Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change To List and Trade Shares of iShares Copper Trust Pursuant to NYSE Arca Equities Rule 8.201, 48181-48188 [2012-19790]

Download as PDF Federal Register / Vol. 77, No. 156 / Monday, August 13, 2012 / Notices Paper Comments B. Self-Regulatory Organization’s Statement on Burden on Competition • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. The proposed rule change does not impose any burden on competition. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange has not solicited, and does not intend to solicit, comments on this proposed rule change. The Exchange has not received any unsolicited written comments from members or other interested parties. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Because the proposed rule change does not (i) significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest, the proposed rule change has become effective pursuant to Section 19(b)(3)(A) of the Act 13 and Rule 19b–4(f)(6) thereunder.14 At any time within 60 days of the filing of such proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. 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 mstockstill on DSK4VPTVN1PROD with NOTICES • 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–ISE–2012–69 on the subject line. U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(6). As required under Rule 19b–4(f)(6)(iii), the Exchange provided the Commission with written notice of its intent to file the proposed rule change along with a brief description and the text of the proposed rule change, at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission. Jkt 226001 [Release No. 34–67616; File No. SR– NYSEArca-2012–66] Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change To List and Trade Shares of iShares Copper Trust Pursuant to NYSE Arca Equities Rule 8.201 I. Introduction On June 19, 2012, NYSE Arca, Inc. (‘‘Exchange’’ or ‘‘NYSE Arca’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to list and trade shares (‘‘Shares’’) of iShares Copper Trust (‘‘Trust’’) pursuant to NYSE Arca Equities Rule 8.201. The proposed rule change was published for comment in the Federal Register on June 27, 2012.3 The Commission received one comment letter on the proposed rule change.4 This order institutes proceedings under Section 19(b)(2)(B) of the Act to determine whether to approve or disapprove the proposed rule change. The institution of proceedings does not indicate that the Commission has reached any conclusions with respect to any of the issues involved, nor does it mean that the Commission will ultimately disapprove the proposed rule change. Rather, as described in greater detail below, the Commission seeks and encourages interested persons to provide additional comment on the proposed rule change to inform the Commission’s analysis of whether to approve or disapprove the proposed rule change. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.15 Kevin M. O’Neill, Deputy Secretary. II. Description of the Proposal The Exchange proposes to list and trade the Shares under NYSE Arca Equities Rule 8.201, which governs the [FR Doc. 2012–19739 Filed 8–10–12; 8:45 am] 15 17 PO 00000 CFR 200.30–3(a)(12). Frm 00059 Fmt 4703 August 8, 2012. 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 Securities Exchange Act Release No. 67237 (June 22, 2012), 77 FR 38351 (‘‘Notice’’). 4 See letter from Robert B. Bernstein, Vandenberg & Feliu, LLP (‘‘V&F’’), to Elizabeth M. Murphy, Secretary, Commission, dated July 18 2012 (‘‘July 18 V&F Letter’’). The July 18 V&F Letter is available at https://www.sec.gov/comments/sr-nysearca-201266/nysearca201266-1.pdf. V&F identified itself as a U.S. law firm that represents RK Capital LLC, an international copper merchant, and four end-users of copper: Southwire Company, Encore Wire Corporation, Luvata, and AmRod. V&F states that these companies collectively comprise about 50% of the copper fabricating capacity of the United States. See July 18 V&F Letter at 1. 2 17 BILLING CODE 8011–01–P 14 17 16:29 Aug 10, 2012 SECURITIES AND EXCHANGE COMMISSION All submissions should refer to File Number SR–ISE–2012–69. 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 10:00 a.m. and 3:00 p.m. Copies of the 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–ISE– 2012–69 and should be submitted on or before September 4, 2012. 13 15 VerDate Mar<15>2010 48181 Sfmt 4703 E:\FR\FM\13AUN1.SGM 13AUN1 48182 Federal Register / Vol. 77, No. 156 / Monday, August 13, 2012 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES listing and trading of commodity-based trust shares. BlackRock Asset Management International Inc. is the sponsor of the Trust (‘‘Sponsor’’). The Bank of New York Mellon is the trustee of the Trust (‘‘Trustee’’). Metro International Trade Services LLC is the custodian of the Trust (‘‘Custodian’’). The Trust’s investment objective is for the value of the Shares to reflect, at any given time, the value of the copper owned by the Trust at that time, less the Trust’s expenses and liabilities at that time. The Trust would not be actively managed and would not engage in any activities designed to obtain a profit from, or to prevent losses caused by, changes in the price of copper. The Trust will create Shares only in exchange for copper that: (1) Meets the requirements to be delivered in settlement of copper futures contracts traded on the LME; and (2) is eligible to be placed on London Metal Exchange (‘‘LME’’) warrant at the time it is delivered to the Trust.5 The Trust expects to create and redeem Shares on a continuous basis but only with authorized participants in blocks of five or more baskets of 2,500 Shares each.6 Unless otherwise instructed by the Trustee, no copper held by the Custodian on behalf of the Trust may be on LME warrant.7 The Custodian may keep the Trust’s copper at locations within or outside the United States that are agreed from time to time by the Custodian and the Trustee. As of the date of the Registration Statement,8 the Custodian is authorized to hold copper owned by the Trust at warehouses located in: East Chicago, Indiana; Mobile, Alabama; New Orleans, Louisiana; Saint Louis, Missouri; Hull, England; Liverpool, England; Rotterdam, Netherlands; and Antwerp, Belgium (collectively, ‘‘Approved Warehouses’’). Unless otherwise agreed in writing by the Trustee, each of the warehouses where the Trust’s copper will be stored must be LME-approved at the time copper is delivered to the Custodian for storage in such warehouse. The net asset value (‘‘NAV’’) of the Trust will be calculated as promptly as practicable after 4:00 p.m. EST on each business day. The Trustee will value the Trust’s copper at that day’s announced LME Bid Price.9 If there is no 5 See Notice, supra note 3, 77 FR at 38356. id. 7 See id. 8 Pre-Effective Amendment No. 4 to Form S–1 for iShares Copper Trust, filed with the Commission on September 2, 2011 (No. 333–170131) (‘‘Registration Statement’’). 9 The ‘‘LME Bid Price’’ is announced by the LME at 1:20 p.m. London Time and represents the price 6 See VerDate Mar<15>2010 16:29 Aug 10, 2012 Jkt 226001 announced LME Bid Price on a business day, the Trustee will be authorized to use the most recently announced LME Bid Price unless the Sponsor determines that such price is inappropriate as a basis for valuation.10 NYSE Arca indicates that it will require that a minimum of 100,000 Shares be outstanding at the start of trading,11 which represents 1,000 metric tons of copper. The Trust seeks to register 12,120,000 Shares,12 which represents 121,200 metric tons of copper. The Exchange states that it intends to utilize appropriate surveillance procedures applicable to derivative products, including commodity-based trust shares, to monitor trading in the Shares, and represents that such procedures will be adequate to properly monitor Exchange trading of the Shares in all trading sessions and to deter and detect violations of Exchange rules and applicable federal securities laws.13 The Exchange further represents that all trading in the Shares will be subject to applicable surveillance procedures.14 In discussing its ability to obtain information relevant to trading of the Shares on its facilities, the Exchange states that it is able to obtain information: (1) Regarding trading in physical copper, the Shares, and other copper derivatives by ETP Holders acting as registered market makers, pursuant to NYSE Arca Equities Rule 8.201(g); (2) from the LME, with which the Exchange has a comprehensive surveillance sharing agreement that applies with respect to trading in copper and copper derivatives; and (3) via the Intermarket Surveillance Group (‘‘ISG’’) from other exchanges who are members of the ISG, of which CME Group, Inc., which includes Commodity Exchange, Inc. (‘‘COMEX’’), is a member.15 The Notice and the Registration Statement include additional information regarding: The Trust; the Shares; the Trust’s investment objectives, strategies, policies, and restrictions; fees and expenses; creation and redemption of Shares; the physical copper market; availability of information; trading rules and halts; and surveillance procedures.16 that a buyer is willing to pay to receive a warrant in any warehouse within the LME system. See Notice, supra note 3, 77 FR at 38356 n. 25. 10 See id. at 38358. 11 See id. at 38359. 12 See Registration Statement, supra note 8. 13 See Notice, supra note 3, 77 FR at 38360. 14 See id. 15 See id. 16 See Notice and Registration Statement, supra notes 3 and 8, respectively. PO 00000 Frm 00060 Fmt 4703 Sfmt 4703 III. Summary of V&F’s Comments V&F opposes the proposed rule change.17 As discussed in greater detail below, V&F states its belief that the issuance by the Trust of all of the Shares covered by the Registration Statement within a short period of time would result in: (1) A material reduction in the immediately available supply of global copper; (2) increased volatility in the price of copper, which would in turn significantly harm the U.S. economy; and (3) a destabilization of the physical copper market that would make it more susceptible to manipulation. A. Adverse Copper Market Impact 1. Impact on Supply of Copper Available for Immediate Delivery V&F states that almost all of the refined copper produced annually worldwide is subject to long-term delivery contracts with copper fabricating companies, and that at any given time, there is only a limited supply of copper available for immediately delivery.18 In particular, according to V&F, most American copper fabricators enter into long-term supply contracts for ‘‘about 85% of their annual requirements.’’ 19 V&F states that U.S. copper fabricators depend on the market for copper available for immediate delivery to ‘‘protect against the risk of reductions in demand for product without having to incur the added expense of storing inventory they cannot use.’’ 20 17 The Commenter also opposes a separate pending proposed rule change by NYSE Arca to list and trade shares of the JPM Copper Trust (‘‘JPM Copper Trust Proposal’’). See generally Securities Exchange Act Release No. 67470 (July 19, 2012), 77 FR 43620 (July 25, 2012). In the July 18 V&F Letter, V&F incorporated by reference a letter it submitted in opposition to the JPM Copper Trust Proposal, which was received by the Commission on May 9, 2012 (‘‘May 9 V&F Letter’’). See July 18 V&F Letter, supra note 4, at 5. The May 9 V&F Letter is available at https://www.sec.gov/comments/sr-nysearca-201228/nysearca201228.shtml. V&F also attached to the July 18 V&F Letter (1) another letter dated July 13, 2012 that it submitted in opposition to the JPM Copper Trust Proposal (‘‘July 13 V&F Letter’’); and (2) a letter from U.S. Senator Carl Levin dated July 16, 2012 submitted in opposition to the JPM Copper Trust Proposal (‘‘Senator Levin Letter’’). See id. The July 13 V&F Letter and the Senator Levin Letter are available, along with the July 18 V&F Letter, at https://www.sec.gov/comments/sr-nysearca-2012-66/ nysearca201266-1.pdf. Additionally, the July 13 V&F Letter and the Senator Levin Letter are available at https://www.sec.gov/comments/srnysearca-2012-28/nysearca201228-5.pdf and https:// www.sec.gov/comments/sr-nysearca-2012-28/ nysearca201228-6.pdf, respectively. 18 See July 18 V&F Letter, supra note 4, at 1. 19 Id. at 4. 20 Id. at 4–5. Additionally, V&F states that copper stored at LME warehouses usually is deposited there by producers with excess supply or by copper merchants looking for purchasers and is sold to traders seeking to close out short positions or to E:\FR\FM\13AUN1.SGM 13AUN1 Federal Register / Vol. 77, No. 156 / Monday, August 13, 2012 / Notices V&F believes that the only refined copper generally available for immediate delivery is the copper in LME and COMEX warehouses.21 V&F states that, at present, there is only approximately 240,000 metric tons of copper in LME warehouses worldwide, and an additional 60,000 metric tons of copper in COMEX warehouses in the United States, or about 290,000 total metric tons of copper available for immediate delivery.22 V&F states that as much as 121,200 metric tons of immediately available copper would be removed from the market if the Trust sells all of the Shares it seeks to register pursuant to the Registration Statement.23 Taking into account the sale of all of the shares of the JPM Copper Trust, another proposed commodity-based exchange traded product (‘‘CB–ETP’’) that would hold physical copper,24 V&F states that as much as 183,000 metric tons, or 63%, of immediately available copper would be removed from the market.25 V&F also expects that much of the copper used to fund the Trust will come from the immediately available supply in the U.S., stating: mstockstill on DSK4VPTVN1PROD with NOTICES What is more, these effects are, as a practical matter, most likely to be felt most directly in the United States. The reason is that, as with the JPM offering, the copper that is cheapest to acquire will most likely be copper on warrant in United States warehouses. This is because, for the most part, the cheapest location premiums for copper on warrant is from copper in LME warehouses in the United States. The ‘‘Authorized Participants,’’ like Goldman Sachs, who will be authorized to acquire copper for the BlackRock Trust will want to acquire copper at the cheapest location premiums possible in order for the price of ETF shares to be issued in exchange for the copper to mirror as closely as possible, the price per metric ton of copper on the LME. Thus, depletion of copper from the LME fabricators in sudden need of additional supply. See May 9 V&F Letter, supra note 17, at 3. 21 See July 18 V&F Letter, supra note 4, at 1. 