply in developed
economies. The copper and copper alloy industries rely on the fact that
copper scrap is easily and economically used and reused. Depending on
its quality and other factors, copper scrap can be refined and
converted back into cathode form for further use, directly melted to
produce semi-fabricated products or used in primary production as a
cooling additive during the smelting process.
Copper Consumption
As highlighted above, copper has many uses. From copper derived
from primary and secondary production, fabricators produce semi-
fabricated products, such as copper wire, copper alloys, tube products,
rods, bars, section, plate, sheets and strips, for various
applications. For example, tube products have many applications,
including plumbing, heating, vacuuming and air conditioning. Copper
wire accounted for 55% of total copper fabrication in 2011.
Global copper consumption in 2011 is estimated to have measured
19.931 million metric tons, an increase of approximately 3.5% from
2010. By market sector, copper is equally exposed to construction and
electrical and electronic applications (each 33% of total demand in
2010). In 2010, significant other sources of demand included industrial
machinery (13%), transportation (13%) and consumer products (8%).
The combination of a Western economic recovery and ongoing robust
demand in emerging markets is expected to result in growth of global
copper demand of close to 3.7% in 2012. According to projections by
Brook Hunt, copper demand is likely to measure 20.67 million metric
tons in 2012 (excluding the direct use of secondary copper by semi-
fabricators). Current projections for total copper consumption in 2012
are at about 25.8 million metric tons, a number inclusive of refined
copper from primary and secondary production and the direct use of
secondary copper in the fabrication sector.
World Copper Production and Consumption 2000-2011 (in Metric Tons)
The following table sets forth a summary of world copper production
and consumption from 2000 to 2011.\14\
---------------------------------------------------------------------------
\14\ Please note that the figures may not add up to equal the
totals listed due to independent rounding.
--------------------------------------------------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
--------------------------------------------------------------------------------------------------------------------------------------------------------
Electro-Refined Copper Production\15\....... 12552 13118 12733 12601 13277 13951 14540 15035 15189 15017 15703 16293
SX/EW Production\16\........................ 2291 2538 2619 2676 2658 2644 2755 2990 3071 3289 3309 3401
Refined Copper Production................... 14844 15656 15351 15277 15935 16595 17296 18025 18260 18306 19012 19694
Europe Consumption.......................... 4584 4539 4437 4498 4736 4607 5023 4787 4482 3536 3861 3994
Americas Consumption........................ 3281 2859 2644 2497 2712 2549 2395 2307 2188 1764 1897 1957
China Consumption........................... 1850 2230 2425 3020 3565 3815 3967 4670 5100 6375 7204 7780
Japan Consumption........................... 1349 1145 1164 1202 1279 1256 1307 1268 1199 876 1060 1038
Other Consumption........................... 4096 4010 4224 4358 4729 4730 4792 4949 4960 4750 5242 5162
Refined Copper Consumption (1).............. 15160 14783 14894 15575 17021 16957 17484 17981 17929 17301 19264 19931
Refined Metal Balance....................... -316 873 457 -298 -1086 -362 -188 44 331 1005 -252 -237
--------------------------------------------------------------------------------------------------------------------------------------------------------
E
[[Page 23775]]
The Global Copper Market
The global market in copper consists of (i) trading within the
physical copper market and (ii) financial trading, through either (a)
the exchange-traded futures and options market or (b) the over-the-
counter (``OTC'') market. Each of these is described below in further
detail.
---------------------------------------------------------------------------
\15\ Copper is extracted from copper sulfide ores using a multi-
step production process. First, a ``mine production'' process is
used to extract the metal. Then, the metal ore is separated from the
waste. The ore is subsequently crushed and placed in flotation cells
with chemical reagents, and, using a process called froth flotation,
a material commonly known as ``copper in concentrate'' is extracted.
Copper in concentrate is a mixture of about 25-35% copper (the rest
being various other metals and impurities). The copper in
concentrate then undergoes a ``smelter production,'' through which
the copper is processed under high heat (or ``smelted'') to remove
impurities, such as iron, sulfur and oxygen. Finally, the copper is
chemically leached through an electro-refining process (``electro-
refined copper production''), whereby copper is placed into a bath
of sulfuric acid and then an electric current is used to move the
copper out of the solution onto a stainless steel sheet (an
``anode''). This is repeated until the steel sheets are covered in
copper in cathode form.
\16\ Copper is extracted from copper oxide ores using a chemical
leaching process called solvent extraction and electrowinning (``SX/
EW production''), a process which involves dissolving copper into a
soluble liquid such as acid, from which the copper is later
recovered as copper plates (``cathodes'').
---------------------------------------------------------------------------
The Physical Copper Market
Copper, like any other good or merchandise, is traded between
producers (such as mining companies and refiners), consumers (such as
fabricators and manufacturers) and/or merchants. Mining companies sell
their present or future production to refiners and smelters that
transform the metal into shapes or alloys, so that fabricators and
manufacturers can then transform these into different end-use products.
Copper is used in many different industrial processes, which makes its
location relative to consumption demand important, especially given its
bulk and the cost of transportation. The source of copper (i.e., mine
location and smelters/refineries) is also actively tracked by buyers,
including fabricators and consumers, and affects buying behavior.
Buyers may require copper from very specific sources because both the
physical shape and chemical composition must match the setup of their
respective production facilities or fabrication needs. Copper supply
chains need to be actively managed on a continuous basis because of
fluctuating demand in the market.
Depending on the timing of physical delivery, the price of copper
is usually either a function of the cash price (specifically, the
settlement price, plus any contractually agreed upon locational
premium, if applicable) for the present day or the relevant forward
price for future days. The settlement price is the price utilized in a
trade for physical delivery of copper assuming that delivery occurs two
business days after the price is agreed upon, while a forward price is
employed when the delivery is agreed to take place at a specific time
in the future. The LME provides the global benchmark prices for the
settlement price and forward prices of Grade A Copper. The LME
settlement price and three-month forward price of Grade A Copper are
the most widely used benchmarks for daily prices of physical copper
held in bonded, customs and duties free zones and traded in the
international physical copper market, and are published by various
financial information sources. Unless otherwise specified, the term
``copper,'' as used in the Registration Statement, always refers to
Grade A Copper and the ``settlement price'' or ``LME settlement price''
of copper \17\ always refers to the official cash sellers price per
metric ton in U.S. dollars of Grade A Copper as quoted on the LME for a
particular Business Day.\18\
---------------------------------------------------------------------------
\17\ The ``LME settlement price'' or ``settlement price'' is,
with respect to any Business Day, the official cash sellers price
per metric ton of Grade A Copper on the LME, stated in U.S. dollars,
as determined by the LME at the end of the morning's second ring
session (12:35 p.m. London time) for copper on each day that the LME
is open for trading. The LME settlement price is made publicly
available in real-time through third-party vendors such as Bloomberg
and Reuters (on Bloomberg, it is currently displayed on Bloomberg
page ``LOCADY ''). It is also made publicly available on a
delayed basis on the LME's Web site at approximately 10 p.m. London
time.
\18\ With respect to the submission of creation and redemption
orders and the processing of such orders, and the calculation of
NAV, a ``Business Day'' is a day that the Exchange is open for
regular trading and that is not a holiday in London, England. With
respect to the delivery of Creation Units of Shares in connection
with creations or redemptions, a ``Business Day'' is a day that the
Exchange is open for regular trading, without regard to London
holidays. For example, if in a particular week Tuesday is a London
holiday but not an Exchange holiday, a creation or redemption order
that is placed on Monday will require Shares to be delivered on
Thursday. If in a particular week Tuesday is an Exchange holiday but
not a London holiday, a creation or redemption order that is placed
on Monday will require Shares to be delivered on Friday. In either
case, creation and redemption orders would not be accepted on
Tuesday.
---------------------------------------------------------------------------
According to the Registration Statement, in addition to the
settlement price or forward prices, in order to obtain copper of a
specific brand that is stored at a specific location, consumers are
prepared to pay an additional locational premium. As discussed further
in ``Locational Premia for Copper'' below, these locational premia are
based on various supply and demand factors, for example, freight rates,
time to transport and relative pricing power of the producers versus
consumers, which in turn is reflective of available sources of copper.
A location that is low in supply and high in demand will generally
carry a higher locational premium than a location where supply is high
and demand is low. Supply contracts between physical market
participants are generally annual contracts under which the locational
premium is fixed for the period of the contract while the spot or
forward price is floating and only fixed at the point of delivery. This
approach ensures that the physical aspects of the contract are fixed in
order to provide both producers and consumers certainty but leaves both
parties exposed to price risk. This price risk is managed independently
by both producers and consumers through positions either on futures
exchanges or in OTC markets.
The Sponsor represents that, according to the Valuation Agent, on
December 30, 2011, the average locational premium per metric ton in the
physical copper market in the permitted warehouse locations (as
discussed in ``Description of the Trust'' below) ranged from
approximately $10.00 to $120.54 over an LME settlement price of
$7,554.00; in percentage terms, the average premium ranged from 0.1203%
to 1.4308% of the LME settlement price.
Futures Exchanges
The role of a commodity futures exchange is to facilitate and make
transparent the process of determining commodity prices. According to
the Registration Statement, a majority of copper trading occurs on
three commodity exchanges: The LME, COMEX (a division of CME Group,
Inc.) and the Shanghai Futures Exchange (``SHFE'').\19\ LME members are
regulated by the Financial Services Authority (``FSA''), the regulator
of the financial services industry in the UK (as discussed below under
``The London Metal Exchange''). COMEX is regulated
[[Page 23776]]
by the U.S. Commodity Futures Trading Commission (``CFTC'') under the
Commodity Exchange Act.\20\ The SHFE is regulated by the Chinese
Securities Regulatory Commission.
---------------------------------------------------------------------------
\19\ According to data sourced from Bloomberg, copper futures
volume on COMEX for 2011 was 10,222,548 contracts. As of December
30, 2011, COMEX open interest for copper was 120,988 contracts.
Copper futures volume on SHFE for 2011 was 40,833,743 contracts. As
of December 30, 2011, SHFE open interest for copper was 429,582
contracts. Copper futures volume on LME for 2011 was 34,503,680
contracts. As of December 30, 2011, LME open interest for copper was
448,161 contracts. Turnover (described as the number of contracts
traded in a year multiplied by the number of metric tons per
contract) in the calendar year of 2011 for the LME, COMEX and SHFE
was 863 million metric tons, 141.4 million metric tons and 204
million metric tons, respectively.
\20\ 7 U.S.C. 1 et seq.
---------------------------------------------------------------------------
Futures prices are settled by bid and offer, reflecting the
market's perception of supply and demand of a commodity on a particular
day. On the LME, copper is traded in 25 metric ton lots and quoted in
U.S. dollars per metric ton. On COMEX, copper is traded in lots of
25,000 pounds and quoted in U.S. cents per pound. On the SHFE, copper
is traded in lots of five metric tons and quoted in Chinese renminbi
per metric ton. At present, Chinese regulations stipulate that only
companies or organizations organized and registered in China or Chinese
citizens are allowed to participate in trading on the SHFE.
