Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change as Modified by Amendment No. 1 To List and Trade Shares of the JPM XF Physical Copper Trust Pursuant to NYSE Arca Equities Rule 8.201, 75468-75487 [2012-30647]

Download as PDF 75468 Federal Register / Vol. 77, No. 245 / Thursday, December 20, 2012 / Notices (File No. AN–OCC–2012–04), whichever is later. For the Commission by the Division of Trading and Markets, pursuant to delegated authority.13 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2012–30689 Filed 12–19–12; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–68440; File No. SR– NYSEArca–2012–28] Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change as Modified by Amendment No. 1 To List and Trade Shares of the JPM XF Physical Copper Trust Pursuant to NYSE Arca Equities Rule 8.201 December 14, 2012. I. Introduction On April 2, 2012, NYSE Arca, Inc. (‘‘Exchange’’ or ‘‘NYSE Arca’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to list and trade shares (‘‘Shares’’) of JPM XF Physical Copper Trust (‘‘Trust’’) pursuant to NYSE Arca Equities Rule 8.201. J.P. Morgan Commodity ETF Services LLC is the sponsor of the Trust (‘‘Sponsor’’). The proposed rule change was published for comment in the Federal Register on April 20, 2012.3 The Commission initially received one comment letter, which opposed the proposed rule change.4 On May 30, 2012, the Commission extended the time period for Commission action to July 19, 2012.5 On June 19, 2012, NYSE Arca submitted a letter in support of its proposal.6 On July 13, 2012, V&F submitted a second comment letter 13 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 Securities Exchange Act Release No. 66816 (April 16, 2012), 77 FR 23772 (‘‘Notice’’). 4 See letter from Vandenberg & Feliu, LLP (‘‘V&F’’), received May 9, 2012 (‘‘V&F May 9 Letter’’). Comment letters are available at https:// www.sec.gov/comments/sr-nysearca-2012-28/ nysearca201228.shtml. 5 See Securities Exchange Act Release No. 67075, 77 FR 33258 (June 5, 2012). 6 See letter from Janet McGinness, General Counsel, NYSE Markets, NYSE Euronext, to Elizabeth M. Murphy, Secretary, Commission, dated June 19, 2012 (‘‘Arca June 19 Letter’’). tkelley on DSK3SPTVN1PROD with 1 15 VerDate Mar<15>2010 16:07 Dec 19, 2012 Jkt 229001 opposing the proposed rule change.7 On July 16, 2012, United States Senator Carl Levin submitted a comment letter opposing the proposed rule change.8 Additionally, on July 19, 2012, the Commission received a comment letter from another party opposing the proposed rule change.9 On July 19, 2012, the Commission instituted proceedings to determine whether to approve or disapprove the proposed rule change.10 The initial comments for the proceeding were due on August 24, 2012, and the Commission received four comment letters (another letter from V&F, another letter from the Exchange, a letter on behalf of the Sponsor, and a letter from several copper fabricators).11 Rebuttal comments to submissions made during the initial comment period were due on September 10, 2012. The Commission received three more comment letters (another letter from V&F and two more on behalf of the Sponsor).12 On October 7 See letter from Robert B. Bernstein, V&F, to Elizabeth M. Murphy, Secretary, Commission, dated July 13, 2012 (‘‘V&F July 13 Letter’’). 8 See letter from U.S. Senator Carl Levin, to Elizabeth M. Murphy, Secretary, Commission, dated July 16, 2012 (‘‘Levin Letter’’). 9 See Web comment from Suzanne H. Shatto (‘‘Shatto Letter’’). 10 See Securities Exchange Act Release No. 67470, 77 FR 43620 (July 25, 2012) (‘‘Order Instituting Proceedings’’). 11 See letters from Janet McGinness, General Counsel, NYSE Markets, NYSE Euronext, to Elizabeth M. Murphy, Secretary, Commission, dated August 23, 2012 (‘‘Arca August 23 Letter’’); Joe Williamson, Senior Vice President, Strategic Sourcing, Southwire Company; Janet Sander, Vice President, Director of Purchasing, Encore Wire Corporation; Ron Beal, Executive Vice President, Tubes Division, Luvata; and Mark Woehnklar, President, Amrod Corp., to Elizabeth M. Murphy, Secretary, Commission, dated August 23, 2012 (‘‘Copper Fabricators Letter’’); Robert B. Bernstein, V&F, to Elizabeth M. Murphy, Secretary, Commission, dated August 24, 2012 (‘‘V&F August 24 Letter’’); and John G. Crowley, Davis Polk & Wardwell LLP (‘‘DP’’), on behalf of the Sponsor, to Elizabeth M. Murphy, Secretary, Commission, dated August 24, 2012 (‘‘DP August 24 Letter’’). In its August 24 Letter, V&F requested to make an oral presentation in the proceeding. See V&F August 24 Letter at 1. The Commission denied V&F’s request. See letter from Kevin M. O’Neill, Deputy Secretary, Commission, to Robert B. Bernstein, Eaton & Van Winkle LLP (‘‘EVW’’), dated December 5, 2012, available at https://www.sec.gov/comments/srnysearca-2012-28/nysearca201228.shtml. By letter dated November 29, 2012, Mr. Bernstein informed the Commission that he had left V&F and would continue to represent Southwire Company, Encore Wire Corporation, Luvata, and Amrod Corp. (collectively, the ‘‘Copper Fabricators’’) and RK Capital LLC in this proceeding. 12 See letters from Robert B. Bernstein, V&F, to Elizabeth M. Murphy, Secretary, Commission, dated September 10, 2012 (‘‘V&F September 10 Letter’’); John G. Crowley, DP, on behalf of the Sponsor, to Elizabeth M. Murphy, Secretary, Commission, dated September 10, 2012 (‘‘DP September 10 Letter’’); and John G. Crowley, DP, on behalf of the Sponsor, to Elizabeth M. Murphy, Secretary, Commission, dated September 12, 2012 (‘‘DP September 12 Letter’’). PO 00000 Frm 00063 Fmt 4703 Sfmt 4703 2, 2012, the Commission issued a notice of designation of longer period for Commission action on proceedings to determine whether to approve or disapprove the proposed rule change.13 The Commission subsequently received six more comment letters (two more letters from V&F, two letters from Americans for Financial Reform, and two letters from Robert E. Rutkowski).14 On November 30, 2012, the Exchange filed Amendment No. 1 to the proposed rule change.15 On December 7, 2012, the 13 See Securities Exchange Act Release No. 67965, 77 FR 61457 (October 9, 2012). 14 See letters from Robert B. Bernstein, V&F, to Elizabeth M. Murphy, Secretary, Commission, dated October 23, 2012 (‘‘V&F October 23 Letter’’); Americans for Financial Reform (‘‘AFR’’), to Elizabeth M. Murray [sic], Secretary, Commission, dated October 23, 2012 (‘‘AFR October 23 Letter’’); email from Robert E. Rutkowski, to Mary Schapiro, Chair, Commission, dated October 24, 2012 (‘‘Rutkowski October 24 Letter’’); Robert B. Bernstein, V&F, to Elizabeth M. Murphy, Secretary, Commission, dated November 16, 2012 (‘‘V&F November 16 Letter’’); AFR, to Elizabeth M. Murray [sic], Secretary, Commission, dated November 16, 2012 (‘‘AFR November 16 Letter’’); and email from Robert E. Rutkowski, to Mary Schapiro, Chair, Commission, dated November 17, 2012 (‘‘Rutkowski November 17 Letter’’). 15 In Amendment No. 1, the Exchange represented that: (1) It has obtained a representation from the Sponsor that the Sponsor is affiliated with one or more broker-dealers and other entities, and the Sponsor will implement a firewall with respect to such affiliate(s) regarding access to material nonpublic information of the Trust concerning the Trust and the Shares, and will be subject to procedures designed to prevent the use and dissemination of material non-public information of the Trust regarding the Trust and the Shares; (2) it will obtain a representation from the Trust prior to commencement of trading of the Shares that the net asset value (‘‘NAV’’) of the Trust and the NAV per Share will be calculated daily and made available to all market participants at the same time; (3) if the First-Out IIV or the Liquidation IIV (terms defined infra in note 42) is not being disseminated as required, the Exchange may halt trading during the day in which the disruption occurs; if the interruption persists past the day in which it occurred, the Exchange will halt trading no later than the beginning of the trading day following the interruption; (4) its comprehensive surveillance sharing agreement with the London Metal Exchange (‘‘LME’’) applies to trading in copper derivatives (as well as copper); (5) it will require that a minimum of 100,000 Shares be outstanding at the start of trading of the Shares; and (6) it can obtain information regarding the activities of the Sponsor and its affiliates under the Exchange’s listing rules. Additionally, the Exchange supplemented its description of surveillance applicable to the Shares contained in the proposed rule change as originally filed. Specifically, the Exchange represents that trading in the Shares would be subject to the existing trading surveillances, administered by the Financial Industry Regulatory Authority (‘‘FINRA’’) on behalf of the Exchange, and that, in addition, FINRA would augment those existing surveillances with a review specific to the Shares that is designed to identify potential manipulative trading activity through use of the creation and redemption process. The Exchange represented that all those procedures would be operational at the commencement of trading in the Shares on the Exchange and that, on an ongoing basis, NYSE Regulation, Inc. (on behalf of the Exchange) and FINRA would regularly monitor the continued operation of those E:\FR\FM\20DEN1.SGM 20DEN1 Federal Register / Vol. 77, No. 245 / Thursday, December 20, 2012 / Notices form from a source refinery that has had its brand registered with the LME (an ‘‘Acceptable Delivery Brand’’).20 The Exchange states that, although the Shares are not the exact equivalent of an investment in copper, they are designed to provide investors with an alternative that allows a participation in the copper market through the securities market.21 II. Description of the Proposal The Exchange proposes to list and trade the Shares under NYSE Arca Equities Rule 8.201, which governs the listing and trading of ‘‘CommodityBased Trust Shares.’’ 18 The Trust’s investment objective is for the value of the Shares to reflect, at any given time, the value of its copper, less the Trust’s expenses and liabilities. The Trust will invest in Grade A copper 19 in physical tkelley on DSK3SPTVN1PROD with Commission received another comment letter opposing the proposed rule change.16 The Commission is publishing this notice to solicit comments on Amendment No. 1 to the proposed rule change from interested persons, and is approving the proposed rule change, as modified by Amendment No. 1, on an accelerated basis.17 A. Description of the Copper Market 22 The following is a summary of the description of the copper market that the Exchange included in its filing. The market participants in the copper market include primary and secondary producers; fabricators, manufacturers, and end-use consumers; physical traders and merchants, who generally facilitate the domestic and international trade of copper supplies along the value chain and support the distribution of supplies to consumers; and the banking sector. Copper supply generally comes from the extraction and processing of ore (‘‘primary production’’) and the recovery of copper from existing stock (‘‘secondary production’’). Primary production accounts for the majority of new global copper supply. Copper’s physical, chemical, and aesthetic properties make it a material of choice in a wide range of electrical, electronics and communication, construction, transportation, industrial machinery and equipment, and general consumer applications. From copper derived from primary and secondary production, fabricators produce semifabricated products, such as copper wire, copper alloys, tube products, rods, bars, section, plate, sheets and strips, for various applications. The location of copper relative to consumption demand is important given the bulk and cost of transportation. The source of copper also is important to fabricators and consumers and affects buying behavior. Copper end-users will pay an additional locational premium to obtain copper of a specific brand that is stored in a specific location.23 The global market in copper consists of: (i) Trading within the physical copper market; and (ii) financial trading, through either (a) the exchange-traded futures and options market or (b) the procedures. In addition, the Exchange has represented that it will communicate as needed regarding trading in the Shares with other markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement. 16 See letter from Robert B. Bernstein, EVW, to Elizabeth M. Murphy, Secretary, Commission, dated December 7, 2012 (‘‘EVW December 7 Letter’’). 17 Similar to other exchange traded products that hold physical metals, the Sponsor, the Trust, and persons or entities engaging in transactions in Shares need to seek exemptions from, or interpretative or no-action advice regarding, Rules 101 and 102 of Regulation M under the Act to create or redeem Shares. See, e.g., letters from James A. Brigagliano, Assistant Director, Division of Market Regulation, (i) to Kathleen Moriarty, Esq., Carter Ledyard & Milburn, dated November 17, 2004, with respect to the trading of StreetTRACKS Gold Trust, (ii) to David Yeres, dated January 27, 2005, with respect to the trading of the iShares COMEX Gold Trust, and (iii) to David Yeres, dated April 27, 2006, with respect to the trading of iShares Silver Trust. The Sponsor, on behalf of itself, the Trust, and persons or entities engaging in transactions in Shares, submitted a request to the Commission requesting that the Commission grant exemptions from, or interpretative or no-action guidance regarding, Rules 101 and 102 of Regulation M. Simultaneous with the approval of the proposed rule change, the Commission, by separate order, is granting the Trust, based on the representations and facts presented in its letter and subject to the conditions contained in that order, an exemption from the requirements of Rules 101 and 102 of Regulation M under the Act with respect to the Trust. See Securities Exchange Act Release No. 68439 (December 14, 2012). 18 Commodity-Based Trust Shares are securities issued by a trust that represent investors’ discrete identifiable and undivided interest in and ownership of the net assets of the trust. 19 According to the Exchange, the LME trades, promotes, and maintains the standards of quality, shape, and weight of Grade A Copper, a commonly accepted standardized form of copper cathode. Grade A Copper currently must conform to the standard BS EN 1978:1998 (Cu-CATH–1), which specifies the allowed source, shape, and chemical composition of the cathode. Most copper cathodes are 99.95% to 99.99% pure copper. The chemical composition, and impurities, in the cathode depend largely on the source of the copper and whether the metal has been processed from copper sulfide ore or copper oxide ore. Copper oxide ore has a smaller number of residual chemical elements in the cathode. See Notice, supra note 3, 77 FR at 23777. VerDate Mar<15>2010 16:07 Dec 19, 2012 Jkt 229001 20 Currently, there are 79 brands that are Acceptable Delivery Brands. The LME may deregister brands from time to time. According to the Exchange, generally, copper that is not of an Acceptable Delivery Brand is worth less than copper that is of an Acceptable Delivery Brand because of the perceived lower liquidity associated with that brand of copper. See Notice, supra note 3, 77 FR at 23777–78. 21 See id. 22 See Notice, supra note 3, for a more detailed description of the copper market. 23 See infra note 35. PO 00000 Frm 00064 Fmt 4703 Sfmt 4703 75469 over-the-counter (‘‘OTC’’) market. Each of these is described below in further detail. 1. Physical Copper Market The physical copper market is comprised of sales directly by producers and refiners to end-users, and by sales transacted by merchants, dealers, and trading banks. A major portion of annual copper production and use is effected through transactions in the physical copper market, often through renewable annual supply contracts. 2. Futures Exchanges A majority of copper derivatives trading occurs on three exchanges: The LME, the Commodity Exchange, Inc. (‘‘COMEX’’) (a division of CME Group, Inc.), and the Shanghai Futures Exchange (‘‘SHFE’’). LME members are regulated by the Financial Services Authority (‘‘FSA’’), the regulator of the financial services industry in the United Kingdom. COMEX is regulated by the U.S. Commodity Futures Trading Commission (‘‘CFTC’’) under the Commodity Exchange Act (‘‘CEA’’). The SHFE is regulated by the Chinese Securities Regulatory Commission (‘‘CSRC’’). At present, Chinese regulations stipulate that only companies or organizations organized and registered in China or Chinese citizens are allowed to participate in trading on the SHFE. Futures exchanges provide for the trading of futures and options on futures contracts, which producers and consumers use to fix a price in the future as a hedge against price variations. Producers and consumers take long or short positions to manage price risk, which activity is facilitated by investors who buy the price risk. Only eligible organizations or members are able to participate directly in trading on the LME. The LME publishes prices discovered as a result of daily trading of exchange contracts on the LME. The LME Settlement Price 24 and forward prices serve as the global benchmark prices of Grade A copper.25 The copper industry uses these prices as the basis of price negotiations for the physical purchase and sale of copper. All contracts registered with the LME are executed on the basis of physical settlement: LME members deliver base metal against LME futures contracts in the form of LME warrants.26 The seller 24 See infra note 34 and accompanying text. infra note 34. 26 An ‘‘LME warrant’’ is a bearer document evidencing the right of the holder to possession of a specified lot of metal at a specified LME warehouse location. LME warrants are traded in the 25 See E:\FR\FM\20DEN1.SGM Continued 20DEN1 75470 Federal Register / Vol. 77, No. 245 / Thursday, December 20, 2012 / Notices has the right to select the LME warrant delivered to the buyer. Pertinent information about LME warrants is recorded in the LMEsword system. The LME publishes the number of LME warrants and associated tonnage (including canceled LME warrants for which copper has yet to be delivered out of the relevant LME warehouse). 3. OTC Market Physical traders, merchants, and banks participate in OTC spot, forward, option, and other derivative transactions for copper.27 The terms of OTC contracts are not standardized and market participants have the flexibility to negotiate all terms of the transaction, including delivery specifications and settlement terms. The OTC market facilitates long-term transactions, such as life-of-mine off-take arrangements,28 which otherwise could be constrained by contract terms on a futures exchange. Participants in OTC transactions are subject to counter-party risk, including credit risk and contractual obligations to perform. The OTC derivative market for copper remains largely unregulated with respect to public disclosure of information by the parties, thus providing confidentiality among principals. tkelley on DSK3SPTVN1PROD with 4. Copper Market Regulation The CFTC is authorized under the CEA to monitor, investigate, and take actions with respect to activities that may have a material impact on the markets for physical commodities, commodity futures, commodity options, and swaps in the United States. Specifically, the CFTC has jurisdiction over manipulation and attempted manipulation of the cash commodity markets.29 The CFTC also has broad OTC market. The holder of an LME warrant is responsible for rental payments for storage of the underlying copper in an LME-approved warehouse as well as any changes to the price of the underlying copper and locational premium. 27 OTC contracts are principal-to-principal agreements traded and negotiated privately between two principal parties, without going through an exchange or other intermediary. 28 A life-of-mine off-take arrangement is an agreement between a producer and a buyer to purchase/sell portions of the producer’s future production over the life of the operation. These agreements are commonly negotiated prior to the construction of a project as they can assist in obtaining financing by showing future revenue streams. 29 Section 9(a)(2) of the CEA, 7 U.S.C. 13(a)(2), provides that it is a felony punishable by up to ten years’ imprisonment or up to a $1 million fine for ‘‘[a]ny person to manipulate or attempt to manipulate the price of any commodity in interstate commerce, * * * or to corner or attempt to corner any such commodity.’’ Section 6(c) of the CEA, 7 U.S.C. 9, authorizes the CFTC to assess treble damage penalties for manipulation or attempted manipulation of the price of any commodity in VerDate Mar<15>2010 16:07 Dec 19, 2012 Jkt 229001 authority over commodity derivatives markets and participants in those markets, including the COMEX.30 Commodity futures and options traded on the COMEX also are subject to regulation by its parent, CME Group’s Market Regulation Oversight Committee (‘‘MROC’’), under CFTC rules. The MROC is a self-regulatory body created in 2004 to ensure competitive and financially sound trading activity on the Chicago Mercantile Exchange, Inc. and its subsidiary exchanges. The FSA is responsible for supervising the LME and regulating the financial soundness and conduct of the business conducted by LME members. The LME, a Recognised Investment Exchange by the FSA, is required by statute to ensure that business on its markets is conducted in an orderly and transparent manner, providing proper protection to investors and persons looking to manage risk. Regulation of the market is largely carried out by the LME. In addition to FSA oversight, the LME and its members also are subject to regulatory controls and input from various U.K. government bodies and offices, as well as directives from the European Union Commission. In international trading, rules applied by overseas regulatory bodies, such as the CFTC, are also taken into account. The SHFE is a self-regulatory body under the supervision and governance of the CSRC. The SHFE is a day-to-day overseer of exchange activity, and is expected to carry out regulation as per the laws established by the CSRC. The CSRC serves as the final authority on exchange regulation and policy development, and ultimately determines the effectiveness of the SHFE as a regulatory entity. The CSRC has the right to overturn or revoke the SHFE’s regulatory privileges at any time. interstate commerce and to adopt rules to prevent manipulative practices. CFTC Rule 180.1 prohibits fraud and fraud-based manipulations, including any such attempts; CFTC Rule 180.2 addresses the elements of price-based manipulation and attempted manipulation. 30 For example, 17 CFR 18.05 requires all traders that hold or control a reportable futures or options positions to: (1) ‘‘Keep books and records showing all details concerning all positions and transactions in the commodity’’ on all reporting markets, OTC transactions, exempt boards of trade, and foreign boards of trade; (2) ‘‘keep books and records showing all details concerning all positions and transactions in the cash commodity, its products and byproducts, and all commercial activities that the trader hedges in the futures or option contract in which the trader is reportable’’; and (3) provide to the CFTC upon request ‘‘pertinent information concerning such positions, transactions, or activities.’’ PO 00000 Frm 00065 Fmt 4703 Sfmt 4703 B. Description of the Proposed Rule Change and the Trust 31 The Exchange proposes to list and trade the Shares under NYSE Arca Equities Rule 8.201. J.P. Morgan Treasury Securities Services, a division of JPMorgan Chase Bank, National Association, is the administrative agent of the Trust (‘‘Administrative Agent’’). Wilmington Trust Company is the trustee of the Trust (‘‘Trustee’’). The Henry Bath Group is the warehousekeeper of the Trust (‘‘Warehousekeeper’’).32 Metal Bulletin Ltd., which is not affiliated with the Sponsor, is the valuation agent of the Trust (‘‘Valuation Agent’’). As mentioned above, the Trust will hold Grade A copper in physical form, and the Trust’s investment objective is for the value of the Shares to reflect, at any given time, the value of the copper owned by the Trust at that time, less the Trust’s expenses and liabilities at that time. The Trust will hold only copper and will not trade in copper futures. The Trust will not be actively managed and will not engage in any activities designed to obtain a profit from, or to prevent losses caused by, changes in the price of copper. The Administrative Agent will calculate the NAV of the Trust as promptly as practicable after 4:00 p.m. EST on each Business Day.33 As part of this calculation, the Administrative Agent will determine the value of the trust’s copper using the LME Settlement Price 34 and locational premia/discount information provided by the Valuation Agent.35 31 See Notice, supra note 3, for a more detailed description. Additional details regarding the Trust also are set forth in the registration statement for the Trust, most recently amended on July 12, 2011 (No. 333–170085) (‘‘Registration Statement’’). 32 Each of Henry Bath & Son Limited, Henry Bath LLC, Henry Bath Singapore Pte Limited, Henry Bath Italia Sr1, and Henry Bath BV is a member of the Henry Bath Group of companies and a wholly owned subsidiary of J.P. Morgan Ventures Energy Corporation, and is an affiliate of the Sponsor. See Notice, supra note 3, 77 FR at 23773 n.10. 33 A Business Day is a day that the Exchange is open for regular trading and that is not a holiday in London, England. See id. at 23775 n.18. 34 The ‘‘LME Settlement Price’’ is, with respect to any Business Day, the official cash sellers price per metric ton of Grade A Copper on the LME, stated in U.S. dollars, as determined by the LME at the end of the morning’s second ring session (12:35 p.m. London time) for copper on each day that the LME is open for trading. The LME Settlement Price is made publicly available in real-time through third-party vendors such as Bloomberg and Reuters (on Bloomberg, it is currently displayed on Bloomberg page ‘‘LOCADY <comdty>’’). It is also made publicly available on a delayed basis on the LME’s Web site at approximately 10:00 p.m. London time. See id. at 23775 n.17. 35 The value of copper depends in part on its location, i.e., copper stored in a location that is low in supply and high in demand carries a higher E:\FR\FM\20DEN1.SGM 20DEN1 Federal Register / Vol. 77, No. 245 / Thursday, December 20, 2012 / Notices tkelley on DSK3SPTVN1PROD with The Trust will store its copper in both LME-approved warehouses and nonLME-approved warehouses that are maintained by the Warehouse-keeper, but none of the copper held by the Trust will be on LME warrant, and therefore will not be subject to regulation by the LME.36 Initially, the permitted warehouse locations will be in the Netherlands (Rotterdam), Singapore (Singapore), South Korea (Busan and Gwangyang), China (Shanghai), and the United States (Baltimore, Chicago, and New Orleans). Although the Trust may hold copper in warehouses in any of these locations (or other locations that may be determined by the Sponsor from time to time), the locations at which copper actually is held will depend on the warehouse locations at which authorized participants have actually delivered copper to the Trust and the warehouse locations from which copper is or has been delivered pursuant to the Trust’s redemption procedures. Shares will be created when an authorized participant transfers Grade A Copper of an Acceptable Delivery Brand and having a weight equal to the Creation Unit Weight 37 to one or more acceptable warehouse locations of the Trust and the Trust, in return for the copper, delivers a Creation Unit of Shares 38 to the authorized participant. In creating Shares, if the aggregate weight of the whole lots transferred by the authorized participant falls short of or exceeds the aggregate Creation Unit Weight, the Administrative Agent will instruct the Warehouse-keeper to transfer ownership of copper between the authorized participant’s book-entry account (‘‘Reserve Account’’) and the premium than copper that is stored in a location where supply is high and demand is low. To assist in valuing the Trust’s copper, by 9:00 a.m. EST, the Valuation Agent will provide the Administrative Agent the locational premia for the locations at which the trust is permitted to hold copper. The locational premium for a warehouse location for a Business Day will be calculated as an amount expressed in U.S. dollars that is equal to the average value of copper per metric ton in such location minus the LME Settlement Price of copper on such Business Day. See id. at 23779. 36 See id. at 23778. 37 The Creation Unit Weight for a particular day will be equal to 25.0 metric tons multiplied by the Creation Unit Ratio in effect for such day. The Creation Unit Ratio will initially be equal to 1.0, but will decline gradually over time to reflect the payment of expenses by the Trust. As a result, the Creation Unit Weight will decline gradually over time as well. The Creation Unit Weight and the Creation Unit Ratio in effect on any Business Day will have been calculated on the prior Business Day, after the calculation of the Trust’s NAV on such Business Day. For a discussion of how the Administrative Agent will calculate the Creation Unit Ratio and the Creation Unit Weight, See id. at 23784. 38 A Creation Unit of Shares is a block of 2,500 Shares. See id. at 23781. VerDate Mar<15>2010 16:07 Dec 19, 2012 Jkt 229001 Warehouse-keeper’s book-entry account (‘‘Trust Account’’) to cover any such amount. Shares will be redeemed when an authorized participant transfers a Creation Unit of Shares to the Trust and the Trust, in return for such Shares, delivers copper having a weight equal to the Creation Unit Weight to the authorized participant, in accordance with the Selection Protocol.39 Following the transfer of whole lots of copper, the Administrative Agent will instruct the Warehouse-keeper to adjust for any redemption underweight by transferring ownership of copper from the Trust Account to the relevant authorized participant’s Reserve Account.40 Because the copper held by the Trust in different locations may vary in value based on the applicable locational premium, the value of the copper actually received by the authorized participant will depend on the location of the specific whole lot(s) and fractional lots, if any, of the copper transferred to the authorized participant. Quotation and last-sale information for the Shares will be available via the Consolidated Tape Association. The Exchange also will make available via the Consolidated Tape trading volume, closing prices, and NAV for the Shares from the previous day.41 In addition, NYSE Arca will calculate and disseminate, approximately every 15 seconds during the Exchange’s Core Trading Session, two different IIVs for the Shares: The First-Out IIV and the Liquidation IIV.42 39 According to NYSE Arca, the Selection Protocol is intended to provide a consistent and transparent method of selecting lots, by requiring the Administrative Agent to select lots in the following manner: (1) Lots will be selected first from the warehouse where it holds available copper that has the lowest locational premium at a particular time (i.e., the ‘‘cheapest-to-deliver location’’), and then from other warehouse locations successively based on a ranking of their respective locational premia from lowest to highest; (2) if there are multiple lots in the same warehouse location specified by the first step, lots in such warehouse location will be selected based on the date such lots were first delivered to the relevant account, with the earliest delivered lot being selected first; and (3) if there are multiple lots in the same warehouse location that were first delivered to the relevant account on the same date, lots will be selected based on the actual weight of the lot, with the lot having the lowest actual weight being selected first. See id. at 23781–82. 40 According to NYSE Arca, when copper is redeemed in this manner, the amount of copper received by the authorized participant will equal a pro rata share of the copper held by the Trust based on the weight of the Trust’s aggregate copper holdings immediately prior to the processing of redemptions. See id. at 23782. 41 See id. at 23786. 42 The ‘‘First-Out IIV’’ is designed to facilitate arbitrage activity by authorized participants by indicating whether the Shares are trading at a PO 00000 Frm 00066 Fmt 4703 Sfmt 4703 75471 On each Business Day, as promptly as practicable after 4:00 p.m. E.T., the Trust will publish the following on its Web site: (1) The number of outstanding Shares as of the beginning of the Business Day; (2) the NAV of the Trust; (3) the NAV per Share; (4) the locational premium for each warehouse location, as calculated by the Valuation Agent at 5:00 p.m. London time, quoted both in U.S. dollars and as a percentage premium relative to the LME settlement price; (5) the price per metric ton of copper in each warehouse location where the Trust is permitted to hold copper; (6) the aggregate weight in metric tons of all copper owned by the Trust; (7) the aggregate weight in metric tons of the copper owned by the Trust in each warehouse location; (8) the gross value in U.S. dollars of the copper owned by the Trust in each warehouse location; (9) the Creation Unit Ratio; and (10) the Creation Unit Weight.43 The Exchange will obtain a representation from the Trust prior to the commencement of trading of the Shares that the NAV will be calculated daily and made available to all market participants at the same time.44 Additionally, as promptly as practicable after 4:00 p.m. E.T. on each Business Day, the Trust will make available on its Web site a downloadable file containing the following information relating to each lot of copper owned by the Trust: (1) The unique identification number of the lot; (2) the warehouse location in which the lot is held; (3) the brand of the lot and, if such brand of copper is not an Acceptable Delivery Brand, an indication that the lot consists of a brand of copper that has been deregistered; (4) the weight in metric tons of the lot; and (5) the date upon which the lot was delivered to the Trust.45 The Exchange states that investors may obtain, almost on a 24-hour basis, copper pricing information based on the spot price of copper from various financial information service providers, discount or premium during the trading day. See id. at 23785. It represents, as of the time of such calculation, the hypothetical U.S. dollar value per Share of the copper that would need to be transferred to or from the Trust to create or redeem one Share included in a Creation Unit, assuming that copper in the cheapest-to-deliver location was used for such creation or redemption. See id. at 23783. The ‘‘Liquidation IIV’’ is an intraday indicative value that represents, as of the time of the calculation, the hypothetical U.S. dollar value per Share of all of the copper owned by the Trust divided by the number of Shares then outstanding. See id. For a description of how the Exchange will calculate the First-Out IIV and the Liquidation IIV, See id. at 23784–86. 43 See id. at 23783. 44 See Amendment No. 1, supra note 15. 45 See Notice, supra note 3, 77 FR at 23783. E:\FR\FM\20DEN1.SGM 20DEN1 75472 Federal Register / Vol. 77, No. 245 / Thursday, December 20, 2012 / Notices such as Reuters and Bloomberg.46 Reuters and Bloomberg provide at no charge on their Web sites delayed information regarding the spot price of copper and last-sale prices of copper futures, as well as information and news about developments in the copper market.47 Reuters and Bloomberg also offer a professional service to subscribers for a fee that provides information on copper prices directly from market participants.48 There are a variety of public Web sites providing information on copper, ranging from those specializing in precious metals to sites maintained by major newspapers, such as The Wall Street Journal.49 The Trust’s Web site will provide ongoing pricing information for copper spot prices and the Shares.50 The Exchange will provide on its Web site (www.nyx.com) a link to the Trust’s Web site.51 NYSE Arca will require that a minimum of 100,000 Shares be outstanding at the start of trading,52 which represents 1,000 metric tons of copper. The Trust seeks to initially register 6,180,000 Shares.53 NYSE Arca represents that the Shares satisfy the requirements of NYSE Arca Equities Rule 8.201, which governs the listing and trading of Commodity-Based Trust Shares, and thereby qualify for listing and trading on the Exchange.54 Under NYSE Arca Equities Rule 7.34(a)(5), if the Exchange becomes aware that the NAV is not being disseminated to all market participants at the same time, it must halt trading on the Exchange until such time as the NAV is available to all market participants at the same time. If the First-Out IIV or the Liquidation IIV is not being disseminated as required, the Exchange may halt trading during the day in which the disruption occurs; if the interruption persists past the day in which it occurred, the Exchange will halt trading no later than the beginning of the trading day following the interruption.55 Further, the Exchange tkelley on DSK3SPTVN1PROD with 46 See id. at 23786. 47 See id. 48 See id. 49 See id. 50 See id. 51 See id. 52 See Amendment No. 1, supra note 15. 53 See Registration Statement, supra note 31. 54 With respect to application of Rule 10A–3 (17 CFR 240.10A–3) under the Act (15 U.S.C. 78a), the Trust relies on the exemption contained in Rule 10A–3(c)(7). See Notice, supra note 3, at 23773 n.12. 55 See Amendment No. 1, supra note 15. NYSE Arca Equities Rule 8.201(e)(2) also provides that the Exchange may seek to delist the Shares in the event the underlying commodity or the IIV is no longer calculated or available as required. VerDate Mar<15>2010 16:07 Dec 19, 2012 Jkt 229001 will consider suspension of trading pursuant to NYSE Arca Rule 8.201(e)(2) if, after the initial 12-month period following commencement of trading: (1) The value of copper is no longer calculated or available on at least a 15second delayed basis from a source unaffiliated with the Sponsor, Trust, or Custodian, or the Exchange stops providing a hyperlink on its Web site to any such unaffiliated source providing that value; or (2) if the Liquidation IIV is no longer made available on at least a 15-second delayed basis. More generally, with respect to trading halts, the Exchange may consider all relevant factors in exercising its discretion to halt or suspend trading in the Shares. Trading on the Exchange in the Shares may be halted because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable. These may include: (1) The extent to which conditions in the underlying copper market have caused disruptions and/or lack of trading; or (2) whether other unusual conditions or circumstances detrimental to the maintenance of a fair and orderly market are present. Additionally, trading in the Shares will be subject to trading halts caused by extraordinary market volatility pursuant to the Exchange’s circuit breaker rule.56 NYSE Arca represents that its surveillance procedures are adequate to properly monitor Exchange trading of the Shares in all trading sessions and to deter and detect violations of NYSE Arca rules and applicable federal securities laws.57 To support this, the Exchange states that, pursuant to NYSE Arca Equities Rule 8.201(g), it is able to obtain information regarding trading in the Shares, physical copper, copper futures contracts, options on copper futures, or any other copper derivative from ETP Holders acting as registered market makers, in connection with their proprietary or customer trades. More generally, NYSE Arca states that it has regulatory jurisdiction over its ETP Holders and their associated persons, which include any person or entity controlling an ETP Holder, as well as a subsidiary or affiliate of an ETP Holder that is in the securities business.58 With respect to a subsidiary or affiliate of an ETP Holder that does business only in commodities or futures contracts, the Exchange states that it can obtain information regarding the activities of such subsidiary or affiliate through surveillance sharing agreements with regulatory organizations of which such 56 See NYSE Arca Equities Rule 7.12. Notice, supra note 3, 77 FR at 23787. 58 See Amendment No. 1, supra note 15. 