22 See id. 23 See id. 24 See supra note 17. See also Securities and Exchange Act Release No. 66816 (April 16, 2012), 77 FR 23772 (April 20, 2012) (SR–NYSEArca–2012– 28) (notice of the JPM Copper Trust Proposal) (‘‘JPM Notice’’). Recently, the Commission instituted proceedings to determine whether to approve or disapprove the JPM Copper Trust Proposal. See Securities and Exchange Act Release No. 67470, supra note 17. The Trust and the JPM Copper Trust are referred to collectively as the ‘‘Copper Trusts.’’ 25 See July 18 V&F Letter, supra note 4, at 1. The Senator Levin Letter, which V&F attached to the July 18 V&F Letter, states that, if the Commission approves the listing and trading of the shares of the Copper Trusts, the trusts would hold approximately 34% of the copper stocks available for immediate delivery and would remove from the U.S. market over 55% of the available copper. See Senator Levin Letter, supra note 17, at 5–6. VerDate Mar<15>2010 16:29 Aug 10, 2012 Jkt 226001 warehouses will most likely be felt the hardest in the United States and, once copper from the LME warehouses is depleted, copper from the Comex warehouses will be depleted as well, as copper there is moved to LME warehouses in order to take advantage of higher prices.26 V&F further states that the collective effect of the Copper Trusts would be ‘‘far-reaching and potentially devastating to the U.S. and world economies,’’ and could cause ‘‘shortages of copper, higher prices to consumers, and increased volatility.’’ 27 V&F asserts that the supply of copper generally is inelastic and that supply, therefore, will not increase fast enough to account for the increased demand from the creation and growth of the Trust.28 V&F further states that U.S. producers do not have surplus product to deliver and therefore asserts that, once copper stored in warehouses disappears, it likely will not be replenished any time soon.29 V&F states that the Registration Statement ‘‘tries to convey the false impression that because there is copper tonnage outside of LME and Comex warehouses, such copper must therefore be available for [the Trust] to acquire.’’30 V&F states that the only copper eligible for Share creation is copper already under LME warrant or stored in COMEX warehouses,31 and that all other eligible copper is unavailable because it is: (1) Already part of the supply chain and subject to long-term contracts between producers and consumers; (2) held in bonded warehouses in China and destined for the Chinese market; 32 or (3) held as strategic reserves by the 26 See July 18 V&F Letter, supra note 4, at 4. 9 V&F Letter, supra note 17, at 10. The Senator Levin Letter, which V&F attached to the July 18 V&F Letter, asserts that there is ample evidence that the potentially smaller JPM Copper Trust would disrupt the supply of copper by removing from the market a substantial percentage of the copper available for immediate delivery. See Senator Levin Letter, supra note 17, at 1. 28 See May 9 V&F Letter, supra note 17, at 5 (‘‘[I]t is difficult for copper producers to increase supply, sometimes taking 15 years or longer before a new mine is opened up, and even in areas where copper is considered plentiful, political instability can keep a mine from producing’’). Further, V&F states that the consensus among experts is that copper is in deficit, has been in deficit for the past three years, and is expected to remain in deficit for at least the next couple of years. See id. at 3. The Senator Levin Letter, which V&F attached to the July 18 V&F Letter, also states that the copper market is inelastic. See Senator Levin Letter, supra note 17, at 3. 29 May 9 V&F Letter, supra note 17, at 5. 30 July 18 V&F Letter, supra note 4, at 2. 31 See id. See also Senator Levin Letter, supra note 17, at 5 (‘‘[I]t appears that most of the remaining copper stocks available for immediate delivery are on the LME and [COMEX]’’). 32 V&F asserts such copper is delivered only rarely to LME warehouses in Asia. See July 18 V&F Letter, supra note 4, at 2. 27 May PO 00000 Frm 00061 Fmt 4703 Sfmt 4703 48183 governments of China and South Korea.33 V&F also believes that investors’ ability to redeem Shares for the Trust’s physical copper would not mitigate the impact of removing substantial quantities of copper from the market.34 According to V&F, most investors in a copper-backed CB–ETP would not have any real economic incentive to redeem their Shares because: (1) They would benefit from a rise in the price of copper; and (2) investors seeking to recognize their profits likely would sell their Shares rather than redeeming them because redeeming them would require assuming delivery risk.35 2. Impact on Copper Prices According to V&F, removing large amounts of copper from LME and COMEX warehouses would disrupt the supply of copper available for immediate delivery and thereby cause a substantial rise in near-term copper prices.36 V&F argues that this also would cause an immediate spike in the cash-to-three-month spread price of copper, as near-term prices for delivery accelerate compared to prices for delivery later in time.37 V&F is concerned that manufacturers and fabricators that rely on the supply of copper available in LME warehouses would be forced to pay substantially higher prices in the short term, and, in turn, manufacturers and fabricators would pass these price increases on to their customers.38 According to V&F, price increases both for copper and copper products will be especially dramatic in the U.S., where copper currently is relatively 33 See id. May 9 V&F Letter, supra note 17, at 5. 35 See id. V&F believes that it is unlikely that fabricators would use Shares to manage their inventory because doing so: (1) Would add cost and risk to fabricators who otherwise would simply purchase available stocks from LME warehouses; (2) may not have any appreciable effect on price or supply in a rising market with tight supply; and (3) would be an inefficient and perhaps impracticable way of obtaining copper because the copper delivered by the Trust may be warehoused in an unhelpful location (e.g., a fabricator in Alabama may need copper in New Orleans, not Shanghai) or of an unacceptable brand or quality. See id. at 5– 6. 36 See id. at 5. 37 See id. 38 See id. See also July 18 V&F Letter, supra note 4, at 4 (‘‘The principal victims will in the first instance be United States consumers who typically rely on supplies of copper for immediate delivery to augment their long-term supply. These fabricators will not only be forced to pay higher prices, and incur the risk of price volatility once prices collapse, but there may be periods of time when those who can least afford it will be unable to get supply.’’) 34 See E:\FR\FM\13AUN1.SGM 13AUN1 48184 Federal Register / Vol. 77, No. 156 / Monday, August 13, 2012 / Notices inexpensive.39 V&F states that U.S. copper fabricators will be forced to pay more for copper and in some instances may not be able to purchase the copper they need.40 According to V&F: [m]anufacturers and fabricators will have to pass these increases in price on to their customers, and because it is the U.S. supplies that will be hit the hardest, it will be U.S. consumers that will be hit the hardest. Everything that requires copper, including copper pipes in new homes, to copper wiring for electricity, to the copper used in the air conditioning units and also in automotive wiring, will all increase in price.’’ 41 V&F believes that the ‘‘chief beneficiary’’ of a tighter copper supply in the U.S. will likely be competitors in China, because Chinese manufacturers will have the copper feedstock on hand to produce copper rod, tubing, and wire, while at least some of their American counterparts will not.42 V&F quotes several statements from the Registration Statement to support its conclusion about the Trust’s impact on copper prices, including the following statement that: a very enthusiastic reception of the Shares by the market, or the proliferation of similar investment vehicles that issue shares backed by physical copper, would result in purchases of copper for deposit into the trust or such similar investment vehicles that could be large enough to result in an increase in the price of physical copper. If that were the case, the price of the Shares would be expected to reflect that increase.43 V&F also states that, because the potential size of the Trust is large relative to the size of the market for copper available for immediate delivery, even modest investor demand for the Shares could place upward pressure on the price of copper.44 V&F characterizes the current physical copper market as volatile, and believes that the successful creation and growth of the Trust would create a bubble, and the bursting of the bubble would result in increased price volatility in the physical copper market.45 V&F states that investors in a copper CB–ETP would benefit immediately from any increase in the price of copper because the more copper 39 See supra note 26 and accompanying text. July 18 V&F Letter, supra note 4, at 4–5. 41 See May 9 V&F Letter, supra note 17, at 5. 42 See July 18 V&F Letter, supra note 4, at 5. V&F also states that the launch of a copper-backed ETF is likely to upset the delicate balance of copper supplied to the United States, with potentially devastating consequences economically across a wide spectrum of industries. See May 9 V&F Letter, supra note 17, at 3. 43 See July 18 V&F Letter, supra note 4, at 3–4. 44 See July 13 V&F Letter, supra note 17, at 8–9. 45 See May 9 V&F Letter, supra note 17, at 2, 9. mstockstill on DSK4VPTVN1PROD with NOTICES 40 See VerDate Mar<15>2010 17:41 Aug 10, 2012 Jkt 226001 removed from the market to satisfy the demand for the copper CB–ETP, the higher the price not only of copper, but of the copper CB–ETP itself.46 V&F further believes that investors in the Trust would be able to measure how much impact their collective removal of copper from the supply available for immediate delivery would have on copper prices each day, and could adjust their purchasing strategies accordingly.47 V&F states that the copper bubble will be no different than others, predicting that, as investor demand for this product wanes, the bubble will burst, leaving in its wake a glut of physical copper that the Trust will be forced to dump on the market, causing prices to plummet, and leaving in its wake unsuspecting investors who will have lost the value of their investment.48 In describing why the bubble it predicts will burst, V&F states that, with the risk of an ETF removing indefinitely all or substantially all of the copper available for immediate delivery, the risk of price volatility becomes enormous. This is because the greater amount of copper artificially kept off-the-market, the greater the chance that investors will eventually no longer keep propping up the price with further purchases, and the greater the likelihood that the bubble will burst, thus flooding the market with surplus copper, and severely depressing the price.49 3. Increased Likelihood of Copper Market Manipulation V&F asserts generally that the tightened supply of copper it believes would be caused by fully funding the Trust would render the physical copper market more susceptible to manipulation.50 V&F also states that copper CB–ETPs such as the Copper Trusts ‘‘risk endangering the price discovery functions of the LME and Comex’’ because they would drawdown and remove from the market of most of the copper in LME and COMEX warehouses.51 According to V&F, the Trust ‘‘is unlike any other metal ETF currently 46 See id. at 5. id. at 9. V&F therefore questions whether the increased market transparency that the Exchange asserts will result from the formation and operation of the Trust (see Notice, supra note 3, 77 FR at 38361) will be in the public interest. See May 9 V&F Letter, supra note 17, at 10. 48 See May 9 V&F Letter, supra note 17, at 2. 49 Id. at 5. The Senator Levin Letter, which V&F attached to the July 18 V&F Letter, also makes statements about the potential effect of the JPM Copper Trust, stating that the ‘‘supply disruption is likely to affect the cash and futures market for copper, increasing volatility and driving up [the share] price to create a bubble and burst cycle.’’ See Senator Levin Letter, supra note 17, at 1. 50 See May 9 V&F Letter, supra note 17, at 1, 10. 51 July 18 V&F Letter, supra note 4, at 4. 47 See PO 00000 Frm 00062 Fmt 4703 Sfmt 4703 listed on the Exchange and would allow speculators in the guise of purchasers of shares to create a squeeze on the market.’’52 Therefore, V&F concludes that the ‘‘proposed rule change is therefore inconsistent with Section 6(b)(5) of the Securities Exchange Act of 1934, which requires that rules be designed to prevent manipulative acts and protect investors and the public interest.’’53 Finally, V&F questions whether NYSE Arca’s surveillance procedures are adequate to prevent fraudulent and manipulative trading in shares of the JPM Trust.54 B. Comparison to Other CommodityBased Trusts According to V&F, no ETF backed by a base metal used exclusively for industrial purposes has ever before been listed and sold on any nationally recognized exchange in the United States.55 V&F states that gold, silver, platinum, and palladium are all precious metals that have traditionally been held for investment purposes and are currently used as currency, and, as a result, there were ample stored sources available to back physical CB– ETPs holding precious metals, such that the introduction of those CB–ETPs had virtually no impact on the available supply.56 In contrast, V&F states that 52 Id. at 5. id. The Senator Levin Letter, which V&F attached to the July 18 V&F Letter, also states that the JPM Copper Trust may encourage manipulative acts by allowing ‘‘speculators to squeeze or corner the market in copper.’’ Senator Levin Letter, supra note 17, at 7. According to Senator Levin, market participants could use the shares to remove copper from the available supply with the intent to artificially inflate the price of copper, and this activity would go undetected by the LME because CB–ETPs currently are not subject to any form of commodity regulations. Id. Senator Levin states that, by holding physical copper rather than LME warrants, the Trust can control more of the available supply of copper without triggering LME reporting rules. Id. Senator Levin further believes that creating this market condition would be inconsistent with the requirements in Section 6(b)(5) of the Act that exchange rules be designed to prevent manipulative acts and protect investors and the public interest. Id. 54 See May 9 V&F Letter, supra note 17, at 10. According to V&F, NYSE Arca’s surveillance procedures are not adequate because they are the kind of garden-variety measures that are always in place to prevent collusion and other forms of manipulation by traders. See id. 55 July 18 V&F Letter, supra note 4, at 2. 