Exchanges provide for the trading of futures and options contracts.
These contracts allow producers and consumers to fix a price in the
future, thus providing the consumers a hedge against price variations.
Producers and consumers often seek to manage their price risk by taking
long or short positions on the futures exchange. The participation of
investors, who are ready to buy the risk of price variation in exchange
for potential monetary reward, increases liquidity in the market. A
futures or options contract defines the standard of the product, the
size of the lot, delivery dates and other aspects related to the
trading process. Contracts are unique for each exchange. The existence
of futures contracts also allows producers and their clients to agree
on different price settling arrangements to accommodate different
interests.
Over-the-Counter Contracts
OTC contracts are principal-to-principal agreements traded and
negotiated privately between two principal parties, without going
through an exchange or intermediary. Unlike exchange contracts, OTC
contracts can be customized to the counterparty's individual exposures
(e.g., through changes to the standardized contract terms in areas such
as settlement dates, settlement process, strike, spot or averaging
settlement calculations, underlying currency exposures and contract
size).\21\ OTC contracts can also be structured similarly to exchange
contracts such that they are ``look-alikes'' to underlying exchange
contracts. In other words, OTC contracts can contain the same economic
terms as exchange contracts, although they are not registered with an
exchange and are settled bilaterally between the parties to the
contract. At present, a central clearing counterparty does not stand
between OTC counterparties for the purpose of insulating counterparties
from default losses. The underlying price risk of OTC contracts is
determined bilaterally, between a dealer or a market maker, acting as a
counterparty, and another trading counterparty, which may be a
consumer, producer or another dealer. Such OTC transactions can be
documented using negotiated terms and references that suit the parties
to the contract. These can be the same as the terms and references of
exchange contracts (the ``terms of business'') or documentation
provided by the International Swaps and Derivatives Association, Inc.
---------------------------------------------------------------------------
\21\ According to the Registration Statement, the Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010, passed [sic]
on July 21, 2010, will impose mandatory clearing, exchange-trading,
margin and disclosure requirements on many derivatives transactions
for certain participants in the U.S. market, including formerly
unregulated OTC derivatives. The Commission, the CFTC, the Federal
Reserve and other regulators are currently engaged in rulemaking to
determine and clarify the details of these requirements.
---------------------------------------------------------------------------
The London Metal Exchange
According to the Registration Statement, the most significant
copper futures exchange is the LME. The LME was founded to trade copper
in 1877 and later added the trading of additional metals. The LME is a
principal-to-principal market where only eligible organizations or
``members'' are able to participate directly in trading. Through its
members, the LME offers its clients, who represent all aspects of the
physical industry, the opportunity to ``hedge'' their price risk and
therefore gain protection from future adverse price movements. Within
the membership structure, there are a number of categories of
membership, and each category provides for a different level of
activity. For example, the trading and clearing members can provide
their clients with access to the market, its risk management tools and
the LME's delivery mechanism.
Trading between members takes place across three trading platforms:
Through open-outcry trading in the ``Ring,'' through an inter-office
telephone market and through LMEselect, the LME's electronic trading
platform. The LME is a member-owned organization, and membership is
open to all companies that meet the relevant criteria as described in
the LME's rules and regulations. Membership categories are generally
divided between broker members and trade members.
Category 1 members are ``Ring Dealing Members,'' currently
including twelve entities, which are entitled to trade in the Ring, on
LMEselect and by telephone. They may operate a 24-hour market by
trading through the inter-office telephone market. All Ring Dealing
Members are also members of LCH.Clearnet and hence are entitled to
clear all transactions with other LCH.Clearnet members through the
independent clearing house. The twelve Ring Dealing members of the LME
are: Amalgamated Metal Trading Limited, Barclays Capital, ED & F Man
Commodity Advisers Limited, INTL FCStone (Europe) Ltd., J.P. Morgan
Securities Ltd., MAREX Financial Limited, Metdist Trading Ltd, Natixis
Commodity Markets Limited, Newedge Group (U.K. Branch),
Soci[eacute]t[eacute] G[eacute]n[eacute]rale, Sucden Financial Limited,
and Triland Metals Ltd.
Category 2 members are ``Associate Broker Clearing Members,''
currently including 26 entities, which have all the trading rights of
the Ring Dealing Members, except that they may not trade in the Ring.
As members of LCH.Clearnet, they also have the capacity to clear all
transactions with other LCH.Clearnet members through the independent
clearing house.
Category 3 members are ``Associate Trade Clearing Members,''
currently including two entities, which cannot issue client contracts
or trade in the Ring. They are typically industrial users of the market
that are able to clear their own transactions through LCH.Clearnet.
Category 4 members are ``Associate Broker Members,'' currently
including seven entities, which can issue exchange contracts but are
not members of LCH.Clearnet and hence cannot make use of its clearing
services. They may not trade in the Ring, nor directly on LMEselect,
and instead trade through the 24-hour inter-office telephone market.
Category 5 members, ``Associate Trade Members,'' have no trading
rights on the LME except as clients. Associate Trade Members are
typically industrial and financial companies with an interest in the
base metals market.
According to the Registration Statement, the LME provides a
transparent forum for the trading of exchange contracts. As a result of
this daily trading, prices are ``discovered'' and published by the LME.
The prices are then used by the international physical industry as the
basis of price negotiations for the physical purchase or sale of base
metals. As discussed above, the LME provides global
[[Page 23777]]
benchmark prices by publishing the settlement price and three-month
forward price of Grade A Copper. Price discovery (i.e., the process of
establishing these official prices), as well as a significant portion
of the trading volume on the LME, is conducted during regular London
trading hours by open-outcry among the twelve Ring Dealing Members in
the Ring, a circular area in which the LME Ring Dealing Members trade.
Open outcry is the oldest and most popular way of trading on the
LME and consists of a morning session and an afternoon session, in
which each of the different metal contracts traded on the LME is traded
in a five-minute ring session for each contract, and after a five-
minute interval break, the series is repeated. The second ring session
in the morning session is integral to setting the cash buyer price, the
cash seller price (i.e., the settlement price) and three-month seller
price (which is a three-month forward price) for Grade A Copper. At the
end of this ring session, the LME determines official prices for these
contracts from the last bid and offer prices, before the bell is
sounded to signal the session's end. Ring prices are disseminated
around the world in real time.
According to the Registration Statement, the LME is required by
statute to ensure that business on its markets is conducted in an
orderly and transparent manner, providing proper protection to
investors and persons looking to manage risk. Regulation of the market
is largely carried out by the LME, while the FSA, the regulator of the
financial services industry in the United Kingdom, is responsible for
regulating the financial soundness and conduct of the business
conducted by LME members. The FSA was given rule-making, enforcement,
and regulatory powers by the Financial Services and Markets Act 2000
(the ``FSM Act''). The FSA was granted this authority to fulfill four
statutory objectives: (1) Market confidence, (2) financial stability,
(3) consumer protection, and (4) reduction of financial crime. The LME
is approved as a Recognised Investment Exchange, and, in conformance
with U.K. and other international regulatory requirements, the LME
offers, through price, volume transparency and audit trails, a forum
for the trading of base metals, including by providing rules for
arbitration proceedings. LME members also operate in a strict
regulatory environment overseen by the FSA.
The LME and its members are also subject to regulatory controls and
input from various U.K. government bodies and offices, as well as
directives from the European Union Commission. In international
trading, rules applied by overseas regulatory bodies, such as the CFTC,
are also taken into account.
LME Warrants
According to the Registration Statement, all contracts registered
with the LME are executed on the basis of physical settlement by
delivery. In order to effectuate such physical delivery, the LME
members are obligated to deliver base metal against LME futures
contracts in the form of LME warrants. An ``LME warrant'' is a bearer
document evidencing the right of the holder to possession of a
specified lot of metal at a specified LME warehouse location. It is the
right of the seller of the futures contract to select the LME warrant
it will deliver to the buyer of the futures contract. LME warrants are
tradable in their own right in the OTC market. The holder of each LME
warrant bears the rental payments for storage of the underlying copper
in an LME-approved warehouse location, as well as the risk of any
changes to the value of the LME warrant due to the physical variance of
the underlying copper and any changes in the locational premium or
rent. The system for recording all pertinent information regarding LME
warrants is called LME Sword and is controlled by the LME as part of
its custody and clearing operations. The LME publishes, as a matter of
public record (in the form of daily stock reports), the number of, and
tonnage associated with, LME warrants (including cancelled LME warrants
for which copper has yet to be delivered out of the relevant LME
warehouse), as well as other relevant information, such as holding
reports. The LME has become a primary source of information regarding
the physical demand and supply for specific metals, such as copper.
This is because of the perception that it is a ``market of last
resort'' for participants to sell excess stock in times of oversupply
or as a source of material in times of extreme shortage.
Physical Variance of Copper
The LME trades, promotes and maintains the standards of quality,
shape and weight of Grade A Copper, a commonly accepted standardized
form of copper cathode. Grade A Copper currently must conform to the
standard BS EN 1978:1998 (Cu-CATH-1). This standard specifies the
allowed source, shape and chemical composition of the cathode. Most
copper cathodes are 99.95% to 99.99% pure copper. The chemical
composition, and impurities, in the cathode depend largely on the
source of the copper and whether the metal has been processed from
copper sulfide ore or copper oxide ore. Copper oxides have a smaller
number of residual chemical elements in the cathode.
As discussed further below, all copper delivered to the LME that
underlies an LME warrant must be of an acceptable weight (with each LME
warrant representing one lot of copper), Acceptable Delivery Brand (as
defined below) and acceptable chemical composition (i.e., Grade A
Copper) and must be stored in an LME-approved warehouse.
Each cathode varies in size and weight, depending on the refining
process. Cathodes are aggregated into ``lots'' of 25 metric tons each,
which is the standard weight of the physical metal underlying each LME
futures contract traded through the LME clearing system and futures
market. Each LME futures contract provides for the delivery of one lot
of copper (i.e., 25 metric tons), and upon the settlement of an LME
futures contract, a person can satisfy the futures contract's physical
delivery requirement with the delivery of one LME warrant representing
one lot of copper. Because all physical substances vary in weight, the
LME Rules and Regulations (the ``LME Rules'') provide for a tolerance
of plus or minus 2% in the weight of a lot of copper as represented by
an LME warrant.
Similarly, the physical copper market also trades most copper based
on a 25 metric ton lot and has also adopted the standard tolerance of
plus or minus 2% in the weight of a lot of copper as set by the LME
Rules. In practice, this means that one lot of copper in the physical
market generally uses tolerance levels similar to the levels applied by
the LME of plus or minus 2% in weight. Therefore, any transaction in
physical copper, including a transaction by the Trust, will need to
account for such physical tolerances.