57 See PO 00000 Frm 00067 Fmt 4703 Sfmt 4703 subsidiary or affiliate is a member.59 Further, NYSE Arca states that it may obtain trading information via the Intermarket Surveillance Group (‘‘ISG’’) from other exchanges that are members of the ISG, including the COMEX,60 and that it has entered into a comprehensive surveillance sharing agreement with the LME that applies with respect to trading in copper and copper derivatives.61 Prior to the commencement of trading, the Exchange represents that it will inform its ETP Holders in an Information Bulletin of the special characteristics and risks associated with trading the Shares. Specifically, the Information Bulletin will discuss the following: (a) The procedures for purchases and redemptions of Shares in the Creation Unit (including noting that Shares are not individually redeemable); (b) NYSE Arca Equities Rule 9.2(a), which imposes a duty of due diligence on its ETP Holders to learn the essential facts relating to every customer prior to trading the Shares; (c) how information regarding the IIV is disseminated; (d) the requirement that ETP Holders deliver a prospectus to investors purchasing newly issued Shares prior to or concurrently with the confirmation of a transaction; (e) the possibility that trading spreads and the resulting premium or discount on the Shares may widen as a result of reduced liquidity of physical copper trading during the Core and Late Trading Sessions after the close of the major world copper markets; and (f) trading information. The Notice and the Registration Statement include additional information about: The Trust; the Shares; the Trust’s investment objectives, strategies, policies, and restrictions; fees and expenses; creation and redemption of Shares; the physical copper market; availability of information; trading rules and halts; and surveillance procedures.62 III. Discussion and Commission Findings After careful review and for the reasons discussed below, the Commission finds that the proposed rule change is consistent with the requirements of the Act, including Section 6 of the Act,63 and the rules and regulations thereunder applicable to a national securities exchange. In particular, the Commission finds that the proposed rule change is consistent 59 See id. Notice, supra note 3, 77 FR at 23787. 61 See Amendment No. 1, supra note 15. 62 See Notice and the Registration Statement, supra notes 3 and 31, respectively. 63 15 U.S.C. 78f. 60 See E:\FR\FM\20DEN1.SGM 20DEN1 Federal Register / Vol. 77, No. 245 / Thursday, December 20, 2012 / Notices with Section 6(b)(5) of the Act,64 which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, and to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. In addition, the Commission finds that the proposed rule change is consistent with Section 6(b)(8) of the Act,65 which requires that the rules of a national securities exchange not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. The Commission also finds that the proposed rule change is consistent with Section 11A(a)(1)(C)(iii) of the Act,66 which sets forth Congress’s finding that it is in the public interest and appropriate for the protection of investors to assure the availability to brokers, dealers, and investors of information with respect to quotations for and transactions in securities. Further, pursuant to Section 3(f) of the Act, the Commission has considered whether the proposed rule change will promote efficiency, competition, and capital formation. Six commenters submitted fourteen comment letters to explain their opposition to the proposed rule change.67 Generally, the opposing commenters assert that the proposed rule change is inconsistent with Section 6(b)(5) of the Act.68 V&F (and EVW), the 64 15 U.S.C. 78f(b)(5). U.S.C. 78f(b)(8). 66 15 U.S.C. 78k–1(a)(1)(C)(iii). 67 See V&F May 9 Letter, supra note 4; V&F July 13 Letter, supra note 7; Levin Letter, supra note 8; Shatto Letter, supra note 9; Copper Fabricators Letter, supra note 11; V&F August 24 Letter, supra note 11; V&F September 10 Letter, supra note 12; V&F October 23 Letter, supra note 14; AFR October 23 Letter, supra note 14; Rutkowski October 24 Letter, supra note 14; V&F November 16 Letter, supra note 14; AFR November 16 Letter, supra note 14; Rutkowski November 17 Letter, supra note 14; and EVW December 7 Letter, supra note 16. V&F, and subsequently EVW, identified themselves as law firms that represent RK Capital LLC, an international copper merchant, and the Copper Fabricators. See V&F July 13 Letter, supra note 7, at 1; and EVW December 7 Letter, supra note 16, at 1. See also supra note 16 (explaining the change in representation). The Copper Fabricators state that they collectively comprise about 50% of the copper fabricating capacity of the United States. See Copper Fabricators Letter, supra note 11, at 1. AFR identifies itself as a coalition of over 250 groups who advocate for reform of the financial industry. See AFR October 23 Letter, supra note 14, at 1. 68 Ms. Shatto does not tie her objections to any particular provision of the Act. First, she believes that ‘‘jp morgan’’ does not need another derivative tkelley on DSK3SPTVN1PROD with 65 15 VerDate Mar<15>2010 16:07 Dec 19, 2012 Jkt 229001 Copper Fabricators, Senator Levin, and AFR (collectively, ‘‘Opposing Commenters’’) assert that the issuance by the Trust of all of the Shares covered by the Registration Statement within a short period of time would result in a substantial reduction in the supply of global copper available for immediate delivery.69 The Opposing Commenters assert that this reduction in short-term supply would increase both the price of copper and volatility in the copper market, which would in turn significantly harm the U.S. economy.70 They further state that the predicted decrease in copper available for immediate delivery would make the physical copper market more susceptible to manipulation.71 In response, the Exchange and the Sponsor generally state that the Trust would serve as a transparent and accessible alternative by which participants in the copper market can access or offload physical copper inventory and associated price risk.72 The Sponsor believes that the Trust would move copper from one type of liquid stock to another type of liquid stock, rather than removing inventory from the market, and would track, rather product. This principle is not relevant to consideration of the proposed rule change under the Act. Second, she questions whether ‘‘jp morgan,’’ which she says ‘‘already trades a lot in the commodities market,’’ may be able to ‘‘manipulate the market,’’ a concern shared by other commenters. She asserts that ‘‘jp morgan gets inside information by using their warehouses to buy and sell copper which maximizes profits to the detriment of commercial interests who have to buy copper.’’ Concerns regarding the potential for manipulation are addressed in Section III.D and III.E. Third, she asserts that derivatives often allow short selling, which affects many equities at one time, making the equities market extremely volatile. Ms. Shatto does not provide further information to explain why this concern is relevant to the proposed rule change. Concerns regarding the potential for increased volatility in the copper market are addressed in Section III.C. Fourth, she states: ‘‘banks should be banks, not business conglomerations.’’ This principle is not relevant to consideration of the proposed rule change under the Act. Finally, she recommends that the Commission not enable short sellers or options traders. The proposed rule change does not address short selling or approve the listing and trading of options on the Shares. Mr. Rutkowski requests that the Commission deny the proposed rule change for the reasons articulated by AFR. 69 See V&F May 9 Letter, supra note 4, at 3, 6; Levin Letter, supra note 8, at 1, 4; Copper Fabricators Letter, supra note 11, at 3; and AFR October 23 Letter, supra note 14, at 2. 70 See V&F May 9 Letter, supra note 4, at 5–7; Levin Letter, supra note 8, at 1, 7; Copper Fabricators Letter, supra note 11, at 4–5; and AFR October 23 Letter, supra note 14, at 2. 71 See V&F May 9 Letter, supra note 4, at 1, 10; Levin Letter, supra note 8, at 7; AFR October 23 Letter, supra note 14, at 4–5; Copper Fabricators Letter, supra note 11, at 5–6; and AFR October 23 Letter, supra note 14, at 4–5. 72 See DP August 24 Letter, supra note 11, at 7; and Arca June 19 Letter, supra note 6, at 5. PO 00000 Frm 00068 Fmt 4703 Sfmt 4703 75473 than drive, copper prices.73 The Exchange and the Sponsor believe the structure of the Trust and the regulatory regime for the Shares and copper derivatives (including non-securities) suggest approval of the proposed rule change would not render the copper market more susceptible to manipulation.74 Given the concerns expressed by the commenters that the Trust would remove a substantial amount of the supply of copper available for immediate delivery over a short period of time, which would render the physical copper market more susceptible to manipulation, and that the Trust therefore would provide market participants an effective means to manipulate the price of copper and thereby the price of the Shares,75 the Commission analyzes the comments to examine, among other things, the extent to which the listing and trading of the Shares may (1) impact the supply of copper available for immediate delivery and the ability of market participants to manipulate the price of copper, and (2) be susceptible to manipulation. The sections below summarize and respond to the comments received. A. The Trust’s Impact on the Supply of Copper Available for Immediate Delivery The Opposing Commenters believe that the issuance by the Trust of all of the Shares covered by the Registration Statement within a short period of time would result in the withdrawal of substantial quantities of copper from LME and COMEX warehouses, thus negatively impacting the supply of copper available for immediate delivery.76 As discussed below, this belief assumes that: (1) Copper held by the Trust would not be available for immediate delivery; (2) the global supply of copper available for immediate delivery that could be used to create Shares consists almost exclusively of copper already under LME or COMEX warrant, and therefore the Shares would be created primarily using copper already under LME or COMEX warrant; and (3) the Trust would acquire a substantial amount of copper within a short period of time, such that copper suppliers would not be able to adjust production to replace the copper removed from the market by the 73 See DP August 24 Letter, supra note 11, at 11, 13. 74 See id. at 4–5; and Arca June 19 Letter, supra note 6, at 5–6. 75 See V&F May 9 Letter, supra note 4, at 1, 10. 76 See id. at 3–4; Levin Letter, supra note 8, at 4– 5; Copper Fabricators Letter, supra note 11, at 5; and AFR October 23 Letter, supra note 14, at 3. E:\FR\FM\20DEN1.SGM 20DEN1 75474 Federal Register / Vol. 77, No. 245 / Thursday, December 20, 2012 / Notices Trust. The Commission believes that the record does not support each of the contentions, and thus, for the reasons discussed below, the Commission does not believe that the listing and trading of the Shares is likely to disrupt the supply of copper available for immediate delivery. tkelley on DSK3SPTVN1PROD with 1. Availability of the Trust’s Copper Opposing Commenters assert that copper held by the Trust would not be available for immediate delivery, and therefore copper deposited into the Trust would be removed from the market and would be unavailable to end-users.77 In response, the Sponsor asserts that the Trust would not remove immediately available copper inventory from the market.78 The Sponsor points out that a report cited by one of the commenters defines inventories held in exchange-traded funds as ‘‘liquid stocks.’’ 79 The Sponsor asserts that, in effect, the Trust would move copper from one type of liquid stock (warrants) to another type of liquid stock (Shares).80 The Commission agrees with the Sponsor that copper held by the Trust will remain available to consumers and other participants in the physical copper market because: (1) The Trust will not consume copper; 81 (2) Shares are redeemable (in size) for copper on every Business Day; 82 and (3) redeeming authorized participants will receive the right to obtain their copper within three business days.83 77 See V&F May 9 Letter, supra note 4, at 1; Levin Letter, supra note 8, at 7; Copper Fabricators Letter, supra note 11, at 3, and AFR October 23 Letter supra note 14, at 3. 78 See, e.g., DP August 24 Letter, supra note 11, at 13. 79 See DP August 24 Letter, supra note 11, at 13; and DP September 10 Letter, supra note 12, at 5 n.11. 80 See DP August 24 Letter, supra note 11, at 13. 81 See id. at 22. 82 See Notice, supra note 3, 77 FR at 23782. 83 See DP August 24 Letter, supra note 11, at 7. The record is unclear whether authorized participants that are redeeming the Shares will be able to physically remove copper from the warehouse in which it is stored within three business days, or whether this reference is to three business days in addition to the existing time it takes to remove copper from the warehouses. The Registration Statement provides: ‘‘Redemption orders will be settled by delivery of copper on the third Trading Day following the redemption order date, provided that, by 3:00 p.m. New York City time on the date such settlement is to take place, the Administrative Agent confirms in writing to the Warehouse-keeper that (x) the Administrative Agent’s DTC account has been credited with the Creation Units to be redeemed and (ii) the Authorized Participant has paid the Administrative Agent the applicable transaction fee for such redemption order.’’ Registration Statement, supra note 31 (emphasis in original). One of the Opposing Commenters acknowledged, however, that taking copper off LME warrant, which the commenter VerDate Mar<15>2010 16:07 Dec 19, 2012 Jkt 229001 Additionally, as the Sponsor explains, the copper received in exchange for redeemed Shares could be: (1) Sold in the OTC market for cash; (2) swapped in the OTC market for copper in a different location or for a different brand; and/or (3) removed from the warehouse and consumed.84 The Sponsor states that these three types of transactions are commonplace in the copper market.85 Further, copper delivered from the Trust considers to be copper available for immediate delivery, takes time; according to that commenter: (1) The amount of time it takes to take copper off LME warrant depends ‘‘on the length of the loading out queue’’ at the LME warehouse; and (2) queues ‘‘are currently ranging from 275 working days Vlissingen, Netherlands, 91 working days (4.5 months) in New Orleans, 51 working days (2.5 months) in Johor, Malaysia to under one month in Korea and Rotterdam, Netherlands.’’ V&F August 24 Letter, supra note 11, at 14. This commenter expresses further concern in its latest comment letter about an increasing length of time that it takes to withdraw metal, including copper, from LME warehouses. The commenter argues that this ‘‘troubling new development’’ may, together with the proposed listing and trading of the Shares, jeopardize the ability of United States copper consumers to obtain the physical copper they need in a timely manner. See generally EVW December 7 Letter, supra note 16. By its December 7 submission, the commenter appears to be updating information previously provided about the length of queues, but does not assert any new reason for disapproving the listing and trading of the Shares that is distinct from its original assertion, responded to in the text above, that listing and trading of the Shares will reduce the supply of copper available for immediate delivery. For purposes of analyzing this proposed rule change, the Commission assumes that copper will be transferred to an authorized participant’s bookentry account within three days, and that an authorized participant taking delivery of copper from an LME warehouse will then have to wait in the queues described by this Opposing Commenter, just like other owners withdrawing metal from that warehouse. The Commission believes that waiting up to an extra three business days beyond the time required to take copper off of LME warrant is not a significant enough delay to consider the copper delivered from the Trust unavailable for immediate delivery. In this regard, the Commission notes that the commenter, who acknowledges that taking copper off of LME warrant takes time, considers copper on LME warrant to be available for immediate delivery. See, e.g., V&F July 13 Letter, supra note 7, at 1 (stating its view that there are no substantial sources of copper available for immediate delivery available to the Trust other than warranted copper in LME warehouses). Further, as noted above, the Trust’s copper may be held in both LME-approved warehouses and non-LME-approved warehouses, and there is nothing in the record concerning the existence of unloading queues in non-LME warehouses. The Commission also notes that the LME appears to be attempting to address the unloading queue issue, see London Metal Exchange, Consultation on Changes to LME Policy for Approval of Warehouses in Relation to Delivery Out Rates, Notice 12/296: A295: W152 (November 15, 2012), available at https://www.lme.com/ downloads/notices/12_296_A295_W152_ Consultation_on_Changes_to_LME_Policy_for_ Approval_of_Warehouses_in_Relation_to_Delivery_ Out_Rates.pdf, which applies to LME warehoused aluminum and zinc, not just copper. See also EVW December 7 Letter, supra note 16, at 3. 84 See DP August 24 Letter, supra note 11, at 7. 85 See id. at 8. PO 00000 Frm 00069 Fmt 4703 Sfmt 4703 (in exchange for Shares) could be placed under LME warrant if required by LME market participants.86 Given the structure of the Trust, the Commission believes that the amount of copper accessible to industrial users will not meaningfully change as a result of the listing and trading of the Shares. Accordingly, the Commission believes that the proposed rule change will not burden capital formation for users who acquire copper for industrial and other purposes. The Commission recognizes that one group of end users state that they would not acquire Shares for the purpose of redeeming them to acquire copper because the copper they would receive in exchange for Shares might be in a location far from their plants or might be of brands that are not acceptable to their plants.87 Regardless of the preferences of these consumers, authorized participants may redeem Shares for copper and the record does not contain any evidence that these or any other consumers of copper could not use the Shares to obtain copper through an authorized participant. Further, the record supports that the same logistical issues exist and are regularly addressed by end-users of copper holding LME warrants. Currently, a purchaser of an LME warrant does not know the location or brand of the underlying copper, and therefore warrant holders sometimes need to swap the warrants to acquire copper of a preferred brand in a convenient location.88 The end user commenters explain that, because not all available brands of copper held at LME and COMEX warehouses are acceptable for the efficient operation of their fabricating plants, they currently rely on copper merchants to obtain their desired brands of copper by aggregating the lots from copper on warrant at LME and COMEX warehouses.89 Nothing in the record indicates that copper merchants will not be able to perform the same function in connection with copper delivered in connection with Share redemptions. As discussed above,90 on a daily basis, the Trust will publish information on the location and brand of copper that will be delivered to the next redeeming authorized participant, and this may assist end 86 See id. Copper Fabricators Letter, supra note 11, at 7. See also V&F September 10 Letter, supra note 12, at 4; and V&F July 13 Letter, supra note 7, at 7. 88 See DP August 24 Letter, supra note 11, at 8. 89 See Copper Fabricators Letter, supra note 11, at 3. 90 See supra text accompanying note 45. 87 See E:\FR\FM\20DEN1.SGM 20DEN1 Federal Register / Vol. 77, No. 245 / Thursday, December 20, 2012 / Notices users of copper and copper merchants to locate suitable copper. One of the Opposing Commenters also expresses concern that investors who hold the Shares would not sell them, and therefore Shares would not be readily available for redemption.91 This claim is unsupported. There is no evidence in the record to suggest that investors holding the Shares will be unwilling to sell them, particularly in response to market movements or changes in investor needs. The Commission believes that the listing and trading of the Shares, as proposed, could provide another way for market participants and investors to trade in copper, and could enhance competition among trading venues. Further, the Commission believes that the listing and trading of the Shares will provide investors another investment alternative, which could enhance a well-diversified portfolio. By broadening the securities investment alternatives available to investors, the Commission believes that trading in the Shares could increase competition among financial products and the efficiency of financial investment. 2. Source of Copper Used To Create Shares The Opposing Commenters believe that the global supply of copper available for immediate delivery, and eligible to be used to create Shares, consists almost exclusively of copper already under LME or COMEX warrant, and therefore they believe that Shares would be created primarily using copper already under LME or COMEX warrant.92 One of the Opposing Commenters states that the size of the market for copper available for immediate delivery is small relative to the size it expects the Trust to attain, asserting that there is only 230,000 metric tons available on the LME, with an additional 60,000 metric tons available on the COMEX, and projects that the Trust would remove as much as 61,800 metric tons from the market, which would be about 21.3% of the copper available for immediate delivery.93 The Opposing Commenters 91 See V&F September 10 Letter, supra note 12, tkelley on DSK3SPTVN1PROD with at 3. 92 See Levin Letter, supra note 8, at 4–5; Copper Fabricators Letter, supra note 11, at 3 (‘‘The market for copper available for immediate delivery consists of copper on warrant in LME and Comex warehouses. If there is any other copper available for us to purchase and be delivered within a week or two, we are generally not aware of it.’’); V&F July 13 Letter, supra note 7, at 2–4; and AFR October 23 Letter, supra note 14, at 2. 93 See V&F July 13 Letter, supra note 7, at 8. How opposing commenters measure the projected size of the Trust is discussed infra in Section III.A.3. VerDate Mar<15>2010 16:07 Dec 19, 2012 Jkt 229001 also assert that the Trust would be funded with copper under warrant in the United States, which would result in a shortage of copper in the United States.94 These Opposing Commenters urge the Commission to consider collectively the supply impacts of the Trust and the iShares Copper Trust,95 the shares of which the Exchange also is proposing to list and trade.96 In contrast, the Sponsor believes that there are very substantial copper inventories available outside of the LME and COMEX that are deliverable on a short-term basis that could be used to fund the Trust. Specifically, the Sponsor states that, even according to the data provided by one of the Opposing Commenters, there are substantial sources of liquid copper stock inventory outside of the LME and other exchanges, and that most liquid copper stock inventory is non-LME or exchange inventory.97 The Sponsor provided data that it says shows that liquid global copper inventories that are considered LME-branded are estimated at approximately 1.4 million metric tons as of July 31, 2012, and that approximately 70% of these inventories are not under warrant with the LME, COMEX, or any other exchange.98 Additionally, the Another Opposing Commenter states that, in 2011, total global copper stocks were 3.515 million metric tons, of which it believes only 808,000 metric tons were considered to be ‘‘liquid.’’ Levin Letter, supra note 8, at 4. The commenter then goes on to assert that: (1) Of those liquid stocks, most actually are unavailable for purchase; (2) most of that liquid copper that is available for immediate delivery is under LME or COMEX warrant; and (3) as of August 2011, the LME and COMEX had only 537,500 metric tons under warrant. See id. at 4–5. That commenter estimates that the Trust, which he expects would hold up to 61,800 metric tons of copper, and the iShares Copper Trust (see infra note 95), which would hold up to 121,200 metric tons of copper, collectively would hold approximately 34% of the copper available for immediate delivery. See Levin Letter, supra note 8, at 5. The Commission is not addressing the iShares Copper Trust proposed rule change in this order. 94 See Levin Letter, supra note 8, at 6; V&F May 9 Letter, supra note 4, at 4; V&F July 13 Letter, supra note 7, at 9; Copper Fabricators Letter, supra note 11, at 4–5; and AFR October 23 Letter, supra note 14, at 2. 95 See Securities Exchange Act Release No. 67237 (June 22, 2012), 77 FR 38351 (June 27, 2012) (SR– NYSEArca–2012–66) (notice of proposal to list and trade shares of the iShares Copper Trust). 96 See Levin Letter, supra note 8, at 5, 6; Copper Fabricators Letter, supra note 11, at 3–4; and V&F May 9 Letter, supra note 4, at 6. 10. 97 See DP August 24 Letter, supra note 11, at 13. 98 See DP September 10 Letter, supra note 12, at 2. The Sponsor cites a report by Metal Bulletin Research indicating there are 4.09 million metric tonnes of refined copper stocks worldwide, 1.78 million metric tonnes of which can be considered to be liquid. See DP August 24 Letter, supra note 11, at Annex C–5 at 7, 10 (citing Metal Bulletin Research, ‘‘Independent Assessment of Global Copper Stocks,’’ August 22, 2012). According to the Sponsor, Metal Bulletin Research is the research arm of Metal Bulletin Ltd., the Trust’s Valuation PO 00000 Frm 00070 Fmt 4703 Sfmt 4703 75475 Sponsor asserts that authorized participants would not deposit into the Trust copper exclusively or disproportionately from the U.S.; according to the Sponsor, five of the initial permitted warehouses are located outside of the U.S. and, based on current conditions, the Sponsor states that Shanghai, South Korea, and Singapore are the most likely locations at which copper would be delivered to the Trust.99 The Commission believes that there is significant uncertainty about the locations from which copper will be purchased to create Shares. Based on the description of the Trust in the proposed rule change, authorized participants and their customers will choose what eligible copper to deposit with the Trust. Further, the Commission understands, based on information submitted by the Sponsor, that premia in different locations have fluctuated historically relative to one another and will continue to change over time, and that a region with the highest locational premia at a given time may have the lowest locational premia at a later date.100 The Commission also believes that the record supports the view that there are sufficient copper stockpiles such that up Agent. See id. at 15 n.44. Metal Bulletin Research estimates that 1.36 million metric tonnes of the 1.78 million metric tonnes considered to be liquid are in the form of LME brands. See id. at Annex C–5 at 7. Metal Bulletin Research further estimates that 249,000 metric tonnes are on LME warrant and 136,000 metric tonnes are LME-branded but located on other exchanges, leaving approximately 70% (or 975,000 metric tonnes) of liquid copper stocks that are eligible to be placed on LME warrant. See id. at Annex C–5 at 10. 99 See DP September 10 Letter, supra note 12, at 8 n.32; and DP August 24 Letter, supra note 11, at 26. 100 The Sponsor provided the following information provided by the Valuation Agent regarding locational premia: (1) In the United States, the average locational premium as a percentage of average physical price was 1.4217% for the year ended December 31, 2010; 1.1377% between January 1 and March 31, 2011, and 1.1590% between April 1 and June 15, 2011; (2) in Europe, the average locational premium as a percentage of average physical price was .9426% for the year ended December 31, 2010; .7035% between January 1 and March 31, 2011, and .7327% between April 1 and June 15, 2011; (3) in Shanghai, China, the average locational premium as a percentage of average physical price was 1.3500% for the year ended December 31, 2010; .3982% between January 1 and March 31, 2011, and .4640% between April 1 and June 15, 2011; and in Singapore, the average locational premium as a percentage of average physical price was 1.1259% for the year ended December 31, 2010; .7117% between January 1 and March 31, 2011, and .4964% between April 1 and June 15, 2011. See DP August 24 Letter, supra note 11, at C–3. The Sponsor states that this data provided in Annex C–3 demonstrates that locational premia vary over time and, as a result, ‘‘a region with the highest premia in one interval of time may have the lowest premia at a later date, and vice versa.’’ See id. at 32. E:\FR\FM\20DEN1.SGM 20DEN1 75476 Federal Register / Vol. 77, No. 245 / Thursday, December 20, 2012 / Notices tkelley on DSK3SPTVN1PROD with to 61,800 metric tons of copper could be deposited into the Trust without authorized participants taking copper off of either LME or COMEX warrant. For example, the Valuation Agent 101 estimates liquid global copper inventories that are considered LMEbranded to be approximately 1.4 million metric tons as of July 31, 2012, and approximately 70% of these inventories are not under warrant with the LME, COMEX, or any other exchange.102 One of the Opposing Commenters argues that this supply of non-warranted copper belongs to producers, consumers, and/or merchants and traders and is not otherwise in the supply pipeline, and that the only copper available for immediate delivery is in LME and COMEX warehouses.103 The Commission believes, however, that it is more plausible that a sufficient portion of the estimated 1.4 million metric tons of copper inventories cited by commenters currently is available for authorized participants to use to create Shares. For example, an Opposing Commenter states that there is estimated to be between 500,000 and 600,000 metric tons of bonded copper inventory in Shanghai and Guangzhou, China, and that up to 10% of this stockpile is not deliverable because it has not been kept under cover.104 In the Commission’s view, this leaves between 450,000 and 540,000 tons of copper that may be deliverable to the Trust. The Sponsor says that ‘‘Metal Bulletin’’ estimates that 80% of these bonded stocks are LME acceptable metal given the imported status of such metal and arbitrage activity between the LME and SHFE.105 One of the Opposing Commenters argues that the Commission should not include copper located in China as inventory available for immediate delivery, noting that China is one of the largest copper-consuming countries in the world, leading the commenter to conclude that China would not export copper.106 That commenter does not provide any empirical support for this view. That commenter also suggests that 101 The Exchange states that the Valuation Agent is an independent, third-party valuation agent that is not affiliated with the Sponsor. See Notice, supra note 3, 77 FR at 23773. 102 See DP September 10 Letter, supra note 12, at 2. 103 See V&F September 10 Letter, supra note 12, at 2. 104 See V&F August 24 Letter, supra note 11, at 9–10. In contrast, the Sponsor states that there is estimated to be 550,000 metric tons of copper in bonded warehouses in Shanghai alone. See DP August 24 Letter, supra note 11, at 33. 105 See DP August 24 Letter, supra note 11, at 30. 106 See V&F September 10 Letter, supra note 12, at 5. VerDate Mar<15>2010 16:07 Dec 19, 2012 Jkt 229001 copper in China is unavailable because ‘‘a substantial percentage of the inventory in bonded warehouses in China is being held in financing structures,’’ 107 but the commenter admits that it does not know either how much of the copper is so encumbered under financing arrangements or how long such copper would be restricted.108 Further, even if the commenter is correct that, as a practical matter, such copper may be unavailable to U.S. copper consumers, that does not preclude copper in Shanghai from being deposited into the Trust (if it is otherwise eligible), as one of the Trust’s initial permitted warehouse locations is Shanghai. Even assuming that authorized participants will need to remove copper from LME warrant to deposit the copper into the Trust, as discussed above, the Commission believes that the Trust’s copper will remain available for immediate delivery to consumers and participants in the physical markets.109 Accordingly, the Commission does not believe that the listing and trading of the Shares is likely to disrupt the supply of copper available for immediate delivery. 3. Growth of the Trust One of the Opposing Commenters believes it is reasonable to expect that the Trust would sell all of the Shares covered by the Registration Statement in the three months after the registration becomes effective because of: (1) ‘‘the stated desire to have the Trust remove enough copper from the market each month to move prices upward to cover the costs of storage’’; (2) the very limited quantity of copper available for immediate delivery to accomplish the Trust’s objective; and (3) the increase in copper prices in the three months following October 2010, when the Trust, iShares Copper Trust, and ETFS Physical Copper were announced.110 That commenter also asserts that the copper supply is inelastic and that supply, therefore, is unlikely to increase fast enough to account for the increased demand that the commenter believes would be unleashed by the creation and 107 V&F August 24 Letter, supra note 11, at 9. id. 109 See supra Section III.A.1. 110 See V&F August 24 Letter, supra note 11, at 20. ETFS Physical Copper is a trust that holds copper under LME warrant and its shares are traded ¨ on the London Stock Exchange and Deutsche Borse. See https://www.etfsecurities.com/en/updates/ document_pdfs/ ETFS_Physical_Industrial_Copper_Fact_Sheet.pdf. A discussion of the effect of ETFS Physical Copper on the price of copper is included below. See infra Section III.B. 108 See PO 00000 Frm 00071 Fmt 4703 Sfmt 4703 growth of the Trust.111 Opposing commenters state that the Trust would hold approximately 61,800 metric tons of copper if the Sponsor sells all of the 6,180,000 Shares covered by its Registration Statement.112 The Sponsor states that it does not expect to sell all registered Shares within three months after the Registration Statement becomes effective, and states: ‘‘[l]ike all other physical metal ETVs, the Trust would register significantly more Shares than it initially intends to sell so that it is able to meet any such demand.’’ 113 The Sponsor predicts that, in connection with the initial offering of Shares, the Trust would hold 9,893 metric tons of copper.114 As a preliminary matter, the Opposing Commenters appear to conflate the amount of copper held by the Trust with the number of Shares issued. When Commodity-Based Trusts redeem shares, those redeemed shares do not get put ‘‘back on the shelf’’; once securities are redeemed, the issuer cannot resell securities of the same amount unless there is either sufficient capacity left on the registration statement (i.e., enough registered securities to cover the new issuance of shares by the issuer) or unless a new registration statement is filed to register the offer and sale of the securities.115 Accordingly, 6,180,000 issued Shares will correspond with 61,800 metric tons of copper held by the Trust only if authorized participants do not redeem any Shares. Based on the existence of the arbitrage mechanism of the Trust,116 which is common to many exchange-traded vehicles, the Commission believes it is very unlikely that no Shares will be redeemed. The Commission believes that the amount of copper held by the Trust will 111 See V&F May 9 Letter, supra note 4, at 5. That commenter states that, in the longer term, copper miners are likely to respond to price signals and increase production. See V&F August 24 Letter, supra note 11, at 28. Another Opposing Commenter generally asserted that the Trust actually would change ‘‘supply and demand relationships.’’ AFR October 23 Letter, supra note 14, at 4. That commenter offered neither an explanation for nor quantitative data to support its belief. As discussed below, the Commission believes that the Opposing Commenters have not supported their prediction that the assets of the Trust will grow so quickly, and that copper supply is sufficiently inelastic, such that copper prices would be impacted. See infra text following note 118. 112 See V&F May 9 Letter, supra note 4, at 3; Levin Letter, supra note 8, at 5. 113 DP August 24 Letter, supra note 11, at 41. 114 See id. 115 See Sections 5 and 6 of the Securities Act, 15 U.S.C. 77e and 15 U.S.C. 77f, respectively. 116 The Trust’s arbitrage mechanism allows authorized participants to create and redeem Shares, and is designed to align the secondary market price per Share to the NAV per Share. See Notice, supra note 3, 77 FR at 23780. E:\FR\FM\20DEN1.SGM 20DEN1 Federal Register / Vol. 77, No. 245 / Thursday, December 20, 2012 / Notices depend on investor demand for the Shares and the extent to which authorized participants fulfill such demand by buying Creation Units and not redeeming issued Shares. Investor demand for the Shares is currently unknown. The Commission notes that ETFS Physical Copper, shares of which are listed and traded on the London ¨ Stock Exchange and Deutsche Borse, has not grown to a substantial size since its inception.117 As discussed above, the Commission believes that copper held by the Trust will be available for immediate delivery.118 However, even assuming that the Trust’s copper will be unavailable for immediate delivery, the Commission believes that the Opposing Commenters have not supported their prediction that the Trust would grow so quickly that it would significantly disrupt the supply of copper available for immediate delivery. 4. Other Physical Commodity Trusts tkelley on DSK3SPTVN1PROD with Opposing commenters admit that the introduction of Commodity-Based Trusts that hold other metals had virtually no impact on the available supply, but they assert that these other metals—gold, silver, platinum, and palladium—are fundamentally different because they have traditionally been held for investment purposes, currently are used as currency, and that, as a result, there were ample stored sources available to fund Commodity-Based Trusts overlying those metals.119 They assert that copper, in contrast, generally is not held as an investment, but rather is used exclusively for industrial purposes, with the annual demand generally exceeding the available supply, and they therefore believe that the introduction of the Trust would impact supply.120 117 According to one Opposing Commenter, on December 17, 2010 (one week after the product was launched), ETFS Physical Copper held 1,445.4 metric tons of copper, and on August 3, 2012, it held 1,763.7 metric tons of copper, although there have been periods where ETFS Physical Copper has held greater quantities of copper, reaching as high as 7,072.9 metric tons of copper in March and April of 2012. See V&F August 24 Letter, supra note 11, at 15. 118 See supra Section III.A.1. 119 See V&F May 9 Letter, supra note 4, at 2; and Levin Letter, supra note 8, at 6. 120 See V&F May 9 Letter, supra note 4, at 2–3; and Levin Letter, supra note 8, at 7. Senator Levin states that because copper is very expensive to store and difficult to transport, relative to precious metals, copper is not currently held for investment purposes, and predicts that holding copper for investment purposes will have a significantly greater impact on the copper market than the precious metals Commodity-Based Trusts had on their markets and the broader economy. See Levin Letter, supra note 8, at 7. VerDate Mar<15>2010 16:07 Dec 19, 2012 Jkt 229001 In response, the Sponsor states that the majority of the market for silver, platinum, and palladium is industrial in nature.121 The Sponsor has provided statistics from Thomson Reuters GFMS, a provider of information about the international metals industries, showing that in 2011, industrial use accounted for 84% of global palladium demand, 66% of global platinum demand, and 53% of global silver demand.122 The Sponsor also states its belief that any holding of physical copper inventories, or of a financial replicating position, is implicitly an investment in copper.123 Given the industrial usage of silver, platinum, and palladium as compared to copper,124 the Commission believes that it is reasonable to project that any impact of the listing and trading of the Shares will not be meaningfully different than that of the listing and trading of shares of these other Commodity-Based Trusts due solely to the nature of the underlying commodity markets. In any event, the Commission’s analyses above in Sections III.A.1–3 are the primary bases for our belief that the listing and trading of the Shares is not likely to disrupt the supply of copper available for immediate delivery. The non-impact of those other trusts on the supplies in the underlying precious metals markets is consistent with this view, but it is not a significant factor underlying it. B. The Trust’s Impact on the Price of Copper The Opposing Commenters assert that, due to the rapid growth of the Trust, which they believe would occur and would remove a substantial portion of the supply of immediately available LME-warranted copper,125 the price of 121 See DP August 24 Letter, supra note 11, at 39. Similarly, the Exchange states that the Trust would not be the first Commodity-Based Trust to hold a metal that is used primarily for industrial purposes. See Arca June 19 Letter, supra note 6, at 6. 