56 See May 9 V&F Letter, supra note 17, at 2. V&F states that, unlike copper, there is enough of a supply of platinum and palladium (which are used for both industrial and investment purposes) available in storage and being produced that the introduction of CB–ETPs backed by these metals did not cause the kind of disruption to the market that a copper-backed CB–ETPs would cause. See July 13 V&F Letter, supra note 17, at 11. Specifically, V&F states that: (1) In recent years, there has been a surplus in palladium due to the 53 See E:\FR\FM\13AUN1.SGM 13AUN1 Federal Register / Vol. 77, No. 156 / Monday, August 13, 2012 / Notices copper generally is not held as an investment, but rather is used exclusively for industrial purposes,57 with the annual demand generally exceeding the available supply.58 mstockstill on DSK4VPTVN1PROD with NOTICES IV. Proceedings To Determine Whether To Approve or Disapprove SR– NYSEArca–2012–66 and Grounds for Disapproval Under Consideration The Commission is instituting proceedings pursuant to Section 19(b)(2)(B) of the Act 59 to determine whether this proposed rule change should be approved or disapproved. Institution of such proceedings is appropriate at this time in view of the legal and policy issues raised by the proposed rule change. As noted above, the institution of proceedings does not indicate that the Commission has reached any conclusions with respect to any of the issues involved. Rather, as described in greater detail below, the Commission seeks and encourages interested persons to provide additional comment on the proposed rule change to inform the Commission’s analysis of whether to approve or disapprove the proposed rule change. Pursuant to Section 19(b)(2)(B) of the Act,60 the Commission is providing notice of the grounds for disapproval under consideration. The Commission believes that questions remain about whether the proposed rule change is there is about a year’s supply of platinum reserves above ground; and (3) there is only a 1–2 week supply of copper available on the LME. See id. Similarly, the Senator Levin Letter, which V&F attached to the July 18 V&F Letter, also states that gold, silver, platinum, and palladium are substantially different than copper because these four metals are the only precious metals that are currently treated as world currencies and commonly held for investment purposes, and as a result there are substantial existing supplies of these metals that could be acquired to back an CB– ETPs without affecting the world market price in these metals. See Senator Levin Letter, supra note 17, at 6–7. 57 The Senator Levin Letter, which V&F attached to the July 18 V&F Letter, states that copper is not currently held for investment purposes because it is very expensive to store and difficult to transport, and there is not the same existing supply of copper for the Trust to acquire to back its CB–ETP, and concludes that holding copper for investment purposes will have a significantly greater impact on the copper market than CB–ETPs holding platinum, palladium, silver, or gold had on their respective markets and the broader economy. See Senator Levin Letter, supra note 17, at 7. 58 See May 9 V&F Letter, supra note 17, at 2–3. 59 15 U.S.C. 78s(b)(2)(B). Section 19(b)(2)(B) of the Act also provides that proceedings to determine whether to disapprove a proposed rule change must be concluded within 180 days of the date of publication of notice of the filing of the proposed rule change. Id. The time for conclusion of the proceedings may be extended for up to 60 days if the Commission finds good cause for such extension and publishes its reasons for so finding. Id. 60 Id. VerDate Mar<15>2010 16:29 Aug 10, 2012 Jkt 226001 consistent with the requirements of Section 6(b)(5) of the Act,61 which requires that the rules of an exchange be designed, among other things, 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 a national market system and, in general, to protect investors and the public interest. As discussed above, the Commission received one comment letter opposing the proposed rule change. V&F asserts that the successful creation of the Trust would materially reduce the supply of copper available for immediate delivery, which would increase the price of copper and volatility in the copper market, and, in turn, would harm the U.S. economy.62 In addition, V&F argues that, by decreasing the amount of copper available for immediate delivery, the Trust will make the copper market more susceptible to manipulation.63 V&F further believes the Exchange’s surveillance procedures are inadequate to prevent fraudulent and manipulative trading in the Shares.64 In light of the comments received, the Commission is soliciting further comments on the proposed rule change, including comments regarding the issues already commented upon. V. Request for Written Comments The Commission requests that interested persons provide written submissions of their views, data, and arguments with respect to the concerns identified above, as well as any others they may have regarding the proposed rule change. In particular, the Commission invites the written views of interested persons concerning whether the proposed rule change is consistent with Section 6(b)(5) or any other provision of the Act, or the rules and regulations thereunder. The Commission will consider, pursuant to Rule 19b–4, any request for an opportunity to make an oral presentation.65 61 15 U.S.C. 78f(b)(5). supra Section III.A.1–2. 63 See supra Section III.A.3. 64 See supra note 54 and accompanying text. 65 Section 19(b)(2) of the Act, as amended by the Securities Act Amendments of 1975, Public Law 94–29 (June 4, 1975), grants the Commission flexibility to determine what type of proceeding— either oral or notice and opportunity for written comments—is appropriate for consideration of a particular proposal by a self-regulatory organization. See Securities Act Amendments of 1975, Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st Sess. 30 (1975). 62 See PO 00000 Frm 00063 Fmt 4703 Sfmt 4703 48185 Interested persons are invited to submit written data, views and arguments regarding whether the proposed rule change should be disapproved by September 12, 2012. Any person who wishes to file a rebuttal to any other person’s submission must file that rebuttal by September 27, 2012. The Commission asks that commenters address the sufficiency and merit of the proposed rule change and the comments received, in addition to any other comments they may wish to submit about the proposed rule change. The Commission requests that commenters support their responses to the questions below with empirical data sufficient to inform the Commission’s decision making. In particular, the Commission seeks comment on the following: 1. In light of the comments received, the Commission is soliciting further comments regarding copper usage and supply trends. For example: Æ What was the world mine production capacity in each of the past 10 years? What data is available regarding projected world mine production over the next 3 to 5 years? What factors impact the ability to increase or decrease mine production? Æ What was the refined production in each of the past 10 years? How much of the refined production was from primary and secondary sources? What was the world refinery capacity in each of the past 10 years? What data is available regarding projected refined production over the next 3 to 5 years? What factors impact the ability to increase or decrease refinery production? Æ What was the world refined usage in each of the past 10 years? What data is available regarding projected usage over the next 3 to 5 years? Æ How much copper has been held for investment purposes over the past 10 years? How much of this copper was taken off LME warrant? How much of this copper has been eligible to be placed on LME warrant? 2. According to the International Copper Study Group (‘‘ICSG’), world refined usage of copper exceeded world refined production by approximately 417,000 tons in 2010 and 231,000 tons in 2011, and world refined stocks decreased by 161,000 tons in 2010 and increased by 13,000 tons in 2011.66 What factors account for refined stocks decreasing less than the deficit amount (or even increasing) in 2010 and 2011? 66 Press Release, ICSG, Copper: Preliminary Data for February 2012 (June 20, 2012), available at https://www.icsg.org/index.php?option=com_ content&task=view&id=63&Itemid=64. E:\FR\FM\13AUN1.SGM 13AUN1 48186 Federal Register / Vol. 77, No. 156 / Monday, August 13, 2012 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES Are there any factors with respect to the supply of copper available for immediate delivery that the Commission should consider in evaluating the market’s ability to meet demand for copper? When a deficit occurs, are copper fabricators and other end users able to access copper to meet excess demand? If so, what are the sources of that copper? How much copper is available for immediate delivery that is not on LME warrant? 3. V&F states that the Trust and the proposed JPM Copper Trust,67 collectively, will remove from the market a substantial percentage of the copper available for immediate delivery.68 According to V&F, the Copper Trusts would remove 63% of the copper currently held in LME and COMEX warehouses.69 V&F states that the collective effect of the Copper Trusts would be ‘‘far-reaching and potentially devastating to the U.S. and world economies,’’ including ‘‘shortages of copper, higher prices to consumers, and increased volatility.’’ 70 Do commenters agree or disagree with these statements? If so, why or why not? For example: Æ Do commenters believe creation of the Trust will have an impact on the supply of copper? If so, what will that impact be? If not, why not? Æ How does a change in the supply of copper impact the price of copper? To what extent do copper stocks need to be reduced or increased to impact the price of copper? Æ To what extent is the LME Bid Price affected by the amount of copper on LME warrant? To what extent must copper on LME warrant be reduced to impact the LME Bid Price? To what extent, if at all, is the LME Bid Price affected by the supply of copper ineligible to be placed on LME warrant? Æ How does a change in the supply of copper impact volatility in the physical copper and copper derivatives markets? Æ Is there empirical evidence that creation of the Trust will impact copper prices and volatility? What impact, if any, will creation of the Trust have on the US economy? 4. V&F states that Shares would be created by removing copper from LME and COMEX warehouses in the United 67 See supra note 17. See also JPM Notice, supra note 24. 68 The Senator Levin Letter, which V&F attached to the July 18 V&F Letter, states that the Copper Trusts would hold approximately 34% of the copper stocks available for immediate delivery and would remove from the U.S. market over 55% of the available copper. See Senator Levin Letter, supra note 17, at 5–6. 69 See July 18 V&F Letter, supra note 4, at 1. 70 See July 13 V&F Letter, supra note 17, at 10. VerDate Mar<15>2010 16:29 Aug 10, 2012 Jkt 226001 States,71 thus driving up the cost of copper particularly in the United States.72 According to V&F, correspondingly: The principal victims will * * * be United States consumers who typically rely on supplies of copper for immediate delivery to augment their long-term supply. These fabricators will not only be forced to pay higher prices, and incur the risk of price volatility once prices collapse, but there may be periods of time when those who can least afford it will be unable to get supply.73 Do commenters agree or disagree with these concerns? Why or why not? Additionally, what mechanisms (if any) exist to allow market participants in need of copper in a specific location to trade an LME warrant or warehouse receipt for copper at another location? 5. V&F states that the only copper eligible for Share creation is copper: (1) Already under LME warrant; (2) stored in COMEX warehouses; (3) already part of the supply chain, subject to long-term contracts between producers and consumers; (4) held in bonded warehouses in China and destined for the Chinese market, which V&F asserts is only rarely delivered to LME warehouses in Asia; or (5) held as strategic reserves by the governments of China and South Korea.74 The Commission is soliciting further comments regarding physical copper stocks. For example: Æ How much copper is currently held in LME warehouses? How much of the copper currently held in LME warehouses is on warrant? How much copper in LME warehouses is available for investment purposes? Æ How much copper is held in COMEX, Shanghai Futures Exchange (‘‘SHFE’’), and Multi Commodity Exchange of India (‘‘MCX’’) warehouses? How much copper held in COMEX, SHFE, and MCX warehouses is eligible to be placed on LME warrant (i.e., is of a brand registered with the LME)? How much of this LME warranteligible copper is available for investment purposes? Where is this copper located? 71 V&F believes this to be true because it states that the copper that is cheapest to deliver to the Trust will most likely be on warrant in United States warehouses. See July 18 V&F Letter, supra note 4, at 4. 72 See id. (‘‘[D]epletion of copper from the LME warehouses will most likely be felt the hardest in the United States and, once copper from the LME warehouses is depleted, copper from the Comex warehouses will be depleted as well, as copper there is moved to LME warehouses in order to take advantage of higher prices’’). 73 See id. 74 See July 18 V&F Letter, supra note 4, at 2. See also May 9 V&F Letter, supra note 17, at 3; July 13 V&F Letter, supra note 17, at 3, 5. PO 00000 Frm 00064 Fmt 4703 Sfmt 4703 Æ What quantity of copper stock, if any, is held in other locations that would be eligible to be placed on LME warrant (if it were located at an LME warehouse)? Æ How accessible are stocks of copper eligible to be placed on warrant that are not held in LME warehouses? Æ Are commenters aware of any activities involving the stockpiling of copper? If so, how much copper has been stockpiled? Where is such copper located? How accessible is such copper? How much of this stock was taken off LME warrant? How much of this copper is eligible to be placed on LME warrant? 6. The Custodian will store the Trust’s copper in Approved Warehouses around the world.75 What is the locational premium at each of the Approved Warehouses? What impact would changes in locational premia have on supply and demand for copper at each of the Approved Warehouses? How much copper is held at each of the Approved Warehouses? How much of the copper held at each of the Approved Warehouses is on LME warrant? How much is eligible to be placed on LME warrant? How much copper eligible for LME warrant is available for investment purposes? How much is not eligible to be placed on LME warrant? 