Acceptable Delivery Brands and Good Delivery Standards
Each lot of physical copper has a specific brand that is specific
to one refiner. A lot of copper always has a single brand, and there is
no commingling of brands within an individual lot.
The LME oversees the registration process for each refinery seeking
to register its brand of copper as an acceptable delivery brand for LME
registered transactions. Copper cannot be represented by LME warrants
unless the source refinery has had its brand registered with the LME
(an ``Acceptable Delivery Brand'').
[[Page 23778]]
Currently, there are 79 brands that are Acceptable Delivery Brands.
Some refineries have more than one smelting and refining process, so a
refinery may register more than one brand, reflecting, among other
factors, the different chemical composition, size, origins and bundling
of the copper cathodes. The country with the largest number of
Acceptable Delivery Brands is Chile, which has 22 Acceptable Delivery
Brands, followed by Japan, which has 9 Acceptable Delivery Brands.
The LME has the authority to de-register brands from the LME from
time to time. This decision is generally made by the LME, on the
recommendation of the LME's Copper Committee, when an Acceptable
Delivery Brand ceases to have a proper tradable market, for example
upon a merger of the refiner that causes the brand to be subsumed into
the surviving entity's product line, upon closure of the refinery or
specific mining source or due to other commercial reasons. An
Acceptable Delivery Brand may be de-registered after the issuance of a
notice to LME members and other market participants indicating that (i)
no further deliveries of such brand will be accepted for LME warranting
as of a stated effective date and (ii) once the stocks of such brand in
the LME system are exhausted, the brand will be delisted and such
copper will no longer constitute good delivery against LME Grade A
Copper contracts. The LME attempts to make this process occur in an
orderly fashion with sufficient notice to the market.
Acceptable Delivery Brands, de-registered brands and unregistered
brands of copper are traded actively in the physical copper market. If
a de-registered or unregistered brand has a relationship to an
Acceptable Delivery Brand (e.g., a brand is de-registered and phased
out due to the merger of the refiner, whose copper product is now
registered under a different Acceptable Delivery Brand) it is generally
traded in the physical copper market at a slight discount to the LME
price. Generally, copper that is not of an Acceptable Delivery Brand is
worth less than copper that is of an Acceptable Delivery Brand because
of the perceived lower liquidity associated with that brand of metal.
The Trust will accept only copper of an Acceptable Delivery Brand
in connection with the creation of Shares.
Warehousing of Copper
The warehousing of copper can generally be divided into two primary
systems: the LME-approved warehousing system (i.e., for LME warrants)
and the warehousing of copper for the physical market (i.e., any copper
delivered outside of systems or exchanges like the LME).
Copper represented by an LME warrant may be stored only in an LME-
approved warehouse. Each LME-approved warehouse must comply with the
LME Rules related to road, rail and water access to the specific
warehouse. LME-approved warehouses are required to be in bonded,
customs- and duties-free zones within a jurisdiction and the LME Rules
set certain requirements, such as mandatory inspections carried out by
the LME, to ensure that LME-registered metal is accepted, processed and
stored in accordance with the LME Rules. The LME sets the maximum
storage and delivery fees a warehouse can charge for the delivery of
LME-registered metal into or out of an LME-approved warehouse.
Additionally, the LME sets a maximum daily rent charge (per metric ton)
and the rental payment schedule for LME-registered metal stored in an
LME-approved warehouse. Warehouse rental rates as of April 2012 will
range from 39 to 41 cents per metric ton per day, with annual payment
in advance due on March 31 of each calendar year. As a result, LME
Warrants generally trade in between these payment dates, inclusive of
accrued rent. Warehouse rental charges are typically revised annually,
generally in April or May of each calendar year.
According to the Registration Statement, in contrast to the LME-
approved warehousing system, warehousing in the physical copper market
is not subject to regulations like the LME Rules, although it has
developed links, locations and standard practices similar to those used
by LME-approved warehouses. These warehouses can be established in
bonded, customs- and duties-free zones within a country (as with LME-
approved warehouses), or alternatively located in jurisdictions where
the movement of metal is subject to customs and duties charges. Rental
rates for the storage of non-LME registered copper are agreed upon on a
bilateral basis between the warehouse-keeper and the contracting party.
An LME-approved warehouse can reside within the same location as a
non-LME-approved warehouse. In addition, LME-approved warehouses may
hold copper that is not registered with the LME (i.e., not underlying
the issuance of an LME warrant), although the relevant warehouse is
obligated to identify, record and store copper not registered with the
LME separately from any copper registered with the LME. Such metal is
not subject to LME supervision or the LME Rules. Copper held by the
Trust can be stored by the Warehouse-keeper in both LME-approved and
non-LME-approved warehouses and is not subject to regulation by the
LME. All warehouse locations for the Trust will be in bonded, customs-
and duties-free zones. For the avoidance of doubt, the Trust will only
hold physical copper, not LME warrants.
Locational Premia for Copper
As noted above, copper is bulky relative to precious metals such as
gold, silver, platinum and palladium. Copper is used in many different
industrial processes, which makes its location relative to the place of
consumption important, especially given its bulk relative to its
monetary value. The settlement price of copper determined on the LME is
based on a theoretical ``cheapest-to-deliver'' LME warrant of copper in
the LME system (that is, the LME warrant of copper with the lowest
locational premium) because determining which copper will be delivered
is the right of the seller. In other words, the settlement price is
determined by the Ring Dealing Members relative to a theoretical
``cheapest-to-deliver'' lot because each transaction requires only the
delivery of an LME warrant representing a lot of copper in any LME-
approved warehouse. By virtue of market forces, any LME dealer required
to deliver copper will always, if possible, deliver the LME warrant
representing the ``cheapest-to-deliver'' LME warrant of copper it owns.
LME warrants in the OTC market (i.e., not used for the settlement
of LME registered transactions) may trade at a price that is different
from the LME settlement price. Depending on the location and the brand
associated with a particular LME warrant, the relevant premium will
differ in amount, reflecting the supply and demand dynamics of the
specific location and brand of copper underlying that LME warrant.
Within the physical copper market, there is a similar dynamic, with
the result that copper trades at a locational premium (or discount) to
the settlement price, depending on the grade, brand and location of the
copper and the terms of delivery (which are often based on the
International Commercial Terms, an internationally recognized standard
used in contracts for the sale of goods also referred to as the
Incoterms[supreg]). All other pricing variables being equal (if copper
is consistently the same grade (e.g., Grade A Copper), the same brand
(e.g., an Acceptable Delivery Brand) and delivered under the same
International
[[Page 23779]]
Commercial Terms (e.g., same in-warehouse insurance, transportation
and/or delivery costs paid, as well as similar pre-entry customs,
duties and taxes)), differences in locational premia can reflect
various supply and demand factors, such as the relative pricing power
of the producers versus the consumers. Currently, warehouse locations
in Asia, such as Singapore, Malaysia and South Korea, due to their
proximity to China, carry the highest locational premia over the LME
settlement price. Fundamentally, copper that is stored in a location
that is low in supply and high in demand will carry a higher premium
than copper that is stored in a location where supply is generally high
and demand is low.
The Trust will hold only copper and will not trade in copper
futures contracts on the LME, COMEX, the SHFE or any other futures
exchange. The Trust will not buy, sell or hold LME Warrants. Rather,
the Trust will take delivery of copper in the form of Grade A Copper.
According to the Registration Statement, the Trust will not be
regulated by the CFTC under the Commodity Exchange Act as a ``commodity
pool,'' and the Sponsor is not subject to regulation by the CFTC as a
commodity pool operator or a commodity trading advisor. Investors in
the Trust will not receive the regulatory protections afforded to
investors in regulated commodity pools, nor may the LME, COMEX, the
SHFE or any futures exchange enforce its rules with respect to the
Trust's activities.
Description of the Trust
The Trust will invest in Grade A copper in physical form. All
copper owned by the Trust will be of an Acceptable Delivery Brand at
the time such copper enters the Trust. The Trust will store copper in
warehouses that are maintained by the Warehouse-keeper. Initially, the
permitted warehouse locations are in the Netherlands (Rotterdam),
Singapore (Singapore), South Korea (Busan and Gwangyang), China
(Shanghai) and the United States (Baltimore, Chicago and New Orleans).
Although the Trust may hold copper in warehouses in any of these
locations (or other locations that may be determined from time to
time), the locations at which copper is actually held will depend on
(i) the warehouse locations at which Authorized Participants have
actually delivered copper to the Trust and (ii) the warehouse locations
from which copper is or has been delivered pursuant to the Trust's
redemption procedures.
As discussed in ``The Physical Copper Market'' above, copper at
different warehouse locations will trade with different locational
premia, based on supply and demand factors (for example, freight rates,
insurance costs, time to transport and the relative pricing power of
the producers versus consumers). The Trust's Selection Protocol, which
is described in ``Selection Protocol'' below, is designed to ensure
that the Trust will always deliver copper first from the warehouse
where it holds available copper that has the lowest locational premium
at a particular time, referred to in the Registration Statement as the
``cheapest-to-deliver location.'' The cheapest-to-deliver location is
determined on each Business Day of the Trust by the Valuation Agent
independently in its sole discretion, using the same procedure applied
by the Valuation Agent to determine the locational premium of each
warehouse location where the Trust holds copper.
The Valuation Agent will be responsible for (i) calculating the
locational premia used to calculate the Trust's NAV and in certain
other calculations by the Administrative Agent and (ii) determining
whether the cheapest-to-deliver location has changed. The locational
premium for a warehouse location for a Business Day will be calculated
as an amount expressed in U.S. dollars that is equal to the average
value of copper per metric ton in such location minus the LME
settlement price of copper on such Business Day.
The Valuation Agent will calculate the average value of copper per
metric ton in a location through a combination of (i) a weighted
calculation (based on tonnage) of actual transactions and (ii) the
indicative prices of market makers. Data will be collected primarily by
phone, but also by email and by direct submission. In order to avoid
any actual or potential conflict of interest, or perception of a
conflict, the Valuation Agent will exclude any information provided by
any JPMorgan-affiliated entity when calculating the locational premium
of copper in any permitted warehouse location. The Valuation Agent will
record details regarding its contacts for reference and internal audit
purposes.
When the Valuation Agent collects information on actual
transactions for use in calculating locational premia, the Valuation
Agent will generally request full details regarding such transactions,
including price, material specifications, transaction size, delivery
point and terms, payment details and other factors, all of which may
inform the Valuation Agent's assessment of the value of the underlying
transaction. If a particular transaction involves a significantly
higher or lower price than other comparable transactions, the Valuation
Agent may request proof of the transaction price, and if such
information is not provided, the price may be excluded from the
assessment. Where possible, the Valuation Agent will seek to confirm
details with the parties on both sides of a transaction.