122 See DP August 24 Letter, supra note 11, at 39. No other commenter provided comparable statistics regarding the industrial use of palladium, platinum, or silver. 123 See id. at 17, 19. The Sponsor believes copper held for investment purposes would include copper inventories on the LME, SHFE, and COMEX (453,464 metric tons as of July 31, 2012); copper inventories held through exchange-traded vehicles (2,356 metric tons as of July 31, 2012); and nonexchange-registered copper stocks (3.6 million metric tons as of July 31, 2012, 100,000 metric tons of which were held by hedge funds and private investors in private warehousing arrangements). See id. at 17–18. 124 As mentioned above, the Sponsor provided statistics showing that in 2011, industrial use accounted for 84% of global palladium demand, 66% of global platinum demand, and 53% of global silver demand. See supra text accompanying note 122. 125 See supra Section III.A.1. PO 00000 Frm 00072 Fmt 4703 Sfmt 4703 75477 copper would be driven up.126 As noted above, one of the Opposing Commenters estimates that the Trust, which would hold up to 61,800 metric tons of copper, and the iShares Copper Trust,127 which would hold up to 121,200 metric tons of copper, collectively would hold approximately 34% of the copper available for immediate delivery.128 That commenter concludes that, ‘‘[i]f the supply of copper available for immediate delivery drops by about 34%, it naturally follows that the price of copper will rise.’’ 129 Another of the Opposing Commenters states: ‘‘[t]he LME settlement price is axiomatically affected by the quantity of copper on warrant * * * because the quantity on warrant defines how much copper is eligible to be delivered against a cash contract, i.e., it is the total supply that is available when setting the settlement price.’’ 130 That commenter also asserts that the launch of the UK-listed ETFS Physical Copper security and announcements about the proposed copper trusts in the United States were part of the cause of a copper price run up,131 and predicts that the price increases for copper would be especially dramatic in the U.S., where copper currently is relatively inexpensive.132 Another Opposing Commenter asserts that the value of copper is based on ‘‘consumption rather than intrinsic value,’’ and the creation of the Trust would introduce a financial element to copper pricing.133 In contrast, the Sponsor asserts that copper cash prices are not determined only by changes in on-warrant LME copper stocks.134 The Sponsor believes 126 See V&F May 9 Letter, supra note 4, at 5; Copper Fabricators Letter, supra note 11, at 4–5; Levin Letter, supra note 8, at 5; and AFR October 23 Letter, supra note 14, at 2, 3. 127 See Levin Letter, supra note 8, at 5. The Commission is not addressing the iShares Copper Trust proposed rule change in this order. 128 See id. 129 See id. Similarly, the Copper Fabricators state that the removal of 183,000 metric tons of copper from LME warehouses, which they believe is virtually all of the copper available for immediate delivery worldwide, would result in prices moving up very sharply. See Copper Fabricators Letter, supra note 11, at 5. 130 See V&F August 24 Letter, supra note 11, at 7. 131 See id. at 16. 132 See V&F May 9 Letter, supra note 4, at 4–5. 133 AFR October 23 Letter supra note 14, at 2. This commenter does not fully explain why the ‘‘financialization’’ of copper would result in higher copper prices. The commenter appears to make the same argument as other commenters: Namely, that the Trust will drive up the price of copper by removing it from the market, an activity that the commenter characterizes as ‘‘hoarding.’’ See id. at 3. Indeed, the commenter incorporates by reference the Levin Letter. See id. at 2. 134 See DP August 24 Letter, supra note 11, at 11. E:\FR\FM\20DEN1.SGM 20DEN1 75478 Federal Register / Vol. 77, No. 245 / Thursday, December 20, 2012 / Notices tkelley on DSK3SPTVN1PROD with that supply and demand fundamentals, independent of the Trust, drive the price of copper.135 According to the Sponsor, the main determinants of price in the copper market are production and demand fundamentals such as: Demand expectations; mine and refinery capacity; marginal costs of production (in particular, the change in marginal costs of production at different production levels); global and regional industrial growth patterns; cost of financing; and inventory levels.136 The Sponsor states that: (1) Prices have reached the highest level and been among the lowest levels both in a ‘‘normal’’ regime and a low-stocks environment; and (2) copper inventories and prices do not always have an inverse relationship.137 In response to questions posed by the Commission about the impact of LME inventories on the LME Settlement Price, the Sponsor states that 5-day changes in the supply of LME inventories of 10,000 metric tons or more are not that uncommon, and that inventory builds or withdrawals equivalent to the amount of copper required for the initial creation unit of Shares currently occur at the LME at least one quarter of the time.138 The Sponsor and the Exchange also state that, due to the Trust’s creation/ redemption mechanism and the related ability of authorized participants to exchange Shares for physical copper, Shares—like shares of other physical commodity backed trusts—would track rather than drive the price of the commodity it holds.139 As discussed above,140 the Commission does not believe that the listing and trading of the Shares is likely to disrupt the supply of copper available for immediate delivery, which is what the Opposing Commenters predict would increase the price of copper. However, even if the supply of copper under LME warrant would decrease because previously warranted copper were transferred to the Trust, for the reasons discussed below, the Commission does not believe that lower LME inventory level by itself will 135 See id. at 10. See also AFR November 16 Letter, supra note 14, at 6–7 (‘‘It is true that if all other factors were equal, the removal of supply from the market through hoarding would increase prices, leading to a positive correlation between inventory and prices. But other supply and demand factors will frequently introduce exactly the opposite relationship between inventory and price.’’ (footnote omitted)). 136 See DP August 24 Letter, supra note 11, at 10. 137 See id. at 24. 138 Id. 139 See id. at 25; and Arca June 19 Letter, supra note 6, at 4. 140 See supra Section III.A. VerDate Mar<15>2010 16:07 Dec 19, 2012 Jkt 229001 increase the LME Settlement Price (or any other price of copper). To analyze the potential impact of changes in the LME inventory level on changes in the LME Settlement Price, Commission staff performed two regression analyses.141 The first analysis was a linear regression of daily copper price changes, using five years of daily data from 2007–2012, against the following explanatory variables: The change in LME copper inventory from the previous day (i.e., the lagged change in LME copper inventory), and the changes in spot prices of nickel, tin, gold, silver, platinum, and palladium, and the S&P 500, VIX index, and the China A-Shares index returns. The results indicate that LME copper inventories do not appear to have any independent statistical effect on prices.142 Commission staff also performed a similar regression analysis using monthly data from January 2000 until June 2012 obtained from the International Copper Study Group (‘‘ICSG’’) to determine whether a relation between copper prices and LME inventories exists over a longer time horizon.143 The second analysis was a linear regression of monthly copper price changes against the following explanatory variables: The previous month’s change in LME copper inventory, total exchange copper inventory (i.e., combined inventory from LME, COMEX, and SHFE), nonexchange copper inventory (i.e., inventory from merchants, producers, and consumers), and spot price changes for nickel, tin, and platinum. This analysis again indicates that LME inventories specifically do not appear to have any independent statistical effect on prices.144 Based on these analyses, even if the listing and trading of Shares of the Trust were to result in the removal of copper on warrant from LME inventories, the Commission does not believe that such a supply reduction will by itself directly impact the LME Settlement Price (or any other price of copper). Although total exchange inventories, in contrast to LME inventories, appear to have some 141 See Memorandum to File, dated November 6, 2012, from the Division of Risk, Strategy, and Financial Innovation (‘‘RF Analysis’’). The RF Analysis was designed to look for evidence of price impact related to changes in copper inventory levels and fund flows. 142 See id. at 10. 143 The Sponsor suggests that some of the inventory data published by the ICSG may be incomplete, but the Sponsor did not question the ICSG LME copper inventory data that was used in the Staff’s analysis. See DP August 24 Letter, supra note 11, at 19. 144 See RF Analysis, supra note 141, at 11. PO 00000 Frm 00073 Fmt 4703 Sfmt 4703 effect on monthly copper prices in this linear regression analysis, the coefficient estimate associated with total exchange inventories indicates that copper prices should decrease when copper is taken off-exchange.145 Commission staff also performed Granger causality analyses 146 to test the causal effect the holdings of other Commodity-Based Trusts historically have had on the prices of their underlying commodities. Specifically, to evaluate whether the introduction of the SPDR Gold Trust, iShares Silver Trust, ETFS Platinum Trust, ETFS Physical Palladium Shares, and ETFS Physical Copper trust had an impact on the return of the metals underlying those trusts, using monthly data from their inceptions until September 2012, Commission staff examined flows into these funds and subsequent changes in underlying prices over time.147 This analysis revealed no observable relation between the flow of assets and subsequent price changes of the underlying metal prices.148 Commission staff repeated this analysis on a daily frequency for iShares Silver Trust, ETFS Platinum Trust, ETFS Physical Palladium Shares, and ETFS Physical Copper.149 Again, Commission staff found no evidence that fund flows were statistically related to subsequent changes in the underlying metals prices. Given the industrial usage of silver, platinum, and palladium as compared to copper,150 the Commission believes that it is reasonable to project that any impact of the listing and trading of the Shares will not be meaningfully different than that of the listing and trading of shares of other CommodityBased Trusts due solely to the nature of the underlying commodity markets. 145 See id. 146 Granger causality is a statistical concept of causality that is based on prediction. If a signal X ‘‘Granger-causes’’ a signal Y, past values of X should contain information that helps predict Y above and beyond the information contained in past values of Y alone. See id. at 3, n.9. 147 See id. at 2–9. Because ETFS Physical Copper is small relative to the potential size of the Trust— holding only approximately 2,000 metric tons of copper as of August 2012—Commission staff augmented its analysis by comparing asset growth of SPDR Gold Trust, iShares Silver Trust, ETFS Platinum Trust, and ETFS Physical Palladium Shares with changes in spot prices for the underlying metals. 148 See id. at 4. 149 Daily asset data was not available for the SPDR Gold Trust within the Commission’s existing data sources. 150 As mentioned above, the Sponsor provided statistics showing that in 2011, industrial use accounted for 84% of global palladium demand, 66% of global platinum demand, and 53% of global silver demand. See supra note 122 and accompanying text. E:\FR\FM\20DEN1.SGM 20DEN1 Federal Register / Vol. 77, No. 245 / Thursday, December 20, 2012 / Notices tkelley on DSK3SPTVN1PROD with The Commission received three comment letters regarding the Commission staff’s analysis.151 These letters include comments on both the substantive conclusions reached as well as the methodology used.152 As described further below, the Commission believes the staff’s analysis reasonably evaluates whether historical price impacts are associated with changes in copper supply, one of the Opposing Commenters’ contentions. One of the Opposing Commenters states that the results in Table 4 in the RF Analysis appear to contradict the staff’s conclusion that there is no statistically significant relationship between copper inventories and copper prices as the results show a strong positive relationship between total exchange inventories and copper prices.153 The Commission believes that the aforementioned linear regression analysis conducted by staff indicates that LME copper inventories do not appear to have any independent 151 See AFR November 16 Letter, supra note 14; V&F November 16 Letter, supra note 14; and Rutkowski November 17 Letter, supra note 14. Mr. Rutkowski urges that the Commission afford the AFR November 16 Letter the attention Mr. Rutkowski believes it deserves. See Rutkowski November 17 Letter, supra note 14. The Commission discusses both the AFR November 16 Letter and the V&F November 16 Letter below. 152 AFR states that ‘‘[t]he detailed regression data, models (including computer code), and full results used in [the RF Analysis] should be released to the public.’’ See AFR November 16 Letter, supra note 14, at 3. The Commission does not believe it is necessary to release this information because the RF Analysis includes sufficient data and information to permit commenters to evaluate the staff’s analyses. 153 See id. at 2. The commenter’s concern appears to be based on its belief that supply changes ‘‘on the margin’’ influence price and that, if supply hoarding increases prices, the key determinant of price levels will be inventories for the source of supply for the marginal unit of copper. The commenter sets forth reasons why it believes the LME inventory no longer represents the marginal unit of copper, and its belief that total exchange inventory (or potentially off-exchange inventory) is the type of inventory most likely to include the marginal unit of copper inventory on the world market. AFR states that in recent years, inventories have been moving from the LME toward other exchanges, and that since 2008, most inventory flow has been to non-LME exchanges. AFR also argues that LME lending rules would make it illogical to use LME-warranted copper to influence market prices. In addition, AFR asserts that total exchange inventories may be a better guide to price impact since the Trust would hold copper that is not on LME warrant. See id. at 4. AFR also states that because the Commission staff’s analysis ‘‘does not properly report the units in which these regression variables are measured in, and does not provide standardized coefficients, it is not possible to fully assess the economic (as opposed to statistical) significance of’’ total exchange inventories and compare it to other coefficients. See id. at 4 n.4. While the Commission acknowledges this comment, the RF Analysis does not rely on the magnitude of coefficient estimates, but rather on the statistical significance of those estimates. VerDate Mar<15>2010 16:07 Dec 19, 2012 Jkt 229001 statistical effect on copper prices. Further, we recognize that the linear regression analysis summarized in Table 4 also indicates that total exchange inventory has a positive relation to copper prices. Specifically, this linear regression analysis indicates that removal of copper from exchanges would lead to a decrease in the price of copper, thus benefiting market participants who use copper as an input.154 This Opposing Commenter also states that the Commission staff’s decision to use the inventory of LME-warranted copper, total exchange copper inventory, and total non-exchange inventory as independent variables makes it difficult to interpret any single coefficient.155 The commenter states that because LME copper inventory makes up a significant portion of total exchange inventory, the two variables are obviously highly correlated, creating the problem of collinearity between regressors.156 As a response to these comments, the Commission notes that its staff conducted a separate analysis, in which COMEX and SHFE copper inventory were substituted for total exchange copper inventory (i.e., the inventory of LME-warranted copper was removed from total exchange copper inventory). Consistent with the findings in the RF Analysis, this separate analysis shows that, even when replacing total exchange inventories with non-LME exchange inventories, LME inventories specifically do not appear to have any independent statistical effect on copper prices.157 Further, this Opposing Commenter states: ‘‘There are growing doubts about 154 In contrast, the Opposing Commenters argue that the removal from the market of a substantial portion of copper available for immediate delivery would drive up the price of copper. See supra notes 125–132 and accompanying text. 155 See AFR November 16 Letter, supra note 14, at 4. Another commenter asserts that Commission staff ‘‘included likely heteroskedastic variables of other LME and LBMA metals prices in the regression, which may in the least, have undermined the cogency of the coefficient pertaining to LME copper inventory levels.’’ See V&F November 16 Letter, supra note 14, at 1–2. There is no evidence in the record of the existence of heteroskedasticity in these variables that would affect the results of the RF Analysis. 156 See AFR November 16 Letter, supra note 14, at 4. This commenter did not identify which independent variables Commission staff should have used and did not provide its own regression analysis for Commission to consider. 157 In this alternative regression specification, the coefficient for non-LME exchange inventories is estimated to be positive and statistically significant, like the coefficient for total exchange inventory in Table 4 of the RF Analysis. This result again implies that taking inventory off these exchanges may result in a decrease in copper prices, as opposed to an increase in prices as predicted by the Opposing Commenters. PO 00000 Frm 00074 Fmt 4703 Sfmt 4703 75479 the utility of not just LME inventories but any established exchange inventories in representing the true global inventory stocks of copper.’’ 158 The commenter asserts that, if there are large global inventories of copper that are not being measured, the utility of any of the models in the Commission staff’s analysis is highly doubtful.159 As discussed above, the Commission believes that there are sufficient copper stockpiles such that up to 61,800 metric tons of copper could be deposited into the Trust without authorized participants taking copper off of either LME or COMEX warrant.160 This may, as the commenter suggests, limit the utility of the RF Analysis regarding the relation between LME inventories and prices. However, other Opposing Commenters have argued that the price of copper will increase precisely because authorized participants will create Shares by taking copper off of LME and/or COMEX warrant, and the RF Analysis addresses this concern.161 Moreover, the Commission believes that if there are large global inventories of copper that are not being measured, it is less likely that the listing and trading of the Shares will by itself increase the price of copper compared with the scenario suggested by other commenters who assert that LME inventories drive prices. This Opposing Commenter also argues that the Commission staff’s analysis ignores key ‘‘institutional factors’’ in the copper market.162 The commenter asserts that price determination in any market is highly dependent on the rules that govern that market, and that for an industrial commodity, factors concerning the practical use of the commodity are important.163 According to the commenter, the most important institutional factor is the LME’s requirement ‘‘that any holder of 50 percent or more of LME warrants in any metal must lend its inventory on demand at rates designed to prevent any 158 See AFR November 16 Letter, supra note 14, at 8. AFR states: ‘‘Table 4 does include a variable for the off-exchange inventory. The coefficient is large but not statistically significant. It is difficult to assess this finding given the collinearity issue and the lack of detail on how the off-exchange inventory variable is calculated.’’ See id. at 4 n.8. The Commission does not believe that the magnitude of the coefficient for off-exchange inventory in Table 4 of the RF Analysis is relevant as the p-value is statistically insignificant. 159 See id. at 9. 160 See supra Section III.A.2. 161 See supra notes 125–132 and accompanying text. 162 See AFR November 16 Letter, supra note 14, at 8. 163 See id. E:\FR\FM\20DEN1.SGM 20DEN1 75480 Federal Register / Vol. 77, No. 245 / Thursday, December 20, 2012 / Notices profit from the dominant position.’’ 164 The commenter asserts that the findings in the RF Analysis are based on analyses of exchange-traded funds backed by LME warrants, and asserts that the findings of that analysis likely do not accurately reflect the likely price impact of the Trust as the assets of the Trust would not be backed by LME warrants.165 As discussed above,166 however, Commission staff evaluated whether the introduction of the SPDR Gold Trust, iShares Silver Trust, ETFS Platinum Trust, ETFS Physical Palladium Shares, and ETFS Physical Copper had an impact on the return of the metals underlying those trusts. Only ETFS Physical Copper holds LME warrants; the SPDR Gold Trust, iShares Silver Trust, ETFS Platinum Trust, and ETFS Physical Palladium Shares all hold physical gold, silver, platinum, and palladium, respectively, not warrants on those metals. Accordingly, the Commission believes the staff’s analysis considers the institutional factor cited by the commenter. Further, one of the Opposing Commenters asserts that the Commission staff’s analysis ignores endogeneity problems.167 The commenter argues that the Commission staff’s Granger causality analyses 168 are inappropriate because they look for a statistical relationship between variables that are simultaneously determined—specifically, asset flows into Commodity-Based Trusts and metals prices.169 In addition, this commenter argues that the Commission staff’s regression analyses, performed to determine whether a relationship exists between copper prices and LME inventories,170 are subject to endogeneity bias.171 The commenter asserts that the Commission staff’s analysis ‘‘attempts to retrieve the causal impact of supply hoarding on prices through regressing price on quantity in the market generally.’’ 172 According to the commenter, although, ‘‘if all other 164 See 165 See id. id. See also supra text accompanying note 147. tkelley on DSK3SPTVN1PROD with 166 See supra note 147 and accompanying text. 167 See AFR November 16 Letter, supra note 14, at 5. AFR states that endogeneity refers to the simultaneous determination of quantity and price in supply-demand systems and ‘‘involves a causal loop between the dependent and independent variable such that the causal impact of the independent variable cannot be isolated.’’ See id. 168 See supra notes 146–150 and accompanying text. 169 See AFR November 16 Letter, supra note 14, at 5. 170 See supra notes 141–144 and accompanying text. 171 See AFR November 16 Letter, supra note 14, at 6. 172 See id. VerDate Mar<15>2010 16:07 Dec 19, 2012 Jkt 229001 factors were equal, the removal of supply from the market through hoarding would increase prices, leading to a positive correlation between inventory and prices,’’ other supply and demand factors, such as an inventory buildup in connection with a decline in prices caused by decreased market demand, can lead to a negative correlation between inventory level and prices.173 Thus, according to the commenter, a correlation between inventory levels and price will not isolate the effect of supply hoarding.174 The Commission does not believe that endogeneity biases are problematic with regard to the linear regression analyses and the Granger causality analyses Commission staff conducted because the analyses examine the relation between lagged inventory changes (in case of the regression analyses) or lagged flows (in the case of the Granger causality analyses) and subsequent price changes. For this reason, the inventory and flow variables are determined prior to the price variables being determined, and are not determined simultaneously with prices.175 Another of the Opposing Commenters states that the Granger causality analyses appear on their face to be incongruous.176 This commenter states its belief that Commission staff appears to be comparing assets under management to the respective price of the commodity held by the trust, and provides a chart that the commenter purports to show that there is a 92% correlation between the rolling monthly change in NAV of the iShares Silver Trust and the silver price.177 The Granger causality analysis from Tables 1 and 2 of the RF Analysis examines the relation between dollar flows into the funds and subsequent changes in the prices of the underlying metals. It does not examine the relation between changes in assets under management, which are driven by both flows and returns of the underlying, and the concurrent change in the prices of the underlying metals. Therefore, the Commission believes that the relation between the change in NAV for these funds and the concurrent change in the 173 See id. at 6–7. id. at 7. 175 The commenter asserts: ‘‘The most preferred method [to address endogeneity issues] is to use an instrumental variables approach that isolates factors that affect market supply but are unrelated to other causal factors.’’ Id. This commenter, however, did not submit for Commission consideration the analysis it asserts is necessary, nor did the commenter provide any examples of instrumental variables it asserted would rectify the analysis. 176 See V&F November 16 Letter, supra note 14, at 6. 177 See id. at 6–7. 174 See PO 00000 Frm 00075 Fmt 4703 Sfmt 4703 prices of the underlying metal is irrelevant for the purposes of the cited analysis. Two of the Opposing Commenters question the time periods used in the Commission staff’s analysis. One of these Opposing Commenters states that Commission staff failed to account for the term structure of prices (e.g., whether, and the extent to which, the market is in contango or backwardation).178 This commenter states: ‘‘[t]he correct lag period to test for price impacts on copper consumers depends upon the delivery times and production lead times, which also affect the price impacts of deep backwardation on consumer access to supplies.’’ 179 While this commenter suggests that the Commission staff did not use the correct lag period in its analysis, the commenter did not provide any specific time intervals that should be used from the many possible alternatives, nor did it explain what time intervals would have been more appropriate than those used by Commission staff. The Commission believes the daily periods used in the RF Analysis were reasonable and appropriate because evidence of the relationship between inventories and prices would likely be seen at daily intervals.180 Another of the Opposing Commenters suggests that Commission staff should have examined the cash to three month time spread and provides its own analysis, which the commenter concludes demonstrates a strong relationship between LME inventory changes and the cash to three month time spread.181 This commenter states that if the Trust and the iShares Copper Trust were to sell all of the shares registered through their respective registration statements, the cash to three month time spread ‘‘would blow out to a massive backwardation, potentially approaching record levels, making it impossible for copper consumers to finance their inventory.’’ 182 The 178 See AFR November 16 Letter, supra note 14, at 9. 179 See id. particular, LME inventory data for the previous day is released on the morning of each trading day so that prices are able to react over the course of that day. Moreover, the use of the monthly lag period confirmed the results of the daily analysis and allowed for the examination of the effect of non-exchange copper inventories for which only monthly data were available within the Commission’s existing data sources. 181 See V&F November 16 Letter, supra note 14, at 3. 182 See id. The commenter further states that the mechanics of unit creation for Commodity-Based Trusts backed by precious metals are fundamentally different than those for Commodity-Based Trusts backed by industrial metals, citing the lack of copper in unallocated accounts that could be used 180 In E:\FR\FM\20DEN1.SGM 20DEN1 Federal Register / Vol. 77, No. 245 / Thursday, December 20, 2012 / Notices tkelley on DSK3SPTVN1PROD with analysis provided by this commenter, however, does not provide the significance level of any test statistics associated with these findings, which would provide an assessment of the likelihood that relations were observed in the data by statistical chance. Without an assessment of statistical significance, it is difficult to conclude whether observed relations in the commenter’s data are systematic or anecdotal. In addition, this commenter’s analyses appear to analyze inventory changes against concurrent price changes. The Commission does not believe that such a concurrent analysis can isolate the effect of inventory changes on prices because such an analysis cannot distinguish whether price changes lead inventory changes or vice versa. Further, as discussed above, the Commission does not believe that the listing and trading of the Shares is likely to disrupt the supply of copper available for immediate delivery,183 and believes that the Opposing Commenters have not supported their prediction that the Trust would grow so quickly that it would significantly disrupt the supply of copper available for immediate delivery.184 This Opposing Commenter also asserts that Commission staff erred by using lagged daily LME stock data. This commenter asserts that because there are ‘‘many consecutive and nonconsecutive days that LME stock levels and LME traded metals do not change while LME prices do * * *, running a daily LME stock series through a regression analysis will yield statistically weak results in most cases.’’ 185 The commenter states that LME inventory data for the prior day is released at 9:00 a.m. in the London trading day, thereby giving the market a full trading day to digest the data.186 The lagged daily LME inventory change used in the RF Analysis in fact was in creating Shares. According to the commenter, neither producers nor consumers are carrying meaningful inventories of copper, which would require authorized participants to acquire copper from LME and COMEX inventories to create Shares. The commenter asserts that a backwardation would be necessary to trigger the movement of copper to authorized participants, and that consumers would have to compete for this metal or lend to authorized participants. See id. at 4. As discussed above, the Commission believes that the record supports the view that there are sufficient copper stockpiles such that up to 61,800 metric tons of copper could be deposited into the Trust without authorized participants taking copper off of either LME or COMEX warrant. See supra Section II.A.2. 183 See supra Section III.A. 184 See supra Section III.A.3. 185 See V&F November 16 Letter, supra note 14, at 2. 186 See id. at 5–6. VerDate Mar<15>2010 16:07 Dec 19, 2012 Jkt 229001 regressed against the change in copper prices for the day on which this information was released at 9:00 a.m.187 In addition, this Opposing Commenter asserts that there is not a strong statistical relationship between lagged copper inventories and contemporaneous copper prices because the LME represents the copper market’s ‘‘warehouse of last resort.’’ 188 According to this commenter, when LME stocks are drawn down or added to, market participants ‘‘should have already fully discounted the fundamental information contained within that particular stock move.’’ 189 This assertion seems consistent with a hypothesis that price changes precede inventory changes, which is contrary to Opposing Commenters’ assertions that inventory changes precede price changes.190 The Commission believes that this argument provides further weight to the Commission staff’s finding that the LME copper inventory changes do not appear to precede price changes. This Opposing Commenter suggests that, instead of looking at lagged daily LME stock data, the Commission staff should have looked at the 30 largest quarter-to-quarter LME inventory declines against changes in the LME cash price over the same time periods. The commenter asserts that such analysis, which the commenter submitted, shows that for the 30 largest observations, the median stock decline was 28.6%, and that the LME cash price rose in 25 out of 30 observations, for a median increase of 10.5%.191 The commenter states that these findings suggest that if LME and COMEX inventories were to decline by more than 50%, which the commenter asserts could happen if the Trust and the iShares Copper Trust were to sell all of 187 To confirm this, Commission staff reconciled a sample of historical LME stock data from the LME Web site (https://www.lme.com/dataprices.asp) and the Bloomberg LME stock data used in the RF Analysis. Additional reconciliation was done against historical LME copper warehouse stock data found at https://www.metalprices.com/historical/ database/copper/lme-copper-warehouse-stocks. 188 See V&F November 16 Letter, supra note 14, at 6. 189 See id. at 6 (stating that LME stocks are drawn down by consumers because neither producers nor traders have material to sell to consumers and consumers are willing to go through the logistical hassle of being long LME warrants, swapping the warrants for their preferred brands, and transporting the copper to their individual plant, and that ‘‘[i]t is nonsensical to assume that the trading community has not already discounted this information into the LME price’’). But see id. at 2 (‘‘Intuitively it doesn’t make sense to argue that in a physically settled exchange system that fungible stock levels don’t exert some statistically robust influence on metals prices.’’). 190 See supra note 154 and accompanying text. 191 See V&F November 16 Letter, supra note 14, at 2. PO 00000 Frm 00076 Fmt 4703 Sfmt 4703 75481 the shares registered through their respective registration statements, prices could increase 20–60% in the quarter that the LME and COMEX inventory decline occurs.192 The analysis provided by this commenter, however, does not provide the significance level of any test statistics associated with these findings.193 In addition, this commenter’s analysis appears to analyze inventory changes against concurrent price changes. The Commission does not believe that such a concurrent analysis can isolate the effect of inventory changes on prices.194 Further, as discussed above, the Commission does not believe that the listing and trading of the Shares is likely to disrupt the supply of copper available for immediate delivery,195 and believes that the Opposing Commenters have not supported their prediction that the Trust would grow so quickly that it would significantly disrupt the supply of copper available for immediate delivery.196 One of the Opposing Commenters states that Commission staff should have considered the impact on locational premia.197 This commenter asserts that the relationship between COMEX inventory and locational premia in the U.S. is strong, and provides data that the commenter suggests shows that when COMEX inventories are at anemic levels, locational premia can be very high (above $200 per metric ton).198 Thus, the commenter argues that if the Trust results in the removal of inventory from LME and COMEX warehouses, the associated market impact will be much higher locational premia.199 The analysis provided by this commenter, however, does not provide the significance level of any test statistics associated with these findings.200 In addition, this commenter’s analysis appears to analyze inventory changes against concurrent price changes. The Commission does not believe that such 192 See id. at 2. supra text following note 182. 194 See supra text following note 182. 195 See supra Section III.A. 196 See supra Section III.A.3. 197 See V&F November 16 Letter, supra note 14, at 3, 5. This commenter refers to ‘‘physical’’ premia in describing the manner in which the Trust will value its copper holdings: ‘‘Another market price that the SEC could have done well to look into is the physical premia, especially in light of the [Trust’s] implied objective to value metal * * * on an in-situ basis, taking into account regional physical price variations.’’ See id. at 5. Consistent with this description, the Commission refers to locational premia rather than physical premia. 198 See id. 199 See id. 200 See supra text following note 182. 193 See E:\FR\FM\20DEN1.SGM 20DEN1 75482 Federal Register / Vol. 77, No. 245 / Thursday, December 20, 2012 / Notices a concurrent analysis can isolate the effect of inventory changes on prices, as discussed previously.201 In addition, according to data provided by commenters, locational premia typically appear to be no greater than 2%. Therefore, the Commission believes the degree to which such premia can be influenced is limited. Further, even assuming that copper was taken off LME warrant to be deposited into the Trust, the Commission believes that the Trust’s copper will remain available for immediate delivery to consumers and participants in the physical markets,202 which will limit the possible effect on locational premia. Finally, this Opposing Commenter asserts that the listing and trading of the Shares could change the fundamental structure of the copper market, and that Commission staff should ‘‘ponder’’ such a structural change in the copper market.203 This commenter states that the ex-post implications for copper outright prices in a market that involves listing and trading of the Shares cannot be accurately inferred from what this commenter characterizes as ‘‘an overlysimplistic ex-ante statistical analysis of LME/global inventories and LME settlement prices.’’ 204 According to this commenter, never before has it been possible for financial players to ‘‘lock up’’ significant amounts of LME and COMEX inventory in a short period of time and remove that copper from the market.205 Further, while this commenter indicates that ‘‘[o]verall historically the level of LME inventories has been generally indicative of the trading environment, not a driver of the metal price per se,’’ creation of the Trust could change the role of LME inventories from being a function of the fundamentals to being a fundamental, and ‘‘arguably THE fundamental, as has become the case in precious metals.’’ 206 201 See supra text following note 182. supra text accompanying note 109. 203 See V&F November 16 Letter, supra note 14, at 3–4. 204 See id. at 4. 205 See id. at 3–4, 8. 206 See id. at 6 (emphasis in original). The commenter states that exchange-traded vehicles backed by silver, platinum, and palladium have become the largest single holder of those metals in a remarkably short period of time (less than eight years) and that exchange-traded vehicles backed by gold are eclipsed at a national level only by the U.S. and Germany. According to the commenter, while the cumulative impact of exchange-traded vehicles on prices has dissipated as these products have matured, ‘‘the reality is that they have become a key fundamental in terms of analyzing the precious metals markets,’’ and have become the main asset class. The commenter asserts that it is not certain, and that it should not be assumed, that potential investors in the Trust will ‘‘be as sticky as they have been in gold and silver, and to a lesser degree in platinum and palladium.’’ Id. at 7. The commenters tkelley on DSK3SPTVN1PROD with 202 See VerDate Mar<15>2010 16:07 Dec 19, 2012 Jkt 229001 The Commission believes that such assertions are speculative and unsupported by the record. As discussed in detail throughout this order, the Commission does not believe that the listing and trading of the Shares is likely to alter the supply and demand fundamentals of the copper market. Further, as discussed above, the Commission does not believe that the listing and trading of the Shares is likely to disrupt the supply of copper available for immediate delivery 207 and, even assuming that copper was taken off LME warrant to be deposited into the Trust, the Commission believes that the Trust’s copper will remain available for immediate delivery to consumers and participants in the physical markets.208 Lastly, one of the Opposing Commenters cites a study that ‘‘examines the hedging activity of sponsors using futures as hedges for the total return swaps’’ entered into as part of commodity index funds.209 According to the commenter, the sponsor of a commodity index fund must replace expiring futures contracts with later-maturing futures on a continuous basis (referred to as the ‘‘roll’’).210 The commenter states that the Frenk & Turbeville Study ‘‘found an extremely strong and significant correlation’’ over a multi-year period between the five-day roll period for hedges of the Goldman Sachs Commodity Futures Index in each month with a movement in the forward price curve toward higher prices in the future.211 The commenter believes that suppliers hold onto more of the underlying commodity to take advantage of the rising prices signaled by the movement in the forward price curve (although no fundamental market forces have signaled such higher prices), which in turn increases spot prices to attract supply that otherwise could be ‘‘stickiness’’ argument has been addressed above. See supra Section III.A.1. 