7. The Trustee generally will value the Trust’s copper at that day’s announced LME Bid Price,76 which represents the price that a buyer is willing to pay to receive a warrant in any warehouse within the LME system.77 Given the Trust’s copper will be held off LME warrant, will the LME Bid Price accurately reflect the value of the Trust’s copper? Why or why not? 8. When valuing the Trust’s copper, the Trustee will not take into account the location(s) of the copper. In contrast, to support the JPM Copper Proposal, NYSE Arca states that the value of copper depends in part on its location, i.e., copper stored in a location that is low in supply and high in demand carries a higher premium than copper that is stored in a location where supply is high and demand is low.78 Æ Does the value of the Trust’s copper depend on its location? If so, how? Æ If so, does the LME Bid Price account for the locational premia/ 75 See Notice, supra note 3, 77 FR at 38356 n.23 (as of the date of the Registration Statement, the Custodian is authorized to hold copper owned by the Trust at warehouses located in: East Chicago, Indiana; Mobile, Alabama; New Orleans, Louisiana; Saint Louis, Missouri; Hull, England; Liverpool, England; Rotterdam, Netherlands; and Antwerp, Belgium). 76 See id. at 38358. 77 See id. at 38356 n.25. 78 See JPM Notice, supra note 24, 77 FR at 23779. E:\FR\FM\13AUN1.SGM 13AUN1 mstockstill on DSK4VPTVN1PROD with NOTICES Federal Register / Vol. 77, No. 156 / Monday, August 13, 2012 / Notices discounts of the Trust’s copper held in various locations? 9. V&F states: ‘‘the most obvious and freely available source’’ of copper eligible to create Shares ‘‘is copper on warrant in LME warehouses today.’’ 79 V&F further states that taking copper off LME warrant would involve little or no cost if the LME warrants purchased are for copper that is stored at the Approved Warehouses.80 Æ What costs are involved in taking copper off LME warrant? What costs are involved in putting copper on LME warrant? Æ How long does it take to take copper off LME warrant? How long does it take to put copper on LME warrant? Æ How does the cost and time required to take copper off warrant compare to the cost and time to ship copper to an Approved Warehouse? 10. The Commission understands that ETFS Physical Copper securities currently trade on the London Stock Exchange. How much copper did ETFS Physical Copper hold following the initial creation? How much copper does ETFS Physical Copper currently hold? What change, if any, was there in the price of copper following creation of ETFS Physical Copper? Did the creation of ETFS Physical Copper result in an observable impact on the copper market? Has ETFS Physical Copper engaged in the lending of copper? 11. The Commission has previously approved listing on the Exchange under NYSE Arca Equities Rule 8.201 of other issues of CB–ETPs backed by gold, silver, platinum, and palladium (collectively ‘‘precious metals’’). While these precious metals are often held for investment purposes, the Commission understands they are also used for various industrial purposes. V&F asserts that copper is used exclusively for industrial purposes and is not generally held for investment.81 The Commission requests information regarding the production and use of precious metals. How much gold, silver, platinum, and palladium has been produced in each of the last 10 years? How much gold, silver, platinum, and palladium has been used for investment purposes in each of the last 10 years? How much gold, silver, platinum, and palladium has been used for industrial purposes in each of the last 10 years? Are there any other uses of gold, silver, platinum, and palladium relevant to understanding utilization of these precious metals? What are the current and historic stocks of gold, silver, platinum, and 79 See July 18 V&F Letter, supra note 4, at 2. July 13 V&F Letter, supra note 17, at 6. 81 See May 9 V&F Letter, supra note 17, at 2–3. 80 See VerDate Mar<15>2010 16:29 Aug 10, 2012 Jkt 226001 palladium? Is there any empirical evidence that the listing of CB–ETPs backed by gold, silver, platinum, or palladium impacted prices in these markets? 12. V&F states that creation of the Trust could result in the immediate removal of up to 121,200 metric tons of copper from the market.82 What is the likelihood that the Trust will sell all registered Shares initially? What is the likelihood that the Trust will sell all registered Shares in the three months after the registration goes effective? How quickly did the CB–ETPs backed by gold, silver, platinum, and palladium sell the shares registered in the first registration statement? 13. V&F argues that, by decreasing the amount of copper available for immediate delivery, the Trust will make the copper market more susceptible to manipulation.83 Specifically, V&F states that ‘‘the drawing down of stocks in LME and Comex warehouses’’ resulting from the listing and trading of the Shares ‘‘will make it much easier and cheaper for [copper market] speculators to engage in temporary market squeezes and corners.’’ 84 The Commission requests comment on these concerns, as well as whether commenters agree or disagree with the comments and why or why not. For example: Æ Will creation of the Trust impact the ability to manipulate the physical copper or copper derivatives markets? If so, how? If not, why not? Æ Has there been any increased manipulative behavior due to the reduction of copper available for immediate delivery that resulted from the prior years’ deficits in copper production versus copper consumption? Æ Are there any structural aspects of the copper market that render it more or less susceptible to manipulation? Æ Is there empirical evidence that the creation of CB–ETPs backed by gold, silver, platinum, and palladium has led to manipulation of the physical markets for those precious metals? If so, please describe. 14. V&F states the listing and trading of shares of copper CB–ETPs like those ‘‘being proposed by BlackRock and JPM—and the consequent drawdown and removal from the market of most of the copper in LME and Comex warehouses—risk endangering the price discovery functions of the LME and Comex.’’ 85 V&F also states that such potential impacts of a copper CB–ETP on the copper market in turn could affect the Shares, stating: the risk of an ETF removing indefinitely all or substantially all of the copper available for immediate delivery, the risk of price volatility becomes enormous. This is because the greater amount of copper artificially kept off-the-market, the greater the chance that investors will eventually no longer keep propping up the price with further purchases, and the greater the likelihood that the bubble will burst, thus flooding the market with surplus copper, and severely depressing the price.86 V&F further states that investors in a copper CB–ETP would benefit immediately from any increase in the price of copper because the more copper removed from the market to satisfy the demand for the copper CB–ETP, the higher the price not only of copper, but of the copper CB–ETP itself.87 According to V&F, like all bubbles, as investor demand for this product wanes, the bubble will burst, leaving in its wake a glut of physical copper that the Trust will be forced to dump on the market, causing prices to plummet, and leaving in its wake unsuspecting investors who will have lost the value of their investment.88 Do commenters agree or disagree with these comments? If so, why or why not? 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 rulecomments@sec.gov. Please include File Number SR–NYSEArca–2012–66 on the subject line. Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. 85 July 82 See July 18 V&F Letter, supra note 4, at 1. 83 See May 9 V&F Letter, supra note 17, at 1, 10. See also July 18 V&F Letter, supra note 4, at 5 (‘‘In short, the proposed ETF * * * would allow speculators in the guise of purchasers of shares to create a squeeze on the market’’). 84 May 9 V&F Letter, supra note 17, at 9. The Senator Levin Letter, which V&F attached to the July 18 V&F Letter, also argues that approval of the proposed rule change would make the copper market more susceptible to squeezes and corners by speculators. See Senator Levin Letter, supra note 17, at 7. PO 00000 Frm 00065 Fmt 4703 Sfmt 4703 48187 18 V&F Letter, supra note 4, at 4. 9 V&F Letter, supra note 17, at 5. See also July 18 V&F Letter, supra note 4, at 4 (asserting that BlackRock admits that the boom may bust, and quoting from the Registration Statement). 87 See May 9 V&F Letter, supra note 17, at 5. 88 See id. at 2. The Senator Levin Letter, which V&F attached to the July 18 V&F Letter, states that the supply disruption caused by the listing and trading of a copper CB–ETP ‘‘is likely to affect the cash and futures market for copper, increasing volatility and driving up its price to create a bubble and burst cycle.’’ See Senator Levin Letter, supra note 17, at 1. 86 May E:\FR\FM\13AUN1.SGM 13AUN1 48188 Federal Register / Vol. 77, No. 156 / Monday, August 13, 2012 / Notices All submissions should refer to File Number SR–NYSEArca–2012–66. These file numbers 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 10:00 a.m. and 3:00 p.m. Copies of such filings also will be available for inspection and copying at the principal office of the Exchanges. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR– NYSEArca–2012–66 and should be submitted on or before September 12, 2012. Rebuttal comments should be submitted by September 27, 2012. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.89 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2012–19790 Filed 8–10–12; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION mstockstill on DSK4VPTVN1PROD with NOTICES [Release No. 34–67607; File No. SR–EDGA– 2012–35] Self-Regulatory Organizations; EDGA Exchange, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Amendments to the EDGA Exchange, Inc. Fee Schedule August 7, 2012. CFR 200.30–3(a)(57). VerDate Mar<15>2010 16:29 Aug 10, 2012 I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend its fees and rebates applicable to Members 3 of the Exchange pursuant to EDGA Rule 15.1(a) and (c). All of the changes described herein are applicable to EDGA Members. The text of the proposed rule change is available on the Exchange’s Internet Web site at https:// www.directedge.com, at the Exchange’s principal office, and at the Public Reference Room of the Commission. 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 these statements may be examined at the places specified in Item IV below. The self-regulatory organization has prepared summaries, set forth in sections A, B and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to append Footnote 18 to its standard rebate of $0.0003 per share for adding liquidity on the EDGA fee schedule to add the Step Up Tier. The Exchange also proposes to append Footnote 18 to Flags B, V, Y, 3, and 4 to signify a potential rate change should the Member meet the criteria of the Step Up Tier. Members may qualify for a rebate of $0.0005 per share on their displayed shares (Flags B, V, Y, 3, and 4) for adding liquidity to 1 15 Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the 89 17 ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on August 1, 2012 the EDGA Exchange, Inc. (the ‘‘Exchange’’ or ‘‘EDGA’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II and III 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. Jkt 226001 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 A Member is any registered broker or dealer, or any person associated with a registered broker or dealer, that has been admitted to membership in the Exchange. 2 17 PO 00000 Frm 00066 Fmt 4703 Sfmt 4703 EDGA if the Member, on a daily basis, measured monthly, posts 0.10% of the Total Consolidated Volume (‘‘TCV’’) 4 in Average Daily Volume (‘‘ADV’’) more than their July 2012 ADV added to EDGA. Because the Exchange can now differentiate non-displayed orders that add liquidity using the Mid Point Discretionary Order type 5 (Flag DM) from non-displayed orders that remove liquidity using the Mid Point Discretionary Order type (Flag DT),6 the Exchange proposes to count the volume generated from Flags DM and DT toward the volume threshold in Footnote 2 since Flags DM and DT represent a nondisplayed order type. Therefore, where a Member adds or removes liquidity using non-displayed (hidden) orders, a Member is charged a rate of $0.0010 per share for Flags HA or HR, contingent upon a Member adding or removing greater than 1,000,000 shares hidden on a daily basis, measured monthly (where the volume generated from Flags HA, HR, DM and DT count towards this tier) or a Member posting greater than 8,000,000 shares on a daily basis, measured monthly. Members not meeting either minimum will be charged $0.0030 per share for Flags HA or HR. The Exchange proposes to make conforming amendments to the text of Footnote 2. The Exchange notes that it will continue to charge Members a rate of $0.0005 per share for non-displayed orders that add liquidity using Mid Point Discretionary Orders that yield Flag DM and $0.0005 per share for nondisplayed orders that remove liquidity using Mid Point Discretionary Orders that yield Flag DT. The Exchange proposes to delete Footnote 4 that is appended to Flag HA in order to clarify for Members that the volume from Flag HA counts towards achieving the tiered pricing in Footnote 4 and the rate for Flag HA does not change where a Member achieves the thresholds outlined in Footnote 4. The Exchange notes that these proposed changes do not modify the Exchanges existing treatment of Flag HA. This amendment supports the Exchange’s 4 TCV is defined as volume reported by all exchanges and trade reporting facilities to the consolidated transaction reporting plans for Tapes A, B and C securities for the month prior to the month in which the fees are calculated. 5 See Securities Exchange Act Release No. 67226 (June 20, 2012), 77 FR 38113 (June 26, 2012) (SR– EDGA–2012–22). 6 See Securities and Exchange Act Release No. 67380 (July 10, 2012), 77 FR 41847 (July 16, 2012) (SR–EDGA–2012–29) (where the Exchange provided additional transparency to Members by bifurcating then existing Flag DM into two flags: Flag DM (adds liquidity in the discretionary range) and Flag DT (removes liquidity in the discretionary range)). E:\FR\FM\13AUN1.SGM 13AUN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 77, Number 156 (Monday, August 13, 2012)]
[Notices]
[Pages 48181-48188]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-19790]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67616; File No. SR-NYSEArca-2012-66]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting
Proceedings To Determine Whether To Approve or Disapprove a Proposed
Rule Change To List and Trade Shares of iShares Copper Trust Pursuant
to NYSE Arca Equities Rule 8.201