The Valuation Agent is expected to conduct its polling process for
each permitted warehouse location of the Trust for each day that is a
regular Business Day in such location; if a day is not a regular
Business Day in a permitted warehouse location, the last calculated
locational premium will be used. The Valuation Agent will use a
combination of actual and indicative transaction prices from market
participants. The number of market participants that provide
information will vary.
In calculating the locational premia, the Valuation Agent will
determine in its discretion the relative weights that it will give to
actual transactions as compared to indicative prices. The Valuation
Agent may vary the relative weights of the components based on the
level of physical activity on a particular Business Day as well as
other factors. The use of both actual transaction information and
indicative pricing information is intended to allow continuity of
pricing and up-to-date market quotes for periods when physical activity
has declined.
Pursuant to the Valuation Agreement, the Valuation Agent has made
numerous commitments to ensure the integrity and objectivity of the
locational premia:
The Valuation Agent will not make any locational premia
publicly available prior to the time such information is provided to
the Trust, the Sponsor and the Administrative Agent on any Business
Day.
The Valuation Agent will maintain books and records
relating to its valuations for at least ten years from the end of the
period to which they relate, and will allow an independent third party
to inspect such books and records upon reasonable notice.
The Valuation Agent will at all times maintain written
policies and procedures reasonably designed to:
(i) Prevent any violation of applicable law, including without
limitation the Securities Act, the Exchange Act and the Commodity
Exchange Act, in connection with its provision of services under the
Valuation Agreement; and
(ii) Ensure the Valuation Agent's compliance with, and prevent
violations of, the Valuation Agreement.
[[Page 23780]]
The Valuation Agent will designate a chief compliance
officer who is responsible for administering the Compliance Policies
and Procedures. The chief compliance officer must:
(i) Review on an ongoing basis the adequacy of the Compliance
Policies and Procedures and the effectiveness of their implementation;
(ii) Provide a report to the Sponsor, at least annually, on the
adequacy of the Compliance Policies and Procedures and the
effectiveness of their implementation; and
(iii) Report promptly to the Sponsor (A) any violation of the
Compliance Policies and Procedures and (B) any material weakness or
inadequacy in the Compliance Policies and Procedures and the steps
taken or to be taken to remedy any such weakness.
The Valuation Agent must provide to the Sponsor:
(i) For each fiscal year of the Trust, within 30 days of the end of
such fiscal year, a certification that (A) during such fiscal year the
Valuation Agent has complied with the terms and conditions of the
Valuation Agreement and its valuation methodology and (B) the Valuation
Agent's representations and warranties in the Valuation Agreement
continue to be materially true and correct;
(ii) For each calendar quarter, reports or certifications requested
by the Sponsor relating to the valuation data, valuation methodology
and related services; and
(iii) Such other reports or certifications at such other times as
the Sponsor may reasonably request from time to time in response to an
articulated, identifiable concern, including reports or certifications
required to be delivered to a governmental agency or regulatory body.
The Valuation Agent may not purchase or sell, and must
instruct its officers, directors, employees and agents not to purchase
or sell, any securities of the Trust or futures, options or other
derivative instruments on securities of the Trust, and must maintain
compliance policies and procedures reasonably designed to promote and
monitor compliance with such instruction by the foregoing persons.
The Valuation Agent must take specific security measures
when collecting, storing, processing, archiving and disposing of
information used to derive locational premia.
The Sponsor has represented that it believes that the Valuation
Agent's independence, valuation methodology and other commitments will
ensure the integrity and objectivity of the pricing information, and
that such pricing information, together with the procedures for
transparency and public availability of information set forth below,
will produce a robust arbitrage mechanism that will (i) align the
secondary market price per Share to the NAV per Share and (ii)
facilitate having creation and redemptions occur at a value close to
the NAV per Share.
The Sponsor has further represented that, because the Trust will
create and redeem Shares based solely on a weight of copper, rather
than a price of copper (as described below), the locational premia will
be used primarily for (i) informational purposes, such as calculating
intraday indicative values that are published in order to facilitate
arbitrage activity, and (ii) making other determinations, such as
whether and when copper will be sold in order to pay the Trust's
expenses, that bear little relationship to creation and redemption
activity.
Daily Operations of the Trust
According to the Registration Statement, on each Business Day,
after 4 p.m. Eastern Time (``E.T.'') (unless otherwise indicated
below), the following activities, each of which is described in more
detail below, will be taken by or on behalf of the Trust, in the order
indicated:
First, if the Valuation Agent has determined and informed
the Administrative Agent by 5 p.m. London time on any such Business
Day, that the cheapest-to-deliver location has changed, the
Administrative Agent and the Warehouse-keeper will follow the
procedures described in the Registration Statement relating to a change
in the cheapest-to-deliver location.
Second, the Administrative Agent will (A) process any
creation orders successively, in the order that they were submitted in
completed form to the Administrative Agent, (B) instruct the Warehouse-
keeper to give effect to changes in the ownership of copper as a result
of processing any such creation orders and (C) cause the Trust to
create Shares to effect any such creation orders.
Third, the Administrative Agent will (A) process any
redemption orders successively, in the order that they were submitted
in completed form to the Administrative Agent, (B) instruct the
Warehouse-keeper to give effect to changes in the ownership of copper
as a result of processing any such redemption orders and (C) cause the
Trust to redeem Shares to effect any such redemption orders.
Fourth, the Administrative Agent will calculate the
Trust's NAV, NAV per Share, Creation Unit Ratio and Creation Unit
Weight effective for the next Business Day.
Fifth, if the Trust's procedure for paying the Sponsor's
fee (as described in the Registration Statement) requires copper to be
transferred on such Business Day, the Administrative Agent will
instruct the Warehouse-keeper to effectuate a book-entry transfer of
the ownership of such copper to the Sponsor for payment of any accrued
unpaid Sponsor's fee.
Sixth, if the Trust's procedure for paying Other Expenses
\22\ (as discussed in the Registration Statement) requires copper to be
transferred on such Business Day, the Administrative Agent will
instruct the Warehouse-keeper to effectuate the book-entry transfer of
such copper from the Trust to the Sponsor for sale and the application
of the proceeds toward payment of accrued unpaid Other Expenses.
---------------------------------------------------------------------------
\22\ ``Other Expenses'' are expenses of the Trust other than the
Sponsor's fee.
---------------------------------------------------------------------------
Creations and Redemptions of Shares
Shares of the Trust are created when an Authorized Participant
transfers copper having a weight equal to the Creation Unit Weight (as
described below) to the Trust and the Trust, in return for such copper,
delivers a Creation Unit of Shares to the Authorized Participant.\23\
Shares of the Trust are redeemed when an Authorized Participant
transfers a Creation Unit of Shares to the Trust and the Trust, in
return for such Shares, delivers copper having a weight equal to the
Creation
[[Page 23781]]
Unit Weight to the Authorized Participant.\24\
---------------------------------------------------------------------------
\23\ To be an Authorized Participant, a person must: (i) Be a
registered broker-dealer or other securities market participant such
as a bank or other financial institution that is not required to
register as a broker-dealer to engage in securities transactions;
(ii) be a participant in DTC; (iii) have entered into, or had its
agent enter into on its behalf, an Authorized Participant Warehouse
Agreement with the Warehouse-keeper establishing the Authorized
Participant's Reserve Account and Private Account; (iv) have entered
into an Authorized Participant Agreement with the Sponsor on behalf
of the Trust, which among other things grants express authority to
the Administrative Agent to instruct the Warehouse-keeper to
transfer whole lots and/or fractional lots of copper (including
creation overweight and creation underweight amounts of copper
associated with any creation order and redemption underweight
amounts of copper associated with any redemption order) between the
Trust Account and such Authorized Participant's Private Account and
Reserve Account; and (v) have delivered at least 25.0 metric tons of
copper to the Warehouse-keeper at a permitted warehouse location of
the Trust to establish its Reserve Account (and thereafter maintain
at least 15.0 metric tons of copper in its Reserve Account at any
permitted warehouse location of the Trust). In general, in order to
create Shares, an Authorized Participant must own copper that is
held in a permitted warehouse location of the Warehouse-keeper prior
to the submission of a creation order.
\24\ Creation orders submitted to the Administrative Agent must
contain the following information: (i) The number of Creation Units
expected to be created; (ii) the amount of the transaction fee due
for such creation order; (iii) the warehouse location for each whole
lot proposed to be transferred to the Trust; (iv) the specific
identification number for each whole lot proposed to be transferred
to the Trust; (v) the exact weight, expressed in metric tons, of
each whole lot proposed to be transferred to the Trust; and (vi) the
brand of each whole lot to be transferred to the Trust, which must
be an Acceptable Delivery Brand. Creation orders will be given
effect in the order accepted by the Administrative Agent, after the
implementation of any change in the cheapest-to-deliver location on
a particular Business Day, but before giving effect to any
redemptions or the payment of any accrued unpaid Sponsor's fee or
accrued unpaid Other Expenses on such Business Day. The amount of
copper required to be transferred from the Authorized Participant to
the Trust Account will be determined using the Creation Unit Ratio
calculated on the immediately prior Business Day. All weights will
be calculated to the nearest 0.001 metric ton.
---------------------------------------------------------------------------
A Creation Unit of Shares is a block of 2,500 Shares. The Creation
Unit Weight for a particular day is equal to 25.0 metric tons
multiplied by the Creation Unit Ratio in effect for such day. The
Creation Unit Ratio is initially equal to 1.0, but declines gradually
over time, reflecting the payment of expenses by the Trust. As a
result, the Creation Unit Weight will decline gradually over time as
well. The Creation Unit Weight and Creation Unit Ratio in effect on any
Business Day will have been calculated on the prior Business Day, after
the calculation of the Trust's NAV on such Business Day.\25\
---------------------------------------------------------------------------
\25\ References in the Registration Statement to the ``weight''
of copper refer to the net weight of copper in metric tons. This
means, with respect to any lot, the weight of the actual copper in
the lot and does not include the weight of any bindings, straps,
wooden platforms (pallets), or of any temporary or permanent storage
mechanisms.
---------------------------------------------------------------------------
Holding and Transferring Copper in Whole Lots and Fractional Lots
In connection with a creation order or a redemption order, an
Authorized Participant must transfer to the Trust, or the Trust must
transfer to the Authorized Participant, as applicable, copper having an
aggregate weight equal to the number of Creation Units being created or
redeemed, multiplied by the Creation Unit Weight in effect for such
day. The copper that the Trust holds normally trades in standardized
lots, each of which weighs between 24.5 metric tons and 25.5 metric
tons. These lots (referred to in the Registration Statement as ``whole
lots'') will not be physically divisible in connection with the Trust's
activities, and consequently the exact weight of copper required for a
creation or a redemption generally cannot be transferred using only
whole lots.