207 See supra Section III.A. Even assuming that the Trust’s copper will be unavailable for immediate delivery, the Commission believes that the Opposing Commenters have not supported their prediction that the Trust would grow so quickly that it would significantly disrupt the supply of copper available for immediate delivery. See supra Section III.A.3. 208 See supra text accompanying note 109. 209 AFR October 23 Letter, supra note 14, at 4 (citing David Frenk & Wallace Turbeville, Commodity Index Traders and the Boom/Bust Cycle in Commodities Prices (October 2011), available at https://papers.ssrn.com/sol3/ papers.cfm?abstract_id=1945570 (‘‘Frenk & Turbeville Study’’)). The commenter states that these total return swaps do not reference a single commodity, but rather are valued based on indices comprised of a basket of commodity futures. See id. at 3. 210 See id. at 4. 211 See id. PO 00000 Frm 00077 Fmt 4703 Sfmt 4703 hoarded.212 The commenter believes that the proposed trust will have a more direct effect on the copper market as withdrawal of supply in rising-price markets (and flooding of supply in decreasing-price markets) constitutes an actual change in supply and demand relationships.213 The Commission is not persuaded that the conclusions of a study on correlations between the roll periods of futures indexes and commodities prices should be extrapolated to predict the impact of the Trust, which will hold physical copper (not copper derivatives), on the price of copper. As discussed above, the Commission believes that copper delivered into and held by the Trust will remain available for immediate delivery and, even if it is ‘‘removed from the market’’ as commenters have suggested, the supply of copper available for immediate delivery is sufficient such that the creation and quick growth of the Trust alone is not expected to impact the price of copper.214 Because the Commission does not believe that the listing and trading of the Shares, by itself, will increase the price of copper, the Commission also believes that approval of the proposed rule change will not have an adverse effect on the efficiency of copper allocation for industrial uses and will also not have an adverse effect on capital formation for industrial uses of copper. C. The Trust’s Impact on Copper Price Volatility The Opposing Commenters assert that the successful creation and growth of the Trust would make the price of copper, which one of those commenters states already is volatile,215 even more volatile. Specifically, they assert that the successful creation and growth of the Trust, which would in their view substantially restrict supply and increase copper prices, would create a boom and bust cycle in copper prices.216 For example, the Copper Fabricators predict that: (1) The Trust would remove copper from the market, and thus would drive the price of copper higher, which in turn would 212 See id. 213 Id. 214 See supra Sections III.A.1 and A.3. V&F May 9 Letter, supra note 4, at 5. 216 See id. at 5; Levin Letter, supra note 8, at 5; Copper Fabricators Letter, supra note 11, at 5–6; and AFR October 23 Letter, supra note 14, at 2. But see V&F November 16 Letter, supra note 14, at 8 (stating that if Commission staff were to analyze whether the discrete flow of ounces in and out of exchange-traded vehicles drives underlying metals price, it would likely show that volatility in precious metals is not solely a function of net metal flow in and out of the exchange-traded vehicles). 215 See E:\FR\FM\20DEN1.SGM 20DEN1 Federal Register / Vol. 77, No. 245 / Thursday, December 20, 2012 / Notices tkelley on DSK3SPTVN1PROD with drive the price of the Shares higher; (2) at some point, the anticipated incremental increase in price would either be insufficient to cover the increasing costs of storage or would not be enough to generate a profit; and (3) that when that expected outcome occurs, Share holders would sell their Shares and authorized participants would redeem them, returning the copper held in the Trust to the physical market.217 The Opposing Commenters predict that this ultimate sell-off would be quick, and predict that the expected ‘‘dumping’’ of thousands of metric tons of copper back onto the market would depress the price of copper and negatively impact the world economy at large.218 In contrast, NYSE Arca and the Sponsor assert that the Trust would not increase copper price volatility in this manner and in fact may reduce it. The Exchange states that, because of the arbitrage mechanism common to all exchange-traded vehicles, share prices of physical commodity-backed exchange-traded vehicles generally follow rather than drive the price of the underlying assets.219 The Sponsor asserts that volatility in prices results when there is a major change in prevailing expectations about fundamental market parameters, and the Trust would not affect any of the fundamental parameters that drive supply and demand.220 Further, the Sponsor states that the Trust may reduce copper price volatility because, if holders of the Shares act according to their incentives—namely, to sell into rallies and buy on price dips—their actions may tend to reduce peaks and valleys in pricing, and help to reduce volatility.221 The Opposing Commenters’ prediction that the listing and trading of the Shares would cause a boom and bust is premised upon both the supply and price impacts they predict. As discussed 217 See Copper Fabricators Letter, supra note 11, at 5–6. 218 See, e.g., Levin Letter, supra note 8, at 6. More specifically, V&F states that, because of this predicted boom and bust, mines will go bust and resources will be needlessly misallocated. See V&F August 24 Letter, supra note 11, at 28. 219 See Arca June 19 Letter, supra at 6, at 4. 220 See DP August 24 Letter, supra note 11, at 11. The Sponsor also states: (1) Changes in realized volatility of physical copper prices and prices of copper derivatives based on changes in global copper supply are not constants; (2) LME prices and price volatility do not increase or decrease based solely on LME copper stocks or on-warrant LME copper stocks; and (3) in general, realized volatility of copper prices tends to be higher in a lower stocks environment, as strong physical demand draws production and distribution systems to full capacity utilization. See id. at 24–25. 221 See id. at 11. VerDate Mar<15>2010 16:07 Dec 19, 2012 Jkt 229001 above, the Commission does not believe that the listing and trading of the Shares is likely to disrupt the supply of copper available for immediate delivery 222 or increase the price of copper.223 In addition, this boom and bust prediction is unsupported by any empirical evidence. As a result, the Commission does not believe that the proposed listing and trading of the Shares will impact copper volatility in the manner that Opposing Commenters suggest. Further, the Commission does not believe that approval of the proposed rule change will impede the use of copper because the listing and trading of the Shares is not expected to, as discussed above, result in heightened volatility. Therefore, the Commission does not believe that the listing and trading of the Shares will have an adverse effect on the efficiency of copper allocation and capital formation. D. The Trust’s Impact on the Potential To Manipulate the Price of Copper The Opposing Commenters set forth a number of arguments about why the Trust would increase the potential for manipulation of the copper market. One of the Opposing Commenters asserts that the Trust, in effect, would introduce so much transparency into the copper market that it would allow the Trust to manipulate, or alternatively provide market participants an effective means to manipulate, the price of copper and thereby the price of the Shares. According to that commenter, investors in the Trust would be able to measure how much impact their collective removal of copper from the supply available for immediate delivery would have on copper prices each day, and could adjust their purchasing strategies accordingly.224 Therefore, that commenter believes that the increased market transparency, which the Exchange asserts would result from the formation and operation of the Trust, would not be in the public interest.225 Instead, the commenter believes the transparency of the Trust’s holdings would provide market participants with critical information about ‘‘how much copper needs to be removed on any given day in order to artificially inflate [copper] prices and thus the price of the Trust’s shares.’’ 226 Due to their view of the Trust’s impact on the supply of copper available for immediate delivery, Opposing Commenters predict that the 222 See supra Section III.A. supra Section III.B. 224 See V&F May 9 Letter, supra note 4, at 9. 225 See id. at 10. 226 V&F July 13 Letter, supra note 7, at 10. 223 See PO 00000 Frm 00078 Fmt 4703 Sfmt 4703 75483 Trust would make the copper market more susceptible to squeezes and corners.227 According to an Opposing Commenter, after a substantial portion of the copper market is deposited in one or more physical copper trusts, the costs of acquiring the remaining inventory would be relatively inexpensive, thus reducing a hurdle to engineering a corner or squeeze.228 According to another commenter, such manipulative activities could go undetected by the LME because trusts that hold physical commodities are not subject to any form of commodity regulations; by holding physical copper rather than LME warrants, the Trust would be able to control more of the available supply of copper without triggering LME reporting or rules.229 In response, the Exchange states that the Trust instead may reduce the potential for fraud or manipulation in the physical copper market because: (1) The Trust may hold copper in multiple global locations, which is intended to provide a larger, more liquid supply of copper than would be available if creations and redemptions were only permitted using copper held in a single location; (2) the Trust and transactions in the Shares would be transparent, publishing information about its holdings and operations through its Web site; (3) the Trust would utilize a consistent, transparent, nondiscretionary, rules-based, and fully disclosed selection protocol for redemptions; and (4) the Trust’s copper would be valued by a recognized, independent valuation agent.230 The Sponsor also claims that the Trust may reduce the potential for fraud or manipulation in the physical copper market,231 which would have an impact on any potential manipulation of the 227 See V&F May 9 Letter, supra note 4, at 1, 10; Levin Letter, supra note 8, at 7; and AFR October 23 Letter, supra note 14, at 4–5. One of the Opposing Commenters describes a squeeze on the copper market as occurring ‘‘when a lack of supply and excess demand forces the price upward, and a corner is when one party acquires enough copper to be able to manipulate its price.’’ Levin Letter, supra note 8, at 7. 228 See V&F September 10 Letter, supra note 12, at 7. Senator Levin asserts that the Trust will make the copper market more susceptible to squeezes because it could be used by market participants to remove copper from the available supply in order to artificially inflate the price. See Levin Letter, supra note 8, at 7. 229 See Levin Letter, supra note 8, at 7. 230 See Arca June 19 Letter, supra note 6, at 5– 6. 231 See DP August 24 Letter, supra note 11, at 4. The Sponsor also states that neither it nor the Trust could deliberately influence copper prices even if it sought to because the Trust is not managed—it does not take positions or buy and sell copper, and it cannot place large orders that could affect the market. See id. at 12. E:\FR\FM\20DEN1.SGM 20DEN1 tkelley on DSK3SPTVN1PROD with 75484 Federal Register / Vol. 77, No. 245 / Thursday, December 20, 2012 / Notices Shares as well. Specifically, the Sponsor asserts that the Trust already has introduced greater transparency into the copper market.232 According to the Sponsor, prior to July 16, 2011, locational premia (i.e., prices) for physical copper were reported infrequently, available only by subscription, and available only for certain broad regions.233 Since then, in anticipation of the Trust’s potential launch, the Valuation Agent has calculated the locational premium for physical copper in each of the Trust’s approved warehouses on a daily basis, and published the locational premia on a weekly basis.234 The Sponsor expects that transparency would increase through the listing of the Shares because when trading of the Shares commences: (1) The Trust would post on its Web site these locational premia on a daily basis; (2) the Exchange would continuously disseminate pricing information as part of its required intraday indicative value (‘‘IIV’’) reporting; (3) the Sponsor believes that Shares would be created using previously unreported nonexchange-registered stocks, and thus copper market participants would have more information about supply; and (4) the Trust would furnish complete visibility into creation and redemption activity by certain authorized participants.235 The Sponsor also argues that the underlying copper market is subject to extensive and explicit regulatory authority, and the increased transparency furnished by the Trust would enhance regulators’ ability to oversee the copper market and enforce applicable laws and rules. Specifically, the Sponsor states: (1) The CFTC has explicit anti-fraud and antimanipulation authority under the CEA that extends over the U.S. physical commodity markets; (2) the Department of Justice has the ability to pursue antitrust violations, such as concerted buying and selling involving commodities, under the federal antitrust laws; and (3) the LME has broad rights to obtain information relating to the activities of LME members and their affiliates if the LME has cause to suspect undesirable or improper trading that affects the copper markets, including the markets for both LME-warranted and non-warranted copper, and therefore the LME can obtain information about both LME and non-LME metal trading activities from J.P. Morgan Securities plc, an affiliate of the Sponsor that is a 232 See id. at 4–5. id. 234 See id. 235 See id. 233 See VerDate Mar<15>2010 16:07 Dec 19, 2012 Jkt 229001 ring-dealing member of the LME, as well as from the Sponsor.236 The Sponsor also asserts that there has been no increased manipulative behavior due to the reduction of copper available for immediate delivery that resulted from the prior years’ deficits in copper production versus copper consumption, and that the creation of commodity backed trusts holding gold, silver, platinum, and/or palladium has not led to manipulation of the markets for those precious metals.237 The Commission does not believe that the listing and trading of the Shares is likely to increase the likelihood of manipulation of the copper market and, correspondingly, of the price of the Shares. Generally, the Commission believes that increased transparency helps mitigate risks of manipulation. For example, in approving the listing and trading of shares of the iShares Silver Trust, the Commission stated that the dissemination of information about the silver shares would ‘‘facilitate transparency with respect to the Silver Shares and diminish the risk of manipulation or unfair informational advantage.’’ 238 In this case, the Commission believes the transparency that the Trust will provide with respect to its holdings, the locational premium for and price per metric ton of the copper in each warehouse location of the Trust, and creation and redemption activity, including the locations of creations and redemptions, as well as the dissemination of quotations for and last-sale prices of transactions in the Shares and the IIV and NAV of the Trust,239 all are expected to help reduce the ability of market participants to manipulate the physical copper market or the price of Shares.240 Also, the Commission believes that the listing and trading of the Shares on the Exchange (and any other national securities exchange that trades the Shares pursuant to unlisted trading privileges) 241 may serve to make the 236 See id. at 5. id. at 45, 46. 238 See Securities Exchange Act Release No. 53521 (March 20, 2006), 71 FR 14967, 14975 (March 24, 2006). 239 See DP August 24 Letter, supra note 11, at 43– 45, and supra text accompanying notes 43 and 45. 240 Further, the Trust is a passive vehicle, and therefore V&F’s concerns about manipulation by the Trust itself are misplaced. 241 When a national securities exchange extends ‘‘unlisted trading privileges’’ to a security, it allows the trading of a security that is not listed and registered on that exchange. See Securities Exchange Act Release No. 35323 (February 2, 1995), 60 FR 7718, 7718 (February 9, 1995) (proposing rules to reduce the period that exchanges have to wait before extending unlisted trading privileges to any listed initial public offering security). A number of national securities exchanges have rules 237 See PO 00000 Frm 00079 Fmt 4703 Sfmt 4703 overall copper market more transparent if OTC trading of unreported warehouse receipts shifts to trading Shares on exchanges.242 In particular, additional information regarding the supply of copper will be disseminated, which will enable users of copper to make betterinformed decisions. Over the long term, this additional transparency could enhance efficiency in the market for copper and capital formation for participants in this market. In addition, the Commission believes that the listing and delisting criteria for the Shares are expected to help to maintain a minimum level of liquidity and therefore minimize the potential for manipulation of the Shares.243 The Opposing Commenters assert serious disruptions in the supply of copper would make corners and squeezes more likely.244 As discussed above, the Commission does not believe that the listing and trading of the Shares is likely to disrupt the supply of copper available for immediate delivery.245 Depending on the size of the Trust though, it is possible that copper holdings may be dispersed across an additional market—i.e., less copper may be held under LME and/or COMEX that allow the extension of unlisted trading privileges to issues such as the Shares. See, e.g., Securities Exchange Act Release No. 57806 (May 9, 2008), 73 FR 28541 (May 16, 2008) (SR–Phlx–2008– 34); Securities Exchange Act Release No. 58623 (September 23, 2008), 73 FR 57169 (October 1, 2008) (SR–BATS–2008–004). 242 Market participants that acquire a large percentage of the Shares must identify themselves to the Commission by filing Schedules 13D or 13G. See 17 CFR 240.13d–1. Specifically, Section 13(d) of the Act, 15 U.S.C. 78m(d), and the rules thereunder require that a person file with the Commission, within ten days after acquiring, directly or indirectly, beneficial ownership of more than five percent of a class of equity securities, a disclosure statement on Schedule 13D, subject to certain exceptions. See 17 CFR 240.13d–1. Section 13(g) and the rules thereunder enable certain persons who are the beneficial owners of more than five percent of a class of certain equity securities to instead file a short form Schedule 13G, assuming certain conditions have been met. Beneficial owners are also required to report changes in the information filed. In addition, Section 13(f)(1) of the Act and Rule 13f–1 thereunder require every ‘‘institutional investment manager,’’ as defined in Section 13(f)(5)(A) of the Act, that exercises investment discretion with respect to ‘‘section 13(f) securities,’’ as defined in Rule 13f–1, having an aggregate fair market value of at least $100 million (‘‘Reportable Securities’’), to file with the Commission quarterly reports on Form 13F setting forth each Reportable Security’s name, CUSIP number, the number of shares held, and the market value of the position. 243 For example, under NYSE Arca Equities Rule 8.201(e)(2)(ii), the Exchange will consider suspending trading in the Shares or delisting the Shares if, following the initial 12-month period following commencement of trading, there are fewer than 50,000 Shares issued and outstanding. 244 See supra notes 227–229 and accompanying text. 245 See supra Section III.A. E:\FR\FM\20DEN1.SGM 20DEN1 Federal Register / Vol. 77, No. 245 / Thursday, December 20, 2012 / Notices tkelley on DSK3SPTVN1PROD with warrant and more copper may be held by the Trust. However, the availability of inter-market arbitrage is expected to help mitigate any potential increase in the ability of market participants to engage in corners or squeezes as a result of any dispersion of copper holdings across markets (as distinguished from a reduction in the copper supply). For example, if the Trust grows large relative to the market for warrants on the LME, LME market participants faced with a potential corner or squeeze may acquire Shares, redeem them (through an authorized participant) for LME warrantable copper, put the copper on LME warrant, and deliver the warrants.246 Further, although the Exchange currently provides for the listing and trading of shares of Commodity-Based Trusts backed by physical gold, silver, platinum, and palladium, none of the commenters has identified any evidence that the trading of shares of these Commodity-Based Trusts has led to manipulation of the gold, silver, platinum, or palladium markets. For the reasons discussed above, the Commission does not believe that the proposed listing and trading of the Shares is likely to render the copper market or the price of Shares more susceptible to manipulation. Correspondingly, the Commission does not believe that approval of the proposed rule change will impose any burden on competition between participants in the market for copper as it will not provide market participants a greater opportunity to achieve an unfair competitive advantage. E. Surveillance One of the Opposing Commenters questions whether NYSE Arca’s surveillance procedures are adequate to prevent fraudulent and manipulative trading in the Shares. According to that commenter, NYSE Arca’s surveillance procedures are not adequate because they are the kind of garden-variety measures that are always in place to prevent collusion and other forms of manipulation by traders.247 Two other Opposing Commenters assert that the Sponsor would be in a privileged informational position and could improperly trade on that non-public information.248 One of those commenters asserts that the Sponsor participates in other, non-security copper derivatives markets (namely futures and swaps), and states that the 246 See supra note 85. V&F May 9 Letter, supra note 4, at 10. 248 See Shatto Letter, supra note 9; and AFR October 23 Letter, supra note 14, at 2. 247 See VerDate Mar<15>2010 16:07 Dec 19, 2012 Jkt 229001 Sponsor has an extensive commodities trading operation and ‘‘owns copper warehousing capacity in the United States giving it access to physical supply.’’ 249 The commenter also expresses concern that, if the Sponsor ‘‘knows information regarding ETF inflows and outflows and understands the volatility consequences of changes in the holdings of the ETF,’’ it can take advantage of that asymmetrical information and could ‘‘be a potential source of disruption to the markets.’’ 250 NYSE Arca asserts that the statements about its surveillance are unsubstantiated,251 and states that its surveillance procedures are adequate to properly monitor Exchange trading of the Shares in all trading sessions and to deter and detect violations of Exchange rules and applicable federal securities laws.252 In particular, the Exchange represents the following: • Pursuant to NYSE Arca Equities Rule 8.201(g), an ETP Holder acting as a registered Market Maker in Commodity-Based Trust Shares must file with the Exchange and keep current a list identifying all accounts for trading in an underlying commodity, related commodity futures or options on commodity futures, or any other related commodity derivatives, which the Market Maker may have or over which it may exercise investment discretion. No Market Maker shall trade in an underlying commodity, related commodity futures or options on commodity futures, or any other related commodity derivatives, in an account in which a Market Maker, directly or indirectly, controls trading activities, or has a direct interest in the profits or losses thereof, which has not been reported to the Exchange as required by NYSE Arca Equities Rule 8.201. • In addition, pursuant to NYSE Arca Equities Rule 8.201(g), the Exchange is able to obtain information regarding trading in the Shares, physical copper, copper futures contracts, options on copper futures, or any other copper derivative from ETP Holders acting as registered market makers, in connection 249 See AFR October 23 Letter supra note 14, at 4. 250 Id. Similarly, another opposing commenter asserts that ‘‘jp morgan gets inside information by using their warehouses to buy and sell copper which maximizes profits to the detriment of commercial interests who have to buy copper.’’ Shatto Letter, supra note 9. 251 See Arca August 23 Letter, supra note 11, at 1. 252 See Notice, supra note 3, 77 FR at 23787. The Exchange also states that its existing surveillances will be augmented with a product-specific review designed to identify potential manipulative trading activity through the use of the creation and redemption process. See Amendment No. 1, supra note 15. PO 00000 Frm 00080 Fmt 4703 Sfmt 4703 75485 with their proprietary or customer trades.253 • NYSE Arca has regulatory jurisdiction over its ETP Holders and their associated persons, which include any person or entity controlling an ETP Holder, as well as a subsidiary or affiliate of an ETP Holder that is in the securities business.254 • With respect to a subsidiary or affiliate of an ETP Holder that does business only in commodities or futures contracts, the Exchange can obtain information regarding the activities of such subsidiary or affiliate through surveillance sharing agreements with regulatory organizations of which such subsidiary or affiliate is a member.255 • Commentary .04 of NYSE Arca Equities Rule 6.3 requires an ETP Holder acting as a registered Market Maker in the Shares, and its affiliates, to establish, maintain and enforce written policies and procedures reasonably designed to prevent the misuse of any material nonpublic information with respect to such products, any components of the related products, any physical asset or commodity underlying the product, applicable currencies, underlying indexes, related futures or options on futures, and any related derivative instruments (including the Shares).256 • NYSE Arca may obtain trading information via ISG from other exchanges that are members of the ISG, including the COMEX.257 The Exchange also states that it has entered into a comprehensive surveillance sharing agreement with LME that applies to trading in copper and copper derivatives.258 Further, in the context of preventing fraudulent and manipulative acts, the Exchange discusses its authority to halt trading in the Shares in the interest of promoting a fair and orderly market and protecting the interests of investors.259 According to the Exchange, the Valuation Agent will exclude any information provided by any JPMorgan253 See Notice, supra note 3, 77 FR at 23787. See also Arca August 23 Letter, supra note 11, at 2–3. 254 See Amendment No. 1, supra note 15. 255 See id. See also infra text accompanying notes 257–258. 256 See Notice, supra note 3, 77 FR at 23786. See also Arca August 23 Letter, supra note 11, at 3. 257 See Notice, supra note 3, 77 FR at 23787. See also Arca August 23 Letter, supra note 11, at 3. 258 See Amendment No. 1, supra note 15. 259 See Arca August 23 Letter, supra note 11, at 3 (‘‘As stated in the Notice, the Exchange may consider all relevant factors in exercising its discretion to halt or suspend trading in the Shares, and trading on the Exchange in the Shares may be halted because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable.’’). E:\FR\FM\20DEN1.SGM 20DEN1 75486 Federal Register / Vol. 77, No. 245 / Thursday, December 20, 2012 / Notices affiliated entity when calculating the locational premium of copper in any permitted warehouse location.260 In addition, NYSE Arca has obtained a representation from the Sponsor that it will (i) implement a firewall with respect to its affiliates regarding access to material non-public information of the Trust concerning the Trust and the Shares, and (ii) will be subject to procedures designed to prevent the use and dissemination of material nonpublic information of the Trust regarding the Trust and the Shares.261 The Commission believes the firewall that the Exchange will require the Sponsor to erect is a reasonable measure to help prevent the flow of non-public information to the Sponsor’s affiliates.262 More generally, based on the Exchange’s representations, the Commission believes that the Exchange’s surveillance procedures appear to be reasonably designed to permit the Exchange to monitor for, detect, and deter violations of Exchange rules and applicable federal securities laws and rules.263 In addition to all of the same surveillance procedures employed with respect to the trading of all other Commodity-Based Trust Shares, NYSE Arca states that a new product specific review will be employed to monitor trading in the Shares to identify potential manipulative trading activity through the use of the creation and redemption process.264 The commenters have not identified any specific deficiency in the proposed procedures or provided any evidence that the Exchange’s surveillance program has been ineffective with respect to trading in other Commodity-Based Trust Shares. F. Dissemination of Information About the Shares and Copper The Commission believes the proposal is reasonably designed to promote sufficient disclosure of information that may be necessary to price the Shares appropriately. Specifically, the Commission believes that dissemination of the NAV, IIV, and copper holdings information, as discussed above, will facilitate supra note 3, 77 FR at 23783. Amendment No. 1, supra note 15. 262 Further, NYSE Arca represents that it can obtain information about the activities of the Sponsor and its affiliates under the Exchange’s listing rules. 263 The Commission has discussed above in Section III.D other reasons why it believes that the listing and trading of the Shares as proposed is unlikely increase the likelihood of manipulation of the copper market and, correspondingly, of the price of the Shares. 264 See Amendment No. 1, supra note 15. transparency with respect to the Shares and diminish the risk of manipulation or unfair informational advantage.265 Further, as noted above, quotation and last-sale information for the Shares will be available via the Consolidated Tape Association, and the Exchange will make available via the Consolidated Tape trading volume, closing prices, and NAV for the Shares from the previous day.266 Additionally, as discussed above, the Exchange has identified numerous sources of copper price information unconnected with the Exchange that are readily available to investors.267 The Commission therefore believes that sufficient venues for obtaining reliable copper pricing information exist to allow investors in the Shares to adequately monitor the price of copper and compare it to the NAV of the Shares. G. Listing and Trading of the Shares The Commission believes that the Exchange’s proposed rules and procedures for the listing and trading of the Shares are consistent with the Act. For example, the Commission believes that the proposal is reasonably designed to prevent trading when a reasonable degree of transparency cannot be assured. As detailed above, NYSE Arca Equities Rules 7.34(a)(5) and 8.201(e)(2) respectively provide that: (1) If the Exchange becomes aware that the NAV is not being disseminated to all market participants at the same time, it must halt trading on the NYSE Marketplace until such time as the NAV is available to all market participants; and (2) the Exchange will consider suspension of trading if, after the initial 12-month period following commencement of trading: (a) The value of copper is no longer calculated or available on at least a 15-second delayed basis from a source unaffiliated with the Sponsor, Trust, or Custodian, or the Exchange stops providing a hyperlink on its Web site to any such unaffiliated source providing that value; or (b) if the Liquidation IIV is no longer made available on at least a 15-second delayed basis.268 In addition, the Exchange’s general authority to halt trading because of market conditions or for reasons that, in the view of the Exchange, make trading 260 Notice, tkelley on DSK3SPTVN1PROD with 261 See VerDate Mar<15>2010 16:07 Dec 19, 2012 Jkt 229001 265 See supra notes 238–242, and accompanying text. 266 See supra text accompanying note 41. Notice, supra note 3, 77 FR at 23786. 268 Additionally, if the First-Out IIV or the Liquidation IIV is not being disseminated as required, the Exchange may halt trading during the day in which the disruption occurs; if the interruption persists past the day in which it occurred, the Exchange will halt trading no later than the beginning of the trading day following the interruption. See Amendment No. 1, supra note 15. 267 See PO 00000 Frm 00081 Fmt 4703 Sfmt 4703 in the Shares inadvisable, also will advance this objective. Further, trading in the Shares will be subject to NYSE Arca Equities Rule 7.12, the Exchange’s circuit breaker rule, which governs trading halts caused by extraordinary market volatility. Further, the Shares will be subject to Exchange rules governing the responsibilities of market makers and customer suitability requirements. In addition, the Shares will be subject to Exchange Rule 8.201 for initial and continued listing of Shares.269 As discussed above,270 the Commission believes that the listing and delisting criteria for the Shares are expected to maintain a minimum level of liquidity and therefore minimize the potential for manipulation of the Shares. The Commission also believes that the Information Bulletin will adequately inform members and member organizations about the terms, characteristics, and risks of trading the Shares. H. Commission Findings After careful review, and for the reasons discussed in Sections III.A–G above, the Commission finds that the proposed rule change is consistent with the requirements of the Act, including Section 6 of the Act,271 and the rules and regulations thereunder applicable to a national securities exchange.272 In particular, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act,273 which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, and to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest; with Section 6(b)(8) of the Act,274 which requires that the rules of a national securities exchange not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act; and with Section 11A(a)(1)(C)(iii) of the Act,275 which sets forth Congress’s finding that it is in the public interest and appropriate for 269 See Notice, supra note 3, 77 FR at 23786. supra text accompanying note 243. 271 15 U.S.C. 78f. 272 This approval order is based on all of the Exchange’s representations. 273 15 U.S.C. 78f(b)(5). 274 15 U.S.C. 78f(b)(8). 275 15 U.S.C. 78k–1(a)(1)(C)(iii). 270 See E:\FR\FM\20DEN1.SGM 20DEN1 Federal Register / Vol. 77, No. 245 / Thursday, December 20, 2012 / Notices the protection of investors to assure the availability to brokers, dealers, and investors of information with respect to quotations for and transactions in securities.276 IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether Amendment No.1 to the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rulecomments@sec.gov. Please include File Number SR–NYSEArca–2012–28 on the subject line. tkelley on DSK3SPTVN1PROD with Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–NYSEArca–2012–28. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/sro.shtml). Copies of the submissions, all subsequent amendments, all written statements with respect to the proposed rule changes that are filed with the Commission, and all written communications relating to the proposed rule changes between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filings also will be available for inspection and copying at the principal offices of the Exchanges. All comments received will be posted without change; 276 As noted above (see supra Section II.B), quotation and last-sale information for the Shares will be available via the Consolidated Tape Association, and the Exchange will make available via the Consolidated Tape trading volume, closing prices, and NAV for the Shares from the previous day. See supra text accompanying note 41. VerDate Mar<15>2010 16:07 Dec 19, 2012 Jkt 229001 the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR– NYSEArca–2012–28 and should be submitted on or before January 10, 2013. V. Accelerated Approval of Proposed Rule Change As Modified by Amendment No. 1 As discussed above, the Exchange submitted Amendment No. 1 to make additional representations regarding trading in the Shares, availability of information, and the Exchange’s surveillance program.277 The Commission believes these additional representations are useful to, among other things, help: (1) Assure adequate liquidity in the Shares; (2) assure adequate availability of information to investors to support the arbitrage mechanism; (3) assure adequate information available to the Exchange to support its monitoring of Exchange trading of the Shares in all trading sessions; and (4) the Exchange deter and detect violations of NYSE Arca rules and applicable federal securities laws. Accordingly, the Commission finds good cause, pursuant to Section 19(b)(2) of the Act,278 for approving the proposed rule change, as modified by Amendment No. 1, prior to the 30th day after the date of publication of notice in the Federal Register. VI. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,279 that the proposed rule change (SR–NYSEArca– 2012–28), as modified by Amendment No. 1, be, and hereby is, approved on an accelerated basis. By the Commission. Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2012–30647 Filed 12–19–12; 8:45 am] BILLING CODE 8011–01–P supra note 15. U.S.C. 78s(b)(2). 279 15 U.S.C. 78s(b)(2). 278 15 Frm 00082 Fmt 4703 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–68438; File No. AN–OCC– 2012–04] Self-Regulatory Organizations; The Options Clearing Corporation; Notice of No Objection to Advance Notice Filing To Revise the Method for Determining the Minimum Clearing Fund Size To Include Consideration of the Amount Necessary To Draw on Secured Credit Facilities December 14, 2012. I. Introduction On October 18, 2012, The Options Clearing Corporation (‘‘OCC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) an advance notice concerning a proposed rule change AN–OCC–2012–04 pursuant to Section 806(e) of Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (‘‘Dodd-Frank Act’’),1 entitled the Payment, Clearing, and Settlement Supervision Act of 2010 (‘‘Title VIII’’ or ‘‘Clearing Supervision Act’’) and Rule 19b–4 under the Securities Exchange Act of 1934 (‘‘Exchange Act’’).2 The advance notice was published in the Federal Register on November 20, 2012.3 The Commission did not receive comments on the advance notice publication. This publication serves as a notice of no objection to the proposed rule change discussed in the advance notice. II. Description of Proposed Rule Change A. Background On September 23, 2011, the Commission approved a proposed rule change by OCC to establish the size of OCC’s clearing fund as the amount that is required, within a confidence level selected by OCC, to sustain the maximum anticipated loss under a defined set of scenarios as determined by OCC, subject to a minimum clearing fund size of $1 billion.4 OCC implemented this change in May 2012. Until that time, the size of OCC’s 1 Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111–203, 124 Stat. 1376 (2010). 2 17 CFR 240.19b–4. 3 Securities Exchange Act Release No. 68225 (November 14, 2012), 77 FR 69668 (November 20, 2012). OCC also filed a proposed rule change under Section 19(b)(1) of the Exchange Act relating to these changes. See Securities Exchange Act Release No. 68130 (November 1, 2012), 77 FR 66900 (November 7, 2012) (Proposing Release). The Commission did not receive comments on the proposed rule change. 4 Securities Exchange Act Release No. 65386 (September 23, 2011), 76 FR 60572 (September 29, 2011) (SR–OCC–2011–10). 277 See PO 00000 75487 Sfmt 4703 E:\FR\FM\20DEN1.SGM 20DEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 77, Number 245 (Thursday, December 20, 2012)]
[Notices]
[Pages 75468-75487]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-30647]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68440; File No. SR-NYSEArca-2012-28]