August 8, 2012.

I. Introduction

On June 19, 2012, NYSE Arca, Inc. (``Exchange'' or ``NYSE Arca'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
list and trade shares (``Shares'') of iShares Copper Trust (``Trust'')
pursuant to NYSE Arca Equities Rule 8.201. The proposed rule change was
published for comment in the Federal Register on June 27, 2012.\3\ The
Commission received one comment letter on the proposed rule change.\4\
---------------------------------------------------------------------------

\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 67237 (June 22, 2012),
77 FR 38351 (``Notice'').
\4\ See letter from Robert B. Bernstein, Vandenberg & Feliu, LLP
(``V&F''), to Elizabeth M. Murphy, Secretary, Commission, dated July
18 2012 (``July 18 V&F Letter''). The July 18 V&F Letter is
available at https://www.sec.gov/comments/sr-nysearca-2012-66/nysearca201266-1.pdf. V&F identified itself as a U.S. law firm that
represents RK Capital LLC, an international copper merchant, and
four end-users of copper: Southwire Company, Encore Wire
Corporation, Luvata, and AmRod. V&F states that these companies
collectively comprise about 50% of the copper fabricating capacity
of the United States. See July 18 V&F Letter at 1.
---------------------------------------------------------------------------

This order institutes proceedings under Section 19(b)(2)(B) of the
Act to determine whether to approve or disapprove the proposed rule
change. The institution of proceedings does not indicate that the
Commission has reached any conclusions with respect to any of the
issues involved, nor does it mean that the Commission will ultimately
disapprove the proposed rule change. Rather, as described in greater
detail below, the Commission seeks and encourages interested persons to
provide additional comment on the proposed rule change to inform the
Commission's analysis of whether to approve or disapprove the proposed
rule change.

II. Description of the Proposal

The Exchange proposes to list and trade the Shares under NYSE Arca
Equities Rule 8.201, which governs the

[[Page 48182]]

listing and trading of commodity-based trust shares. BlackRock Asset
Management International Inc. is the sponsor of the Trust
(``Sponsor''). The Bank of New York Mellon is the trustee of the Trust
(``Trustee''). Metro International Trade Services LLC is the custodian
of the Trust (``Custodian'').
The Trust's investment objective is for the value of the Shares to
reflect, at any given time, the value of the copper owned by the Trust
at that time, less the Trust's expenses and liabilities at that time.
The Trust would not be actively managed and would not engage in any
activities designed to obtain a profit from, or to prevent losses
caused by, changes in the price of copper.
The Trust will create Shares only in exchange for copper that: (1)
Meets the requirements to be delivered in settlement of copper futures
contracts traded on the LME; and (2) is eligible to be placed on London
Metal Exchange (``LME'') warrant at the time it is delivered to the
Trust.\5\ The Trust expects to create and redeem Shares on a continuous
basis but only with authorized participants in blocks of five or more
baskets of 2,500 Shares each.\6\ Unless otherwise instructed by the
Trustee, no copper held by the Custodian on behalf of the Trust may be
on LME warrant.\7\ The Custodian may keep the Trust's copper at
locations within or outside the United States that are agreed from time
to time by the Custodian and the Trustee. As of the date of the
Registration Statement,\8\ the Custodian is authorized to hold copper
owned by the Trust at warehouses located in: East Chicago, Indiana;
Mobile, Alabama; New Orleans, Louisiana; Saint Louis, Missouri; Hull,
England; Liverpool, England; Rotterdam, Netherlands; and Antwerp,
Belgium (collectively, ``Approved Warehouses''). Unless otherwise
agreed in writing by the Trustee, each of the warehouses where the
Trust's copper will be stored must be LME-approved at the time copper
is delivered to the Custodian for storage in such warehouse.
---------------------------------------------------------------------------

\5\ See Notice, supra note 3, 77 FR at 38356.
\6\ See id.
\7\ See id.
\8\ Pre-Effective Amendment No. 4 to Form S-1 for iShares Copper
Trust, filed with the Commission on September 2, 2011 (No. 333-
170131) (``Registration Statement'').
---------------------------------------------------------------------------

The net asset value (``NAV'') of the Trust will be calculated as
promptly as practicable after 4:00 p.m. EST on each business day. The
Trustee will value the Trust's copper at that day's announced LME Bid
Price.\9\ If there is no announced LME Bid Price on a business day, the
Trustee will be authorized to use the most recently announced LME Bid
Price unless the Sponsor determines that such price is inappropriate as
a basis for valuation.\10\
---------------------------------------------------------------------------

\9\ The ``LME Bid Price'' is announced by the LME at 1:20 p.m.
London Time and represents the price that a buyer is willing to pay
to receive a warrant in any warehouse within the LME system. See
Notice, supra note 3, 77 FR at 38356 n. 25.
\10\ See id. at 38358.
---------------------------------------------------------------------------

NYSE Arca indicates that it will require that a minimum of 100,000
Shares be outstanding at the start of trading,\11\ which represents
1,000 metric tons of copper. The Trust seeks to register 12,120,000
Shares,\12\ which represents 121,200 metric tons of copper.
---------------------------------------------------------------------------

\11\ See id. at 38359.
\12\ See Registration Statement, supra note 8.
---------------------------------------------------------------------------

The Exchange states that it intends to utilize appropriate
surveillance procedures applicable to derivative products, including
commodity-based trust shares, to monitor trading in the Shares, and
represents that such procedures will be adequate to properly monitor
Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities
laws.\13\ The Exchange further represents that all trading in the
Shares will be subject to applicable surveillance procedures.\14\ In
discussing its ability to obtain information relevant to trading of the
Shares on its facilities, the Exchange states that it is able to obtain
information: (1) Regarding trading in physical copper, the Shares, and
other copper derivatives by ETP Holders acting as registered market
makers, pursuant to NYSE Arca Equities Rule 8.201(g); (2) from the LME,
with which the Exchange has a comprehensive surveillance sharing
agreement that applies with respect to trading in copper and copper
derivatives; and (3) via the Intermarket Surveillance Group (``ISG'')
from other exchanges who are members of the ISG, of which CME Group,
Inc., which includes Commodity Exchange, Inc. (``COMEX''), is a
member.\15\
---------------------------------------------------------------------------

\13\ See Notice, supra note 3, 77 FR at 38360.
\14\ See id.
\15\ See id.
---------------------------------------------------------------------------

The Notice and the Registration Statement include additional
information regarding: The Trust; the Shares; the Trust's investment
objectives, strategies, policies, and restrictions; fees and expenses;
creation and redemption of Shares; the physical copper market;
availability of information; trading rules and halts; and surveillance
procedures.\16\
---------------------------------------------------------------------------

\16\ See Notice and Registration Statement, supra notes 3 and 8,
respectively.
---------------------------------------------------------------------------

III. Summary of V&F's Comments

V&F opposes the proposed rule change.\17\ As discussed in greater
detail below, V&F states its belief that the issuance by the Trust of
all of the Shares covered by the Registration Statement within a short
period of time would result in: (1) A material reduction in the
immediately available supply of global copper; (2) increased volatility
in the price of copper, which would in turn significantly harm the U.S.
economy; and (3) a destabilization of the physical copper market that
would make it more susceptible to manipulation.
---------------------------------------------------------------------------

\17\ The Commenter also opposes a separate pending proposed rule
change by NYSE Arca to list and trade shares of the JPM Copper Trust
(``JPM Copper Trust Proposal''). See generally Securities Exchange
Act Release No. 67470 (July 19, 2012), 77 FR 43620 (July 25, 2012).
In the July 18 V&F Letter, V&F incorporated by reference a letter it
submitted in opposition to the JPM Copper Trust Proposal, which was
received by the Commission on May 9, 2012 (``May 9 V&F Letter'').
See July 18 V&F Letter, supra note 4, at 5. The May 9 V&F Letter is
available at https://www.sec.gov/comments/sr-nysearca-2012-28/nysearca201228.shtml. V&F also attached to the July 18 V&F Letter
(1) another letter dated July 13, 2012 that it submitted in
opposition to the JPM Copper Trust Proposal (``July 13 V&F
Letter''); and (2) a letter from U.S. Senator Carl Levin dated July
16, 2012 submitted in opposition to the JPM Copper Trust Proposal
(``Senator Levin Letter''). See id. The July 13 V&F Letter and the
Senator Levin Letter are available, along with the July 18 V&F
Letter, at https://www.sec.gov/comments/sr-nysearca-2012-66/nysearca201266-1.pdf. Additionally, the July 13 V&F Letter and the
Senator Levin Letter are available at https://www.sec.gov/comments/sr-nysearca-2012-28/nysearca201228-5.pdf and https://www.sec.gov/comments/sr-nysearca-2012-28/nysearca201228-6.pdf, respectively.
---------------------------------------------------------------------------

A. Adverse Copper Market Impact

1. Impact on Supply of Copper Available for Immediate Delivery
V&F states that almost all of the refined copper produced annually
worldwide is subject to long-term delivery contracts with copper
fabricating companies, and that at any given time, there is only a
limited supply of copper available for immediately delivery.\18\ In
particular, according to V&F, most American copper fabricators enter
into long-term supply contracts for ``about 85% of their annual
requirements.'' \19\ V&F states that U.S. copper fabricators depend on
the market for copper available for immediate delivery to ``protect
against the risk of reductions in demand for product without having to
incur the added expense of storing inventory they cannot use.'' \20\
---------------------------------------------------------------------------

\18\ See July 18 V&F Letter, supra note 4, at 1.
\19\ Id. at 4.
\20\ Id. at 4-5. Additionally, V&F states that copper stored at
LME warehouses usually is deposited there by producers with excess
supply or by copper merchants looking for purchasers and is sold to
traders seeking to close out short positions or to fabricators in
sudden need of additional supply. See May 9 V&F Letter, supra note
17, at 3.