As a result, the creation and redemption of shares in the manner
contemplated by the Trust's operations requires a means of owning and
transferring not only whole lots of copper, but also ``fractional
lots,'' i.e., interests that represent a fractional portion of a whole
lot, in order to resolve any overweight amounts or underweight amounts.
Therefore, the Warehouse-keeper will establish and utilize a book-
entry procedure to record ownership by the Trust, the Sponsor or an
Authorized Participant of specific whole and fractional lots of copper
held in the warehouse locations. The Warehouse-keeper's book-entry
system will use three different types of accounts, referred to in the
Registration Statement as the Trust Account,\26\ the Reserve Accounts
\27\ and the Private Accounts.\28\ The Warehouse-keeper will record in
these accounts the warehouse receipts it issues representing the
ownership of specific whole and fractional lots of copper by the Trust,
the Sponsor and each Authorized Participant. An overview of each of
these types of accounts and the operation of the accounts in connection
with creations and redemptions of Creation Units is described further
in the Registration Statement.
---------------------------------------------------------------------------
\26\ The Warehouse-keeper will maintain a book-entry account at
each warehouse location to record all of the copper that is owned by
the Trust. Collectively, such book-entry accounts are referred to as
the ``Trust Account.'' The Trust's ownership of whole lots and
fractional lots of copper will be recorded in the Trust Account.
Copper that is transferred to the Trust in connection with creation
orders will be recorded by the Warehouse-keeper, upon instruction
from the Administrative Agent, as an addition to the Trust Account,
and copper that is transferred from the Trust in connection with
redemption orders or the payment of Trust expenses will be recorded
by the Warehouse-keeper, upon instruction from the Administrative
Agent, as a removal from the Trust Account. In consideration for its
Sponsor's Fee, the Sponsor will pay all expenses associated with the
storage of copper owned by the Trust and recorded in the Trust
Account, including both whole and fractional lots.
\27\ The Warehouse-keeper will maintain at each warehouse
location a book-entry account to record the private ownership
interest in copper held by an Authorized Participant at such
warehouse location. These book-entry accounts with respect to an
Authorized Participant are collectively referred to herein as the
``Reserve Account'' of such Authorized Participant. A Reserve
Account serves two primary purposes. First, in order to reduce the
risk that creation orders will fail as a result of an insufficient
amount of copper being transferred from an Authorized Participant's
Private Account (as discussed below) to the Trust in connection with
a creation order, each Authorized Participant will be required to
hold an excess amount of copper that meets a minimum requirement in
order to satisfy any underweight amounts remaining from a creation
order. This copper will be held in the Reserve Account so that it is
separately identifiable from the copper owned by the same Authorized
Participant through its Private Account. Second, a Reserve Account
will be used to record any fractional lot of copper that an
Authorized Participant may hold at a warehouse location as a result
of the processing of creation or redemption orders. A fractional lot
can be created when the weight of copper needed to create or redeem
a Creation Unit of Shares is more or less than the weight of the
whole lots of copper delivered.
\28\ The Warehouse-keeper will maintain at each warehouse
location book-entry accounts to record the private ownership
interest in copper held by each of the Sponsor and each Authorized
Participant, as applicable. These book-entry accounts of the Sponsor
or an Authorized Participant, as applicable, are collectively
referred to herein for any single owner as the ``Private Account''
of such owner. As part of a creation or redemption, an Authorized
Participant will use its Private Account to facilitate movements of
copper between itself and the Trust. Each Authorized Participant or
the Sponsor can add or remove copper from its respective Private
Account by adding copper to, or removing copper from, a warehouse
location.
---------------------------------------------------------------------------
Selection Protocol
The operation of the Trust requires the Administrative Agent to
follow a prescribed procedure to identify specific lots of copper to be
used for (i) the reconciliation of any creation overweight and creation
underweight amounts when the Trust issues Creation Units of Shares;
(ii) the satisfaction of any redemption orders accepted on any Business
Day; (iii) the reconciliation of any redemption underweight amounts
when the Trust redeems Creation Units of Shares; (iv) the calculation
and payment of Trust expenses; and (v) the reallocation of ownership
interests in copper to the extent required in connection with a change
in the cheapest-to-deliver location, as described in the Registration
Statement. The ``Selection Protocol'' is the procedure used by the
Administrative Agent whenever it needs to select lots for these
purposes.
The Selection Protocol is intended to provide a consistent and
transparent method of selecting lots, by requiring the Administrative
Agent to select lots in the following manner:
Lots will be selected first from the cheapest-to-deliver
location, and then from other warehouse locations successively based on
a ranking of their respective locational premia from lowest to highest.
If there are multiple lots in the same warehouse location
specified by the first step, lots in such warehouse location will be
selected based on the date such lots were first delivered to the
relevant account, with the earliest delivered lot being selected first.
If there are multiple lots in the same warehouse location
that were first delivered to the relevant account on the
[[Page 23782]]
same date, lots will be selected based on the actual weight of the lot,
with the lot having the lowest actual weight being selected first.
The Sponsor represents that, in addition to providing an objective
selection protocol, these selection methods make it more likely that
``older'' lots of copper will be redeemed and potentially used for
industrial purposes rather than held indefinitely by the Trust.
Creation of Shares
In connection with any creation order on any Business Day, an
Authorized Participant will be required to transfer to the Trust copper
having an aggregate weight equal to the number of Creation Units being
created multiplied by the Creation Unit Weight in effect for such
Business Day. When an Authorized Participant submits a creation order
it must specify, among other things, the specific whole lot(s) in its
Private Account to be transferred to the Trust Account for such
creation order (using the unique identification number(s) of such
lot(s)), as well as the warehouse location and weight of each such lot
(calculated to the nearest 0.001 metric ton).\29\ In order to assure
that the exact required amount of copper is transferred to the Trust
Account, in connection with any creation order, the Administrative
Agent will calculate the amount by which the aggregate actual weight of
the whole lots to be transferred by the Authorized Participant falls
short of (a ``creation underweight'') or exceeds (a ``creation
overweight'') the aggregate Creation Unit Weight for such creation
order, and will instruct the Warehouse-keeper to adjust for any such
overweight or underweight amount for such creation order by
transferring ownership of copper between the Authorized Participant's
Reserve Account and the Trust Account, pursuant to specific procedures
set forth in the Registration Statement.
---------------------------------------------------------------------------
\29\ The Authorized Participant chooses the location from which
whole lots of metal will be transferred to the Trust for a creation.
This can include the potential that whole lots specified in a
creation order will be from more than one location. This provides
Authorized Participants with greater flexibility in order to fulfill
a creation order. In addition, the Trust does not know at all times
where an Authorized Participant will have sufficient stock available
for creations at any given time. Although the Authorized Participant
will choose which location(s) to which to deliver, the metal must be
Grade A Copper of an acceptable LME brand (at such time) and the
location(s) must be acceptable warehouse locations for the Trust (at
such time).
---------------------------------------------------------------------------
Redemption of Shares
In connection with any redemption order on any Business Day, the
Trust will be required to transfer to the redeeming Authorized
Participant copper having an aggregate weight equal to the number of
Creation Units being redeemed multiplied by the Creation Unit Weight in
effect for such Business Day (calculated to the nearest 0.001 metric
ton). In order to assure that the exact required amount of copper is
delivered from the Trust to the redeeming Authorized Participant in
connection with any redemption order, the Administrative Agent will
select, in accordance with the Selection Protocol, specific whole lots
to be transferred from the Trust to the redeeming Authorized
Participant, and will instruct the Warehouse-keeper to transfer such
selected whole lots to such Authorized Participant's Private Account,
until the aggregate weight of whole lots transferred in connection with
the redemption order is less than the aggregate Creation Unit Weight of
such redemption order and the remaining weight of copper needed to
satisfy the redemption order is less than the weight of the next whole
lot that would be selected pursuant to the Selection Protocol.
The remaining weight by which the aggregate weight of the
transferred whole lots (calculated to the nearest 0.001 metric ton)
falls short of the aggregate weight of the copper required to be
transferred from the Trust to the Authorized Participant is the
``redemption underweight.'' Following the transfer of whole lots of
copper, the Administrative Agent will instruct the Warehouse-keeper to
adjust for any redemption underweight by transferring ownership of
copper recorded in the Trust Account to the relevant Authorized
Participant's Reserve Account, pursuant to specific procedures set
forth in the Registration Statement.
When copper is redeemed in the foregoing manner, the amount of
copper received by the Authorized Participant will equal a pro rata
share of the copper held by the Trust based on the weight of the
Trust's aggregate copper holdings immediately prior to the processing
of redemptions. However, because the copper held by the Trust in
different locations may vary in value based on the applicable
locational premium, the value of the copper actually received by the
Authorized Participant will depend on the location of the specific
whole lot(s) and fractional lots, if any, of copper that were
transferred to the Authorized Participant.
The cut-off time for placing creation orders or redemption orders
for a Business Day is 4 p.m. E.T. Creation orders and redemption orders
will be processed on each Business Day after 4 p.m., in the order that
such orders have been received in satisfactory form by the
Administrative Agent. Redemption orders will be processed individually
following the processing of all creation orders on such day but prior
to the calculation of the Trust's NAV and any payment of accrued
expenses on such day.
The Valuation Agent will generally be responsible for (i)
calculating the locational premia used in connection with the
determination of the NAV, the NAV per Share, the Creation Unit Ratio
and other calculations by the Administrative Agent, and (ii)
determining whether the cheapest-to-deliver location has changed.
The Warehouse-Keeper's Role
The Warehouse-keeper is responsible for the day-to-day storage of
the copper held by the Authorized Participants and the Trust and the
accurate recordkeeping of these inventories of copper.\30\ The
Warehouse-keeper's principal responsibilities include:
---------------------------------------------------------------------------
\30\ According to the Registration Statement, The Henry Bath
Group, the Warehouse-keeper, is a warehousing services provider
specializing in the storage and shipping of exchange-traded metals
and soft commodities around the world. The Henry Bath Group operates
a global platform of exchange-approved storage warehouses for
holding, making and taking delivery of physical commodity products
and is licensed by the LME, the London International Financial
Futures and Options Exchange, the COMEX (a division of the CME
Group), the Intercontinental Exchange and the Dubai Copper &
Commodities Exchange to store and issue exchange-traded warrants for
various commodities including copper, aluminum, zinc, lead, nickel,
tin, aluminum alloy, steel billets, cocoa, robusta coffee, arabica
coffee and plastics.
---------------------------------------------------------------------------
(a) Facilitating the delivery of copper in and out of each
Authorized Participant's Private Account and Reserve Account;
(b) Storing the copper of the Trust, the Authorized Participants
and the Sponsor in its warehouse locations;
(c) Effectuating the transfers or allocations of copper between the
Trust Account and each Authorized Participant's Private Account and
Reserve Account;
(d) Effectuating the transfers or allocations of copper between the
Trust Account and the Sponsor's Private Account;
(e) Confirming the executability of creation orders and redemption
orders and cooperating with the Administrative Agent to resolve any
discrepancies, errors or any other issues affecting a creation order or
redemption
[[Page 23783]]
order prior to acceptance or rejection; and
(f) Electing sub-contractors for warehousing.