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

December 14, 2012.

I. Introduction

    On April 2, 2012, NYSE Arca, Inc. (``Exchange'' or ``NYSE Arca'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
list and trade shares (``Shares'') of JPM XF Physical Copper Trust 
(``Trust'') pursuant to NYSE Arca Equities Rule 8.201. J.P. Morgan 
Commodity ETF Services LLC is the sponsor of the Trust (``Sponsor''). 
The proposed rule change was published for comment in the Federal 
Register on April 20, 2012.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 66816 (April 16, 2012), 
77 FR 23772 (``Notice'').
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    The Commission initially received one comment letter, which opposed 
the proposed rule change.\4\ On May 30, 2012, the Commission extended 
the time period for Commission action to July 19, 2012.\5\ On June 19, 
2012, NYSE Arca submitted a letter in support of its proposal.\6\ On 
July 13, 2012, V&F submitted a second comment letter opposing the 
proposed rule change.\7\ On July 16, 2012, United States Senator Carl 
Levin submitted a comment letter opposing the proposed rule change.\8\ 
Additionally, on July 19, 2012, the Commission received a comment 
letter from another party opposing the proposed rule change.\9\
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    \4\ See letter from Vandenberg & Feliu, LLP (``V&F''), received 
May 9, 2012 (``V&F May 9 Letter''). Comment letters are available at 
https://www.sec.gov/comments/sr-nysearca-2012-28/nysearca201228.shtml.
    \5\ See Securities Exchange Act Release No. 67075, 77 FR 33258 
(June 5, 2012).
    \6\ See letter from Janet McGinness, General Counsel, NYSE 
Markets, NYSE Euronext, to Elizabeth M. Murphy, Secretary, 
Commission, dated June 19, 2012 (``Arca June 19 Letter'').
    \7\ See letter from Robert B. Bernstein, V&F, to Elizabeth M. 
Murphy, Secretary, Commission, dated July 13, 2012 (``V&F July 13 
Letter'').
    \8\ See letter from U.S. Senator Carl Levin, to Elizabeth M. 
Murphy, Secretary, Commission, dated July 16, 2012 (``Levin 
Letter'').
    \9\ See Web comment from Suzanne H. Shatto (``Shatto Letter'').
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    On July 19, 2012, the Commission instituted proceedings to 
determine whether to approve or disapprove the proposed rule 
change.\10\ The initial comments for the proceeding were due on August 
24, 2012, and the Commission received four comment letters (another 
letter from V&F, another letter from the Exchange, a letter on behalf 
of the Sponsor, and a letter from several copper fabricators).\11\ 
Rebuttal comments to submissions made during the initial comment period 
were due on September 10, 2012. The Commission received three more 
comment letters (another letter from V&F and two more on behalf of the 
Sponsor).\12\ On October 2, 2012, the Commission issued a notice of 
designation of longer period for Commission action on proceedings to 
determine whether to approve or disapprove the proposed rule 
change.\13\ The Commission subsequently received six more comment 
letters (two more letters from V&F, two letters from Americans for 
Financial Reform, and two letters from Robert E. Rutkowski).\14\ On 
November 30, 2012, the Exchange filed Amendment No. 1 to the proposed 
rule change.\15\ On December 7, 2012, the

[[Page 75469]]

Commission received another comment letter opposing the proposed rule 
change.\16\ The Commission is publishing this notice to solicit 
comments on Amendment No. 1 to the proposed rule change from interested 
persons, and is approving the proposed rule change, as modified by 
Amendment No. 1, on an accelerated basis.\17\
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    \10\ See Securities Exchange Act Release No. 67470, 77 FR 43620 
(July 25, 2012) (``Order Instituting Proceedings'').
    \11\ See letters from Janet McGinness, General Counsel, NYSE 
Markets, NYSE Euronext, to Elizabeth M. Murphy, Secretary, 
Commission, dated August 23, 2012 (``Arca August 23 Letter''); Joe 
Williamson, Senior Vice President, Strategic Sourcing, Southwire 
Company; Janet Sander, Vice President, Director of Purchasing, 
Encore Wire Corporation; Ron Beal, Executive Vice President, Tubes 
Division, Luvata; and Mark Woehnklar, President, Amrod Corp., to 
Elizabeth M. Murphy, Secretary, Commission, dated August 23, 2012 
(``Copper Fabricators Letter''); Robert B. Bernstein, V&F, to 
Elizabeth M. Murphy, Secretary, Commission, dated August 24, 2012 
(``V&F August 24 Letter''); and John G. Crowley, Davis Polk & 
Wardwell LLP (``DP''), on behalf of the Sponsor, to Elizabeth M. 
Murphy, Secretary, Commission, dated August 24, 2012 (``DP August 24 
Letter''). In its August 24 Letter, V&F requested to make an oral 
presentation in the proceeding. See V&F August 24 Letter at 1. The 
Commission denied V&F's request. See letter from Kevin M. O'Neill, 
Deputy Secretary, Commission, to Robert B. Bernstein, Eaton & Van 
Winkle LLP (``EVW''), dated December 5, 2012, available at https://www.sec.gov/comments/sr-nysearca-2012-28/nysearca201228.shtml. By 
letter dated November 29, 2012, Mr. Bernstein informed the 
Commission that he had left V&F and would continue to represent 
Southwire Company, Encore Wire Corporation, Luvata, and Amrod Corp. 
(collectively, the ``Copper Fabricators'') and RK Capital LLC in 
this proceeding.
    \12\ See letters from Robert B. Bernstein, V&F, to Elizabeth M. 
Murphy, Secretary, Commission, dated September 10, 2012 (``V&F 
September 10 Letter''); John G. Crowley, DP, on behalf of the 
Sponsor, to Elizabeth M. Murphy, Secretary, Commission, dated 
September 10, 2012 (``DP September 10 Letter''); and John G. 
Crowley, DP, on behalf of the Sponsor, to Elizabeth M. Murphy, 
Secretary, Commission, dated September 12, 2012 (``DP September 12 
Letter'').
    \13\ See Securities Exchange Act Release No. 67965, 77 FR 61457 
(October 9, 2012).
    \14\ See letters from Robert B. Bernstein, V&F, to Elizabeth M. 
Murphy, Secretary, Commission, dated October 23, 2012 (``V&F October 
23 Letter''); Americans for Financial Reform (``AFR''), to Elizabeth 
M. Murray [sic], Secretary, Commission, dated October 23, 2012 
(``AFR October 23 Letter''); email from Robert E. Rutkowski, to Mary 
Schapiro, Chair, Commission, dated October 24, 2012 (``Rutkowski 
October 24 Letter''); Robert B. Bernstein, V&F, to Elizabeth M. 
Murphy, Secretary, Commission, dated November 16, 2012 (``V&F 
November 16 Letter''); AFR, to Elizabeth M. Murray [sic], Secretary, 
Commission, dated November 16, 2012 (``AFR November 16 Letter''); 
and email from Robert E. Rutkowski, to Mary Schapiro, Chair, 
Commission, dated November 17, 2012 (``Rutkowski November 17 
Letter'').
    \15\ In Amendment No. 1, the Exchange represented that: (1) It 
has obtained a representation from the Sponsor that the Sponsor is 
affiliated with one or more broker-dealers and other entities, and 
the Sponsor will implement a firewall with respect to such 
affiliate(s) regarding access to material non-public information of 
the Trust concerning the Trust and the Shares, and will be subject 
to procedures designed to prevent the use and dissemination of 
material non-public information of the Trust regarding the Trust and 
the Shares; (2) it will obtain a representation from the Trust prior 
to commencement of trading of the Shares that the net asset value 
(``NAV'') of the Trust and the NAV per Share will be calculated 
daily and made available to all market participants at the same 
time; (3) if the First-Out IIV or the Liquidation IIV (terms defined 
infra in note 42) is not being disseminated as required, the 
Exchange may halt trading during the day in which the disruption 
occurs; if the interruption persists past the day in which it 
occurred, the Exchange will halt trading no later than the beginning 
of the trading day following the interruption; (4) its comprehensive 
surveillance sharing agreement with the London Metal Exchange 
(``LME'') applies to trading in copper derivatives (as well as 
copper); (5) it will require that a minimum of 100,000 Shares be 
outstanding at the start of trading of the Shares; and (6) it can 
obtain information regarding the activities of the Sponsor and its 
affiliates under the Exchange's listing rules. Additionally, the 
Exchange supplemented its description of surveillance applicable to 
the Shares contained in the proposed rule change as originally 
filed. Specifically, the Exchange represents that trading in the 
Shares would be subject to the existing trading surveillances, 
administered by the Financial Industry Regulatory Authority 
(``FINRA'') on behalf of the Exchange, and that, in addition, FINRA 
would augment those existing surveillances with a review specific to 
the Shares that is designed to identify potential manipulative 
trading activity through use of the creation and redemption process. 
The Exchange represented that all those procedures would be 
operational at the commencement of trading in the Shares on the 
Exchange and that, on an ongoing basis, NYSE Regulation, Inc. (on 
behalf of the Exchange) and FINRA would regularly monitor the 
continued operation of those procedures. In addition, the Exchange 
has represented that it will communicate as needed regarding trading 
in the Shares with other markets that are members of ISG or with 
which the Exchange has in place a comprehensive surveillance sharing 
agreement.
    \16\ See letter from Robert B. Bernstein, EVW, to Elizabeth M. 
Murphy, Secretary, Commission, dated December 7, 2012 (``EVW 
December 7 Letter'').
    \17\ Similar to other exchange traded products that hold 
physical metals, the Sponsor, the Trust, and persons or entities 
engaging in transactions in Shares need to seek exemptions from, or 
interpretative or no-action advice regarding, Rules 101 and 102 of 
Regulation M under the Act to create or redeem Shares. See, e.g., 
letters from James A. Brigagliano, Assistant Director, Division of 
Market Regulation, (i) to Kathleen Moriarty, Esq., Carter Ledyard & 
Milburn, dated November 17, 2004, with respect to the trading of 
StreetTRACKS Gold Trust, (ii) to David Yeres, dated January 27, 
2005, with respect to the trading of the iShares COMEX Gold Trust, 
and (iii) to David Yeres, dated April 27, 2006, with respect to the 
trading of iShares Silver Trust. The Sponsor, on behalf of itself, 
the Trust, and persons or entities engaging in transactions in 
Shares, submitted a request to the Commission requesting that the 
Commission grant exemptions from, or interpretative or no-action 
guidance regarding, Rules 101 and 102 of Regulation M. Simultaneous 
with the approval of the proposed rule change, the Commission, by 
separate order, is granting the Trust, based on the representations 
and facts presented in its letter and subject to the conditions 
contained in that order, an exemption from the requirements of Rules 
101 and 102 of Regulation M under the Act with respect to the Trust. 
See Securities Exchange Act Release No. 68439 (December 14, 2012).
---------------------------------------------------------------------------

II. Description of the Proposal

    The Exchange proposes to list and trade the Shares under NYSE Arca 
Equities Rule 8.201, which governs the listing and trading of 
``Commodity-Based Trust Shares.'' \18\ The Trust's investment objective 
is for the value of the Shares to reflect, at any given time, the value 
of its copper, less the Trust's expenses and liabilities. The Trust 
will invest in Grade A copper \19\ in physical form from a source 
refinery that has had its brand registered with the LME (an 
``Acceptable Delivery Brand'').\20\ The Exchange states that, although 
the Shares are not the exact equivalent of an investment in copper, 
they are designed to provide investors with an alternative that allows 
a participation in the copper market through the securities market.\21\
---------------------------------------------------------------------------

    \18\ Commodity-Based Trust Shares are securities issued by a 
trust that represent investors' discrete identifiable and undivided 
interest in and ownership of the net assets of the trust.
    \19\ According to the Exchange, the LME trades, promotes, and 
maintains the standards of quality, shape, and weight of Grade A 
Copper, a commonly accepted standardized form of copper cathode. 
Grade A Copper currently must conform to the standard BS EN 
1978:1998 (Cu-CATH-1), which specifies the allowed source, shape, 
and chemical composition of the cathode. Most copper cathodes are 
99.95% to 99.99% pure copper. The chemical composition, and 
impurities, in the cathode depend largely on the source of the 
copper and whether the metal has been processed from copper sulfide 
ore or copper oxide ore. Copper oxide ore has a smaller number of 
residual chemical elements in the cathode. See Notice, supra note 3, 
77 FR at 23777.
    \20\ Currently, there are 79 brands that are Acceptable Delivery 
Brands. The LME may deregister brands from time to time. According 
to the Exchange, generally, copper that is not of an Acceptable 
Delivery Brand is worth less than copper that is of an Acceptable 
Delivery Brand because of the perceived lower liquidity associated 
with that brand of copper. See Notice, supra note 3, 77 FR at 23777-
78.
    \21\ See id.
---------------------------------------------------------------------------

A. Description of the Copper Market \22\
---------------------------------------------------------------------------

    \22\ See Notice, supra note 3, for a more detailed description 
of the copper market.
---------------------------------------------------------------------------

    The following is a summary of the description of the copper market 
that the Exchange included in its filing. The market participants in 
the copper market include primary and secondary producers; fabricators, 
manufacturers, and end-use consumers; physical traders and merchants, 
who generally facilitate the domestic and international trade of copper 
supplies along the value chain and support the distribution of supplies 
to consumers; and the banking sector. Copper supply generally comes 
from the extraction and processing of ore (``primary production'') and 
the recovery of copper from existing stock (``secondary production''). 
Primary production accounts for the majority of new global copper 
supply.
    Copper's physical, chemical, and aesthetic properties make it a 
material of choice in a wide range of electrical, electronics and 
communication, construction, transportation, industrial machinery and 
equipment, and general consumer applications. From copper derived from 
primary and secondary production, fabricators produce semi-fabricated 
products, such as copper wire, copper alloys, tube products, rods, 
bars, section, plate, sheets and strips, for various applications. The 
location of copper relative to consumption demand is important given 
the bulk and cost of transportation. The source of copper also is 
important to fabricators and consumers and affects buying behavior. 
Copper end-users will pay an additional locational premium to obtain 
copper of a specific brand that is stored in a specific location.\23\
---------------------------------------------------------------------------

    \23\ See infra note 35.
---------------------------------------------------------------------------

    The global market in copper consists of: (i) Trading within the 
physical copper market; and (ii) financial trading, through either (a) 
the exchange-traded futures and options market or (b) the over-the-
counter (``OTC'') market. Each of these is described below in further 
detail.
1. Physical Copper Market
    The physical copper market is comprised of sales directly by 
producers and refiners to end-users, and by sales transacted by 
merchants, dealers, and trading banks. A major portion of annual copper 
production and use is effected through transactions in the physical 
copper market, often through renewable annual supply contracts.
2. Futures Exchanges
    A majority of copper derivatives trading occurs on three exchanges: 
The LME, the Commodity Exchange, Inc. (``COMEX'') (a division of CME 
Group, Inc.), and the Shanghai Futures Exchange (``SHFE''). LME members 
are regulated by the Financial Services Authority (``FSA''), the 
regulator of the financial services industry in the United Kingdom. 
COMEX is regulated by the U.S. Commodity Futures Trading Commission 
(``CFTC'') under the Commodity Exchange Act (``CEA''). The SHFE is 
regulated by the Chinese Securities Regulatory Commission (``CSRC''). 
At present, Chinese regulations stipulate that only companies or 
organizations organized and registered in China or Chinese citizens are 
allowed to participate in trading on the SHFE.
    Futures exchanges provide for the trading of futures and options on 
futures contracts, which producers and consumers use to fix a price in 
the future as a hedge against price variations. Producers and consumers 
take long or short positions to manage price risk, which activity is 
facilitated by investors who buy the price risk.
    Only eligible organizations or members are able to participate 
directly in trading on the LME. The LME publishes prices discovered as 
a result of daily trading of exchange contracts on the LME. The LME 
Settlement Price \24\ and forward prices serve as the global benchmark 
prices of Grade A copper.\25\ The copper industry uses these prices as 
the basis of price negotiations for the physical purchase and sale of 
copper. All contracts registered with the LME are executed on the basis 
of physical settlement: LME members deliver base metal against LME 
futures contracts in the form of LME warrants.\26\ The seller

[[Page 75470]]

has the right to select the LME warrant delivered to the buyer. 
Pertinent information about LME warrants is recorded in the LMEsword 
system. The LME publishes the number of LME warrants and associated 
tonnage (including canceled LME warrants for which copper has yet to be 
delivered out of the relevant LME warehouse).
---------------------------------------------------------------------------

    \24\ See infra note 34 and accompanying text.
    \25\ See infra note 34.
    \26\ An ``LME warrant'' is a bearer document evidencing the 
right of the holder to possession of a specified lot of metal at a 
specified LME warehouse location. LME warrants are traded in the OTC 
market. The holder of an LME warrant is responsible for rental 
payments for storage of the underlying copper in an LME-approved 
warehouse as well as any changes to the price of the underlying 
copper and locational premium.
---------------------------------------------------------------------------

3. OTC Market
    Physical traders, merchants, and banks participate in OTC spot, 
forward, option, and other derivative transactions for copper.\27\ The 
terms of OTC contracts are not standardized and market participants 
have the flexibility to negotiate all terms of the transaction, 
including delivery specifications and settlement terms. The OTC market 
facilitates long-term transactions, such as life-of-mine off-take 
arrangements,\28\ which otherwise could be constrained by contract 
terms on a futures exchange. Participants in OTC transactions are 
subject to counter-party risk, including credit risk and contractual 
obligations to perform. The OTC derivative market for copper remains 
largely unregulated with respect to public disclosure of information by 
the parties, thus providing confidentiality among principals.
---------------------------------------------------------------------------

    \27\ OTC contracts are principal-to-principal agreements traded 
and negotiated privately between two principal parties, without 
going through an exchange or other intermediary.
    \28\ A life-of-mine off-take arrangement is an agreement between 
a producer and a buyer to purchase/sell portions of the producer's 
future production over the life of the operation. These agreements 
are commonly negotiated prior to the construction of a project as 
they can assist in obtaining financing by showing future revenue 
streams.
---------------------------------------------------------------------------

4. Copper Market Regulation
    The CFTC is authorized under the CEA to monitor, investigate, and 
take actions with respect to activities that may have a material impact 
on the markets for physical commodities, commodity futures, commodity 
options, and swaps in the United States. Specifically, the CFTC has 
jurisdiction over manipulation and attempted manipulation of the cash 
commodity markets.\29\ The CFTC also has broad authority over commodity 
derivatives markets and participants in those markets, including the 
COMEX.\30\ Commodity futures and options traded on the COMEX also are 
subject to regulation by its parent, CME Group's Market Regulation 
Oversight Committee (``MROC''), under CFTC rules. The MROC is a self-
regulatory body created in 2004 to ensure competitive and financially 
sound trading activity on the Chicago Mercantile Exchange, Inc. and its 
subsidiary exchanges.
---------------------------------------------------------------------------

    \29\ Section 9(a)(2) of the CEA, 7 U.S.C. 13(a)(2), provides 
that it is a felony punishable by up to ten years' imprisonment or 
up to a $1 million fine for ``[a]ny person to manipulate or attempt 
to manipulate the price of any commodity in interstate commerce, * * 
* or to corner or attempt to corner any such commodity.'' Section 
6(c) of the CEA, 7 U.S.C. 9, authorizes the CFTC to assess treble 
damage penalties for manipulation or attempted manipulation of the 
price of any commodity in interstate commerce and to adopt rules to 
prevent manipulative practices. CFTC Rule 180.1 prohibits fraud and 
fraud-based manipulations, including any such attempts; CFTC Rule 
180.2 addresses the elements of price-based manipulation and 
attempted manipulation.
    \30\ For example, 17 CFR 18.05 requires all traders that hold or 
control a reportable futures or options positions to: (1) ``Keep 
books and records showing all details concerning all positions and 
transactions in the commodity'' on all reporting markets, OTC 
transactions, exempt boards of trade, and foreign boards of trade; 
(2) ``keep books and records showing all details concerning all 
positions and transactions in the cash commodity, its products and 
byproducts, and all commercial activities that the trader hedges in 
the futures or option contract in which the trader is reportable''; 
and (3) provide to the CFTC upon request ``pertinent information 
concerning such positions, transactions, or activities.''
---------------------------------------------------------------------------

    The FSA is responsible for supervising the LME and regulating the 
financial soundness and conduct of the business conducted by LME 
members. The LME, a Recognised Investment Exchange by the FSA, is 
required by statute to ensure that business on its markets is conducted 
in an orderly and transparent manner, providing proper protection to 
investors and persons looking to manage risk. Regulation of the market 
is largely carried out by the LME. In addition to FSA oversight, the 
LME and its members also are subject to regulatory controls and input 
from various U.K. government bodies and offices, as well as directives 
from the European Union Commission. In international trading, rules 
applied by overseas regulatory bodies, such as the CFTC, are also taken 
into account.
    The SHFE is a self-regulatory body under the supervision and 
governance of the CSRC. The SHFE is a day-to-day overseer of exchange 
activity, and is expected to carry out regulation as per the laws 
established by the CSRC. The CSRC serves as the final authority on 
exchange regulation and policy development, and ultimately determines 
the effectiveness of the SHFE as a regulatory entity. The CSRC has the 
right to overturn or revoke the SHFE's regulatory privileges at any 
time.

B. Description of the Proposed Rule Change and the Trust \31\
---------------------------------------------------------------------------

    \31\ See Notice, supra note 3, for a more detailed description. 
Additional details regarding the Trust also are set forth in the 
registration statement for the Trust, most recently amended on July 
12, 2011 (No. 333-170085) (``Registration Statement'').
---------------------------------------------------------------------------

    The Exchange proposes to list and trade the Shares under NYSE Arca 
Equities Rule 8.201. J.P. Morgan Treasury Securities Services, a 
division of JPMorgan Chase Bank, National Association, is the 
administrative agent of the Trust (``Administrative Agent''). 
Wilmington Trust Company is the trustee of the Trust (``Trustee''). The 
Henry Bath Group is the warehouse-keeper of the Trust (``Warehouse-
keeper'').\32\ Metal Bulletin Ltd., which is not affiliated with the 
Sponsor, is the valuation agent of the Trust (``Valuation Agent'').
---------------------------------------------------------------------------

    \32\ Each of Henry Bath & Son Limited, Henry Bath LLC, Henry 
Bath Singapore Pte Limited, Henry Bath Italia Sr1, and Henry Bath BV 
is a member of the Henry Bath Group of companies and a wholly owned 
subsidiary of J.P. Morgan Ventures Energy Corporation, and is an 
affiliate of the Sponsor. See Notice, supra note 3, 77 FR at 23773 
n.10.
---------------------------------------------------------------------------

    As mentioned above, the Trust will hold Grade A copper in physical 
form, and the Trust's investment objective is for the value of the 
Shares to reflect, at any given time, the value of the copper owned by 
the Trust at that time, less the Trust's expenses and liabilities at 
that time. The Trust will hold only copper and will not trade in copper 
futures. The Trust will not be actively managed and will not engage in 
any activities designed to obtain a profit from, or to prevent losses 
caused by, changes in the price of copper.
    The Administrative Agent will calculate the NAV of the Trust as 
promptly as practicable after 4:00 p.m. EST on each Business Day.\33\ 
As part of this calculation, the Administrative Agent will determine 
the value of the trust's copper using the LME Settlement Price \34\ and 
locational premia/discount information provided by the Valuation 
Agent.\35\
---------------------------------------------------------------------------

    \33\ A Business Day is a day that the Exchange is open for 
regular trading and that is not a holiday in London, England. See 
id. at 23775 n.18.
    \34\ The ``LME Settlement Price'' is, with respect to any 
Business Day, the official cash sellers price per metric ton of 
Grade A Copper on the LME, stated in U.S. dollars, as determined by 
the LME at the end of the morning's second ring session (12:35 p.m. 
London time) for copper on each day that the LME is open for 
trading. The LME Settlement Price is made publicly available in 
real-time through third-party vendors such as Bloomberg and Reuters 
(on Bloomberg, it is currently displayed on Bloomberg page ``LOCADY 
''). It is also made publicly available on a delayed basis 
on the LME's Web site at approximately 10:00 p.m. London time. See 
id. at 23775 n.17.
    \35\ The value of copper depends in part on its location, i.e., 
copper stored in a location that is low in supply and high in demand 
carries a higher premium than copper that is stored in a location 
where supply is high and demand is low. To assist in valuing the 
Trust's copper, by 9:00 a.m. EST, the Valuation Agent will provide 
the Administrative Agent the locational premia for the locations at 
which the trust is permitted to hold copper. The locational premium 
for a warehouse location for a Business Day will be calculated as an 
amount expressed in U.S. dollars that is equal to the average value 
of copper per metric ton in such location minus the LME Settlement 
Price of copper on such Business Day. See id. at 23779.

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

[[Page 75471]]

    The Trust will store its copper in both LME-approved warehouses and 
non-LME-approved warehouses that are maintained by the Warehouse-
keeper, but none of the copper held by the Trust will be on LME 
warrant, and therefore will not be subject to regulation by the 
LME.\36\ Initially, the permitted warehouse locations will be in the 
Netherlands (Rotterdam), Singapore (Singapore), South Korea (Busan and 
Gwangyang), China (Shanghai), and the United States (Baltimore, 
Chicago, and New Orleans). Although the Trust may hold copper in 
warehouses in any of these locations (or other locations that may be 
determined by the Sponsor from time to time), the locations at which 
copper actually is held will depend on the warehouse locations at which 
authorized participants have actually delivered copper to the Trust and 
the warehouse locations from which copper is or has been delivered 
pursuant to the Trust's redemption procedures.
---------------------------------------------------------------------------

    \36\ See id. at 23778.
---------------------------------------------------------------------------

    Shares will be created when an authorized participant transfers 
Grade A Copper of an Acceptable Delivery Brand and having a weight 
equal to the Creation Unit Weight \37\ to one or more acceptable 
warehouse locations of the Trust and the Trust, in return for the 
copper, delivers a Creation Unit of Shares \38\ to the authorized 
participant. In creating Shares, if the aggregate weight of the whole 
lots transferred by the authorized participant falls short of or 
exceeds the aggregate Creation Unit Weight, the Administrative Agent 
will instruct the Warehouse-keeper to transfer ownership of copper 
between the authorized participant's book-entry account (``Reserve 
Account'') and the Warehouse-keeper's book-entry account (``Trust 
Account'') to cover any such amount.
---------------------------------------------------------------------------

    \37\ The Creation Unit Weight for a particular day will be equal 
to 25.0 metric tons multiplied by the Creation Unit Ratio in effect 
for such day. The Creation Unit Ratio will initially be equal to 
1.0, but will decline gradually over time to reflect the payment of 
expenses by the Trust. As a result, the Creation Unit Weight will 
decline gradually over time as well. The Creation Unit Weight and 
the Creation Unit Ratio in effect on any Business Day will have been 
calculated on the prior Business Day, after the calculation of the 
Trust's NAV on such Business Day. For a discussion of how the 
Administrative Agent will calculate the Creation Unit Ratio and the 
Creation Unit Weight, See id. at 23784.
    \38\ A Creation Unit of Shares is a block of 2,500 Shares. See 
id. at 23781.
---------------------------------------------------------------------------

    Shares will be redeemed when an authorized participant transfers a 
Creation Unit of Shares to the Trust and the Trust, in return for such 
Shares, delivers copper having a weight equal to the Creation Unit 
Weight to the authorized participant, in accordance with the Selection 
Protocol.\39\ Following the transfer of whole lots of copper, the 
Administrative Agent will instruct the Warehouse-keeper to adjust for 
any redemption underweight by transferring ownership of copper from the 
Trust Account to the relevant authorized participant's Reserve 
Account.\40\ Because the copper held by the Trust in different 
locations may vary in value based on the applicable locational premium, 
the value of the copper actually received by the authorized participant 
will depend on the location of the specific whole lot(s) and fractional 
lots, if any, of the copper transferred to the authorized participant.
---------------------------------------------------------------------------

    \39\ According to NYSE Arca, the Selection Protocol is intended 
to provide a consistent and transparent method of selecting lots, by 
requiring the Administrative Agent to select lots in the following 
manner: (1) Lots will be selected first from the warehouse where it 
holds available copper that has the lowest locational premium at a 
particular time (i.e., the ``cheapest-to-deliver location''), and 
then from other warehouse locations successively based on a ranking 
of their respective locational premia from lowest to highest; (2) if 
there are multiple lots in the same warehouse location specified by 
the first step, lots in such warehouse location will be selected 
based on the date such lots were first delivered to the relevant 
account, with the earliest delivered lot being selected first; and 
(3) if there are multiple lots in the same warehouse location that 
were first delivered to the relevant account on the same date, lots 
will be selected based on the actual weight of the lot, with the lot 
having the lowest actual weight being selected first. See id. at 
23781-82.
    \40\ According to NYSE Arca, when copper is redeemed in this 
manner, the amount of copper received by the authorized participant 
will equal a pro rata share of the copper held by the Trust based on 
the weight of the Trust's aggregate copper holdings immediately 
prior to the processing of redemptions. See id. at 23782.
---------------------------------------------------------------------------

    Quotation and last-sale information for the Shares will be 
available via the Consolidated Tape Association. The Exchange also will 
make available via the Consolidated Tape trading volume, closing 
prices, and NAV for the Shares from the previous day.\41\ In addition, 
NYSE Arca will calculate and disseminate, approximately every 15 
seconds during the Exchange's Core Trading Session, two different IIVs 
for the Shares: The First-Out IIV and the Liquidation IIV.\42\
---------------------------------------------------------------------------

    \41\ See id. at 23786.
    \42\ The ``First-Out IIV'' is designed to facilitate arbitrage 
activity by authorized participants by indicating whether the Shares 
are trading at a discount or premium during the trading day. See id. 
at 23785. It represents, as of the time of such calculation, the 
hypothetical U.S. dollar value per Share of the copper that would 
need to be transferred to or from the Trust to create or redeem one 
Share included in a Creation Unit, assuming that copper in the 
cheapest-to-deliver location was used for such creation or 
redemption. See id. at 23783. The ``Liquidation IIV'' is an intraday 
indicative value that represents, as of the time of the calculation, 
the hypothetical U.S. dollar value per Share of all of the copper 
owned by the Trust divided by the number of Shares then outstanding. 
See id. For a description of how the Exchange will calculate the 
First-Out IIV and the Liquidation IIV, See id. at 23784-86.
---------------------------------------------------------------------------

    On each Business Day, as promptly as practicable after 4:00 p.m. 
E.T., the Trust will publish the following on its Web site: (1) The 
number of outstanding Shares as of the beginning of the Business Day; 
(2) the NAV of the Trust; (3) the NAV per Share; (4) the locational 
premium for each warehouse location, as calculated by the Valuation 
Agent at 5:00 p.m. London time, quoted both in U.S. dollars and as a 
percentage premium relative to the LME settlement price; (5) the price 
per metric ton of copper in each warehouse location where the Trust is 
permitted to hold copper; (6) the aggregate weight in metric tons of 
all copper owned by the Trust; (7) the aggregate weight in metric tons 
of the copper owned by the Trust in each warehouse location; (8) the 
gross value in U.S. dollars of the copper owned by the Trust in each 
warehouse location; (9) the Creation Unit Ratio; and (10) the Creation 
Unit Weight.\43\ The Exchange will obtain a representation from the 
Trust prior to the commencement of trading of the Shares that the NAV 
will be calculated daily and made available to all market participants 
at the same time.\44\
---------------------------------------------------------------------------

    \43\ See id. at 23783.
    \44\ See Amendment No. 1, supra note 15.
---------------------------------------------------------------------------

    Additionally, as promptly as practicable after 4:00 p.m. E.T. on 
each Business Day, the Trust will make available on its Web site a 
downloadable file containing the following information relating to each 
lot of copper owned by the Trust: (1) The unique identification number 
of the lot; (2) the warehouse location in which the lot is held; (3) 
the brand of the lot and, if such brand of copper is not an Acceptable 
Delivery Brand, an indication that the lot consists of a brand of 
copper that has been de-registered; (4) the weight in metric tons of 
the lot; and (5) the date upon which the lot was delivered to the 
Trust.\45\
---------------------------------------------------------------------------

    \45\ See Notice, supra note 3, 77 FR at 23783.
---------------------------------------------------------------------------

    The Exchange states that investors may obtain, almost on a 24-hour 
basis, copper pricing information based on the spot price of copper 
from various financial information service providers,

[[Page 75472]]

such as Reuters and Bloomberg.\46\ Reuters and Bloomberg provide at no 
charge on their Web sites delayed information regarding the spot price 
of copper and last-sale prices of copper futures, as well as 
information and news about developments in the copper market.\47\ 
Reuters and Bloomberg also offer a professional service to subscribers 
for a fee that provides information on copper prices directly from 
market participants.\48\ There are a variety of public Web sites 
providing information on copper, ranging from those specializing in 
precious metals to sites maintained by major newspapers, such as The 
Wall Street Journal.\49\ The Trust's Web site will provide ongoing 
pricing information for copper spot prices and the Shares.\50\ The 
Exchange will provide on its Web site (www.nyx.com) a link to the 
Trust's Web site.\51\
---------------------------------------------------------------------------

    \46\ See id. at 23786.
    \47\ See id.
    \48\ See id.
    \49\ See id.
    \50\ See id.
    \51\ See id.
---------------------------------------------------------------------------

    NYSE Arca will require that a minimum of 100,000 Shares be 
outstanding at the start of trading,\52\ which represents 1,000 metric 
tons of copper. The Trust seeks to initially register 6,180,000 
Shares.\53\ NYSE Arca represents that the Shares satisfy the 
requirements of NYSE Arca Equities Rule 8.201, which governs the 
listing and trading of Commodity-Based Trust Shares, and thereby 
qualify for listing and trading on the Exchange.\54\
---------------------------------------------------------------------------

    \52\ See Amendment No. 1, supra note 15.
    \53\ See Registration Statement, supra note 31.
    \54\ With respect to application of Rule 10A-3 (17 CFR 240.10A-
3) under the Act (15 U.S.C. 78a), the Trust relies on the exemption 
contained in Rule 10A-3(c)(7). See Notice, supra note 3, at 23773 
n.12.
---------------------------------------------------------------------------

    Under NYSE Arca Equities Rule 7.34(a)(5), if the Exchange becomes 
aware that the NAV is not being disseminated to all market participants 
at the same time, it must halt trading on the Exchange until such time 
as the NAV is available to all market participants at the same time. If 
the First-Out IIV or the Liquidation IIV is not being disseminated as 
required, the Exchange may halt trading during the day in which the 
disruption occurs; if the interruption persists past the day in which 
it occurred, the Exchange will halt trading no later than the beginning 
of the trading day following the interruption.\55\ Further, the 
Exchange will consider suspension of trading pursuant to NYSE Arca Rule 
8.201(e)(2) if, after the initial 12-month period following 
commencement of trading: (1) The value of copper is no longer 
calculated or available on at least a 15-second delayed basis from a 
source unaffiliated with the Sponsor, Trust, or Custodian, or the 
Exchange stops providing a hyperlink on its Web site to any such 
unaffiliated source providing that value; or (2) if the Liquidation IIV 
is no longer made available on at least a 15-second delayed basis. More 
generally, with respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Shares. Trading on the Exchange in the Shares may be 
halted because of market conditions or for reasons that, in the view of 
the Exchange, make trading in the Shares inadvisable. These may 
include: (1) The extent to which conditions in the underlying copper 
market have caused disruptions and/or lack of trading; or (2) whether 
other unusual conditions or circumstances detrimental to the 
maintenance of a fair and orderly market are present. Additionally, 
trading in the Shares will be subject to trading halts caused by 
extraordinary market volatility pursuant to the Exchange's circuit 
breaker rule.\56\
---------------------------------------------------------------------------

    \55\ See Amendment No. 1, supra note 15. NYSE Arca Equities Rule 
8.201(e)(2) also provides that the Exchange may seek to delist the 
Shares in the event the underlying commodity or the IIV is no longer 
calculated or available as required.
    \56\ See NYSE Arca Equities Rule 7.12.
---------------------------------------------------------------------------

    NYSE Arca represents that its surveillance procedures are adequate 
to properly monitor Exchange trading of the Shares in all trading 
sessions and to deter and detect violations of NYSE Arca rules and 
applicable federal securities laws.\57\ To support this, the Exchange 
states that, pursuant to NYSE Arca Equities Rule 8.201(g), it is able 
to obtain information regarding trading in the Shares, physical copper, 
copper futures contracts, options on copper futures, or any other 
copper derivative from ETP Holders acting as registered market makers, 
in connection with their proprietary or customer trades. More 
generally, NYSE Arca states that it has regulatory jurisdiction over 
its ETP Holders and their associated persons, which include any person 
or entity controlling an ETP Holder, as well as a subsidiary or 
affiliate of an ETP Holder that is in the securities business.\58\ With 
respect to a subsidiary or affiliate of an ETP Holder that does 
business only in commodities or futures contracts, the Exchange states 
that it can obtain information regarding the activities of such 
subsidiary or affiliate through surveillance sharing agreements with 
regulatory organizations of which such subsidiary or affiliate is a 
member.\59\ Further, NYSE Arca states that it may obtain trading 
information via the Intermarket Surveillance Group (``ISG'') from other 
exchanges that are members of the ISG, including the COMEX,\60\ and 
that it has entered into a comprehensive surveillance sharing agreement 
with the LME that applies with respect to trading in copper and copper 
derivatives.\61\
---------------------------------------------------------------------------

    \57\ See Notice, supra note 3, 77 FR at 23787.
    \58\ See Amendment No. 1, supra note 15.
    \59\ See id.
    \60\ See Notice, supra note 3, 77 FR at 23787.
    \61\ See Amendment No. 1, supra note 15.
---------------------------------------------------------------------------

    Prior to the commencement of trading, the Exchange represents that 
it will inform its ETP Holders in an Information Bulletin of the 
special characteristics and risks associated with trading the Shares. 
Specifically, the Information Bulletin will discuss the following: (a) 
The procedures for purchases and redemptions of Shares in the Creation 
Unit (including noting that Shares are not individually redeemable); 
(b) NYSE Arca Equities Rule 9.2(a), which imposes a duty of due 
diligence on its ETP Holders to learn the essential facts relating to 
every customer prior to trading the Shares; (c) how information 
regarding the IIV is disseminated; (d) the requirement that ETP Holders 
deliver a prospectus to investors purchasing newly issued Shares prior 
to or concurrently with the confirmation of a transaction; (e) the 
possibility that trading spreads and the resulting premium or discount 
on the Shares may widen as a result of reduced liquidity of physical 
copper trading during the Core and Late Trading Sessions after the 
close of the major world copper markets; and (f) trading information.
    The Notice and the Registration Statement include additional 
information about: The Trust; the Shares; the Trust's investment 
objectives, strategies, policies, and restrictions; fees and expenses; 
creation and redemption of Shares; the physical copper market; 
availability of information; trading rules and halts; and surveillance 
procedures.\62\
---------------------------------------------------------------------------

    \62\ See Notice and the Registration Statement, supra notes 3 
and 31, respectively.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    After careful review and for the reasons discussed below, the 
Commission finds that the proposed rule change is consistent with the 
requirements of the Act, including Section 6 of the Act,\63\ and the 
rules and regulations thereunder applicable to a national securities 
exchange. In particular, the Commission finds that the proposed rule 
change is consistent

[[Page 75473]]

with Section 6(b)(5) of the Act,\64\ which requires, among other 
things, that the rules of a national securities exchange be designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, and to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest. In addition, the Commission 
finds that the proposed rule change is consistent with Section 6(b)(8) 
of the Act,\65\ which requires that the rules of a national securities 
exchange not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act. The Commission 
also finds that the proposed rule change is consistent with Section 
11A(a)(1)(C)(iii) of the Act,\66\ which sets forth Congress's finding 
that it is in the public interest and appropriate for the protection of 
investors to assure the availability to brokers, dealers, and investors 
of information with respect to quotations for and transactions in 
securities. Further, pursuant to Section 3(f) of the Act, the 
Commission has considered whether the proposed rule change will promote 
efficiency, competition, and capital formation.
---------------------------------------------------------------------------