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

[[Page 48183]]

V&F believes that the only refined copper generally available for
immediate delivery is the copper in LME and COMEX warehouses.\21\ V&F
states that, at present, there is only approximately 240,000 metric
tons of copper in LME warehouses worldwide, and an additional 60,000
metric tons of copper in COMEX warehouses in the United States, or
about 290,000 total metric tons of copper available for immediate
delivery.\22\ V&F states that as much as 121,200 metric tons of
immediately available copper would be removed from the market if the
Trust sells all of the Shares it seeks to register pursuant to the
Registration Statement.\23\ Taking into account the sale of all of the
shares of the JPM Copper Trust, another proposed commodity-based
exchange traded product (``CB-ETP'') that would hold physical
copper,\24\ V&F states that as much as 183,000 metric tons, or 63%, of
immediately available copper would be removed from the market.\25\
---------------------------------------------------------------------------

\21\ See July 18 V&F Letter, supra note 4, at 1.
\22\ See id.
\23\ See id.
\24\ See supra note 17. See also Securities and Exchange Act
Release No. 66816 (April 16, 2012), 77 FR 23772 (April 20, 2012)
(SR-NYSEArca-2012-28) (notice of the JPM Copper Trust Proposal)
(``JPM Notice''). Recently, the Commission instituted proceedings to
determine whether to approve or disapprove the JPM Copper Trust
Proposal. See Securities and Exchange Act Release No. 67470, supra
note 17. The Trust and the JPM Copper Trust are referred to
collectively as the ``Copper Trusts.''
\25\ See July 18 V&F Letter, supra note 4, at 1. The Senator
Levin Letter, which V&F attached to the July 18 V&F Letter, states
that, if the Commission approves the listing and trading of the
shares of the Copper Trusts, the trusts would hold approximately 34%
of the copper stocks available for immediate delivery and would
remove from the U.S. market over 55% of the available copper. See
Senator Levin Letter, supra note 17, at 5-6.
---------------------------------------------------------------------------

V&F also expects that much of the copper used to fund the Trust
will come from the immediately available supply in the U.S., stating:

What is more, these effects are, as a practical matter, most
likely to be felt most directly in the United States. The reason is
that, as with the JPM offering, the copper that is cheapest to
acquire will most likely be copper on warrant in United States
warehouses. This is because, for the most part, the cheapest
location premiums for copper on warrant is from copper in LME
warehouses in the United States. The ``Authorized Participants,''
like Goldman Sachs, who will be authorized to acquire copper for the
BlackRock Trust will want to acquire copper at the cheapest location
premiums possible in order for the price of ETF shares to be issued
in exchange for the copper to mirror as closely as possible, the
price per metric ton of copper on the LME. Thus, depletion of copper
from the LME warehouses will most likely be felt the hardest in the
United States and, once copper from the LME warehouses is depleted,
copper from the Comex warehouses will be depleted as well, as copper
there is moved to LME warehouses in order to take advantage of
higher prices.\26\
---------------------------------------------------------------------------

\26\ See July 18 V&F Letter, supra note 4, at 4.

V&F further states that the collective effect of the Copper Trusts
would be ``far-reaching and potentially devastating to the U.S. and
world economies,'' and could cause ``shortages of copper, higher prices
to consumers, and increased volatility.'' \27\
---------------------------------------------------------------------------

\27\ May 9 V&F Letter, supra note 17, at 10. The Senator Levin
Letter, which V&F attached to the July 18 V&F Letter, asserts that
there is ample evidence that the potentially smaller JPM Copper
Trust would disrupt the supply of copper by removing from the market
a substantial percentage of the copper available for immediate
delivery. See Senator Levin Letter, supra note 17, at 1.

V&F asserts that the supply of copper generally is inelastic and
that supply, therefore, will not increase fast enough to account for
the increased demand from the creation and growth of the Trust.\28\ V&F
further states that U.S. producers do not have surplus product to
deliver and therefore asserts that, once copper stored in warehouses
disappears, it likely will not be replenished any time soon.\29\
---------------------------------------------------------------------------

\28\ See May 9 V&F Letter, supra note 17, at 5 (``[I]t is
difficult for copper producers to increase supply, sometimes taking
15 years or longer before a new mine is opened up, and even in areas
where copper is considered plentiful, political instability can keep
a mine from producing''). Further, V&F states that the consensus
among experts is that copper is in deficit, has been in deficit for
the past three years, and is expected to remain in deficit for at
least the next couple of years. See id. at 3. The Senator Levin
Letter, which V&F attached to the July 18 V&F Letter, also states
that the copper market is inelastic. See Senator Levin Letter, supra
note 17, at 3.
\29\ May 9 V&F Letter, supra note 17, at 5.
---------------------------------------------------------------------------

V&F states that the Registration Statement ``tries to convey the
false impression that because there is copper tonnage outside of LME
and Comex warehouses, such copper must therefore be available for [the
Trust] to acquire.''\30\ V&F states that the only copper eligible for
Share creation is copper already under LME warrant or stored in COMEX
warehouses,\31\ and that all other eligible copper is unavailable
because it is: (1) Already part of the supply chain and subject to
long-term contracts between producers and consumers; (2) held in bonded
warehouses in China and destined for the Chinese market; \32\ or (3)
held as strategic reserves by the governments of China and South
Korea.\33\
---------------------------------------------------------------------------

\30\ July 18 V&F Letter, supra note 4, at 2.
\31\ See id. See also Senator Levin Letter, supra note 17, at 5
(``[I]t appears that most of the remaining copper stocks available
for immediate delivery are on the LME and [COMEX]'').
\32\ V&F asserts such copper is delivered only rarely to LME
warehouses in Asia. See July 18 V&F Letter, supra note 4, at 2.
\33\ See id.
---------------------------------------------------------------------------

V&F also believes that investors' ability to redeem Shares for the
Trust's physical copper would not mitigate the impact of removing
substantial quantities of copper from the market.\34\ According to V&F,
most investors in a copper-backed CB-ETP would not have any real
economic incentive to redeem their Shares because: (1) They would
benefit from a rise in the price of copper; and (2) investors seeking
to recognize their profits likely would sell their Shares rather than
redeeming them because redeeming them would require assuming delivery
risk.\35\
---------------------------------------------------------------------------

\34\ See May 9 V&F Letter, supra note 17, at 5.
\35\ See id. V&F believes that it is unlikely that fabricators
would use Shares to manage their inventory because doing so: (1)
Would add cost and risk to fabricators who otherwise would simply
purchase available stocks from LME warehouses; (2) may not have any
appreciable effect on price or supply in a rising market with tight
supply; and (3) would be an inefficient and perhaps impracticable
way of obtaining copper because the copper delivered by the Trust
may be warehoused in an unhelpful location (e.g., a fabricator in
Alabama may need copper in New Orleans, not Shanghai) or of an
unacceptable brand or quality. See id. at 5-6.
---------------------------------------------------------------------------

2. Impact on Copper Prices
According to V&F, removing large amounts of copper from LME and
COMEX warehouses would disrupt the supply of copper available for
immediate delivery and thereby cause a substantial rise in near-term
copper prices.\36\ V&F argues that this also would cause an immediate
spike in the cash-to-three-month spread price of copper, as near-term
prices for delivery accelerate compared to prices for delivery later in
time.\37\ V&F is concerned that manufacturers and fabricators that rely
on the supply of copper available in LME warehouses would be forced to
pay substantially higher prices in the short term, and, in turn,
manufacturers and fabricators would pass these price increases on to
their customers.\38\
---------------------------------------------------------------------------

\36\ See id. at 5.
\37\ See id.
\38\ See id. See also July 18 V&F Letter, supra note 4, at 4
(``The principal victims will in the first instance be United States
consumers who typically rely on supplies of copper for immediate
delivery to augment their long-term supply. These fabricators will
not only be forced to pay higher prices, and incur the risk of price
volatility once prices collapse, but there may be periods of time
when those who can least afford it will be unable to get supply.'')
---------------------------------------------------------------------------

According to V&F, price increases both for copper and copper
products will be especially dramatic in the U.S., where copper
currently is relatively

[[Page 48184]]

inexpensive.\39\ V&F states that U.S. copper fabricators will be forced
to pay more for copper and in some instances may not be able to
purchase the copper they need.\40\ According to V&F:
---------------------------------------------------------------------------

\39\ See supra note 26 and accompanying text.
\40\ See July 18 V&F Letter, supra note 4, at 4-5.

[m]anufacturers and fabricators will have to pass these increases in
price on to their customers, and because it is the U.S. supplies
that will be hit the hardest, it will be U.S. consumers that will be
hit the hardest. Everything that requires copper, including copper
pipes in new homes, to copper wiring for electricity, to the copper
used in the air conditioning units and also in automotive wiring,
will all increase in price.'' \41\
---------------------------------------------------------------------------

\41\ See May 9 V&F Letter, supra note 17, at 5.

V&F believes that the ``chief beneficiary'' of a tighter copper supply
in the U.S. will likely be competitors in China, because Chinese
manufacturers will have the copper feedstock on hand to produce copper
rod, tubing, and wire, while at least some of their American
counterparts will not.\42\
---------------------------------------------------------------------------

\42\ See July 18 V&F Letter, supra note 4, at 5. V&F also states
that the launch of a copper-backed ETF is likely to upset the
delicate balance of copper supplied to the United States, with
potentially devastating consequences economically across a wide
spectrum of industries. See May 9 V&F Letter, supra note 17, at 3.

V&F quotes several statements from the Registration Statement to
support its conclusion about the Trust's impact on copper prices,
---------------------------------------------------------------------------
including the following statement that:

a very enthusiastic reception of the Shares by the market, or the
proliferation of similar investment vehicles that issue shares
backed by physical copper, would result in purchases of copper for
deposit into the trust or such similar investment vehicles that
could be large enough to result in an increase in the price of
physical copper. If that were the case, the price of the Shares
would be expected to reflect that increase.\43\
---------------------------------------------------------------------------

\43\ See July 18 V&F Letter, supra note 4, at 3-4.

V&F also states that, because the potential size of the Trust is large
relative to the size of the market for copper available for immediate
delivery, even modest investor demand for the Shares could place upward
pressure on the price of copper.\44\
---------------------------------------------------------------------------

\44\ See July 13 V&F Letter, supra note 17, at 8-9.

V&F characterizes the current physical copper market as volatile,
and believes that the successful creation and growth of the Trust would
create a bubble, and the bursting of the bubble would result in
increased price volatility in the physical copper market.\45\ V&F
states that investors in a copper CB-ETP would benefit immediately from
any increase in the price of copper because the more copper removed
from the market to satisfy the demand for the copper CB-ETP, the higher
the price not only of copper, but of the copper CB-ETP itself.\46\ V&F
further believes that investors in the Trust would be able to measure
how much impact their collective removal of copper from the supply
available for immediate delivery would have on copper prices each day,
and could adjust their purchasing strategies accordingly.\47\
---------------------------------------------------------------------------

\45\ See May 9 V&F Letter, supra note 17, at 2, 9.
\46\ See id. at 5.
\47\ See id. at 9. V&F therefore questions whether the increased
market transparency that the Exchange asserts will result from the
formation and operation of the Trust (see Notice, supra note 3, 77
FR at 38361) will be in the public interest. See May 9 V&F Letter,
supra note 17, at 10.
---------------------------------------------------------------------------

V&F states that the copper bubble will be no different than others,
predicting that, as investor demand for this product wanes, the bubble
will burst, leaving in its wake a glut of physical copper that the
Trust will be forced to dump on the market, causing prices to plummet,
and leaving in its wake unsuspecting investors who will have lost the
value of their investment.\48\ In describing why the bubble it predicts
will burst, V&F states that, with
---------------------------------------------------------------------------

\48\ See May 9 V&F Letter, supra note 17, at 2.

the risk of an ETF removing indefinitely all or substantially all of
the copper available for immediate delivery, the risk of price
volatility becomes enormous. This is because the greater amount of
copper artificially kept off-the-market, the greater the chance that
investors will eventually no longer keep propping up the price with
further purchases, and the greater the likelihood that the bubble
will burst, thus flooding the market with surplus copper, and
severely depressing the price.\49\
---------------------------------------------------------------------------