The Henry Bath Group warehouse locations utilized by the Trust will
consist of both LME-approved and non-LME-approved warehouses. With
respect to LME-approved warehouses, the LME sets minimum security
standards for all such member warehouse facilities, including but not
limited to scheduled inspections of premises, visual inspection of all
metal in storage, quarterly inspection of all weighing equipment by an
institution unaffiliated with the warehouse and review of all records
and supporting documentation.
Reporting and Valuation
According to the Registration Statement, on each Business Day, as
promptly as practicable after 4 p.m. E.T., the following will be
published on the Trust's Web site:
The number of outstanding Shares of the Trust as of the
beginning of the Business Day;
The Trust's NAV;
The NAV per Share;
The locational premium for each warehouse location, as
calculated by the Valuation Agent at 5 p.m. London time, quoted both in
U.S. dollars and as a percentage premium relative to the LME settlement
price;
The price per metric ton of copper in each warehouse
location where the Trust is permitted to hold copper;
The aggregate weight in metric tons of all copper owned by
the Trust;
The aggregate weight in metric tons of the copper owned by
the Trust in each warehouse location;
The gross value in U.S. dollars of the copper owned by the
Trust in each warehouse location;
The Creation Unit Ratio; and
The Creation Unit Weight.
On each Business Day, as promptly as practicable after 4 p.m. E.T.,
a downloadable file will be made available on the Trust's Web site with
the following information relating to each lot of copper owned by the
Trust:
The unique identification number of such lot;
The warehouse location in which such lot is held;
The brand of such lot and, if such brand of copper is not
an Acceptable Delivery Brand, an indication that such lot consists of a
brand of copper that has been de-registered;
The weight in metric tons of such lot; and
The date upon which such lot was delivered to the Trust.
In addition, during the NYSE Arca Core Trading Session from 9:30
a.m. to 4 p.m. E.T., NYSE Arca will calculate and publish:
The ``First-Out IIV,'' an intraday indicative value per
Share disseminated approximately every 15 seconds that represents, as
of the time of such calculation, the hypothetical U.S. dollar value per
Share of the copper that would need to be transferred to or from the
Trust to create or redeem one Share included in a Creation Unit,
assuming that copper in cheapest-to-deliver location was used for such
creation or redemption; and
The ``Liquidation IIV,'' an intraday indicative value per
Share disseminated approximately every 15 seconds that represents, as
of the time of such calculation, the hypothetical U.S. dollar value per
Share of all of the copper owned by the Trust divided by the number of
Shares then outstanding.\31\
---------------------------------------------------------------------------
\31\ The Liquidation IIV is the Indicative Trust Value for
purposes of NYSE Arca Equities Rule 8.201(e)(2)(v).
---------------------------------------------------------------------------
The Valuation Agent will calculate the average value of copper per
metric ton in a location through a combination of (i) a weighted
calculation (based on tonnage) of actual transactions and (ii) the
indicative prices of market makers. Data will be collected primarily by
phone, but also by email and by direct submission. In order to avoid
any actual or potential conflict of interest, or perception of a
conflict, the Valuation Agent will exclude any information provided by
any JPMorgan-affiliated entity when calculating the locational premium
of copper in any permitted warehouse location. The Valuation Agent will
record details regarding its contacts for reference and internal audit
purposes.
When the Valuation Agent collects information on actual
transactions for use in calculating locational premia, the Valuation
Agent will generally request full details regarding such transactions,
including price, material specifications, transaction size, delivery
point and terms, payment details and other factors, all of which may
inform the Valuation Agent's assessment of the value of the underlying
transaction. If a particular transaction involves a significantly
higher or lower price than other comparable transactions, the Valuation
Agent may request proof of the transaction price, and if such
information is not provided, the price may be excluded from the
assessment. Where possible, the Valuation Agent will seek to confirm
details with the parties on both sides of a transaction.
The tonnage weighting of copper for indicative prices will be set
at the equivalent of 10 lots, or approximately 250 metric tons, of
copper.
In calculating the locational premia, the Valuation Agent will
determine in its discretion the relative weights that it will give to
actual transactions as compared to indicative prices. The Valuation
Agent may vary the relative weights of the components based on the
level of physical activity on a particular Business Day, as well as
other factors. The use of both actual transaction information and
indicative pricing information is intended to allow continuity of
pricing and up-to-date market quotes when physical activity falls.
In conducting its valuation process, the Valuation Agent generally
aims to speak to market participants from both sides of the market. The
Valuation Agent seeks to maintain an open process that allows any
participants who are conducting business in a market to contribute
information to the Valuation Agent. The Valuation Agent may, however,
disregard data that it believes is incorrect or unrepresentative of the
market. There is no set parameter to decide whether a particular data
point will be excluded as an outlier, as such a determination will
depend significantly on prevailing market conditions.
On each Business Day, the Valuation Agent will provide locational
premia to the Administrative Agent at or before 5 p.m. London time.
Net Asset Value
The Administrative Agent will calculate the NAV of the Trust on
each Business Day as promptly as practicable after 4 p.m. E.T.
To calculate the NAV of the Trust, the Administrative Agent will
first calculate the Trust's gross asset value. The Trust's gross asset
value, with respect to any Business Day, will be equal to the aggregate
value in U.S. dollars of all whole lots and fractional lots of copper
held by the Trust in each warehouse location, calculated using the LME
settlement price as of such Business Day plus the applicable locational
premia, after giving effect to, as applicable, (i) any change in the
cheapest-to-deliver location (as discussed below), (ii) any creation
orders and (iii) any redemption orders, but before the selection of
lots of copper for the purpose of paying any accrued unpaid Trust
expenses on such Business Day.
After the Administrative Agent calculates the gross asset value,
the Administrative Agent will calculate the Trust's NAV, with respect
to any
[[Page 23784]]
Business Day, as an amount equal to (x) the gross asset value of the
Trust as of such Business Day minus (y) the Trust's accrued unpaid
expenses (i.e., the total amount of any accrued unpaid Sponsor's fee
and accrued unpaid Other Expenses) as of such Business Day.
NAV Per Share
On any Business Day, as promptly as practicable following the
calculation of the Trust's NAV as set forth above, the Administrative
Agent will calculate the NAV per Share by dividing (x) the Trust's NAV
for such Business Day by (y) the number of Shares of the Trust
outstanding on such Business Day, after accounting for any creations or
redemptions of Shares for such Business Day.
Creation Unit Ratio and Creation Unit Weight
On each Business Day, as promptly as practicable after 4 p.m. E.T.,
the Administrative Agent will calculate the Creation Unit Ratio that
will be effective for the next Business Day. The Administrative Agent
will use the Creation Unit Ratio to determine the Creation Unit Weight,
which is the weight of copper that an Authorized Participant or the
Trust is obligated to transfer in connection with a creation or
redemption, as applicable, of a Creation Unit of Shares for the
applicable Business Day.
The Creation Unit Ratio will be determined by the Administrative
Agent as follows:
First, the Administrative Agent will calculate the
aggregate weight in metric tons of all the copper owned by the Trust,
after giving effect to (i) any creation orders and (ii) any redemption
orders, but before the selection of any lots of copper for the purpose
of paying accrued unpaid Trust expenses on such Business Day.
Second, the Administrative Agent will calculate the
accrued unpaid Sponsor's fee, expressed in metric tons, owed by the
Trust. The Administrative Agent will do so by (i) first, calculating
the accrued unpaid Sponsor's fee in U.S. dollars, (ii) second,
selecting pursuant to the Selection Protocol (from a population of
whole lots available in the Trust Account) and taking into account
their value (including any locational premia), the lots that would need
to be transferred to pay such accrued unpaid Sponsor's fee in full
(including any portion of a whole lot, as applicable) and (iii) third,
calculating the aggregate weight in metric tons of such lots identified
in (ii).
Third, the Administrative Agent will calculate all accrued
unpaid Other Expenses, expressed in metric tons, owed by the Trust. The
Administrative Agent will proceed in so doing by (i) first, calculating
the accrued unpaid Other Expenses in U.S. dollars, (ii) second,
selecting pursuant to the Selection Protocol (from a population of
whole lots available in the Trust Account, excluding for such purposes
any lots used, either in whole or in part, in the calculation described
in step two above) and taking into account their value (including any
locational premia), the lots that would need to be transferred or sold
to pay such accrued unpaid Other Expenses in full (including any
portion of a whole lot, as applicable) and (iii) third, calculating the
aggregate weight in metric tons of such lots identified in (ii).
Fourth, the Administrative Agent will subtract the weights
determined pursuant to the second and third steps above from the
aggregate weight in metric tons of all of the Trust's copper (i.e., the
amount determined in the first step above). This process represents a
calculation of the Trust's NAV, but expressed in metric tons of copper
instead of U.S. dollars.
Finally, the Administrative Agent will calculate the
Creation Unit Ratio by dividing (x) the weight derived pursuant to the
fourth step above by (y) one-hundredth (1/100) multiplied by the number
of Shares of the Trust then outstanding. (The divisor in this step
reflects the fact that each Share of the Trust included in the initial
Creation Unit will have, a value equal to one-hundredth (1/100) of one
metric ton of copper, because the initial Creation Unit of Shares will
be issued in exchange for 25 metric tons of copper and a Creation Unit
will consist of 2,500 Shares of the Trust.)
On each Business Day, as soon as practicable following the
calculation of the Creation Unit Ratio, the Administrative Agent will
calculate the Creation Unit Weight that will be effective for the next
Business Day. The Creation Unit Weight for any Business Day will be
equal to 25.0 metric tons of copper multiplied by the Creation Unit
Ratio in effect for the next Business Day, as calculated pursuant to
the process described above. The Creation Unit Weight is the weight of
copper that an Authorized Participant or the Trust would be obligated
to transfer in connection with a creation order or a redemption order
in respect of one Creation Unit on such Business Day.
Intraday Indicative Values
The Administrative Agent will calculate the NAV of the Trust and
the NAV per Share only once each day. In order to provide market
participants with an indication of the underlying value of the Trust's
Shares during the during the [sic] trading day, on each day on which
NYSE Arca is open for business, NYSE Arca will disseminate,
approximately every 15 seconds, two different intraday indicative
values for the Trust's Shares, referred to in the Registration
Statement as the ``First-Out IIV'' and the ``Liquidation IIV.'' Both
the First-Out IIV and the Liquidation IIV will incorporate the price of
copper as well as the previous day's locational premia, as discussed
further below.