    \63\ 15 U.S.C. 78f.
    \64\ 15 U.S.C. 78f(b)(5).
    \65\ 15 U.S.C. 78f(b)(8).
    \66\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
---------------------------------------------------------------------------

    Six commenters submitted fourteen comment letters to explain their 
opposition to the proposed rule change.\67\ Generally, the opposing 
commenters assert that the proposed rule change is inconsistent with 
Section 6(b)(5) of the Act.\68\ V&F (and EVW), the Copper Fabricators, 
Senator Levin, and AFR (collectively, ``Opposing Commenters'') assert 
that the issuance by the Trust of all of the Shares covered by the 
Registration Statement within a short period of time would result in a 
substantial reduction in the supply of global copper available for 
immediate delivery.\69\ The Opposing Commenters assert that this 
reduction in short-term supply would increase both the price of copper 
and volatility in the copper market, which would in turn significantly 
harm the U.S. economy.\70\ They further state that the predicted 
decrease in copper available for immediate delivery would make the 
physical copper market more susceptible to manipulation.\71\
---------------------------------------------------------------------------

    \67\ See V&F May 9 Letter, supra note 4; V&F July 13 Letter, 
supra note 7; Levin Letter, supra note 8; Shatto Letter, supra note 
9; Copper Fabricators Letter, supra note 11; V&F August 24 Letter, 
supra note 11; V&F September 10 Letter, supra note 12; V&F October 
23 Letter, supra note 14; AFR October 23 Letter, supra note 14; 
Rutkowski October 24 Letter, supra note 14; V&F November 16 Letter, 
supra note 14; AFR November 16 Letter, supra note 14; Rutkowski 
November 17 Letter, supra note 14; and EVW December 7 Letter, supra 
note 16. V&F, and subsequently EVW, identified themselves as law 
firms that represent RK Capital LLC, an international copper 
merchant, and the Copper Fabricators. See V&F July 13 Letter, supra 
note 7, at 1; and EVW December 7 Letter, supra note 16, at 1. See 
also supra note 16 (explaining the change in representation). The 
Copper Fabricators state that they collectively comprise about 50% 
of the copper fabricating capacity of the United States. See Copper 
Fabricators Letter, supra note 11, at 1. AFR identifies itself as a 
coalition of over 250 groups who advocate for reform of the 
financial industry. See AFR October 23 Letter, supra note 14, at 1.
    \68\ Ms. Shatto does not tie her objections to any particular 
provision of the Act. First, she believes that ``jp morgan'' does 
not need another derivative product. This principle is not relevant 
to consideration of the proposed rule change under the Act. Second, 
she questions whether ``jp morgan,'' which she says ``already trades 
a lot in the commodities market,'' may be able to ``manipulate the 
market,'' a concern shared by other commenters. She asserts that 
``jp morgan gets inside information by using their warehouses to buy 
and sell copper which maximizes profits to the detriment of 
commercial interests who have to buy copper.'' Concerns regarding 
the potential for manipulation are addressed in Section III.D and 
III.E. Third, she asserts that derivatives often allow short 
selling, which affects many equities at one time, making the 
equities market extremely volatile. Ms. Shatto does not provide 
further information to explain why this concern is relevant to the 
proposed rule change. Concerns regarding the potential for increased 
volatility in the copper market are addressed in Section III.C. 
Fourth, she states: ``banks should be banks, not business 
conglomerations.'' This principle is not relevant to consideration 
of the proposed rule change under the Act. Finally, she recommends 
that the Commission not enable short sellers or options traders. The 
proposed rule change does not address short selling or approve the 
listing and trading of options on the Shares. Mr. Rutkowski requests 
that the Commission deny the proposed rule change for the reasons 
articulated by AFR.
    \69\ See V&F May 9 Letter, supra note 4, at 3, 6; Levin Letter, 
supra note 8, at 1, 4; Copper Fabricators Letter, supra note 11, at 
3; and AFR October 23 Letter, supra note 14, at 2.
    \70\ See V&F May 9 Letter, supra note 4, at 5-7; Levin Letter, 
supra note 8, at 1, 7; Copper Fabricators Letter, supra note 11, at 
4-5; and AFR October 23 Letter, supra note 14, at 2.
    \71\ See V&F May 9 Letter, supra note 4, at 1, 10; Levin Letter, 
supra note 8, at 7; AFR October 23 Letter, supra note 14, at 4-5; 
Copper Fabricators Letter, supra note 11, at 5-6; and AFR October 23 
Letter, supra note 14, at 4-5.
---------------------------------------------------------------------------

    In response, the Exchange and the Sponsor generally state that the 
Trust would serve as a transparent and accessible alternative by which 
participants in the copper market can access or offload physical copper 
inventory and associated price risk.\72\ The Sponsor believes that the 
Trust would move copper from one type of liquid stock to another type 
of liquid stock, rather than removing inventory from the market, and 
would track, rather than drive, copper prices.\73\ The Exchange and the 
Sponsor believe the structure of the Trust and the regulatory regime 
for the Shares and copper derivatives (including non-securities) 
suggest approval of the proposed rule change would not render the 
copper market more susceptible to manipulation.\74\
---------------------------------------------------------------------------

    \72\ See DP August 24 Letter, supra note 11, at 7; and Arca June 
19 Letter, supra note 6, at 5.
    \73\ See DP August 24 Letter, supra note 11, at 11, 13.
    \74\ See id. at 4-5; and Arca June 19 Letter, supra note 6, at 
5-6.
---------------------------------------------------------------------------

    Given the concerns expressed by the commenters that the Trust would 
remove a substantial amount of the supply of copper available for 
immediate delivery over a short period of time, which would render the 
physical copper market more susceptible to manipulation, and that the 
Trust therefore would provide market participants an effective means to 
manipulate the price of copper and thereby the price of the Shares,\75\ 
the Commission analyzes the comments to examine, among other things, 
the extent to which the listing and trading of the Shares may (1) 
impact the supply of copper available for immediate delivery and the 
ability of market participants to manipulate the price of copper, and 
(2) be susceptible to manipulation. The sections below summarize and 
respond to the comments received.
---------------------------------------------------------------------------

    \75\ See V&F May 9 Letter, supra note 4, at 1, 10.
---------------------------------------------------------------------------

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

    The Opposing Commenters believe that the issuance by the Trust of 
all of the Shares covered by the Registration Statement within a short 
period of time would result in the withdrawal of substantial quantities 
of copper from LME and COMEX warehouses, thus negatively impacting the 
supply of copper available for immediate delivery.\76\ As discussed 
below, this belief assumes that: (1) Copper held by the Trust would not 
be available for immediate delivery; (2) the global supply of copper 
available for immediate delivery that could be used to create Shares 
consists almost exclusively of copper already under LME or COMEX 
warrant, and therefore the Shares would be created primarily using 
copper already under LME or COMEX warrant; and (3) the Trust would 
acquire a substantial amount of copper within a short period of time, 
such that copper suppliers would not be able to adjust production to 
replace the copper removed from the market by the

[[Page 75474]]

Trust. The Commission believes that the record does not support each of 
the contentions, and thus, for the reasons discussed below, the 
Commission does not believe that the listing and trading of the Shares 
is likely to disrupt the supply of copper available for immediate 
delivery.
---------------------------------------------------------------------------

    \76\ See id. at 3-4; Levin Letter, supra note 8, at 4-5; Copper 
Fabricators Letter, supra note 11, at 5; and AFR October 23 Letter, 
supra note 14, at 3.
---------------------------------------------------------------------------

1. Availability of the Trust's Copper
    Opposing Commenters assert that copper held by the Trust would not 
be available for immediate delivery, and therefore copper deposited 
into the Trust would be removed from the market and would be 
unavailable to end-users.\77\ In response, the Sponsor asserts that the 
Trust would not remove immediately available copper inventory from the 
market.\78\ The Sponsor points out that a report cited by one of the 
commenters defines inventories held in exchange-traded funds as 
``liquid stocks.'' \79\ The Sponsor asserts that, in effect, the Trust 
would move copper from one type of liquid stock (warrants) to another 
type of liquid stock (Shares).\80\
---------------------------------------------------------------------------

    \77\ See V&F May 9 Letter, supra note 4, at 1; Levin Letter, 
supra note 8, at 7; Copper Fabricators Letter, supra note 11, at 3, 
and AFR October 23 Letter supra note 14, at 3.
    \78\ See, e.g., DP August 24 Letter, supra note 11, at 13.
    \79\ See DP August 24 Letter, supra note 11, at 13; and DP 
September 10 Letter, supra note 12, at 5 n.11.
    \80\ See DP August 24 Letter, supra note 11, at 13.
---------------------------------------------------------------------------

    The Commission agrees with the Sponsor that copper held by the 
Trust will remain available to consumers and other participants in the 
physical copper market because: (1) The Trust will not consume copper; 
\81\ (2) Shares are redeemable (in size) for copper on every Business 
Day; \82\ and (3) redeeming authorized participants will receive the 
right to obtain their copper within three business days.\83\ 
Additionally, as the Sponsor explains, the copper received in exchange 
for redeemed Shares could be: (1) Sold in the OTC market for cash; (2) 
swapped in the OTC market for copper in a different location or for a 
different brand; and/or (3) removed from the warehouse and 
consumed.\84\ The Sponsor states that these three types of transactions 
are commonplace in the copper market.\85\ Further, copper delivered 
from the Trust (in exchange for Shares) could be placed under LME 
warrant if required by LME market participants.\86\ Given the structure 
of the Trust, the Commission believes that the amount of copper 
accessible to industrial users will not meaningfully change as a result 
of the listing and trading of the Shares. Accordingly, the Commission 
believes that the proposed rule change will not burden capital 
formation for users who acquire copper for industrial and other 
purposes.
---------------------------------------------------------------------------

    \81\ See id. at 22.
    \82\ See Notice, supra note 3, 77 FR at 23782.
    \83\ See DP August 24 Letter, supra note 11, at 7. The record is 
unclear whether authorized participants that are redeeming the 
Shares will be able to physically remove copper from the warehouse 
in which it is stored within three business days, or whether this 
reference is to three business days in addition to the existing time 
it takes to remove copper from the warehouses. The Registration 
Statement provides: ``Redemption orders will be settled by delivery 
of copper on the third Trading Day following the redemption order 
date, provided that, by 3:00 p.m. New York City time on the date 
such settlement is to take place, the Administrative Agent confirms 
in writing to the Warehouse-keeper that (x) the Administrative 
Agent's DTC account has been credited with the Creation Units to be 
redeemed and (ii) the Authorized Participant has paid the 
Administrative Agent the applicable transaction fee for such 
redemption order.'' Registration Statement, supra note 31 (emphasis 
in original). One of the Opposing Commenters acknowledged, however, 
that taking copper off LME warrant, which the commenter considers to 
be copper available for immediate delivery, takes time; according to 
that commenter: (1) The amount of time it takes to take copper off 
LME warrant depends ``on the length of the loading out queue'' at 
the LME warehouse; and (2) queues ``are currently ranging from 275 
working days Vlissingen, Netherlands, 91 working days (4.5 months) 
in New Orleans, 51 working days (2.5 months) in Johor, Malaysia to 
under one month in Korea and Rotterdam, Netherlands.'' V&F August 24 
Letter, supra note 11, at 14.
    This commenter expresses further concern in its latest comment 
letter about an increasing length of time that it takes to withdraw 
metal, including copper, from LME warehouses. The commenter argues 
that this ``troubling new development'' may, together with the 
proposed listing and trading of the Shares, jeopardize the ability 
of United States copper consumers to obtain the physical copper they 
need in a timely manner. See generally EVW December 7 Letter, supra 
note 16. By its December 7 submission, the commenter appears to be 
updating information previously provided about the length of queues, 
but does not assert any new reason for disapproving the listing and 
trading of the Shares that is distinct from its original assertion, 
responded to in the text above, that listing and trading of the 
Shares will reduce the supply of copper available for immediate 
delivery.
    For purposes of analyzing this proposed rule change, the 
Commission assumes that copper will be transferred to an authorized 
participant's book-entry account within three days, and that an 
authorized participant taking delivery of copper from an LME 
warehouse will then have to wait in the queues described by this 
Opposing Commenter, just like other owners withdrawing metal from 
that warehouse. The Commission believes that waiting up to an extra 
three business days beyond the time required to take copper off of 
LME warrant is not a significant enough delay to consider the copper 
delivered from the Trust unavailable for immediate delivery. In this 
regard, the Commission notes that the commenter, who acknowledges 
that taking copper off of LME warrant takes time, considers copper 
on LME warrant to be available for immediate delivery. See, e.g., 
V&F July 13 Letter, supra note 7, at 1 (stating its view that there 
are no substantial sources of copper available for immediate 
delivery available to the Trust other than warranted copper in LME 
warehouses). Further, as noted above, the Trust's copper may be held 
in both LME-approved warehouses and non-LME-approved warehouses, and 
there is nothing in the record concerning the existence of unloading 
queues in non-LME warehouses. The Commission also notes that the LME 
appears to be attempting to address the unloading queue issue, see 
London Metal Exchange, Consultation on Changes to LME Policy for 
Approval of Warehouses in Relation to Delivery Out Rates, Notice 12/
296: A295: W152 (November 15, 2012), available at https://www.lme.com/downloads/notices/12_296_A295_W152_Consultation_on_Changes_to_LME_Policy_for_Approval_of_Warehouses_in_Relation_to_Delivery_Out_Rates.pdf, which applies to LME 
warehoused aluminum and zinc, not just copper. See also EVW December 
7 Letter, supra note 16, at 3.
    \84\ See DP August 24 Letter, supra note 11, at 7.
    \85\ See id. at 8.
    \86\ See id.
---------------------------------------------------------------------------

    The Commission recognizes that one group of end users state that 
they would not acquire Shares for the purpose of redeeming them to 
acquire copper because the copper they would receive in exchange for 
Shares might be in a location far from their plants or might be of 
brands that are not acceptable to their plants.\87\ Regardless of the 
preferences of these consumers, authorized participants may redeem 
Shares for copper and the record does not contain any evidence that 
these or any other consumers of copper could not use the Shares to 
obtain copper through an authorized participant. Further, the record 
supports that the same logistical issues exist and are regularly 
addressed by end-users of copper holding LME warrants. Currently, a 
purchaser of an LME warrant does not know the location or brand of the 
underlying copper, and therefore warrant holders sometimes need to swap 
the warrants to acquire copper of a preferred brand in a convenient 
location.\88\ The end user commenters explain that, because not all 
available brands of copper held at LME and COMEX warehouses are 
acceptable for the efficient operation of their fabricating plants, 
they currently rely on copper merchants to obtain their desired brands 
of copper by aggregating the lots from copper on warrant at LME and 
COMEX warehouses.\89\ Nothing in the record indicates that copper 
merchants will not be able to perform the same function in connection 
with copper delivered in connection with Share redemptions. As 
discussed above,\90\ on a daily basis, the Trust will publish 
information on the location and brand of copper that will be delivered 
to the next redeeming authorized participant, and this may assist end

[[Page 75475]]

users of copper and copper merchants to locate suitable copper.
---------------------------------------------------------------------------

    \87\ See Copper Fabricators Letter, supra note 11, at 7. See 
also V&F September 10 Letter, supra note 12, at 4; and V&F July 13 
Letter, supra note 7, at 7.
    \88\ See DP August 24 Letter, supra note 11, at 8.
    \89\ See Copper Fabricators Letter, supra note 11, at 3.
    \90\ See supra text accompanying note 45.
---------------------------------------------------------------------------

    One of the Opposing Commenters also expresses concern that 
investors who hold the Shares would not sell them, and therefore Shares 
would not be readily available for redemption.\91\ This claim is 
unsupported. There is no evidence in the record to suggest that 
investors holding the Shares will be unwilling to sell them, 
particularly in response to market movements or changes in investor 
needs.
---------------------------------------------------------------------------

    \91\ See V&F September 10 Letter, supra note 12, at 3.
---------------------------------------------------------------------------

    The Commission believes that the listing and trading of the Shares, 
as proposed, could provide another way for market participants and 
investors to trade in copper, and could enhance competition among 
trading venues. Further, the Commission believes that the listing and 
trading of the Shares will provide investors another investment 
alternative, which could enhance a well-diversified portfolio. By 
broadening the securities investment alternatives available to 
investors, the Commission believes that trading in the Shares could 
increase competition among financial products and the efficiency of 
financial investment.
2. Source of Copper Used To Create Shares
    The Opposing Commenters believe that the global supply of copper 
available for immediate delivery, and eligible to be used to create 
Shares, consists almost exclusively of copper already under LME or 
COMEX warrant, and therefore they believe that Shares would be created 
primarily using copper already under LME or COMEX warrant.\92\ One of 
the Opposing Commenters states that the size of the market for copper 
available for immediate delivery is small relative to the size it 
expects the Trust to attain, asserting that there is only 230,000 
metric tons available on the LME, with an additional 60,000 metric tons 
available on the COMEX, and projects that the Trust would remove as 
much as 61,800 metric tons from the market, which would be about 21.3% 
of the copper available for immediate delivery.\93\ The Opposing 
Commenters also assert that the Trust would be funded with copper under 
warrant in the United States, which would result in a shortage of 
copper in the United States.\94\ These Opposing Commenters urge the 
Commission to consider collectively the supply impacts of the Trust and 
the iShares Copper Trust,\95\ the shares of which the Exchange also is 
proposing to list and trade.\96\
---------------------------------------------------------------------------

    \92\ See Levin Letter, supra note 8, at 4-5; Copper Fabricators 
Letter, supra note 11, at 3 (``The market for copper available for 
immediate delivery consists of copper on warrant in LME and Comex 
warehouses. If there is any other copper available for us to 
purchase and be delivered within a week or two, we are generally not 
aware of it.''); V&F July 13 Letter, supra note 7, at 2-4; and AFR 
October 23 Letter, supra note 14, at 2.
    \93\ See V&F July 13 Letter, supra note 7, at 8. How opposing 
commenters measure the projected size of the Trust is discussed 
infra in Section III.A.3. Another Opposing Commenter states that, in 
2011, total global copper stocks were 3.515 million metric tons, of 
which it believes only 808,000 metric tons were considered to be 
``liquid.'' Levin Letter, supra note 8, at 4. The commenter then 
goes on to assert that: (1) Of those liquid stocks, most actually 
are unavailable for purchase; (2) most of that liquid copper that is 
available for immediate delivery is under LME or COMEX warrant; and 
(3) as of August 2011, the LME and COMEX had only 537,500 metric 
tons under warrant. See id. at 4-5. That commenter estimates that 
the Trust, which he expects would hold up to 61,800 metric tons of 
copper, and the iShares Copper Trust (see infra note 95), which 
would hold up to 121,200 metric tons of copper, collectively would 
hold approximately 34% of the copper available for immediate 
delivery. See Levin Letter, supra note 8, at 5. The Commission is 
not addressing the iShares Copper Trust proposed rule change in this 
order.
    \94\ See Levin Letter, supra note 8, at 6; V&F May 9 Letter, 
supra note 4, at 4; V&F July 13 Letter, supra note 7, at 9; Copper 
Fabricators Letter, supra note 11, at 4-5; and AFR October 23 
Letter, supra note 14, at 2.
    \95\ See Securities Exchange Act Release No. 67237 (June 22, 
2012), 77 FR 38351 (June 27, 2012) (SR-NYSEArca-2012-66) (notice of 
proposal to list and trade shares of the iShares Copper Trust).
    \96\ See Levin Letter, supra note 8, at 5, 6; Copper Fabricators 
Letter, supra note 11, at 3-4; and V&F May 9 Letter, supra note 4, 
at 6. 10.
---------------------------------------------------------------------------

    In contrast, the Sponsor believes that there are very substantial 
copper inventories available outside of the LME and COMEX that are 
deliverable on a short-term basis that could be used to fund the Trust. 
Specifically, the Sponsor states that, even according to the data 
provided by one of the Opposing Commenters, there are substantial 
sources of liquid copper stock inventory outside of the LME and other 
exchanges, and that most liquid copper stock inventory is non-LME or 
exchange inventory.\97\ The Sponsor provided data that it says shows 
that liquid global copper inventories that are considered LME-branded 
are estimated at approximately 1.4 million metric tons as of July 31, 
2012, and that approximately 70% of these inventories are not under 
warrant with the LME, COMEX, or any other exchange.\98\ Additionally, 
the Sponsor asserts that authorized participants would not deposit into 
the Trust copper exclusively or disproportionately from the U.S.; 
according to the Sponsor, five of the initial permitted warehouses are 
located outside of the U.S. and, based on current conditions, the 
Sponsor states that Shanghai, South Korea, and Singapore are the most 
likely locations at which copper would be delivered to the Trust.\99\
---------------------------------------------------------------------------

    \97\ See DP August 24 Letter, supra note 11, at 13.
    \98\ See DP September 10 Letter, supra note 12, at 2. The 
Sponsor cites a report by Metal Bulletin Research indicating there 
are 4.09 million metric tonnes of refined copper stocks worldwide, 
1.78 million metric tonnes of which can be considered to be liquid. 
See DP August 24 Letter, supra note 11, at Annex C-5 at 7, 10 
(citing Metal Bulletin Research, ``Independent Assessment of Global 
Copper Stocks,'' August 22, 2012). According to the Sponsor, Metal 
Bulletin Research is the research arm of Metal Bulletin Ltd., the 
Trust's Valuation Agent. See id. at 15 n.44. Metal Bulletin Research 
estimates that 1.36 million metric tonnes of the 1.78 million metric 
tonnes considered to be liquid are in the form of LME brands. See 
id. at Annex C-5 at 7. Metal Bulletin Research further estimates 
that 249,000 metric tonnes are on LME warrant and 136,000 metric 
tonnes are LME-branded but located on other exchanges, leaving 
approximately 70% (or 975,000 metric tonnes) of liquid copper stocks 
that are eligible to be placed on LME warrant. See id. at Annex C-5 
at 10.
    \99\ See DP September 10 Letter, supra note 12, at 8 n.32; and 
DP August 24 Letter, supra note 11, at 26.
---------------------------------------------------------------------------

    The Commission believes that there is significant uncertainty about 
the locations from which copper will be purchased to create Shares. 
Based on the description of the Trust in the proposed rule change, 
authorized participants and their customers will choose what eligible 
copper to deposit with the Trust. Further, the Commission understands, 
based on information submitted by the Sponsor, that premia in different 
locations have fluctuated historically relative to one another and will 
continue to change over time, and that a region with the highest 
locational premia at a given time may have the lowest locational premia 
at a later date.\100\
---------------------------------------------------------------------------

    \100\ The Sponsor provided the following information provided by 
the Valuation Agent regarding locational premia: (1) In the United 
States, the average locational premium as a percentage of average 
physical price was 1.4217% for the year ended December 31, 2010; 
1.1377% between January 1 and March 31, 2011, and 1.1590% between 
April 1 and June 15, 2011; (2) in Europe, the average locational 
premium as a percentage of average physical price was .9426% for the 
year ended December 31, 2010; .7035% between January 1 and March 31, 
2011, and .7327% between April 1 and June 15, 2011; (3) in Shanghai, 
China, the average locational premium as a percentage of average 
physical price was 1.3500% for the year ended December 31, 2010; 
.3982% between January 1 and March 31, 2011, and .4640% between 
April 1 and June 15, 2011; and in Singapore, the average locational 
premium as a percentage of average physical price was 1.1259% for 
the year ended December 31, 2010; .7117% between January 1 and March 
31, 2011, and .4964% between April 1 and June 15, 2011. See DP 
August 24 Letter, supra note 11, at C-3. The Sponsor states that 
this data provided in Annex C-3 demonstrates that locational premia 
vary over time and, as a result, ``a region with the highest premia 
in one interval of time may have the lowest premia at a later date, 
and vice versa.'' See id. at 32.
---------------------------------------------------------------------------

    The Commission also believes that the record supports the view that 
there are sufficient copper stockpiles such that up

[[Page 75476]]

to 61,800 metric tons of copper could be deposited into the Trust 
without authorized participants taking copper off of either LME or 
COMEX warrant. For example, the Valuation Agent \101\ estimates liquid 
global copper inventories that are considered LME-branded to be 
approximately 1.4 million metric tons as of July 31, 2012, and 
approximately 70% of these inventories are not under warrant with the 
LME, COMEX, or any other exchange.\102\ One of the Opposing Commenters 
argues that this supply of non-warranted copper belongs to producers, 
consumers, and/or merchants and traders and is not otherwise in the 
supply pipeline, and that the only copper available for immediate 
delivery is in LME and COMEX warehouses.\103\ The Commission believes, 
however, that it is more plausible that a sufficient portion of the 
estimated 1.4 million metric tons of copper inventories cited by 
commenters currently is available for authorized participants to use to 
create Shares.
---------------------------------------------------------------------------

    \101\ The Exchange states that the Valuation Agent is an 
independent, third-party valuation agent that is not affiliated with 
the Sponsor. See Notice, supra note 3, 77 FR at 23773.
    \102\ See DP September 10 Letter, supra note 12, at 2.
    \103\ See V&F September 10 Letter, supra note 12, at 2.
---------------------------------------------------------------------------

    For example, an Opposing Commenter states that there is estimated 
to be between 500,000 and 600,000 metric tons of bonded copper 
inventory in Shanghai and Guangzhou, China, and that up to 10% of this 
stockpile is not deliverable because it has not been kept under 
cover.\104\ In the Commission's view, this leaves between 450,000 and 
540,000 tons of copper that may be deliverable to the Trust. The 
Sponsor says that ``Metal Bulletin'' estimates that 80% of these bonded 
stocks are LME acceptable metal given the imported status of such metal 
and arbitrage activity between the LME and SHFE.\105\ One of the 
Opposing Commenters argues that the Commission should not include 
copper located in China as inventory available for immediate delivery, 
noting that China is one of the largest copper-consuming countries in 
the world, leading the commenter to conclude that China would not 
export copper.\106\ That commenter does not provide any empirical 
support for this view. That commenter also suggests that copper in 
China is unavailable because ``a substantial percentage of the 
inventory in bonded warehouses in China is being held in financing 
structures,'' \107\ but the commenter admits that it does not know 
either how much of the copper is so encumbered under financing 
arrangements or how long such copper would be restricted.\108\ Further, 
even if the commenter is correct that, as a practical matter, such 
copper may be unavailable to U.S. copper consumers, that does not 
preclude copper in Shanghai from being deposited into the Trust (if it 
is otherwise eligible), as one of the Trust's initial permitted 
warehouse locations is Shanghai.
---------------------------------------------------------------------------

    \104\ See V&F August 24 Letter, supra note 11, at 9-10. In 
contrast, the Sponsor states that there is estimated to be 550,000 
metric tons of copper in bonded warehouses in Shanghai alone. See DP 
August 24 Letter, supra note 11, at 33.
    \105\ See DP August 24 Letter, supra note 11, at 30.
    \106\ See V&F September 10 Letter, supra note 12, at 5.
    \107\ V&F August 24 Letter, supra note 11, at 9.
    \108\ See id.
---------------------------------------------------------------------------

    Even assuming that authorized participants will need to remove 
copper from LME warrant to deposit the copper into the Trust, as 
discussed above, the Commission believes that the Trust's copper will 
remain available for immediate delivery to consumers and participants 
in the physical markets.\109\ Accordingly, the Commission does not 
believe that the listing and trading of the Shares is likely to disrupt 
the supply of copper available for immediate delivery.
---------------------------------------------------------------------------

    \109\ See supra Section III.A.1.
---------------------------------------------------------------------------

3. Growth of the Trust
    One of the Opposing Commenters believes it is reasonable to expect 
that the Trust would sell all of the Shares covered by the Registration 
Statement in the three months after the registration becomes effective 
because of: (1) ``the stated desire to have the Trust remove enough 
copper from the market each month to move prices upward to cover the 
costs of storage''; (2) the very limited quantity of copper available 
for immediate delivery to accomplish the Trust's objective; and (3) the 
increase in copper prices in the three months following October 2010, 
when the Trust, iShares Copper Trust, and ETFS Physical Copper were 
announced.\110\ That commenter also asserts that the copper supply is 
inelastic and that supply, therefore, is unlikely to increase fast 
enough to account for the increased demand that the commenter believes 
would be unleashed by the creation and growth of the Trust.\111\ 
Opposing commenters state that the Trust would hold approximately 
61,800 metric tons of copper if the Sponsor sells all of the 6,180,000 
Shares covered by its Registration Statement.\112\
---------------------------------------------------------------------------

    \110\ See V&F August 24 Letter, supra note 11, at 20. ETFS 
Physical Copper is a trust that holds copper under LME warrant and 
its shares are traded on the London Stock Exchange and Deutsche 
B[ouml]rse. See https://www.etfsecurities.com/en/updates/document_pdfs/ETFS_Physical_Industrial_Copper_Fact_Sheet.pdf. A 
discussion of the effect of ETFS Physical Copper on the price of 
copper is included below. See infra Section III.B.
    \111\ See V&F May 9 Letter, supra note 4, at 5. That commenter 
states that, in the longer term, copper miners are likely to respond 
to price signals and increase production. See V&F August 24 Letter, 
supra note 11, at 28. Another Opposing Commenter generally asserted 
that the Trust actually would change ``supply and demand 
relationships.'' AFR October 23 Letter, supra note 14, at 4. That 
commenter offered neither an explanation for nor quantitative data 
to support its belief. As discussed below, the Commission believes 
that the Opposing Commenters have not supported their prediction 
that the assets of the Trust will grow so quickly, and that copper 
supply is sufficiently inelastic, such that copper prices would be 
impacted. See infra text following note 118.
    \112\ See V&F May 9 Letter, supra note 4, at 3; Levin Letter, 
supra note 8, at 5.
---------------------------------------------------------------------------

    The Sponsor states that it does not expect to sell all registered 
Shares within three months after the Registration Statement becomes 
effective, and states: ``[l]ike all other physical metal ETVs, the 
Trust would register significantly more Shares than it initially 
intends to sell so that it is able to meet any such demand.'' \113\ The 
Sponsor predicts that, in connection with the initial offering of 
Shares, the Trust would hold 9,893 metric tons of copper.\114\
---------------------------------------------------------------------------

    \113\ DP August 24 Letter, supra note 11, at 41.
    \114\ See id.
---------------------------------------------------------------------------

    As a preliminary matter, the Opposing Commenters appear to conflate 
the amount of copper held by the Trust with the number of Shares 
issued. When Commodity-Based Trusts redeem shares, those redeemed 
shares do not get put ``back on the shelf''; once securities are 
redeemed, the issuer cannot resell securities of the same amount unless 
there is either sufficient capacity left on the registration statement 
(i.e., enough registered securities to cover the new issuance of shares 
by the issuer) or unless a new registration statement is filed to 
register the offer and sale of the securities.\115\ Accordingly, 
6,180,000 issued Shares will correspond with 61,800 metric tons of 
copper held by the Trust only if authorized participants do not redeem 
any Shares. Based on the existence of the arbitrage mechanism of the 
Trust,\116\ which is common to many exchange-traded vehicles, the 
Commission believes it is very unlikely that no Shares will be 
redeemed.
---------------------------------------------------------------------------

    \115\ See Sections 5 and 6 of the Securities Act, 15 U.S.C. 77e 
and 15 U.S.C. 77f, respectively.
    \116\ The Trust's arbitrage mechanism allows authorized 
participants to create and redeem Shares, and is designed to align 
the secondary market price per Share to the NAV per Share. See 
Notice, supra note 3, 77 FR at 23780.
---------------------------------------------------------------------------

    The Commission believes that the amount of copper held by the Trust 
will

[[Page 75477]]

depend on investor demand for the Shares and the extent to which 
authorized participants fulfill such demand by buying Creation Units 
and not redeeming issued Shares. Investor demand for the Shares is 
currently unknown. The Commission notes that ETFS Physical Copper, 
shares of which are listed and traded on the London Stock Exchange and 
Deutsche B[ouml]rse, has not grown to a substantial size since its 
inception.\117\
---------------------------------------------------------------------------

    \117\ According to one Opposing Commenter, on December 17, 2010 
(one week after the product was launched), ETFS Physical Copper held 
1,445.4 metric tons of copper, and on August 3, 2012, it held 
1,763.7 metric tons of copper, although there have been periods 
where ETFS Physical Copper has held greater quantities of copper, 
reaching as high as 7,072.9 metric tons of copper in March and April 
of 2012. See V&F August 24 Letter, supra note 11, at 15.
---------------------------------------------------------------------------

    As discussed above, the Commission believes that copper held by the 
Trust will be available for immediate delivery.\118\ However, even 
assuming that the Trust's copper will be unavailable for immediate 
delivery, the Commission believes that the Opposing Commenters have not 
supported their prediction that the Trust would grow so quickly that it 
would significantly disrupt the supply of copper available for 
immediate delivery.
---------------------------------------------------------------------------

    \118\ See supra Section III.A.1.
---------------------------------------------------------------------------

4. Other Physical Commodity Trusts
    Opposing commenters admit that the introduction of Commodity-Based 
Trusts that hold other metals had virtually no impact on the available 
supply, but they assert that these other metals--gold, silver, 
platinum, and palladium--are fundamentally different because they have 
traditionally been held for investment purposes, currently are used as 
currency, and that, as a result, there were ample stored sources 
available to fund Commodity-Based Trusts overlying those metals.\119\ 
They assert that copper, in contrast, generally is not held as an 
investment, but rather is used exclusively for industrial purposes, 
with the annual demand generally exceeding the available supply, and 
they therefore believe that the introduction of the Trust would impact 
supply.\120\
---------------------------------------------------------------------------

    \119\ See V&F May 9 Letter, supra note 4, at 2; and Levin 
Letter, supra note 8, at 6.
    \120\ See V&F May 9 Letter, supra note 4, at 2-3; and Levin 
Letter, supra note 8, at 7. Senator Levin states that because copper 
is very expensive to store and difficult to transport, relative to 
precious metals, copper is not currently held for investment 
purposes, and predicts that holding copper for investment purposes 
will have a significantly greater impact on the copper market than 
the precious metals Commodity-Based Trusts had on their markets and 
the broader economy. See Levin Letter, supra note 8, at 7.
---------------------------------------------------------------------------

    In response, the Sponsor states that the majority of the market for 
silver, platinum, and palladium is industrial in nature.\121\ The 
Sponsor has provided statistics from Thomson Reuters GFMS, a provider 
of information about the international metals industries, showing that 
in 2011, industrial use accounted for 84% of global palladium demand, 
66% of global platinum demand, and 53% of global silver demand.\122\ 
The Sponsor also states its belief that any holding of physical copper 
inventories, or of a financial replicating position, is implicitly an 
investment in copper.\123\
---------------------------------------------------------------------------

    \121\ See DP August 24 Letter, supra note 11, at 39. Similarly, 
the Exchange states that the Trust would not be the first Commodity-
Based Trust to hold a metal that is used primarily for industrial 
purposes. See Arca June 19 Letter, supra note 6, at 6.
    \122\ See DP August 24 Letter, supra note 11, at 39. No other 
commenter provided comparable statistics regarding the industrial 
use of palladium, platinum, or silver.
    \123\ See id. at 17, 19. The Sponsor believes copper held for 
investment purposes would include copper inventories on the LME, 
SHFE, and COMEX (453,464 metric tons as of July 31, 2012); copper 
inventories held through exchange-traded vehicles (2,356 metric tons 
as of July 31, 2012); and non-exchange-registered copper stocks (3.6 
million metric tons as of July 31, 2012, 100,000 metric tons of 
which were held by hedge funds and private investors in private 
warehousing arrangements). See id. at 17-18.
---------------------------------------------------------------------------