\49\ Id. at 5. The Senator Levin Letter, which V&F attached to
the July 18 V&F Letter, also makes statements about the potential
effect of the JPM Copper Trust, stating that the ``supply disruption
is likely to affect the cash and futures market for copper,
increasing volatility and driving up [the share] price to create a
bubble and burst cycle.'' See Senator Levin Letter, supra note 17,
at 1.
---------------------------------------------------------------------------

3. Increased Likelihood of Copper Market Manipulation
V&F asserts generally that the tightened supply of copper it
believes would be caused by fully funding the Trust would render the
physical copper market more susceptible to manipulation.\50\ V&F also
states that copper CB-ETPs such as the Copper Trusts ``risk endangering
the price discovery functions of the LME and Comex'' because they would
drawdown and remove from the market of most of the copper in LME and
COMEX warehouses.\51\
---------------------------------------------------------------------------

\50\ See May 9 V&F Letter, supra note 17, at 1, 10.
\51\ July 18 V&F Letter, supra note 4, at 4.
---------------------------------------------------------------------------

According to V&F, the Trust ``is unlike any other metal ETF
currently listed on the Exchange and would allow speculators in the
guise of purchasers of shares to create a squeeze on the market.''\52\
Therefore, V&F concludes that the ``proposed rule change is therefore
inconsistent with Section 6(b)(5) of the Securities Exchange Act of
1934, which requires that rules be designed to prevent manipulative
acts and protect investors and the public interest.''\53\
---------------------------------------------------------------------------

\52\ Id. at 5.
\53\ See id. The Senator Levin Letter, which V&F attached to the
July 18 V&F Letter, also states that the JPM Copper Trust may
encourage manipulative acts by allowing ``speculators to squeeze or
corner the market in copper.'' Senator Levin Letter, supra note 17,
at 7. According to Senator Levin, market participants could use the
shares to remove copper from the available supply with the intent to
artificially inflate the price of copper, and this activity would go
undetected by the LME because CB-ETPs currently are not subject to
any form of commodity regulations. Id. Senator Levin states that, by
holding physical copper rather than LME warrants, the Trust can
control more of the available supply of copper without triggering
LME reporting rules. Id. Senator Levin further believes that
creating this market condition would be inconsistent with the
requirements in Section 6(b)(5) of the Act that exchange rules be
designed to prevent manipulative acts and protect investors and the
public interest. Id.
---------------------------------------------------------------------------

Finally, V&F questions whether NYSE Arca's surveillance procedures
are adequate to prevent fraudulent and manipulative trading in shares
of the JPM Trust.\54\
---------------------------------------------------------------------------

\54\ See May 9 V&F Letter, supra note 17, at 10. According to
V&F, NYSE Arca's surveillance procedures are not adequate because
they are the kind of garden-variety measures that are always in
place to prevent collusion and other forms of manipulation by
traders. See id.
---------------------------------------------------------------------------

B. Comparison to Other Commodity-Based Trusts

According to V&F, no ETF backed by a base metal used exclusively
for industrial purposes has ever before been listed and sold on any
nationally recognized exchange in the United States.\55\ V&F states
that gold, silver, platinum, and palladium are all precious metals that
have traditionally been held for investment purposes and are currently
used as currency, and, as a result, there were ample stored sources
available to back physical CB-ETPs holding precious metals, such that
the introduction of those CB-ETPs had virtually no impact on the
available supply.\56\ In contrast, V&F states that

[[Page 48185]]

copper generally is not held as an investment, but rather is used
exclusively for industrial purposes,\57\ with the annual demand
generally exceeding the available supply.\58\
---------------------------------------------------------------------------

\55\ July 18 V&F Letter, supra note 4, at 2.
\56\ See May 9 V&F Letter, supra note 17, at 2. V&F states that,
unlike copper, there is enough of a supply of platinum and palladium
(which are used for both industrial and investment purposes)
available in storage and being produced that the introduction of CB-
ETPs backed by these metals did not cause the kind of disruption to
the market that a copper-backed CB-ETPs would cause. See July 13 V&F
Letter, supra note 17, at 11. Specifically, V&F states that: (1) In
recent years, there has been a surplus in palladium due to the
Russian government's sell-off of its stockpile; (2) there is about a
year's supply of platinum reserves above ground; and (3) there is
only a 1-2 week supply of copper available on the LME. See id.
Similarly, the Senator Levin Letter, which V&F attached to the July
18 V&F Letter, also states that gold, silver, platinum, and
palladium are substantially different than copper because these four
metals are the only precious metals that are currently treated as
world currencies and commonly held for investment purposes, and as a
result there are substantial existing supplies of these metals that
could be acquired to back an CB-ETPs without affecting the world
market price in these metals. See Senator Levin Letter, supra note
17, at 6-7.
\57\ The Senator Levin Letter, which V&F attached to the July 18
V&F Letter, states that copper is not currently held for investment
purposes because it is very expensive to store and difficult to
transport, and there is not the same existing supply of copper for
the Trust to acquire to back its CB-ETP, and concludes that holding
copper for investment purposes will have a significantly greater
impact on the copper market than CB-ETPs holding platinum,
palladium, silver, or gold had on their respective markets and the
broader economy. See Senator Levin Letter, supra note 17, at 7.
\58\ See May 9 V&F Letter, supra note 17, at 2-3.
---------------------------------------------------------------------------

IV. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2012-66 and Grounds for Disapproval Under Consideration

The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \59\ to determine whether this proposed rule
change should be approved or disapproved. Institution of such
proceedings is appropriate at this time in view of the legal and policy
issues raised by the proposed rule change. As noted above, the
institution of proceedings does not indicate that the Commission has
reached any conclusions with respect to any of the issues involved.
Rather, as described in greater detail below, the Commission seeks and
encourages interested persons to provide additional comment on the
proposed rule change to inform the Commission's analysis of whether to
approve or disapprove the proposed rule change.
---------------------------------------------------------------------------

\59\ 15 U.S.C. 78s(b)(2)(B). Section 19(b)(2)(B) of the Act also
provides that proceedings to determine whether to disapprove a
proposed rule change must be concluded within 180 days of the date
of publication of notice of the filing of the proposed rule change.
Id. The time for conclusion of the proceedings may be extended for
up to 60 days if the Commission finds good cause for such extension
and publishes its reasons for so finding. Id.
---------------------------------------------------------------------------

Pursuant to Section 19(b)(2)(B) of the Act,\60\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission believes that questions remain about whether the
proposed rule change is consistent with the requirements of Section
6(b)(5) of the Act,\61\ which requires that the rules of an exchange be
designed, among other things, 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 a national market system and, in general, to protect
investors and the public interest.
---------------------------------------------------------------------------

\60\ Id.
\61\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

As discussed above, the Commission received one comment letter
opposing the proposed rule change. V&F asserts that the successful
creation of the Trust would materially reduce the supply of copper
available for immediate delivery, which would increase the price of
copper and volatility in the copper market, and, in turn, would harm
the U.S. economy.\62\ In addition, V&F argues that, by decreasing the
amount of copper available for immediate delivery, the Trust will make
the copper market more susceptible to manipulation.\63\ V&F further
believes the Exchange's surveillance procedures are inadequate to
prevent fraudulent and manipulative trading in the Shares.\64\
---------------------------------------------------------------------------

\62\ See supra Section III.A.1-2.
\63\ See supra Section III.A.3.
\64\ See supra note 54 and accompanying text.
---------------------------------------------------------------------------

In light of the comments received, the Commission is soliciting
further comments on the proposed rule change, including comments
regarding the issues already commented upon.

V. Request for Written Comments

The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
concerns identified above, as well as any others they may have
regarding the proposed rule change. In particular, the Commission
invites the written views of interested persons concerning whether the
proposed rule change is consistent with Section 6(b)(5) or any other
provision of the Act, or the rules and regulations thereunder. The
Commission will consider, pursuant to Rule 19b-4, any request for an
opportunity to make an oral presentation.\65\
---------------------------------------------------------------------------

\65\ Section 19(b)(2) of the Act, as amended by the Securities
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Act Amendments of 1975, Senate Comm. on
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
---------------------------------------------------------------------------

Interested persons are invited to submit written data, views and
arguments regarding whether the proposed rule change should be
disapproved by September 12, 2012. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
September 27, 2012.
The Commission asks that commenters address the sufficiency and
merit of the proposed rule change and the comments received, in
addition to any other comments they may wish to submit about the
proposed rule change. The Commission requests that commenters support
their responses to the questions below with empirical data sufficient
to inform the Commission's decision making. In particular, the
Commission seeks comment on the following:
1. In light of the comments received, the Commission is soliciting
further comments regarding copper usage and supply trends. For example:
[cir] What was the world mine production capacity in each of the
past 10 years? What data is available regarding projected world mine
production over the next 3 to 5 years? What factors impact the ability
to increase or decrease mine production?
[cir] What was the refined production in each of the past 10 years?
How much of the refined production was from primary and secondary
sources? What was the world refinery capacity in each of the past 10
years? What data is available regarding projected refined production
over the next 3 to 5 years? What factors impact the ability to increase
or decrease refinery production?
[cir] What was the world refined usage in each of the past 10
years? What data is available regarding projected usage over the next 3
to 5 years?
[cir] How much copper has been held for investment purposes over
the past 10 years? How much of this copper was taken off LME warrant?
How much of this copper has been eligible to be placed on LME warrant?
2. According to the International Copper Study Group (``ICSG'),
world refined usage of copper exceeded world refined production by
approximately 417,000 tons in 2010 and 231,000 tons in 2011, and world
refined stocks decreased by 161,000 tons in 2010 and increased by
13,000 tons in 2011.\66\ What factors account for refined stocks
decreasing less than the deficit amount (or even increasing) in 2010
and 2011?

[[Page 48186]]

Are there any factors with respect to the supply of copper available
for immediate delivery that the Commission should consider in
evaluating the market's ability to meet demand for copper? When a
deficit occurs, are copper fabricators and other end users able to
access copper to meet excess demand? If so, what are the sources of
that copper? How much copper is available for immediate delivery that
is not on LME warrant?
---------------------------------------------------------------------------

\66\ Press Release, ICSG, Copper: Preliminary Data for February
2012 (June 20, 2012), available at https://www.icsg.org/index.php?option=com_content&task=view&id=63&Itemid=64.
---------------------------------------------------------------------------

3. V&F states that the Trust and the proposed JPM Copper Trust,\67\
collectively, will remove from the market a substantial percentage of
the copper available for immediate delivery.\68\ According to V&F, the
Copper Trusts would remove 63% of the copper currently held in LME and
COMEX warehouses.\69\ V&F states that the collective effect of the
Copper Trusts would be ``far-reaching and potentially devastating to
the U.S. and world economies,'' including ``shortages of copper, higher
prices to consumers, and increased volatility.'' \70\ Do commenters
agree or disagree with these statements? If so, why or why not? For
example:
---------------------------------------------------------------------------

\67\ See supra note 17. See also JPM Notice, supra note 24.
\68\ The Senator Levin Letter, which V&F attached to the July 18
V&F Letter, states that the Copper Trusts would hold approximately
34% of the copper stocks available for immediate delivery and would
remove from the U.S. market over 55% of the available copper. See
Senator Levin Letter, supra note 17, at 5-6.
\69\ See July 18 V&F Letter, supra note 4, at 1.
\70\ See July 13 V&F Letter, supra note 17, at 10.
---------------------------------------------------------------------------

[cir] Do commenters believe creation of the Trust will have an
impact on the supply of copper? If so, what will that impact be? If
not, why not?
[cir] How does a change in the supply of copper impact the price of
copper? To what extent do copper stocks need to be reduced or increased
to impact the price of copper?
[cir] To what extent is the LME Bid Price affected by the amount of
copper on LME warrant? To what extent must copper on LME warrant be
reduced to impact the LME Bid Price? To what extent, if at all, is the
LME Bid Price affected by the supply of copper ineligible to be placed
on LME warrant?
[cir] How does a change in the supply of copper impact volatility
in the physical copper and copper derivatives markets?
[cir] Is there empirical evidence that creation of the Trust will
impact copper prices and volatility? What impact, if any, will creation
of the Trust have on the US economy?
4. V&F states that Shares would be created by removing copper from
LME and COMEX warehouses in the United States,\71\ thus driving up the
cost of copper particularly in the United States.\72\ According to V&F,
correspondingly:
---------------------------------------------------------------------------

\71\ V&F believes this to be true because it states that the
copper that is cheapest to deliver to the Trust will most likely be
on warrant in United States warehouses. See July 18 V&F Letter,
supra note 4, at 4.
\72\ See id. (``[D]epletion of copper from the LME warehouses
will most likely be felt the hardest in the United States and, once
copper from the LME warehouses is depleted, copper from the Comex
warehouses will be depleted as well, as copper there is moved to LME
warehouses in order to take advantage of higher prices'').