The objective is that the First-Out IIV and the Liquidation IIV
reflect the intraday cash settlement price of copper throughout the
day. The First-Out IIV and the Liquidation IIV can incorporate one of
two values: (1) The ``Last Traded'' price from LMEselect of the cash
price of copper at such point; or (2) the ``Last Traded'' price from
LMEselect of the three-month copper price at such point, and using the
previous day's cash-to-three month spread fixed at the auction, convert
the intraday three-month price of copper to an indicative intraday cash
equivalent.\32\
---------------------------------------------------------------------------
\32\ Currently the three-month copper contract is the most
liquid intraday contract, with live ticking prices every second. It
is therefore the most accurate reflection of intraday price activity
and, hence, the current best method to derive an IIV price for
copper. At some point in the future, the intraday activity for the
cash price of copper (i.e., copper to be settled two days from trade
date) might become a deeper and more liquid market. This would allow
the Exchange to switch from using the three-month copper price plus
a cash-to-three month spread conversion to simply applying the
intraday cash price traded. If the Sponsor instructs the Exchange to
make the change described above to the method of deriving the IIV
price for copper, the Sponsor will notify the market of such change
by causing the Trust to make a public filing to that effect (i.e., a
press release that would be filed on Form 8-K and, if required, an
amendment to the Trust's Registration Statement). See email from
Michael Cavalier, Chief Counsel, NYSE Euronext, to Christopher W.
Chow, Special Counsel, and Brian J. Baltz, Attorney-Advisor,
Commission, dated April 11, 2012.
---------------------------------------------------------------------------
First-Out IIV
The Sponsor expects that, because of the Selection Protocol,
Authorized Participants generally will expect to receive copper from
the cheapest-to-deliver location whenever they redeem Creation Units of
Shares. The Sponsor also expects that, because an Authorized
Participant will not expect that the copper it will receive upon
redeeming a Creation Unit will be more valuable (i.e., have a higher
locational premium) than the copper it delivers to the Trust when
creating a Creation Unit of Shares, the Authorized Participant will
tend to deliver copper in exchange for Creation Units of Shares only
from the cheapest-
[[Page 23785]]
to-deliver location at which the Authorized Participant holds copper.
Because of the foregoing dynamic and the arbitrage mechanism described
below, the Sponsor expects that the Shares will trade with a market
price that is within a limited range, with the lower end of that range
approximating the value of copper in the cheapest-to-deliver location
and the higher end of that range approximating the value of copper in
the cheapest-to-deliver location at which the Authorized Participants
have copper available.
The ``First-Out IIV'' is an intraday indicative value disseminated
every 15 seconds during the Exchange trading day that represents, as of
the time of such calculation, the hypothetical U.S. dollar value per
Share of the copper that would need to be transferred to or from the
Trust to create or redeem one Share included in a Creation Unit,
assuming that copper in the cheapest-to-deliver location was used for
such creation or redemption. The First-Out IIV will be calculated and
published by NYSE Arca.
The Exchange will calculate the First-Out IIV as follows:
First, NYSE Arca will calculate an indicative price per
metric ton of copper in the cheapest-to-deliver location, which will be
the sum of (x) a deemed intraday indicative cash price per metric ton
of copper in U.S. dollars based on either a live cash price or a
combination of basis swaps and live intraday futures prices, as of the
time of such First-Out IIV calculation, derived by methods and means
established by the Exchange, and (y) the last available locational
premium calculated by the Valuation Agent for copper in the cheapest-
to-deliver location on such Business Day (which will have been provided
to Arca by the Administrative Agent); \33\
---------------------------------------------------------------------------
\33\ The locational premia will not change in the generation of
the IIV associated with the pricing for such day. These published
locational premia will be published by the Valuation Agent in U.S.
dollars per metric ton. These levels will be converted into a Share
equivalent as a function of the Creation Unit Weight applicable on
such day for a Creation Unit of Shares and the number of Shares
within a Creation Unit.
---------------------------------------------------------------------------
Second, NYSE Arca will calculate an indicative value for a
Creation Unit Weight of copper in the cheapest-to-deliver location, by
multiplying the value calculated in the first step by the Creation Unit
Weight in effect for such Business Day (which will have been provided
to NYSE Arca by the Administrative Agent). The calculation in this step
represents an indicative value in U.S. dollars, as of the time of
calculation, of the amount of copper in the cheapest-to-deliver
location that would need to be delivered by an Authorized Participant
for a Creation Unit of Shares; and
Third, NYSE Arca will convert the value obtained in the
second step to a U.S. dollar value per Share by dividing the value
obtained in the second step by 2,500 (the number of Shares in a
Creation Unit). The result of this calculation is the First-Out IIV.
The First-Out IIV is intended to facilitate arbitrage activity by
Authorized Participants by serving as an indicator of whether the
Trust's Shares are trading at a discount or premium during the Exchange
trading day. If an Authorized Participant views the First-Out IIV as an
estimate of the underlying value of copper per Share in U.S. dollars of
the Shares it could create or redeem on any Business Day, an Authorized
Participant may seek to create Shares when the market price exceeds the
First-Out IIV (if the Authorized Participant has copper lots available
for delivery to the Trust in the cheapest-to-deliver location), and may
seek to redeem Shares when the market price is less than the First-Out
IIV, because:
If the market price per Share is greater than the
underlying value of copper per Share in U.S. dollars, an Authorized
Participant could create a Creation Unit of Shares by delivering the
Creation Unit Weight of copper in the cheapest-to-deliver location to
the Trust, and may be able to sell such Shares on the NYSE Arca for an
aggregate amount that is greater than the value of the copper used to
create the Shares; and
If the underlying value per Share in U.S. dollars is
greater than the market price per Share, an Authorized Participant
could redeem a Creation Unit of Shares by delivering the Creation Unit
to the Trust and receiving a Creation Unit Weight of copper in the
cheapest-to-deliver location, and may be able to sell the copper for an
aggregate amount that is greater than [sic] amount it paid to acquire
the Shares.
Liquidation IIV
The ``Liquidation IIV'' is an intraday indicative value
disseminated every 15 seconds during the NYSE Arca Core Trading Session
that represents, as of the time of the calculation, the hypothetical
U.S. dollar value per Share of all of the copper owned by the Trust
divided by the number of Shares then outstanding.\34\
---------------------------------------------------------------------------
\34\ As noted above, the Liquidation IIV is the Indicative Trust
Value for purposes of NYSE Arca Equities Rule 8.201(e)(2)(v).
---------------------------------------------------------------------------
The Exchange will calculate the Liquidation IIV as follows:
First, NYSE Arca will determine an indicative price per
metric ton of copper reflecting the weighted average price of copper
held in the Trust, calculated as the sum of (a) a deemed intraday
indicative cash price per metric ton of copper in U.S. dollars based on
either a live cash price or a combination of basis swaps and live
intraday futures prices, as of the time of such Liquidation IIV
calculation, derived by methods and means established by the Exchange,
and (b) the weighted average locational premium per metric ton,
calculated using the locational premium calculated by the Valuation
Agent for each warehouse location in effect for such time for such
Business Day, and the number of metric tons of copper held by the Trust
at each warehouse location on such Business Day (which will have been
provided to the NYSE Arca by the Administrative Agent);
Second, NYSE Arca will calculate an indicative value for a
Creation Unit Weight of copper in the Trust by multiplying the value
calculated in the first step by the Creation Unit Weight in effect for
such Business Day (which will have been provided to NYSE Arca by the
Administrative Agent). The calculation in this step represents an
indicative average value in U.S. dollars, as of the time of
calculation, of the amount of copper in the Trust (including both whole
and fractional lots of copper) corresponding to a Creation Unit of
Shares; and
Third, NYSE Arca will convert the value obtained in the
second step to a U.S. dollar value per Share by dividing the value
obtained in the second step by 2,500 (the number of Shares in a
Creation Unit). The result of this calculation is the Liquidation IIV.
Additional Information Relating to the Trust
While 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, the
Shares may trade in the secondary market on NYSE Arca at prices that
are lower or higher than the NAV per Share. The amount of the discount
or premium in the trading price relative to the NAV per Share may be
influenced by, among other things, non-concurrent trading hours between
NYSE Arca and the LME. While the Shares will trade on NYSE Arca until
the market closes (generally 4 p.m. E.T.), liquidity in the global
copper market will be reduced after the close of copper trading on the
LME (generally 4:55 p.m. London time, or 11:55 a.m. E.T.). As a result,
during the time after the close of
[[Page 23786]]
trading on the LME, trading spreads, and the resulting premium or
discount on the Shares, may widen. In addition, the NAV per Share
includes a locational premium for the Trust's copper in each warehouse
location, which will not be reflected in the price of copper that is
traded on the LME. Creations and redemptions of Creation Units are not
executed at the NAV per Share, but rather occur based on a specified
weight of copper required to create or redeem Shares on a particular
day, which may contribute to disparities between the NAV per Share and
the secondary market price of Shares.
Additional information regarding the world copper market, the
Shares and the operation of the Trust, including termination events,
risks, Trust expenses, Sponsor fees, and creation and redemption
procedures, are described in the Registration Statement.
Availability of Information Regarding Copper Prices
Currently, the Consolidated Tape Plan does not provide for
dissemination of the spot price of a commodity, such as copper, over
the Consolidated Tape. However, there will be disseminated over the
Consolidated Tape the last sale price for the Shares, as is the case
for all equity securities traded on the Exchange (including exchange-
traded funds). In addition, there is a considerable amount of copper
price and copper market information available on public Web sites and
through professional and subscription services.
Investors may obtain almost on a 24-hour basis copper pricing
information based on the spot price for an ounce of copper from various
financial information service providers, such as Reuters and Bloomberg.
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 about news and developments in
the copper market. Reuters and Bloomberg also offer a professional
service to subscribers for a fee that provides information on copper
prices directly from market participants. Complete real-time data for
copper futures and options prices traded on the COMEX are available by
subscription from Reuters and Bloomberg. The COMEX also provides
delayed futures and options information on current and past trading
sessions and market news free of charge on its Web site
(www.cmegroup.com). There are a variety of other 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.
The locational premia will be available on the Trust's Web site and
from various financial information service providers, such as Reuters
and Bloomberg. While the Valuation Agent is the only entity that will
provide locational premia information for each location, other
information vendors provide periodic information relating to copper
pricing in various warehouses. For example, FastMarkets Ltd. provides
weekly premium reports for all primary base metals, including copper,
on an in-warehouse and cost-insurance-freight (``CIF'') basis, based on
information collected directly from a large number of market
participants on all sides of the physical market. In addition, Platts,
a division of The McGraw-Hill Companies, Inc., provides weekly prices
for all primary base metals in the weekly ``Platts Metal Week''
publications.\35\ It is not expected that the weekly price in the
FastMarkets Ltd. and Platts publications generally will differ
significantly from the daily price provided by the Valuation Agent. The
LME settlement price will be available from Bloomberg.\36\
---------------------------------------------------------------------------
\35\ FastMarkets Ltd. and Platts may not publish prices based on
exactly the same warehouse locations as the Valuation Agent.