    Given the industrial usage of silver, platinum, and palladium as 
compared to copper,\124\ the Commission believes that it is reasonable 
to project that any impact of the listing and trading of the Shares 
will not be meaningfully different than that of the listing and trading 
of shares of these other Commodity-Based Trusts due solely to the 
nature of the underlying commodity markets. In any event, the 
Commission's analyses above in Sections III.A.1-3 are the primary bases 
for our belief that the listing and trading of the Shares is not likely 
to disrupt the supply of copper available for immediate delivery. The 
non-impact of those other trusts on the supplies in the underlying 
precious metals markets is consistent with this view, but it is not a 
significant factor underlying it.
---------------------------------------------------------------------------

    \124\ As mentioned above, the Sponsor provided statistics 
showing that in 2011, industrial use accounted for 84% of global 
palladium demand, 66% of global platinum demand, and 53% of global 
silver demand. See supra text accompanying note 122.
---------------------------------------------------------------------------

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

    The Opposing Commenters assert that, due to the rapid growth of the 
Trust, which they believe would occur and would remove a substantial 
portion of the supply of immediately available LME-warranted 
copper,\125\ the price of copper would be driven up.\126\ As noted 
above, one of the Opposing Commenters estimates that the Trust, which 
would hold up to 61,800 metric tons of copper, and the iShares Copper 
Trust,\127\ which would hold up to 121,200 metric tons of copper, 
collectively would hold approximately 34% of the copper available for 
immediate delivery.\128\ That commenter concludes that, ``[i]f the 
supply of copper available for immediate delivery drops by about 34%, 
it naturally follows that the price of copper will rise.'' \129\ 
Another of the Opposing Commenters states: ``[t]he LME settlement price 
is axiomatically affected by the quantity of copper on warrant * * * 
because the quantity on warrant defines how much copper is eligible to 
be delivered against a cash contract, i.e., it is the total supply that 
is available when setting the settlement price.'' \130\ That commenter 
also asserts that the launch of the UK-listed ETFS Physical Copper 
security and announcements about the proposed copper trusts in the 
United States were part of the cause of a copper price run up,\131\ and 
predicts that the price increases for copper would be especially 
dramatic in the U.S., where copper currently is relatively 
inexpensive.\132\ Another Opposing Commenter asserts that the value of 
copper is based on ``consumption rather than intrinsic value,'' and the 
creation of the Trust would introduce a financial element to copper 
pricing.\133\
---------------------------------------------------------------------------

    \125\ See supra Section III.A.1.
    \126\ See V&F May 9 Letter, supra note 4, at 5; Copper 
Fabricators Letter, supra note 11, at 4-5; Levin Letter, supra note 
8, at 5; and AFR October 23 Letter, supra note 14, at 2, 3.
    \127\ See Levin Letter, supra note 8, at 5. The Commission is 
not addressing the iShares Copper Trust proposed rule change in this 
order.
    \128\ See id.
    \129\ See id. Similarly, the Copper Fabricators state that the 
removal of 183,000 metric tons of copper from LME warehouses, which 
they believe is virtually all of the copper available for immediate 
delivery worldwide, would result in prices moving up very sharply. 
See Copper Fabricators Letter, supra note 11, at 5.
    \130\ See V&F August 24 Letter, supra note 11, at 7.
    \131\ See id. at 16.
    \132\ See V&F May 9 Letter, supra note 4, at 4-5.
    \133\ AFR October 23 Letter supra note 14, at 2. This commenter 
does not fully explain why the ``financialization'' of copper would 
result in higher copper prices. The commenter appears to make the 
same argument as other commenters: Namely, that the Trust will drive 
up the price of copper by removing it from the market, an activity 
that the commenter characterizes as ``hoarding.'' See id. at 3. 
Indeed, the commenter incorporates by reference the Levin Letter. 
See id. at 2.
---------------------------------------------------------------------------

    In contrast, the Sponsor asserts that copper cash prices are not 
determined only by changes in on-warrant LME copper stocks.\134\ The 
Sponsor believes

[[Page 75478]]

that supply and demand fundamentals, independent of the Trust, drive 
the price of copper.\135\ According to the Sponsor, the main 
determinants of price in the copper market are production and demand 
fundamentals such as: Demand expectations; mine and refinery capacity; 
marginal costs of production (in particular, the change in marginal 
costs of production at different production levels); global and 
regional industrial growth patterns; cost of financing; and inventory 
levels.\136\ The Sponsor states that: (1) Prices have reached the 
highest level and been among the lowest levels both in a ``normal'' 
regime and a low-stocks environment; and (2) copper inventories and 
prices do not always have an inverse relationship.\137\ In response to 
questions posed by the Commission about the impact of LME inventories 
on the LME Settlement Price, the Sponsor states that 5-day changes in 
the supply of LME inventories of 10,000 metric tons or more are not 
that uncommon, and that inventory builds or withdrawals equivalent to 
the amount of copper required for the initial creation unit of Shares 
currently occur at the LME at least one quarter of the time.\138\ The 
Sponsor and the Exchange also state that, due to the Trust's creation/
redemption mechanism and the related ability of authorized participants 
to exchange Shares for physical copper, Shares--like shares of other 
physical commodity backed trusts--would track rather than drive the 
price of the commodity it holds.\139\
---------------------------------------------------------------------------

    \134\ See DP August 24 Letter, supra note 11, at 11.
    \135\ See id. at 10. See also AFR November 16 Letter, supra note 
14, at 6-7 (``It is true that if all other factors were equal, the 
removal of supply from the market through hoarding would increase 
prices, leading to a positive correlation between inventory and 
prices. But other supply and demand factors will frequently 
introduce exactly the opposite relationship between inventory and 
price.'' (footnote omitted)).
    \136\ See DP August 24 Letter, supra note 11, at 10.
    \137\ See id. at 24.
    \138\ Id.
    \139\ See id. at 25; and Arca June 19 Letter, supra note 6, at 
4.
---------------------------------------------------------------------------

    As discussed above,\140\ the Commission does not believe that the 
listing and trading of the Shares is likely to disrupt the supply of 
copper available for immediate delivery, which is what the Opposing 
Commenters predict would increase the price of copper. However, even if 
the supply of copper under LME warrant would decrease because 
previously warranted copper were transferred to the Trust, for the 
reasons discussed below, the Commission does not believe that lower LME 
inventory level by itself will increase the LME Settlement Price (or 
any other price of copper).
---------------------------------------------------------------------------

    \140\ See supra Section III.A.
---------------------------------------------------------------------------

    To analyze the potential impact of changes in the LME inventory 
level on changes in the LME Settlement Price, Commission staff 
performed two regression analyses.\141\ The first analysis was a linear 
regression of daily copper price changes, using five years of daily 
data from 2007-2012, against the following explanatory variables: The 
change in LME copper inventory from the previous day (i.e., the lagged 
change in LME copper inventory), and the changes in spot prices of 
nickel, tin, gold, silver, platinum, and palladium, and the S&P 500, 
VIX index, and the China A-Shares index returns. The results indicate 
that LME copper inventories do not appear to have any independent 
statistical effect on prices.\142\
---------------------------------------------------------------------------

    \141\ See Memorandum to File, dated November 6, 2012, from the 
Division of Risk, Strategy, and Financial Innovation (``RF 
Analysis''). The RF Analysis was designed to look for evidence of 
price impact related to changes in copper inventory levels and fund 
flows.
    \142\ See id. at 10.
---------------------------------------------------------------------------

    Commission staff also performed a similar regression analysis using 
monthly data from January 2000 until June 2012 obtained from the 
International Copper Study Group (``ICSG'') to determine whether a 
relation between copper prices and LME inventories exists over a longer 
time horizon.\143\ The second analysis was a linear regression of 
monthly copper price changes against the following explanatory 
variables: The previous month's change in LME copper inventory, total 
exchange copper inventory (i.e., combined inventory from LME, COMEX, 
and SHFE), non-exchange copper inventory (i.e., inventory from 
merchants, producers, and consumers), and spot price changes for 
nickel, tin, and platinum. This analysis again indicates that LME 
inventories specifically do not appear to have any independent 
statistical effect on prices.\144\
---------------------------------------------------------------------------

    \143\ The Sponsor suggests that some of the inventory data 
published by the ICSG may be incomplete, but the Sponsor did not 
question the ICSG LME copper inventory data that was used in the 
Staff's analysis. See DP August 24 Letter, supra note 11, at 19.
    \144\ See RF Analysis, supra note 141, at 11.
---------------------------------------------------------------------------

    Based on these analyses, even if the listing and trading of Shares 
of the Trust were to result in the removal of copper on warrant from 
LME inventories, the Commission does not believe that such a supply 
reduction will by itself directly impact the LME Settlement Price (or 
any other price of copper). Although total exchange inventories, in 
contrast to LME inventories, appear to have some effect on monthly 
copper prices in this linear regression analysis, the coefficient 
estimate associated with total exchange inventories indicates that 
copper prices should decrease when copper is taken off-exchange.\145\
---------------------------------------------------------------------------

    \145\ See id.
---------------------------------------------------------------------------

    Commission staff also performed Granger causality analyses \146\ to 
test the causal effect the holdings of other Commodity-Based Trusts 
historically have had on the prices of their underlying commodities. 
Specifically, to evaluate whether the introduction of the SPDR Gold 
Trust, iShares Silver Trust, ETFS Platinum Trust, ETFS Physical 
Palladium Shares, and ETFS Physical Copper trust had an impact on the 
return of the metals underlying those trusts, using monthly data from 
their inceptions until September 2012, Commission staff examined flows 
into these funds and subsequent changes in underlying prices over 
time.\147\ This analysis revealed no observable relation between the 
flow of assets and subsequent price changes of the underlying metal 
prices.\148\ Commission staff repeated this analysis on a daily 
frequency for iShares Silver Trust, ETFS Platinum Trust, ETFS Physical 
Palladium Shares, and ETFS Physical Copper.\149\ Again, Commission 
staff found no evidence that fund flows were statistically related to 
subsequent changes in the underlying metals prices. Given the 
industrial usage of silver, platinum, and palladium as compared to 
copper,\150\ the Commission believes that it is reasonable to project 
that any impact of the listing and trading of the Shares will not be 
meaningfully different than that of the listing and trading of shares 
of other Commodity-Based Trusts due solely to the nature of the 
underlying commodity markets.
---------------------------------------------------------------------------

    \146\ Granger causality is a statistical concept of causality 
that is based on prediction. If a signal X ``Granger-causes'' a 
signal Y, past values of X should contain information that helps 
predict Y above and beyond the information contained in past values 
of Y alone. See id. at 3, n.9.
    \147\ See id. at 2-9. Because ETFS Physical Copper is small 
relative to the potential size of the Trust--holding only 
approximately 2,000 metric tons of copper as of August 2012--
Commission staff augmented its analysis by comparing asset growth of 
SPDR Gold Trust, iShares Silver Trust, ETFS Platinum Trust, and ETFS 
Physical Palladium Shares with changes in spot prices for the 
underlying metals.
    \148\ See id. at 4.
    \149\ Daily asset data was not available for the SPDR Gold Trust 
within the Commission's existing data sources.
    \150\ As mentioned above, the Sponsor provided statistics 
showing that in 2011, industrial use accounted for 84% of global 
palladium demand, 66% of global platinum demand, and 53% of global 
silver demand. See supra note 122 and accompanying text.

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

[[Page 75479]]

    The Commission received three comment letters regarding the 
Commission staff's analysis.\151\ These letters include comments on 
both the substantive conclusions reached as well as the methodology 
used.\152\ As described further below, the Commission believes the 
staff's analysis reasonably evaluates whether historical price impacts 
are associated with changes in copper supply, one of the Opposing 
Commenters' contentions.
---------------------------------------------------------------------------

    \151\ See AFR November 16 Letter, supra note 14; V&F November 16 
Letter, supra note 14; and Rutkowski November 17 Letter, supra note 
14. Mr. Rutkowski urges that the Commission afford the AFR November 
16 Letter the attention Mr. Rutkowski believes it deserves. See 
Rutkowski November 17 Letter, supra note 14. The Commission 
discusses both the AFR November 16 Letter and the V&F November 16 
Letter below.
    \152\ AFR states that ``[t]he detailed regression data, models 
(including computer code), and full results used in [the RF 
Analysis] should be released to the public.'' See AFR November 16 
Letter, supra note 14, at 3. The Commission does not believe it is 
necessary to release this information because the RF Analysis 
includes sufficient data and information to permit commenters to 
evaluate the staff's analyses.
---------------------------------------------------------------------------

    One of the Opposing Commenters states that the results in Table 4 
in the RF Analysis appear to contradict the staff's conclusion that 
there is no statistically significant relationship between copper 
inventories and copper prices as the results show a strong positive 
relationship between total exchange inventories and copper prices.\153\ 
The Commission believes that the aforementioned linear regression 
analysis conducted by staff indicates that LME copper inventories do 
not appear to have any independent statistical effect on copper prices. 
Further, we recognize that the linear regression analysis summarized in 
Table 4 also indicates that total exchange inventory has a positive 
relation to copper prices. Specifically, this linear regression 
analysis indicates that removal of copper from exchanges would lead to 
a decrease in the price of copper, thus benefiting market participants 
who use copper as an input.\154\
---------------------------------------------------------------------------

    \153\ See id. at 2. The commenter's concern appears to be based 
on its belief that supply changes ``on the margin'' influence price 
and that, if supply hoarding increases prices, the key determinant 
of price levels will be inventories for the source of supply for the 
marginal unit of copper. The commenter sets forth reasons why it 
believes the LME inventory no longer represents the marginal unit of 
copper, and its belief that total exchange inventory (or potentially 
off-exchange inventory) is the type of inventory most likely to 
include the marginal unit of copper inventory on the world market. 
AFR states that in recent years, inventories have been moving from 
the LME toward other exchanges, and that since 2008, most inventory 
flow has been to non-LME exchanges. AFR also argues that LME lending 
rules would make it illogical to use LME-warranted copper to 
influence market prices. In addition, AFR asserts that total 
exchange inventories may be a better guide to price impact since the 
Trust would hold copper that is not on LME warrant. See id. at 4.
    AFR also states that because the Commission staff's analysis 
``does not properly report the units in which these regression 
variables are measured in, and does not provide standardized 
coefficients, it is not possible to fully assess the economic (as 
opposed to statistical) significance of'' total exchange inventories 
and compare it to other coefficients. See id. at 4 n.4. While the 
Commission acknowledges this comment, the RF Analysis does not rely 
on the magnitude of coefficient estimates, but rather on the 
statistical significance of those estimates.
    \154\ In contrast, the Opposing Commenters argue that the 
removal from the market of a substantial portion of copper available 
for immediate delivery would drive up the price of copper. See supra 
notes 125-132 and accompanying text.
---------------------------------------------------------------------------

    This Opposing Commenter also states that the Commission staff's 
decision to use the inventory of LME-warranted copper, total exchange 
copper inventory, and total non-exchange inventory as independent 
variables makes it difficult to interpret any single coefficient.\155\ 
The commenter states that because LME copper inventory makes up a 
significant portion of total exchange inventory, the two variables are 
obviously highly correlated, creating the problem of collinearity 
between regressors.\156\ As a response to these comments, the 
Commission notes that its staff conducted a separate analysis, in which 
COMEX and SHFE copper inventory were substituted for total exchange 
copper inventory (i.e., the inventory of LME-warranted copper was 
removed from total exchange copper inventory). Consistent with the 
findings in the RF Analysis, this separate analysis shows that, even 
when replacing total exchange inventories with non-LME exchange 
inventories, LME inventories specifically do not appear to have any 
independent statistical effect on copper prices.\157\
---------------------------------------------------------------------------

    \155\ See AFR November 16 Letter, supra note 14, at 4. Another 
commenter asserts that Commission staff ``included likely 
heteroskedastic variables of other LME and LBMA metals prices in the 
regression, which may in the least, have undermined the cogency of 
the coefficient pertaining to LME copper inventory levels.'' See V&F 
November 16 Letter, supra note 14, at 1-2. There is no evidence in 
the record of the existence of heteroskedasticity in these variables 
that would affect the results of the RF Analysis.
    \156\ See AFR November 16 Letter, supra note 14, at 4. This 
commenter did not identify which independent variables Commission 
staff should have used and did not provide its own regression 
analysis for Commission to consider.
    \157\ In this alternative regression specification, the 
coefficient for non-LME exchange inventories is estimated to be 
positive and statistically significant, like the coefficient for 
total exchange inventory in Table 4 of the RF Analysis. This result 
again implies that taking inventory off these exchanges may result 
in a decrease in copper prices, as opposed to an increase in prices 
as predicted by the Opposing Commenters.
---------------------------------------------------------------------------

    Further, this Opposing Commenter states: ``There are growing doubts 
about the utility of not just LME inventories but any established 
exchange inventories in representing the true global inventory stocks 
of copper.'' \158\ The commenter asserts that, if there are large 
global inventories of copper that are not being measured, the utility 
of any of the models in the Commission staff's analysis is highly 
doubtful.\159\ As discussed above, the Commission believes that there 
are sufficient copper stockpiles such that up to 61,800 metric tons of 
copper could be deposited into the Trust without authorized 
participants taking copper off of either LME or COMEX warrant.\160\ 
This may, as the commenter suggests, limit the utility of the RF 
Analysis regarding the relation between LME inventories and prices. 
However, other Opposing Commenters have argued that the price of copper 
will increase precisely because authorized participants will create 
Shares by taking copper off of LME and/or COMEX warrant, and the RF 
Analysis addresses this concern.\161\ Moreover, the Commission believes 
that if there are large global inventories of copper that are not being 
measured, it is less likely that the listing and trading of the Shares 
will by itself increase the price of copper compared with the scenario 
suggested by other commenters who assert that LME inventories drive 
prices.
---------------------------------------------------------------------------

    \158\ See AFR November 16 Letter, supra note 14, at 8. AFR 
states: ``Table 4 does include a variable for the off-exchange 
inventory. The coefficient is large but not statistically 
significant. It is difficult to assess this finding given the 
collinearity issue and the lack of detail on how the off-exchange 
inventory variable is calculated.'' See id. at 4 n.8. The Commission 
does not believe that the magnitude of the coefficient for off-
exchange inventory in Table 4 of the RF Analysis is relevant as the 
p-value is statistically insignificant.
    \159\ See id. at 9.
    \160\ See supra Section III.A.2.
    \161\ See supra notes 125-132 and accompanying text.
---------------------------------------------------------------------------

    This Opposing Commenter also argues that the Commission staff's 
analysis ignores key ``institutional factors'' in the copper 
market.\162\ The commenter asserts that price determination in any 
market is highly dependent on the rules that govern that market, and 
that for an industrial commodity, factors concerning the practical use 
of the commodity are important.\163\ According to the commenter, the 
most important institutional factor is the LME's requirement ``that any 
holder of 50 percent or more of LME warrants in any metal must lend its 
inventory on demand at rates designed to prevent any

[[Page 75480]]

profit from the dominant position.'' \164\ The commenter asserts that 
the findings in the RF Analysis are based on analyses of exchange-
traded funds backed by LME warrants, and asserts that the findings of 
that analysis likely do not accurately reflect the likely price impact 
of the Trust as the assets of the Trust would not be backed by LME 
warrants.\165\ As discussed above,\166\ however, Commission staff 
evaluated whether the introduction of the SPDR Gold Trust, iShares 
Silver Trust, ETFS Platinum Trust, ETFS Physical Palladium Shares, and 
ETFS Physical Copper had an impact on the return of the metals 
underlying those trusts. Only ETFS Physical Copper holds LME warrants; 
the SPDR Gold Trust, iShares Silver Trust, ETFS Platinum Trust, and 
ETFS Physical Palladium Shares all hold physical gold, silver, 
platinum, and palladium, respectively, not warrants on those metals. 
Accordingly, the Commission believes the staff's analysis considers the 
institutional factor cited by the commenter.
---------------------------------------------------------------------------

    \162\ See AFR November 16 Letter, supra note 14, at 8.
    \163\ See id.
    \164\ See id.
    \165\ See id. See also supra text accompanying note 147.
    \166\ See supra note 147 and accompanying text.
---------------------------------------------------------------------------

    Further, one of the Opposing Commenters asserts that the Commission 
staff's analysis ignores endogeneity problems.\167\ The commenter 
argues that the Commission staff's Granger causality analyses \168\ are 
inappropriate because they look for a statistical relationship between 
variables that are simultaneously determined--specifically, asset flows 
into Commodity-Based Trusts and metals prices.\169\ In addition, this 
commenter argues that the Commission staff's regression analyses, 
performed to determine whether a relationship exists between copper 
prices and LME inventories,\170\ are subject to endogeneity bias.\171\ 
The commenter asserts that the Commission staff's analysis ``attempts 
to retrieve the causal impact of supply hoarding on prices through 
regressing price on quantity in the market generally.'' \172\ According 
to the commenter, although, ``if all other factors were equal, the 
removal of supply from the market through hoarding would increase 
prices, leading to a positive correlation between inventory and 
prices,'' other supply and demand factors, such as an inventory buildup 
in connection with a decline in prices caused by decreased market 
demand, can lead to a negative correlation between inventory level and 
prices.\173\ Thus, according to the commenter, a correlation between 
inventory levels and price will not isolate the effect of supply 
hoarding.\174\
---------------------------------------------------------------------------

    \167\ See AFR November 16 Letter, supra note 14, at 5. AFR 
states that endogeneity refers to the simultaneous determination of 
quantity and price in supply-demand systems and ``involves a causal 
loop between the dependent and independent variable such that the 
causal impact of the independent variable cannot be isolated.'' See 
id.
    \168\ See supra notes 146-150 and accompanying text.
    \169\ See AFR November 16 Letter, supra note 14, at 5.
    \170\ See supra notes 141-144 and accompanying text.
    \171\ See AFR November 16 Letter, supra note 14, at 6.
    \172\ See id.
    \173\ See id. at 6-7.
    \174\ See id. at 7.
---------------------------------------------------------------------------

    The Commission does not believe that endogeneity biases are 
problematic with regard to the linear regression analyses and the 
Granger causality analyses Commission staff conducted because the 
analyses examine the relation between lagged inventory changes (in case 
of the regression analyses) or lagged flows (in the case of the Granger 
causality analyses) and subsequent price changes. For this reason, the 
inventory and flow variables are determined prior to the price 
variables being determined, and are not determined simultaneously with 
prices.\175\
---------------------------------------------------------------------------

    \175\ The commenter asserts: ``The most preferred method [to 
address endogeneity issues] is to use an instrumental variables 
approach that isolates factors that affect market supply but are 
unrelated to other causal factors.'' Id. This commenter, however, 
did not submit for Commission consideration the analysis it asserts 
is necessary, nor did the commenter provide any examples of 
instrumental variables it asserted would rectify the analysis.
---------------------------------------------------------------------------

    Another of the Opposing Commenters states that the Granger 
causality analyses appear on their face to be incongruous.\176\ This 
commenter states its belief that Commission staff appears to be 
comparing assets under management to the respective price of the 
commodity held by the trust, and provides a chart that the commenter 
purports to show that there is a 92% correlation between the rolling 
monthly change in NAV of the iShares Silver Trust and the silver 
price.\177\ The Granger causality analysis from Tables 1 and 2 of the 
RF Analysis examines the relation between dollar flows into the funds 
and subsequent changes in the prices of the underlying metals. It does 
not examine the relation between changes in assets under management, 
which are driven by both flows and returns of the underlying, and the 
concurrent change in the prices of the underlying metals. Therefore, 
the Commission believes that the relation between the change in NAV for 
these funds and the concurrent change in the prices of the underlying 
metal is irrelevant for the purposes of the cited analysis.
---------------------------------------------------------------------------

    \176\ See V&F November 16 Letter, supra note 14, at 6.
    \177\ See id. at 6-7.
---------------------------------------------------------------------------

    Two of the Opposing Commenters question the time periods used in 
the Commission staff's analysis. One of these Opposing Commenters 
states that Commission staff failed to account for the term structure 
of prices (e.g., whether, and the extent to which, the market is in 
contango or backwardation).\178\ This commenter states: ``[t]he correct 
lag period to test for price impacts on copper consumers depends upon 
the delivery times and production lead times, which also affect the 
price impacts of deep backwardation on consumer access to supplies.'' 
\179\ While this commenter suggests that the Commission staff did not 
use the correct lag period in its analysis, the commenter did not 
provide any specific time intervals that should be used from the many 
possible alternatives, nor did it explain what time intervals would 
have been more appropriate than those used by Commission staff. The 
Commission believes the daily periods used in the RF Analysis were 
reasonable and appropriate because evidence of the relationship between 
inventories and prices would likely be seen at daily intervals.\180\
---------------------------------------------------------------------------

    \178\ See AFR November 16 Letter, supra note 14, at 9.
    \179\ See id.
    \180\ In particular, LME inventory data for the previous day is 
released on the morning of each trading day so that prices are able 
to react over the course of that day. Moreover, the use of the 
monthly lag period confirmed the results of the daily analysis and 
allowed for the examination of the effect of non-exchange copper 
inventories for which only monthly data were available within the 
Commission's existing data sources.
---------------------------------------------------------------------------

    Another of the Opposing Commenters suggests that Commission staff 
should have examined the cash to three month time spread and provides 
its own analysis, which the commenter concludes demonstrates a strong 
relationship between LME inventory changes and the cash to three month 
time spread.\181\ This commenter states that if the Trust and the 
iShares Copper Trust were to sell all of the shares registered through 
their respective registration statements, the cash to three month time 
spread ``would blow out to a massive backwardation, potentially 
approaching record levels, making it impossible for copper consumers to 
finance their inventory.'' \182\ The

[[Page 75481]]

analysis provided by this commenter, however, does not provide the 
significance level of any test statistics associated with these 
findings, which would provide an assessment of the likelihood that 
relations were observed in the data by statistical chance. Without an 
assessment of statistical significance, it is difficult to conclude 
whether observed relations in the commenter's data are systematic or 
anecdotal. In addition, this commenter's analyses appear to analyze 
inventory changes against concurrent price changes. The Commission does 
not believe that such a concurrent analysis can isolate the effect of 
inventory changes on prices because such an analysis cannot distinguish 
whether price changes lead inventory changes or vice versa.
---------------------------------------------------------------------------

    \181\ See V&F November 16 Letter, supra note 14, at 3.
    \182\ See id. The commenter further states that the mechanics of 
unit creation for Commodity-Based Trusts backed by precious metals 
are fundamentally different than those for Commodity-Based Trusts 
backed by industrial metals, citing the lack of copper in 
unallocated accounts that could be used in creating Shares. 
According to the commenter, neither producers nor consumers are 
carrying meaningful inventories of copper, which would require 
authorized participants to acquire copper from LME and COMEX 
inventories to create Shares. The commenter asserts that a 
backwardation would be necessary to trigger the movement of copper 
to authorized participants, and that consumers would have to compete 
for this metal or lend to authorized participants. See id. at 4. As 
discussed above, the Commission believes that the record supports 
the view that there are sufficient copper stockpiles such that up to 
61,800 metric tons of copper could be deposited into the Trust 
without authorized participants taking copper off of either LME or 
COMEX warrant. See supra Section II.A.2.
---------------------------------------------------------------------------

    Further, as discussed above, the Commission does not believe that 
the listing and trading of the Shares is likely to disrupt the supply 
of copper available for immediate delivery,\183\ and believes that the 
Opposing Commenters have not supported their prediction that the Trust 
would grow so quickly that it would significantly disrupt the supply of 
copper available for immediate delivery.\184\
---------------------------------------------------------------------------

    \183\ See supra Section III.A.
    \184\ See supra Section III.A.3.
---------------------------------------------------------------------------

    This Opposing Commenter also asserts that Commission staff erred by 
using lagged daily LME stock data. This commenter asserts that because 
there are ``many consecutive and non-consecutive days that LME stock 
levels and LME traded metals do not change while LME prices do * * *, 
running a daily LME stock series through a regression analysis will 
yield statistically weak results in most cases.'' \185\ The commenter 
states that LME inventory data for the prior day is released at 9:00 
a.m. in the London trading day, thereby giving the market a full 
trading day to digest the data.\186\ The lagged daily LME inventory 
change used in the RF Analysis in fact was regressed against the change 
in copper prices for the day on which this information was released at 
9:00 a.m.\187\
---------------------------------------------------------------------------

    \185\ See V&F November 16 Letter, supra note 14, at 2.
    \186\ See id. at 5-6.
    \187\ To confirm this, Commission staff reconciled a sample of 
historical LME stock data from the LME Web site (https://www.lme.com/dataprices.asp) and the Bloomberg LME stock data used in the RF 
Analysis. Additional reconciliation was done against historical LME 
copper warehouse stock data found at https://www.metalprices.com/historical/database/copper/lme-copper-warehouse-stocks.
---------------------------------------------------------------------------

    In addition, this Opposing Commenter asserts that there is not a 
strong statistical relationship between lagged copper inventories and 
contemporaneous copper prices because the LME represents the copper 
market's ``warehouse of last resort.'' \188\ According to this 
commenter, when LME stocks are drawn down or added to, market 
participants ``should have already fully discounted the fundamental 
information contained within that particular stock move.'' \189\ This 
assertion seems consistent with a hypothesis that price changes precede 
inventory changes, which is contrary to Opposing Commenters' assertions 
that inventory changes precede price changes.\190\ The Commission 
believes that this argument provides further weight to the Commission 
staff's finding that the LME copper inventory changes do not appear to 
precede price changes.
---------------------------------------------------------------------------

    \188\ See V&F November 16 Letter, supra note 14, at 6.
    \189\ See id. at 6 (stating that LME stocks are drawn down by 
consumers because neither producers nor traders have material to 
sell to consumers and consumers are willing to go through the 
logistical hassle of being long LME warrants, swapping the warrants 
for their preferred brands, and transporting the copper to their 
individual plant, and that ``[i]t is nonsensical to assume that the 
trading community has not already discounted this information into 
the LME price''). But see id. at 2 (``Intuitively it doesn't make 
sense to argue that in a physically settled exchange system that 
fungible stock levels don't exert some statistically robust 
influence on metals prices.'').
    \190\ See supra note 154 and accompanying text.
---------------------------------------------------------------------------

    This Opposing Commenter suggests that, instead of looking at lagged 
daily LME stock data, the Commission staff should have looked at the 30 
largest quarter-to-quarter LME inventory declines against changes in 
the LME cash price over the same time periods. The commenter asserts 
that such analysis, which the commenter submitted, shows that for the 
30 largest observations, the median stock decline was 28.6%, and that 
the LME cash price rose in 25 out of 30 observations, for a median 
increase of 10.5%.\191\ The commenter states that these findings 
suggest that if LME and COMEX inventories were to decline by more than 
50%, which the commenter asserts could happen if the Trust and the 
iShares Copper Trust were to sell all of the shares registered through 
their respective registration statements, prices could increase 20-60% 
in the quarter that the LME and COMEX inventory decline occurs.\192\
---------------------------------------------------------------------------

    \191\ See V&F November 16 Letter, supra note 14, at 2.
    \192\ See id. at 2.
---------------------------------------------------------------------------

    The analysis provided by this commenter, however, does not provide 
the significance level of any test statistics associated with these 
findings.\193\ In addition, this commenter's analysis appears to 
analyze inventory changes against concurrent price changes. The 
Commission does not believe that such a concurrent analysis can isolate 
the effect of inventory changes on prices.\194\ Further, as discussed 
above, the Commission does not believe that the listing and trading of 
the Shares is likely to disrupt the supply of copper available for 
immediate delivery,\195\ and believes that the Opposing Commenters have 
not supported their prediction that the Trust would grow so quickly 
that it would significantly disrupt the supply of copper available for 
immediate delivery.\196\
---------------------------------------------------------------------------

    \193\ See supra text following note 182.
    \194\ See supra text following note 182.
    \195\ See supra Section III.A.
    \196\ See supra Section III.A.3.
---------------------------------------------------------------------------

    One of the Opposing Commenters states that Commission staff should 
have considered the impact on locational premia.\197\ This commenter 
asserts that the relationship between COMEX inventory and locational 
premia in the U.S. is strong, and provides data that the commenter 
suggests shows that when COMEX inventories are at anemic levels, 
locational premia can be very high (above $200 per metric ton).\198\ 
Thus, the commenter argues that if the Trust results in the removal of 
inventory from LME and COMEX warehouses, the associated market impact 
will be much higher locational premia.\199\ The analysis provided by 
this commenter, however, does not provide the significance level of any 
test statistics associated with these findings.\200\ In addition, this 
commenter's analysis appears to analyze inventory changes against 
concurrent price changes. The Commission does not believe that such

[[Page 75482]]

a concurrent analysis can isolate the effect of inventory changes on 
prices, as discussed previously.\201\ In addition, according to data 
provided by commenters, locational premia typically appear to be no 
greater than 2%. Therefore, the Commission believes the degree to which 
such premia can be influenced is limited. Further, even assuming that 
copper was taken off LME warrant to be deposited into the Trust, the 
Commission believes that the Trust's copper will remain available for 
immediate delivery to consumers and participants in the physical 
markets,\202\ which will limit the possible effect on locational 
premia.
---------------------------------------------------------------------------

    \197\ See V&F November 16 Letter, supra note 14, at 3, 5. This 
commenter refers to ``physical'' premia in describing the manner in 
which the Trust will value its copper holdings: ``Another market 
price that the SEC could have done well to look into is the physical 
premia, especially in light of the [Trust's] implied objective to 
value metal * * * on an in-situ basis, taking into account regional 
physical price variations.'' See id. at 5. Consistent with this 
description, the Commission refers to locational premia rather than 
physical premia.
    \198\ See id.
    \199\ See id.
    \200\ See supra text following note 182.
    \201\ See supra text following note 182.
    \202\ See supra text accompanying note 109.
---------------------------------------------------------------------------

    Finally, this Opposing Commenter asserts that the listing and 
trading of the Shares could change the fundamental structure of the 
copper market, and that Commission staff should ``ponder'' such a 
structural change in the copper market.\203\ This commenter states that 
the ex-post implications for copper outright prices in a market that 
involves listing and trading of the Shares cannot be accurately 
inferred from what this commenter characterizes as ``an overly-
simplistic ex-ante statistical analysis of LME/global inventories and 
LME settlement prices.'' \204\ According to this commenter, never 
before has it been possible for financial players to ``lock up'' 
significant amounts of LME and COMEX inventory in a short period of 
time and remove that copper from the market.\205\ Further, while this 
commenter indicates that ``[o]verall historically the level of LME 
inventories has been generally indicative of the trading environment, 
not a driver of the metal price per se,'' creation of the Trust could 
change the role of LME inventories from being a function of the 
fundamentals to being a fundamental, and ``arguably THE fundamental, as 
has become the case in precious metals.'' \206\
---------------------------------------------------------------------------

    \203\ See V&F November 16 Letter, supra note 14, at 3-4.
    \204\ See id. at 4.
    \205\ See id. at 3-4, 8.
    \206\ See id. at 6 (emphasis in original). The commenter states 
that exchange-traded vehicles backed by silver, platinum, and 
palladium have become the largest single holder of those metals in a 
remarkably short period of time (less than eight years) and that 
exchange-traded vehicles backed by gold are eclipsed at a national 
level only by the U.S. and Germany. According to the commenter, 
while the cumulative impact of exchange-traded vehicles on prices 
has dissipated as these products have matured, ``the reality is that 
they have become a key fundamental in terms of analyzing the 
precious metals markets,'' and have become the main asset class. The 
commenter asserts that it is not certain, and that it should not be 
assumed, that potential investors in the Trust will ``be as sticky 
as they have been in gold and silver, and to a lesser degree in 
platinum and palladium.'' Id. at 7. The commenters ``stickiness'' 
argument has been addressed above. See supra Section III.A.1.
---------------------------------------------------------------------------

    The Commission believes that such assertions are speculative and 
unsupported by the record. As discussed in detail throughout this 
order, the Commission does not believe that the listing and trading of 
the Shares is likely to alter the supply and demand fundamentals of the 
copper market. Further, as discussed above, the Commission does not 
believe that the listing and trading of the Shares is likely to disrupt 
the supply of copper available for immediate delivery \207\ and, even 
assuming that copper was taken off LME warrant to be deposited into the 
Trust, the Commission believes that the Trust's copper will remain 
available for immediate delivery to consumers and participants in the 
physical markets.\208\
---------------------------------------------------------------------------

    \207\ See supra Section III.A. Even assuming that the Trust's 
copper will be unavailable for immediate delivery, the Commission 
believes that the Opposing Commenters have not supported their 
prediction that the Trust would grow so quickly that it would 
significantly disrupt the supply of copper available for immediate 
delivery. See supra Section III.A.3.
    \208\ See supra text accompanying note 109.
---------------------------------------------------------------------------

    Lastly, one of the Opposing Commenters cites a study that 
``examines the hedging activity of sponsors using futures as hedges for 
the total return swaps'' entered into as part of commodity index 
funds.\209\ According to the commenter, the sponsor of a commodity 
index fund must replace expiring futures contracts with later-maturing 
futures on a continuous basis (referred to as the ``roll'').\210\ The 
commenter states that the Frenk & Turbeville Study ``found an extremely 
strong and significant correlation'' over a multi-year period between 
the five-day roll period for hedges of the Goldman Sachs Commodity 
Futures Index in each month with a movement in the forward price curve 
toward higher prices in the future.\211\ The commenter believes that 
suppliers hold onto more of the underlying commodity to take advantage 
of the rising prices signaled by the movement in the forward price 
curve (although no fundamental market forces have signaled such higher 
prices), which in turn increases spot prices to attract supply that 
otherwise could be hoarded.\212\ The commenter believes that the 
proposed trust will have a more direct effect on the copper market as 
withdrawal of supply in rising-price markets (and flooding of supply in 
decreasing-price markets) constitutes an actual change in supply and 
demand relationships.\213\
---------------------------------------------------------------------------

    \209\ AFR October 23 Letter, supra note 14, at 4 (citing David 
Frenk & Wallace Turbeville, Commodity Index Traders and the Boom/
Bust Cycle in Commodities Prices (October 2011), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1945570 (``Frenk & 
Turbeville Study'')). The commenter states that these total return 
swaps do not reference a single commodity, but rather are valued 
based on indices comprised of a basket of commodity futures. See id. 
at 3.
    \210\ See id. at 4.
    \211\ See id.
    \212\ See id.
    \213\ Id.
---------------------------------------------------------------------------

    The Commission is not persuaded that the conclusions of a study on 
correlations between the roll periods of futures indexes and 
commodities prices should be extrapolated to predict the impact of the 
Trust, which will hold physical copper (not copper derivatives), on the 
price of copper. As discussed above, the Commission believes that 
copper delivered into and held by the Trust will remain available for 
immediate delivery and, even if it is ``removed from the market'' as 
commenters have suggested, the supply of copper available for immediate 
delivery is sufficient such that the creation and quick growth of the 
Trust alone is not expected to impact the price of copper.\214\
---------------------------------------------------------------------------

    \214\ See supra Sections III.A.1 and A.3.
---------------------------------------------------------------------------

    Because the Commission does not believe that the listing and 
trading of the Shares, by itself, will increase the price of copper, 
the Commission also believes that approval of the proposed rule change 
will not have an adverse effect on the efficiency of copper allocation 
for industrial uses and will also not have an adverse effect on capital 
formation for industrial uses of copper.