The principal victims will * * * be United States consumers who
typically rely on supplies of copper for immediate delivery to
augment their long-term supply. These fabricators will not only be
forced to pay higher prices, and incur the risk of price volatility
once prices collapse, but there may be periods of time when those
who can least afford it will be unable to get supply.\73\
---------------------------------------------------------------------------

\73\ See id.

Do commenters agree or disagree with these concerns? Why or why
not? Additionally, what mechanisms (if any) exist to allow market
participants in need of copper in a specific location to trade an LME
warrant or warehouse receipt for copper at another location?
5. V&F states that the only copper eligible for Share creation is
copper: (1) Already under LME warrant; (2) stored in COMEX warehouses;
(3) already part of the supply chain, subject to long-term contracts
between producers and consumers; (4) held in bonded warehouses in China
and destined for the Chinese market, which V&F asserts is only rarely
delivered to LME warehouses in Asia; or (5) held as strategic reserves
by the governments of China and South Korea.\74\ The Commission is
soliciting further comments regarding physical copper stocks. For
example:
---------------------------------------------------------------------------

\74\ See July 18 V&F Letter, supra note 4, at 2. See also May 9
V&F Letter, supra note 17, at 3; July 13 V&F Letter, supra note 17,
at 3, 5.
---------------------------------------------------------------------------

[cir] How much copper is currently held in LME warehouses? How much
of the copper currently held in LME warehouses is on warrant? How much
copper in LME warehouses is available for investment purposes?
[cir] How much copper is held in COMEX, Shanghai Futures Exchange
(``SHFE''), and Multi Commodity Exchange of India (``MCX'') warehouses?
How much copper held in COMEX, SHFE, and MCX warehouses is eligible to
be placed on LME warrant (i.e., is of a brand registered with the LME)?
How much of this LME warrant-eligible copper is available for
investment purposes? Where is this copper located?
[cir] What quantity of copper stock, if any, is held in other
locations that would be eligible to be placed on LME warrant (if it
were located at an LME warehouse)?
[cir] How accessible are stocks of copper eligible to be placed on
warrant that are not held in LME warehouses?
[cir] Are commenters aware of any activities involving the
stockpiling of copper? If so, how much copper has been stockpiled?
Where is such copper located? How accessible is such copper? How much
of this stock was taken off LME warrant? How much of this copper is
eligible to be placed on LME warrant?
6. The Custodian will store the Trust's copper in Approved
Warehouses around the world.\75\ What is the locational premium at each
of the Approved Warehouses? What impact would changes in locational
premia have on supply and demand for copper at each of the Approved
Warehouses? How much copper is held at each of the Approved Warehouses?
How much of the copper held at each of the Approved Warehouses is on
LME warrant? How much is eligible to be placed on LME warrant? How much
copper eligible for LME warrant is available for investment purposes?
How much is not eligible to be placed on LME warrant?
---------------------------------------------------------------------------

\75\ See Notice, supra note 3, 77 FR at 38356 n.23 (as of the
date of the Registration Statement, the Custodian is authorized to
hold copper owned by the Trust at warehouses located in: East
Chicago, Indiana; Mobile, Alabama; New Orleans, Louisiana; Saint
Louis, Missouri; Hull, England; Liverpool, England; Rotterdam,
Netherlands; and Antwerp, Belgium).
---------------------------------------------------------------------------

7. The Trustee generally will value the Trust's copper at that
day's announced LME Bid Price,\76\ which represents the price that a
buyer is willing to pay to receive a warrant in any warehouse within
the LME system.\77\ Given the Trust's copper will be held off LME
warrant, will the LME Bid Price accurately reflect the value of the
Trust's copper? Why or why not?
---------------------------------------------------------------------------

\76\ See id. at 38358.
\77\ See id. at 38356 n.25.
---------------------------------------------------------------------------

8. When valuing the Trust's copper, the Trustee will not take into
account the location(s) of the copper. In contrast, to support the JPM
Copper Proposal, NYSE Arca states that the value of copper depends in
part on its location, i.e., copper stored in a location that is low in
supply and high in demand carries a higher premium than copper that is
stored in a location where supply is high and demand is low.\78\
---------------------------------------------------------------------------

\78\ See JPM Notice, supra note 24, 77 FR at 23779.
---------------------------------------------------------------------------

[cir] Does the value of the Trust's copper depend on its location?
If so, how?
[cir] If so, does the LME Bid Price account for the locational
premia/

[[Page 48187]]

discounts of the Trust's copper held in various locations?
9. V&F states: ``the most obvious and freely available source'' of
copper eligible to create Shares ``is copper on warrant in LME
warehouses today.'' \79\ V&F further states that taking copper off LME
warrant would involve little or no cost if the LME warrants purchased
are for copper that is stored at the Approved Warehouses.\80\
---------------------------------------------------------------------------

\79\ See July 18 V&F Letter, supra note 4, at 2.
\80\ See July 13 V&F Letter, supra note 17, at 6.
---------------------------------------------------------------------------

[cir] What costs are involved in taking copper off LME warrant?
What costs are involved in putting copper on LME warrant?
[cir] How long does it take to take copper off LME warrant? How
long does it take to put copper on LME warrant?
[cir] How does the cost and time required to take copper off
warrant compare to the cost and time to ship copper to an Approved
Warehouse?
10. The Commission understands that ETFS Physical Copper securities
currently trade on the London Stock Exchange. How much copper did ETFS
Physical Copper hold following the initial creation? How much copper
does ETFS Physical Copper currently hold? What change, if any, was
there in the price of copper following creation of ETFS Physical
Copper? Did the creation of ETFS Physical Copper result in an
observable impact on the copper market? Has ETFS Physical Copper
engaged in the lending of copper?
11. The Commission has previously approved listing on the Exchange
under NYSE Arca Equities Rule 8.201 of other issues of CB-ETPs backed
by gold, silver, platinum, and palladium (collectively ``precious
metals''). While these precious metals are often held for investment
purposes, the Commission understands they are also used for various
industrial purposes. V&F asserts that copper is used exclusively for
industrial purposes and is not generally held for investment.\81\ The
Commission requests information regarding the production and use of
precious metals. How much gold, silver, platinum, and palladium has
been produced in each of the last 10 years? How much gold, silver,
platinum, and palladium has been used for investment purposes in each
of the last 10 years? How much gold, silver, platinum, and palladium
has been used for industrial purposes in each of the last 10 years? Are
there any other uses of gold, silver, platinum, and palladium relevant
to understanding utilization of these precious metals? What are the
current and historic stocks of gold, silver, platinum, and palladium?
Is there any empirical evidence that the listing of CB-ETPs backed by
gold, silver, platinum, or palladium impacted prices in these markets?
---------------------------------------------------------------------------

\81\ See May 9 V&F Letter, supra note 17, at 2-3.
---------------------------------------------------------------------------

12. V&F states that creation of the Trust could result in the
immediate removal of up to 121,200 metric tons of copper from the
market.\82\ What is the likelihood that the Trust will sell all
registered Shares initially? What is the likelihood that the Trust will
sell all registered Shares in the three months after the registration
goes effective? How quickly did the CB-ETPs backed by gold, silver,
platinum, and palladium sell the shares registered in the first
registration statement?
---------------------------------------------------------------------------

\82\ See July 18 V&F Letter, supra note 4, at 1.
---------------------------------------------------------------------------

13. V&F argues that, by decreasing the amount of copper available
for immediate delivery, the Trust will make the copper market more
susceptible to manipulation.\83\ Specifically, V&F states that ``the
drawing down of stocks in LME and Comex warehouses'' resulting from the
listing and trading of the Shares ``will make it much easier and
cheaper for [copper market] speculators to engage in temporary market
squeezes and corners.'' \84\ The Commission requests comment on these
concerns, as well as whether commenters agree or disagree with the
comments and why or why not. For example:
---------------------------------------------------------------------------

\83\ See May 9 V&F Letter, supra note 17, at 1, 10. See also
July 18 V&F Letter, supra note 4, at 5 (``In short, the proposed ETF
* * * would allow speculators in the guise of purchasers of shares
to create a squeeze on the market'').
\84\ May 9 V&F Letter, supra note 17, at 9. The Senator Levin
Letter, which V&F attached to the July 18 V&F Letter, also argues
that approval of the proposed rule change would make the copper
market more susceptible to squeezes and corners by speculators. See
Senator Levin Letter, supra note 17, at 7.
---------------------------------------------------------------------------

[cir] Will creation of the Trust impact the ability to manipulate
the physical copper or copper derivatives markets? If so, how? If not,
why not?
[cir] Has there been any increased manipulative behavior due to the
reduction of copper available for immediate delivery that resulted from
the prior years' deficits in copper production versus copper
consumption?
[cir] Are there any structural aspects of the copper market that
render it more or less susceptible to manipulation?
[cir] Is there empirical evidence that the creation of CB-ETPs
backed by gold, silver, platinum, and palladium has led to manipulation
of the physical markets for those precious metals? If so, please
describe.
14. V&F states the listing and trading of shares of copper CB-ETPs
like those ``being proposed by BlackRock and JPM--and the consequent
drawdown and removal from the market of most of the copper in LME and
Comex warehouses--risk endangering the price discovery functions of the
LME and Comex.'' \85\ V&F also states that such potential impacts of a
copper CB-ETP on the copper market in turn could affect the Shares,
stating:
---------------------------------------------------------------------------

\85\ July 18 V&F Letter, supra note 4, at 4.

the risk of an ETF removing indefinitely all or substantially all of
the copper available for immediate delivery, the risk of price
volatility becomes enormous. This is because the greater amount of
copper artificially kept off-the-market, the greater the chance that
investors will eventually no longer keep propping up the price with
further purchases, and the greater the likelihood that the bubble
will burst, thus flooding the market with surplus copper, and
severely depressing the price.\86\
---------------------------------------------------------------------------

\86\ May 9 V&F Letter, supra note 17, at 5. See also July 18 V&F
Letter, supra note 4, at 4 (asserting that BlackRock admits that the
boom may bust, and quoting from the Registration Statement).

V&F further states that investors in a copper CB-ETP would benefit
immediately from any increase in the price of copper because the more
copper removed from the market to satisfy the demand for the copper CB-
ETP, the higher the price not only of copper, but of the copper CB-ETP
itself.\87\ According to V&F, like all bubbles, as investor demand for
this product wanes, the bubble will burst, leaving in its wake a glut
of physical copper that the Trust will be forced to dump on the market,
causing prices to plummet, and leaving in its wake unsuspecting
investors who will have lost the value of their investment.\88\ Do
commenters agree or disagree with these comments? If so, why or why
not?
---------------------------------------------------------------------------

\87\ See May 9 V&F Letter, supra note 17, at 5.
\88\ See id. at 2. The Senator Levin Letter, which V&F attached
to the July 18 V&F Letter, states that the supply disruption caused
by the listing and trading of a copper CB-ETP ``is likely to affect
the cash and futures market for copper, increasing volatility and
driving up its price to create a bubble and burst cycle.'' See
Senator Levin Letter, supra note 17, at 1.
---------------------------------------------------------------------------

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-2012-66 on the subject line.

Paper Comments

Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.

[[Page 48188]]

All submissions should refer to File Number SR-NYSEArca-2012-66. These
file numbers 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 10:00 a.m. and 3:00 p.m. Copies of such filings also will be
available for inspection and copying at the principal office of the
Exchanges. All comments received will be posted without change; the
Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-
NYSEArca-2012-66 and should be submitted on or before September 12,
2012. Rebuttal comments should be submitted by September 27, 2012.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\89\
---------------------------------------------------------------------------

\89\ 17 CFR 200.30-3(a)(57).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-19790 Filed 8-10-12; 8:45 am]
BILLING CODE 8011-01-P

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