\36\ See note 17, supra.
---------------------------------------------------------------------------
The Trust's Web site (www.jpmxf.com) will provide ongoing pricing
information for copper spot prices and the Shares. Market prices for
the Shares will be available from a variety of sources including
brokerage firms, information Web sites and other information service
providers. The Net Asset Value will be published by the Sponsor on each
Warehouse Business Day and will be posted on the Trust's Web site. The
Exchange will provide on its Web site (www.nyx.com) a link to the
Trust's Web site.\37\ In addition, the Exchange will make available
over the Consolidated Tape quotation information, trading volume,
closing prices and NAV for the Shares from the previous day.
---------------------------------------------------------------------------
\37\ NYSE Arca Equities Rule 8.201(e)(2)(iv) provides that the
Exchange will consider the suspension or removal from listing of an
issue of Commodity-Based Trust Shares if the Exchange stops
providing a hyperlink on its Web site to the value of the underlying
commodity from a source unaffiliated with the sponsor for such
issue.
---------------------------------------------------------------------------
Criteria for Initial and Continued Listing
The Trust will be subject to the criteria in Rule 8.201(e) for
initial and continued listing of the Shares.
It is anticipated that a minimum of 100,000 Shares will be required
to be outstanding at the start of trading. The minimum number of Shares
required to be outstanding is comparable to requirements that have been
applied to previously listed Shares of the streetTRACKS Gold Trust, the
iShares Gold Trust, the iShares Silver Trust and exchange-traded funds.
The Exchange believes that the anticipated minimum number of Shares
outstanding at the start of trading is sufficient to provide adequate
market liquidity.
Trading Rules
The Exchange deems the Shares to be equity securities, thus
rendering trading in the Fund subject to the Exchange's existing rules
governing the trading of equity securities. Trading in the Shares on
the Exchange will occur in accordance with NYSE Arca Equities Rule
7.34(a). The Exchange has appropriate rules to facilitate transactions
in the Shares during all trading sessions. As provided in NYSE Arca
Equities Rule 7.6, Commentary .03, the minimum price variation
(``MPV'') for quoting and entry of orders in equity securities traded
on the NYSE Arca Marketplace is $0.01, with the exception of securities
that are priced less than $1.00 for which the MPV for order entry is
$0.0001.
Further, NYSE Arca Equities Rule 8.201 sets forth certain
restrictions on ETP Holders acting as registered Market Makers in the
Shares to facilitate surveillance. Pursuant to NYSE Arca Equities Rule
8.201(g), an ETP Holder acting as a registered Market Maker in the
Shares is required to provide the Exchange with information relating to
its trading in the underlying copper, related futures or options on
futures, or any other related derivatives. Commentary .04 of NYSE Arca
Equities Rule 6.3 requires an ETP Holder acting as a registered Market
Maker, and its affiliates, in the Shares 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).
As a general matter, the Exchange 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. A
subsidiary or affiliate of an ETP Holder that does business only in
commodities or futures contracts would not be
[[Page 23787]]
subject to Exchange jurisdiction, but the Exchange could 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.
With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the Shares. Trading on the Exchange in the Shares may be
halted because of market conditions or for reasons that, in the view of
the Exchange, make trading in the Shares inadvisable. These may
include: (1) The extent to which conditions in the underlying copper
market have caused disruptions and/or lack of trading, or (2) whether
other unusual conditions or circumstances detrimental to the
maintenance of a fair and orderly market are present. In addition,
trading in Shares will be subject to trading halts caused by
extraordinary market volatility pursuant to the Exchange's ``circuit
breaker'' rule.\38\
---------------------------------------------------------------------------
\38\ See NYSE Arca Equities Rule 7.12.
---------------------------------------------------------------------------
Surveillance
The Exchange intends to utilize its existing surveillance
procedures applicable to derivative products (including Commodity-Based
Trust Shares) to monitor trading in the Shares. The Exchange represents
that these procedures are adequate to properly monitor Exchange trading
of the Shares in all trading sessions and to deter and detect
violations of Exchange rules and applicable federal securities laws.
The Exchange's current trading surveillance focuses on detecting
securities trading outside their normal patterns. When such situations
are detected, surveillance analysis follows and investigations are
opened, where appropriate, to review the behavior of all relevant
parties for all relevant trading violations. Also, 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 such ETP Holders' proprietary or customer trades
through ETP Holders which they effect on any relevant market. In
addition, the Exchange may obtain trading information via the
Intermarket Surveillance Group (``ISG'') from other exchanges who are
members of the ISG,\39\ including COMEX. In addition, the Exchange has
entered into a comprehensive surveillance sharing agreement with LME
that applies with respect to trading in copper.
---------------------------------------------------------------------------
\39\ A list of ISG members is available at https://www.isgportal.org. The Exchange does not have access to information
regarding copper-related OTC transactions in spot, forwards, options
or other derivatives.
---------------------------------------------------------------------------
Information Bulletin
Prior to the commencement of trading, the Exchange 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: (1) The procedures for
purchases and redemptions of Shares in the Creation Unit (including
noting that Shares are not individually redeemable); (2) NYSE Arca
Equities Rule 9.2(a), which imposes a duty of due diligence on its ETP
Holders to learn the essential facts relating to every customer prior
to trading the Shares; (3) how information regarding the IIV is
disseminated; (4) the requirement that ETP Holders deliver a prospectus
to investors purchasing newly issued Shares prior to or concurrently
with the confirmation of a transaction; (5) the possibility that
trading spreads and the resulting premium or discount on the Shares may
widen as a result of reduced liquidity of physical copper trading
during the Core and Late Trading Sessions after the close of the major
world copper markets; and (6) trading information. For example, the
Information Bulletin will advise ETP Holders, prior to the commencement
of trading, of the prospectus delivery requirements applicable to the
Trust. The Exchange notes that investors purchasing Shares directly
from the Trust (by delivery of the Creation Deposit) will receive a
prospectus. ETP Holders purchasing Shares from the Trust for resale to
investors will deliver a prospectus to such investors.
In addition, the Information Bulletin will reference that the Trust
is subject to various fees and expenses described in the Registration
Statement. The Information Bulletin will also reference the fact that
there is no regulated source of last sale information regarding
physical copper, that the Commission has no jurisdiction over the
trading of copper as a physical commodity, and that the CFTC has
regulatory jurisdiction over the trading of copper futures contracts
and options on copper futures contracts.
The Information Bulletin will also discuss any relief, if granted,
by the Commission or the staff from any rules under the Act.
2. Statutory Basis
The basis under the Act for this proposed rule change is the
requirement under Section 6(b)(5) \40\ that an exchange have rules that
are designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to remove
impediments to, and perfect the mechanism of a free and open market
and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------
\40\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices in that the
Shares will be listed and traded on the Exchange pursuant to the
initial and continued listing criteria in NYSE Arca Equities Rule
8.201. The Exchange has in place surveillance procedures that are
adequate to properly monitor trading in the Shares in all trading
sessions and to deter and detect violations of Exchange rules and
applicable federal securities laws. The Exchange may obtain information
via ISG from other exchanges that are members of ISG, including COMEX.
In addition, the Exchange has entered into a comprehensive surveillance
sharing agreement with LME that applies with respect to trading in
copper. On each day on which NYSE Arca is open for business, the last
sale price for the Shares will be disseminated over the Consolidated
Tape. In addition, there is a considerable amount of copper price and
copper market information available on public Web sites and through
professional and subscription services. Investors may obtain almost on
a 24-hour basis copper pricing information based on the spot price for
an ounce of copper from various financial information service
providers. NYSE Arca will disseminate, approximately every 15 seconds,
two different intraday indicative values for the Trust's Shares--the
First-Out IIV and the Liquidation IIV. The Trust's Web site will
provide ongoing pricing information for copper spot prices and the
Shares. Complete real-time data for copper futures and options prices
traded on the COMEX are available by subscription from Reuters and
Bloomberg. The COMEX also provides delayed futures and options
information on current and past trading sessions and market news free
of charge on its Web site. Market prices for the Shares will be
available from a variety of sources including brokerage firms,
information
[[Page 23788]]
Web sites and other information service providers. The NAV will be
published by the Sponsor on each Warehouse Business Day and will be
posted on the Trust's Web site. The Exchange will provide on its Web
site a link to the Trust's Web site. In addition, the Exchange will
make available over the Consolidated Tape quotation information,
trading volume, closing prices and NAV for the Shares from the previous
day.
The proposed rule change is designed to promote just and equitable
principles of trade and to protect investors and the public interest in
that a large amount of information is publicly available regarding the
Trust and the Shares, thereby promoting market transparency. The
Trust's Web site will provide ongoing pricing information for copper
spot prices and the Shares. Investors may obtain almost on a 24-hour
basis copper pricing information based on the spot price for an ounce
of copper from various financial information service providers. NYSE
Arca will disseminate, approximately every 15 seconds, two different
intraday indicative values for the Trust's Shares--the First-Out IIV
and the Liquidation IIV. Market prices for the Shares will be available
from a variety of sources including brokerage firms, information Web
sites and other information service providers. The NAV will be
published by the Sponsor on each warehouse Business Day and will be
posted on the Trust's Web site. The Exchange will provide on its Web
site a link to the Trust's Web site. In addition, the Exchange will
make available over the Consolidated Tape quotation information,
trading volume, closing prices and NAV for the Shares from the previous
day. Trading in Shares of the Trust will be halted if the circuit
breaker parameters in NYSE Arca Equities Rule 7.12 have been reached or
because of market conditions or for reasons that, in the view of the
Exchange, make trading in the Shares inadvisable. Moreover, prior to
the commencement of trading, the Exchange will inform its ETP Holders
in an Information Bulletin of the special characteristics and risks
associated with trading the Shares.
The proposed rule change is designed to perfect the mechanism of a
free and open market and, in general, to protect investors and the
public interest in that it will facilitate the listing and trading of
an additional type of Commodity-Based Trust Shares that will enhance
competition among market participants, to the benefit of investors and
the marketplace. As noted above, the Exchange has in place surveillance
procedures relating to trading in the Shares and may obtain information
via ISG from other exchanges that are members of ISG or with which the
Exchange has entered into a comprehensive surveillance sharing
agreement.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-NYSEArca-2012-28 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEArca-2012-28. This
file number should be included on the subject line if email is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change 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 a.m. and 3 p.m. Copies of such filing also will be
available for inspection and copying at the principal office of the
Exchange. All comments received will be posted without change; the
Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-
NYSEArca-2012-28, and should be submitted on or before May 11, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\41\
---------------------------------------------------------------------------
\41\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-9528 Filed 4-19-12; 8:45 am]
BILLING CODE 8011-01-P