C. The Trust's Impact on Copper Price Volatility

    The Opposing Commenters assert that the successful creation and 
growth of the Trust would make the price of copper, which one of those 
commenters states already is volatile,\215\ even more volatile. 
Specifically, they assert that the successful creation and growth of 
the Trust, which would in their view substantially restrict supply and 
increase copper prices, would create a boom and bust cycle in copper 
prices.\216\ For example, the Copper Fabricators predict that: (1) The 
Trust would remove copper from the market, and thus would drive the 
price of copper higher, which in turn would

[[Page 75483]]

drive the price of the Shares higher; (2) at some point, the 
anticipated incremental increase in price would either be insufficient 
to cover the increasing costs of storage or would not be enough to 
generate a profit; and (3) that when that expected outcome occurs, 
Share holders would sell their Shares and authorized participants would 
redeem them, returning the copper held in the Trust to the physical 
market.\217\ The Opposing Commenters predict that this ultimate sell-
off would be quick, and predict that the expected ``dumping'' of 
thousands of metric tons of copper back onto the market would depress 
the price of copper and negatively impact the world economy at 
large.\218\
---------------------------------------------------------------------------

    \215\ See V&F May 9 Letter, supra note 4, at 5.
    \216\ See id. at 5; Levin Letter, supra note 8, at 5; Copper 
Fabricators Letter, supra note 11, at 5-6; and AFR October 23 
Letter, supra note 14, at 2. But see V&F November 16 Letter, supra 
note 14, at 8 (stating that if Commission staff were to analyze 
whether the discrete flow of ounces in and out of exchange-traded 
vehicles drives underlying metals price, it would likely show that 
volatility in precious metals is not solely a function of net metal 
flow in and out of the exchange-traded vehicles).
    \217\ See Copper Fabricators Letter, supra note 11, at 5-6.
    \218\ See, e.g., Levin Letter, supra note 8, at 6. More 
specifically, V&F states that, because of this predicted boom and 
bust, mines will go bust and resources will be needlessly 
misallocated. See V&F August 24 Letter, supra note 11, at 28.
---------------------------------------------------------------------------

    In contrast, NYSE Arca and the Sponsor assert that the Trust would 
not increase copper price volatility in this manner and in fact may 
reduce it. The Exchange states that, because of the arbitrage mechanism 
common to all exchange-traded vehicles, share prices of physical 
commodity-backed exchange-traded vehicles generally follow rather than 
drive the price of the underlying assets.\219\ The Sponsor asserts that 
volatility in prices results when there is a major change in prevailing 
expectations about fundamental market parameters, and the Trust would 
not affect any of the fundamental parameters that drive supply and 
demand.\220\ Further, the Sponsor states that the Trust may reduce 
copper price volatility because, if holders of the Shares act according 
to their incentives--namely, to sell into rallies and buy on price 
dips--their actions may tend to reduce peaks and valleys in pricing, 
and help to reduce volatility.\221\
---------------------------------------------------------------------------

    \219\ See Arca June 19 Letter, supra at 6, at 4.
    \220\ See DP August 24 Letter, supra note 11, at 11. The Sponsor 
also states: (1) Changes in realized volatility of physical copper 
prices and prices of copper derivatives based on changes in global 
copper supply are not constants; (2) LME prices and price volatility 
do not increase or decrease based solely on LME copper stocks or on-
warrant LME copper stocks; and (3) in general, realized volatility 
of copper prices tends to be higher in a lower stocks environment, 
as strong physical demand draws production and distribution systems 
to full capacity utilization. See id. at 24-25.
    \221\ See id. at 11.
---------------------------------------------------------------------------

    The Opposing Commenters' prediction that the listing and trading of 
the Shares would cause a boom and bust is premised upon both the supply 
and price impacts they predict. As discussed above, the Commission does 
not believe that the listing and trading of the Shares is likely to 
disrupt the supply of copper available for immediate delivery \222\ or 
increase the price of copper.\223\ In addition, this boom and bust 
prediction is unsupported by any empirical evidence. As a result, the 
Commission does not believe that the proposed listing and trading of 
the Shares will impact copper volatility in the manner that Opposing 
Commenters suggest. Further, the Commission does not believe that 
approval of the proposed rule change will impede the use of copper 
because the listing and trading of the Shares is not expected to, as 
discussed above, result in heightened volatility. Therefore, the 
Commission does not believe that the listing and trading of the Shares 
will have an adverse effect on the efficiency of copper allocation and 
capital formation.
---------------------------------------------------------------------------

    \222\ See supra Section III.A.
    \223\ See supra Section III.B.
---------------------------------------------------------------------------

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

    The Opposing Commenters set forth a number of arguments about why 
the Trust would increase the potential for manipulation of the copper 
market. One of the Opposing Commenters asserts that the Trust, in 
effect, would introduce so much transparency into the copper market 
that it would allow the Trust to manipulate, or alternatively provide 
market participants an effective means to manipulate, the price of 
copper and thereby the price of the Shares. According to that 
commenter, investors in the Trust would be able to measure how much 
impact their collective removal of copper from the supply available for 
immediate delivery would have on copper prices each day, and could 
adjust their purchasing strategies accordingly.\224\ Therefore, that 
commenter believes that the increased market transparency, which the 
Exchange asserts would result from the formation and operation of the 
Trust, would not be in the public interest.\225\ Instead, the commenter 
believes the transparency of the Trust's holdings would provide market 
participants with critical information about ``how much copper needs to 
be removed on any given day in order to artificially inflate [copper] 
prices and thus the price of the Trust's shares.'' \226\
---------------------------------------------------------------------------

    \224\ See V&F May 9 Letter, supra note 4, at 9.
    \225\ See id. at 10.
    \226\ V&F July 13 Letter, supra note 7, at 10.
---------------------------------------------------------------------------

    Due to their view of the Trust's impact on the supply of copper 
available for immediate delivery, Opposing Commenters predict that the 
Trust would make the copper market more susceptible to squeezes and 
corners.\227\ According to an Opposing Commenter, after a substantial 
portion of the copper market is deposited in one or more physical 
copper trusts, the costs of acquiring the remaining inventory would be 
relatively inexpensive, thus reducing a hurdle to engineering a corner 
or squeeze.\228\ According to another commenter, such manipulative 
activities could go undetected by the LME because trusts that hold 
physical commodities are not subject to any form of commodity 
regulations; by holding physical copper rather than LME warrants, the 
Trust would be able to control more of the available supply of copper 
without triggering LME reporting or rules.\229\
---------------------------------------------------------------------------

    \227\ See V&F May 9 Letter, supra note 4, at 1, 10; Levin 
Letter, supra note 8, at 7; and AFR October 23 Letter, supra note 
14, at 4-5. One of the Opposing Commenters describes a squeeze on 
the copper market as occurring ``when a lack of supply and excess 
demand forces the price upward, and a corner is when one party 
acquires enough copper to be able to manipulate its price.'' Levin 
Letter, supra note 8, at 7.
    \228\ See V&F September 10 Letter, supra note 12, at 7. Senator 
Levin asserts that the Trust will make the copper market more 
susceptible to squeezes because it could be used by market 
participants to remove copper from the available supply in order to 
artificially inflate the price. See Levin Letter, supra note 8, at 
7.
    \229\ See Levin Letter, supra note 8, at 7.
---------------------------------------------------------------------------

    In response, the Exchange states that the Trust instead may reduce 
the potential for fraud or manipulation in the physical copper market 
because: (1) The Trust may hold copper in multiple global locations, 
which is intended to provide a larger, more liquid supply of copper 
than would be available if creations and redemptions were only 
permitted using copper held in a single location; (2) the Trust and 
transactions in the Shares would be transparent, publishing information 
about its holdings and operations through its Web site; (3) the Trust 
would utilize a consistent, transparent, non-discretionary, rules-
based, and fully disclosed selection protocol for redemptions; and (4) 
the Trust's copper would be valued by a recognized, independent 
valuation agent.\230\
---------------------------------------------------------------------------

    \230\ See Arca June 19 Letter, supra note 6, at 5-6.
---------------------------------------------------------------------------

    The Sponsor also claims that the Trust may reduce the potential for 
fraud or manipulation in the physical copper market,\231\ which would 
have an impact on any potential manipulation of the

[[Page 75484]]

Shares as well. Specifically, the Sponsor asserts that the Trust 
already has introduced greater transparency into the copper 
market.\232\ According to the Sponsor, prior to July 16, 2011, 
locational premia (i.e., prices) for physical copper were reported 
infrequently, available only by subscription, and available only for 
certain broad regions.\233\ Since then, in anticipation of the Trust's 
potential launch, the Valuation Agent has calculated the locational 
premium for physical copper in each of the Trust's approved warehouses 
on a daily basis, and published the locational premia on a weekly 
basis.\234\ The Sponsor expects that transparency would increase 
through the listing of the Shares because when trading of the Shares 
commences: (1) The Trust would post on its Web site these locational 
premia on a daily basis; (2) the Exchange would continuously 
disseminate pricing information as part of its required intraday 
indicative value (``IIV'') reporting; (3) the Sponsor believes that 
Shares would be created using previously unreported non-exchange-
registered stocks, and thus copper market participants would have more 
information about supply; and (4) the Trust would furnish complete 
visibility into creation and redemption activity by certain authorized 
participants.\235\
---------------------------------------------------------------------------

    \231\ See DP August 24 Letter, supra note 11, at 4. The Sponsor 
also states that neither it nor the Trust could deliberately 
influence copper prices even if it sought to because the Trust is 
not managed--it does not take positions or buy and sell copper, and 
it cannot place large orders that could affect the market. See id. 
at 12.
    \232\ See id. at 4-5.
    \233\ See id.
    \234\ See id.
    \235\ See id.
---------------------------------------------------------------------------

    The Sponsor also argues that the underlying copper market is 
subject to extensive and explicit regulatory authority, and the 
increased transparency furnished by the Trust would enhance regulators' 
ability to oversee the copper market and enforce applicable laws and 
rules. Specifically, the Sponsor states: (1) The CFTC has explicit 
anti-fraud and anti-manipulation authority under the CEA that extends 
over the U.S. physical commodity markets; (2) the Department of Justice 
has the ability to pursue antitrust violations, such as concerted 
buying and selling involving commodities, under the federal antitrust 
laws; and (3) the LME has broad rights to obtain information relating 
to the activities of LME members and their affiliates if the LME has 
cause to suspect undesirable or improper trading that affects the 
copper markets, including the markets for both LME-warranted and non-
warranted copper, and therefore the LME can obtain information about 
both LME and non-LME metal trading activities from J.P. Morgan 
Securities plc, an affiliate of the Sponsor that is a ring-dealing 
member of the LME, as well as from the Sponsor.\236\ The Sponsor also 
asserts that there has been no increased manipulative behavior due to 
the reduction of copper available for immediate delivery that resulted 
from the prior years' deficits in copper production versus copper 
consumption, and that the creation of commodity backed trusts holding 
gold, silver, platinum, and/or palladium has not led to manipulation of 
the markets for those precious metals.\237\
---------------------------------------------------------------------------

    \236\ See id. at 5.
    \237\ See id. at 45, 46.
---------------------------------------------------------------------------

    The Commission does not believe that the listing and trading of the 
Shares is likely to increase the likelihood of manipulation of the 
copper market and, correspondingly, of the price of the Shares. 
Generally, the Commission believes that increased transparency helps 
mitigate risks of manipulation. For example, in approving the listing 
and trading of shares of the iShares Silver Trust, the Commission 
stated that the dissemination of information about the silver shares 
would ``facilitate transparency with respect to the Silver Shares and 
diminish the risk of manipulation or unfair informational advantage.'' 
\238\ In this case, the Commission believes the transparency that the 
Trust will provide with respect to its holdings, the locational premium 
for and price per metric ton of the copper in each warehouse location 
of the Trust, and creation and redemption activity, including the 
locations of creations and redemptions, as well as the dissemination of 
quotations for and last-sale prices of transactions in the Shares and 
the IIV and NAV of the Trust,\239\ all are expected to help reduce the 
ability of market participants to manipulate the physical copper market 
or the price of Shares.\240\ Also, the Commission believes that the 
listing and trading of the Shares on the Exchange (and any other 
national securities exchange that trades the Shares pursuant to 
unlisted trading privileges) \241\ may serve to make the overall copper 
market more transparent if OTC trading of unreported warehouse receipts 
shifts to trading Shares on exchanges.\242\ In particular, additional 
information regarding the supply of copper will be disseminated, which 
will enable users of copper to make better-informed decisions. Over the 
long term, this additional transparency could enhance efficiency in the 
market for copper and capital formation for participants in this 
market. In addition, the Commission believes that the listing and 
delisting criteria for the Shares are expected to help to maintain a 
minimum level of liquidity and therefore minimize the potential for 
manipulation of the Shares.\243\
---------------------------------------------------------------------------

    \238\ See Securities Exchange Act Release No. 53521 (March 20, 
2006), 71 FR 14967, 14975 (March 24, 2006).
    \239\ See DP August 24 Letter, supra note 11, at 43-45, and 
supra text accompanying notes 43 and 45.
    \240\ Further, the Trust is a passive vehicle, and therefore 
V&F's concerns about manipulation by the Trust itself are misplaced.
    \241\ When a national securities exchange extends ``unlisted 
trading privileges'' to a security, it allows the trading of a 
security that is not listed and registered on that exchange. See 
Securities Exchange Act Release No. 35323 (February 2, 1995), 60 FR 
7718, 7718 (February 9, 1995) (proposing rules to reduce the period 
that exchanges have to wait before extending unlisted trading 
privileges to any listed initial public offering security). A number 
of national securities exchanges have rules that allow the extension 
of unlisted trading privileges to issues such as the Shares. See, 
e.g., Securities Exchange Act Release No. 57806 (May 9, 2008), 73 FR 
28541 (May 16, 2008) (SR-Phlx-2008-34); Securities Exchange Act 
Release No. 58623 (September 23, 2008), 73 FR 57169 (October 1, 
2008) (SR-BATS-2008-004).
    \242\ Market participants that acquire a large percentage of the 
Shares must identify themselves to the Commission by filing 
Schedules 13D or 13G. See 17 CFR 240.13d-1. Specifically, Section 
13(d) of the Act, 15 U.S.C. 78m(d), and the rules thereunder require 
that a person file with the Commission, within ten days after 
acquiring, directly or indirectly, beneficial ownership of more than 
five percent of a class of equity securities, a disclosure statement 
on Schedule 13D, subject to certain exceptions. See 17 CFR 240.13d-
1. Section 13(g) and the rules thereunder enable certain persons who 
are the beneficial owners of more than five percent of a class of 
certain equity securities to instead file a short form Schedule 13G, 
assuming certain conditions have been met. Beneficial owners are 
also required to report changes in the information filed.
    In addition, Section 13(f)(1) of the Act and Rule 13f-1 
thereunder require every ``institutional investment manager,'' as 
defined in Section 13(f)(5)(A) of the Act, that exercises investment 
discretion with respect to ``section 13(f) securities,'' as defined 
in Rule 13f-1, having an aggregate fair market value of at least 
$100 million (``Reportable Securities''), to file with the 
Commission quarterly reports on Form 13F setting forth each 
Reportable Security's name, CUSIP number, the number of shares held, 
and the market value of the position.
    \243\ For example, under NYSE Arca Equities Rule 
8.201(e)(2)(ii), the Exchange will consider suspending trading in 
the Shares or delisting the Shares if, following the initial 12-
month period following commencement of trading, there are fewer than 
50,000 Shares issued and outstanding.
---------------------------------------------------------------------------

    The Opposing Commenters assert serious disruptions in the supply of 
copper would make corners and squeezes more likely.\244\ As discussed 
above, the Commission does not believe that the listing and trading of 
the Shares is likely to disrupt the supply of copper available for 
immediate delivery.\245\ Depending on the size of the Trust though, it 
is possible that copper holdings may be dispersed across an additional 
market--i.e., less copper may be held under LME and/or COMEX

[[Page 75485]]

warrant and more copper may be held by the Trust. However, the 
availability of inter-market arbitrage is expected to help mitigate any 
potential increase in the ability of market participants to engage in 
corners or squeezes as a result of any dispersion of copper holdings 
across markets (as distinguished from a reduction in the copper 
supply). For example, if the Trust grows large relative to the market 
for warrants on the LME, LME market participants faced with a potential 
corner or squeeze may acquire Shares, redeem them (through an 
authorized participant) for LME warrantable copper, put the copper on 
LME warrant, and deliver the warrants.\246\ Further, although the 
Exchange currently provides for the listing and trading of shares of 
Commodity-Based Trusts backed by physical gold, silver, platinum, and 
palladium, none of the commenters has identified any evidence that the 
trading of shares of these Commodity-Based Trusts has led to 
manipulation of the gold, silver, platinum, or palladium markets.
---------------------------------------------------------------------------

    \244\ See supra notes 227-229 and accompanying text.
    \245\ See supra Section III.A.
    \246\ See supra note 85.
---------------------------------------------------------------------------

    For the reasons discussed above, the Commission does not believe 
that the proposed listing and trading of the Shares is likely to render 
the copper market or the price of Shares more susceptible to 
manipulation. Correspondingly, the Commission does not believe that 
approval of the proposed rule change will impose any burden on 
competition between participants in the market for copper as it will 
not provide market participants a greater opportunity to achieve an 
unfair competitive advantage.

E. Surveillance

    One of the Opposing Commenters questions whether NYSE Arca's 
surveillance procedures are adequate to prevent fraudulent and 
manipulative trading in the Shares. According to that commenter, NYSE 
Arca's surveillance procedures are not adequate because they are the 
kind of garden-variety measures that are always in place to prevent 
collusion and other forms of manipulation by traders.\247\ Two other 
Opposing Commenters assert that the Sponsor would be in a privileged 
informational position and could improperly trade on that non-public 
information.\248\ One of those commenters asserts that the Sponsor 
participates in other, non-security copper derivatives markets (namely 
futures and swaps), and states that the Sponsor has an extensive 
commodities trading operation and ``owns copper warehousing capacity in 
the United States giving it access to physical supply.'' \249\ The 
commenter also expresses concern that, if the Sponsor ``knows 
information regarding ETF inflows and outflows and understands the 
volatility consequences of changes in the holdings of the ETF,'' it can 
take advantage of that asymmetrical information and could ``be a 
potential source of disruption to the markets.'' \250\
---------------------------------------------------------------------------

    \247\ See V&F May 9 Letter, supra note 4, at 10.
    \248\ See Shatto Letter, supra note 9; and AFR October 23 
Letter, supra note 14, at 2.
    \249\ See AFR October 23 Letter supra note 14, at 4.
    \250\ Id. Similarly, another opposing commenter asserts that 
``jp morgan gets inside information by using their warehouses to buy 
and sell copper which maximizes profits to the detriment of 
commercial interests who have to buy copper.'' Shatto Letter, supra 
note 9.
---------------------------------------------------------------------------

    NYSE Arca asserts that the statements about its surveillance are 
unsubstantiated,\251\ and states that its surveillance procedures are 
adequate to properly monitor Exchange trading of the Shares in all 
trading sessions and to deter and detect violations of Exchange rules 
and applicable federal securities laws.\252\ In particular, the 
Exchange represents the following:
---------------------------------------------------------------------------

    \251\ See Arca August 23 Letter, supra note 11, at 1.
    \252\ See Notice, supra note 3, 77 FR at 23787. The Exchange 
also states that its existing surveillances will be augmented with a 
product-specific review designed to identify potential manipulative 
trading activity through the use of the creation and redemption 
process. See Amendment No. 1, supra note 15.
---------------------------------------------------------------------------

     Pursuant to NYSE Arca Equities Rule 8.201(g), an ETP 
Holder acting as a registered Market Maker in Commodity-Based Trust 
Shares must file with the Exchange and keep current a list identifying 
all accounts for trading in an underlying commodity, related commodity 
futures or options on commodity futures, or any other related commodity 
derivatives, which the Market Maker may have or over which it may 
exercise investment discretion. No Market Maker shall trade in an 
underlying commodity, related commodity futures or options on commodity 
futures, or any other related commodity derivatives, in an account in 
which a Market Maker, directly or indirectly, controls trading 
activities, or has a direct interest in the profits or losses thereof, 
which has not been reported to the Exchange as required by NYSE Arca 
Equities Rule 8.201.
     In addition, pursuant to NYSE Arca Equities Rule 8.201(g), 
the Exchange is able to obtain information regarding trading in the 
Shares, physical copper, copper futures contracts, options on copper 
futures, or any other copper derivative from ETP Holders acting as 
registered market makers, in connection with their proprietary or 
customer trades.\253\
---------------------------------------------------------------------------

    \253\ See Notice, supra note 3, 77 FR at 23787. See also Arca 
August 23 Letter, supra note 11, at 2-3.
---------------------------------------------------------------------------

     NYSE Arca has regulatory jurisdiction over its ETP Holders 
and their associated persons, which include any person or entity 
controlling an ETP Holder, as well as a subsidiary or affiliate of an 
ETP Holder that is in the securities business.\254\
---------------------------------------------------------------------------

    \254\ See Amendment No. 1, supra note 15.
---------------------------------------------------------------------------

     With respect to a subsidiary or affiliate of an ETP Holder 
that does business only in commodities or futures contracts, the 
Exchange can obtain information regarding the activities of such 
subsidiary or affiliate through surveillance sharing agreements with 
regulatory organizations of which such subsidiary or affiliate is a 
member.\255\
---------------------------------------------------------------------------

    \255\ See id. See also infra text accompanying notes 257-258.
---------------------------------------------------------------------------

     Commentary .04 of NYSE Arca Equities Rule 6.3 requires an 
ETP Holder acting as a registered Market Maker in the Shares, and its 
affiliates, to establish, maintain and enforce written policies and 
procedures reasonably designed to prevent the misuse of any material 
nonpublic information with respect to such products, any components of 
the related products, any physical asset or commodity underlying the 
product, applicable currencies, underlying indexes, related futures or 
options on futures, and any related derivative instruments (including 
the Shares).\256\
---------------------------------------------------------------------------

    \256\ See Notice, supra note 3, 77 FR at 23786. See also Arca 
August 23 Letter, supra note 11, at 3.
---------------------------------------------------------------------------

     NYSE Arca may obtain trading information via ISG from 
other exchanges that are members of the ISG, including the COMEX.\257\ 
The Exchange also states that it has entered into a comprehensive 
surveillance sharing agreement with LME that applies to trading in 
copper and copper derivatives.\258\
---------------------------------------------------------------------------

    \257\ See Notice, supra note 3, 77 FR at 23787. See also Arca 
August 23 Letter, supra note 11, at 3.
    \258\ See Amendment No. 1, supra note 15.

Further, in the context of preventing fraudulent and manipulative acts, 
the Exchange discusses its authority to halt trading in the Shares in 
the interest of promoting a fair and orderly market and protecting the 
interests of investors.\259\
---------------------------------------------------------------------------

    \259\ See Arca August 23 Letter, supra note 11, at 3 (``As 
stated in the Notice, the Exchange may consider all relevant factors 
in exercising its discretion to halt or suspend trading in the 
Shares, and trading on the Exchange in the Shares may be halted 
because of market conditions or for reasons that, in the view of the 
Exchange, make trading in the Shares inadvisable.'').
---------------------------------------------------------------------------

    According to the Exchange, the Valuation Agent will exclude any 
information provided by any JPMorgan-

[[Page 75486]]

affiliated entity when calculating the locational premium of copper in 
any permitted warehouse location.\260\ In addition, NYSE Arca has 
obtained a representation from the Sponsor that it will (i) implement a 
firewall with respect to its affiliates regarding access to material 
non-public information of the Trust concerning the Trust and the 
Shares, and (ii) will be subject to procedures designed to prevent the 
use and dissemination of material non-public information of the Trust 
regarding the Trust and the Shares.\261\ The Commission believes the 
firewall that the Exchange will require the Sponsor to erect is a 
reasonable measure to help prevent the flow of non-public information 
to the Sponsor's affiliates.\262\
---------------------------------------------------------------------------

    \260\ Notice, supra note 3, 77 FR at 23783.
    \261\ See Amendment No. 1, supra note 15.
    \262\ Further, NYSE Arca represents that it can obtain 
information about the activities of the Sponsor and its affiliates 
under the Exchange's listing rules.
---------------------------------------------------------------------------

    More generally, based on the Exchange's representations, the 
Commission believes that the Exchange's surveillance procedures appear 
to be reasonably designed to permit the Exchange to monitor for, 
detect, and deter violations of Exchange rules and applicable federal 
securities laws and rules.\263\ In addition to all of the same 
surveillance procedures employed with respect to the trading of all 
other Commodity-Based Trust Shares, NYSE Arca states that a new product 
specific review will be employed to monitor trading in the Shares to 
identify potential manipulative trading activity through the use of the 
creation and redemption process.\264\ The commenters have not 
identified any specific deficiency in the proposed procedures or 
provided any evidence that the Exchange's surveillance program has been 
ineffective with respect to trading in other Commodity-Based Trust 
Shares.
---------------------------------------------------------------------------

    \263\ The Commission has discussed above in Section III.D other 
reasons why it believes that the listing and trading of the Shares 
as proposed is unlikely increase the likelihood of manipulation of 
the copper market and, correspondingly, of the price of the Shares.
    \264\ See Amendment No. 1, supra note 15.
---------------------------------------------------------------------------

F. Dissemination of Information About the Shares and Copper

    The Commission believes the proposal is reasonably designed to 
promote sufficient disclosure of information that may be necessary to 
price the Shares appropriately. Specifically, the Commission believes 
that dissemination of the NAV, IIV, and copper holdings information, as 
discussed above, will facilitate transparency with respect to the 
Shares and diminish the risk of manipulation or unfair informational 
advantage.\265\ Further, as noted above, quotation and last-sale 
information for the Shares will be available via the Consolidated Tape 
Association, and the Exchange will make available via the Consolidated 
Tape trading volume, closing prices, and NAV for the Shares from the 
previous day.\266\ Additionally, as discussed above, the Exchange has 
identified numerous sources of copper price information unconnected 
with the Exchange that are readily available to investors.\267\ The 
Commission therefore believes that sufficient venues for obtaining 
reliable copper pricing information exist to allow investors in the 
Shares to adequately monitor the price of copper and compare it to the 
NAV of the Shares.
---------------------------------------------------------------------------

    \265\ See supra notes 238-242, and accompanying text.
    \266\ See supra text accompanying note 41.
    \267\ See Notice, supra note 3, 77 FR at 23786.
---------------------------------------------------------------------------

G. Listing and Trading of the Shares

    The Commission believes that the Exchange's proposed rules and 
procedures for the listing and trading of the Shares are consistent 
with the Act. For example, the Commission believes that the proposal is 
reasonably designed to prevent trading when a reasonable degree of 
transparency cannot be assured. As detailed above, NYSE Arca Equities 
Rules 7.34(a)(5) and 8.201(e)(2) respectively provide that: (1) If the 
Exchange becomes aware that the NAV is not being disseminated to all 
market participants at the same time, it must halt trading on the NYSE 
Marketplace until such time as the NAV is available to all market 
participants; and (2) the Exchange will consider suspension of trading 
if, after the initial 12-month period following commencement of 
trading: (a) The value of copper is no longer calculated or available 
on at least a 15-second delayed basis from a source unaffiliated with 
the Sponsor, Trust, or Custodian, or the Exchange stops providing a 
hyperlink on its Web site to any such unaffiliated source providing 
that value; or (b) if the Liquidation IIV is no longer made available 
on at least a 15-second delayed basis.\268\ In addition, the Exchange's 
general authority to halt trading because of market conditions or for 
reasons that, in the view of the Exchange, make trading in the Shares 
inadvisable, also will advance this objective. Further, trading in the 
Shares will be subject to NYSE Arca Equities Rule 7.12, the Exchange's 
circuit breaker rule, which governs trading halts caused by 
extraordinary market volatility.
---------------------------------------------------------------------------

    \268\ Additionally, if the First-Out IIV or the Liquidation IIV 
is not being disseminated as required, the Exchange may halt trading 
during the day in which the disruption occurs; if the interruption 
persists past the day in which it occurred, the Exchange will halt 
trading no later than the beginning of the trading day following the 
interruption. See Amendment No. 1, supra note 15.
---------------------------------------------------------------------------

    Further, the Shares will be subject to Exchange rules governing the 
responsibilities of market makers and customer suitability 
requirements. In addition, the Shares will be subject to Exchange Rule 
8.201 for initial and continued listing of Shares.\269\ As discussed 
above,\270\ the Commission believes that the listing and delisting 
criteria for the Shares are expected to maintain a minimum level of 
liquidity and therefore minimize the potential for manipulation of the 
Shares. The Commission also believes that the Information Bulletin will 
adequately inform members and member organizations about the terms, 
characteristics, and risks of trading the Shares.
---------------------------------------------------------------------------

    \269\ See Notice, supra note 3, 77 FR at 23786.
    \270\ See supra text accompanying note 243.
---------------------------------------------------------------------------

H. Commission Findings

    After careful review, and for the reasons discussed in Sections 
III.A-G above, the Commission finds that the proposed rule change is 
consistent with the requirements of the Act, including Section 6 of the 
Act,\271\ and the rules and regulations thereunder applicable to a 
national securities exchange.\272\ In particular, the Commission finds 
that the proposed rule change is consistent with Section 6(b)(5) of the 
Act,\273\ which requires, among other things, that the rules of a 
national securities exchange be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, and to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest; with Section 6(b)(8) of the 
Act,\274\ which requires that the rules of a national securities 
exchange not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act; and with Section 
11A(a)(1)(C)(iii) of the Act,\275\ which sets forth Congress's finding 
that it is in the public interest and appropriate for

[[Page 75487]]

the protection of investors to assure the availability to brokers, 
dealers, and investors of information with respect to quotations for 
and transactions in securities.\276\
---------------------------------------------------------------------------

    \271\ 15 U.S.C. 78f.
    \272\ This approval order is based on all of the Exchange's 
representations.
    \273\ 15 U.S.C. 78f(b)(5).
    \274\ 15 U.S.C. 78f(b)(8).
    \275\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \276\ As noted above (see supra Section II.B), quotation and 
last-sale information for the Shares will be available via the 
Consolidated Tape Association, and the Exchange will make available 
via the Consolidated Tape trading volume, closing prices, and NAV 
for the Shares from the previous day. See supra text accompanying 
note 41.
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No.1 to 
the proposed rule change is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NYSEArca-2012-28 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSEArca-2012-28. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submissions, all subsequent amendments, all 
written statements with respect to the proposed rule changes that are 
filed with the Commission, and all written communications relating to 
the proposed rule changes between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filings also will be available 
for inspection and copying at the principal offices of the Exchanges. 
All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-NYSEArca-2012-
28 and should be submitted on or before January 10, 2013.

V. Accelerated Approval of Proposed Rule Change As Modified by 
Amendment No. 1

    As discussed above, the Exchange submitted Amendment No. 1 to make 
additional representations regarding trading in the Shares, 
availability of information, and the Exchange's surveillance 
program.\277\ The Commission believes these additional representations 
are useful to, among other things, help: (1) Assure adequate liquidity 
in the Shares; (2) assure adequate availability of information to 
investors to support the arbitrage mechanism; (3) assure adequate 
information available to the Exchange to support its monitoring of 
Exchange trading of the Shares in all trading sessions; and (4) the 
Exchange deter and detect violations of NYSE Arca rules and applicable 
federal securities laws. Accordingly, the Commission finds good cause, 
pursuant to Section 19(b)(2) of the Act,\278\ for approving the 
proposed rule change, as modified by Amendment No. 1, prior to the 30th 
day after the date of publication of notice in the Federal Register.
---------------------------------------------------------------------------

    \277\ See supra note 15.
    \278\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\279\ that the proposed rule change (SR-NYSEArca-2012-28), as 
modified by Amendment No. 1, be, and hereby is, approved on an 
accelerated basis.
---------------------------------------------------------------------------

    \279\ 15 U.S.C. 78s(b)(2).

    By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-30647 Filed 12-19-12; 8:45 am]
BILLING CODE 8011-01-P

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