[Federal Register Volume 77, Number 143 (Wednesday, July 25, 2012)]
[Notices]
[Pages 43620-43629]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-18107]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67470; File No. SR-NYSEArca-2012-28]


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

July 19, 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. The proposed 
rule change was published for comment in the Federal Register on April 
20, 2012.\3\ The Commission initially received one comment letter on 
the proposed rule change.\4\ On May 30, 2012, the

[[Page 43621]]

Commission extended the time period for Commission action to July 19, 
2012.\5\ On June 19, 2012, NYSE Arca submitted a response to the V&F 
Letter.\6\ On July 13, 2012, V&F submitted a second comment letter.\7\ 
Additionally, on July 16, 2012, United States Senator Carl Levin 
submitted a comment letter on the proposed rule change.\8\
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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'').
    \4\ See letter from Vandenberg & Feliu, LLP (``V&F''), received 
May 9, 2012 (``V&F Letter''). The V&F Letter is available at http://www.sec.gov/comments/sr-nysearca-2012-28/nysearca201228.shtml. In a 
second comment letter, V&F identified itself as a U.S. law firm that 
represents RK Capital LLC, an international copper merchant, and 
four end-users of copper: Southwire Company, Encore Wire 
Corporation, Luvata, and AmRod. V&F states that these companies 
collectively comprise about 50% of the copper fabricating capacity 
of the United States. See V&F Letter II, infra note 7, at 1.
    \5\ See Securities Exchange Act Release No. 67075, 77 FR 33258 
(June 5, 2012).
    \6\ See letter from Janet McGinness, General Counsel, NYSE 
Markets, to Elizabeth Murphy, Secretary, Commission, dated June 19, 
2012 (``Arca's Response''). Arca's Response is available at http://www.sec.gov/comments/sr-nysearca-2012-28/nysearca201228.shtml.
    \7\ See letter from Robert B. Bernstein, V&F, to Elizabeth M. 
Murphy, Secretary, Commission, dated July 13, 2012 (``V&F Letter 
II''). This letter is available at http://www.sec.gov/comments/sr-nysearca-2012-28/nysearca201228-5.pdf.
    \8\ See letter from U.S. Senator Carl Levin to Elizabeth M. 
Murphy, Secretary, Commission, dated July 16, 2012 (``Sen. Levin 
Letter''). The Sen. Levin Letter is available at http://www.sec.gov/comments/sr-nysearca-2012-28/nysearca201228-6.pdf.
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    This order institutes proceedings under Section 19(b)(2)(B) of the 
Act to determine whether to approve or disapprove the proposed rule 
change. The institution of proceedings does not indicate that the 
Commission has reached any conclusions with respect to any of the 
issues involved, nor does it mean that the Commission will ultimately 
disapprove the proposed rule change. Rather, as described in greater 
detail below, the Commission seeks and encourages interested persons to 
provide additional comment on the proposed rule change to inform the 
Commission's analysis of whether to approve or disapprove the proposed 
rule change.

II. Description of the Proposal

    The Exchange proposes to list and trade the Shares under NYSE Arca 
Equities Rule 8.201, which governs the listing and trading of 
commodity-based trust shares. J.P. Morgan Commodity ETF Services LLC is 
the sponsor of the Trust (``Sponsor'').\9\ 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'').\10\ Metal Bulletin Ltd., an independent, 
third-party valuation agent that is not affiliated with the Sponsor, is 
the valuation agent of the Trust (``Valuation Agent'').
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    \9\ Additional details regarding the Trust are set forth in the 
Registration Statement for the Trust on Amendment No. 5 to Form S-1, 
filed with the Commission on July 12, 2011 (No. 333-170085) 
(``Registration Statement'').
    \10\ Each of Henry Bath & Son Limited, Henry Bath LLC, Henry 
Bath Singapore Pte Limited, Henry Bath Italia Sr1, and Henry Bath BV 
is a member of the Henry Bath Group of companies and a wholly owned 
subsidiary of J.P. Morgan Ventures Energy Corporation, and is an 
affiliate of the Sponsor. See Notice, supra note 3, 77 FR at 23773 
n.10
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    The Trust's investment objective is for the value of the Shares to 
reflect, at any given time, the value of the copper owned by the Trust 
at that time, less the Trust's expenses and liabilities at that time. 
The Trust would not be actively managed and would not engage in any 
activities designed to obtain a profit from, or to prevent losses 
caused by, changes in the price of copper.
    The Trust would invest in Grade A copper \11\ in physical form from 
a source refinery that has had its brand registered with the London 
Metal Exchange (``LME'') (an ``Acceptable Delivery Brand'').\12\ The 
Trust would hold only copper and would not trade in copper futures. 
While the Trust would store its copper in both LME-approved warehouses 
and non-LME-approved warehouses that are maintained by the Warehouse-
keeper, none of the copper held by the Trust would be on LME warrant, 
and therefore would not be subject to regulation by the LME.\13\ 
Initially, the permitted warehouse locations would 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 would depend on (i) the warehouse locations at 
which authorized participants have actually delivered copper to the 
Trust and (ii) the warehouse locations from which copper is or has been 
delivered pursuant to the Trust's redemption procedures.\14\
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    \11\ 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.
    \12\ Currently, there are 79 brands that are Acceptable Delivery 
Brands. Some refineries have more than one smelting and refining 
process, so a refinery may register more than one brand, reflecting, 
among other factors, the different chemical composition, size, 
origins, and bundling of the copper cathodes. The LME has the 
authority to deregister brands from the LME from time to time. 
Generally, copper that is not of an Acceptable Delivery Brand is 
worth less than copper that is of an Acceptable Delivery Brand 
because of the perceived lower liquidity associated with that brand 
of metal. See Notice, supra note 3, 77 FR at 23777-78.
    \13\ See Notice, supra note 3, 77 FR at 23778.
    \14\ Similar to other exchange traded products that hold 
physical metals, the Sponsor, the Trust, and persons or entities 
engaging in transactions in Shares would need to seek exemptions 
from, or interpretative or no-action advice, regarding Rules 101 and 
102 of Regulation M under the Securities Exchange Act of 1934 in 
order 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.
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    The Administrative Agent will calculate the net asset value 
(``NAV'') of the Trust as promptly as practicable after 4:00 p.m. EST 
on each Business Day.\15\ As part of this calculation, the 
Administrative Agent will determine the value of the trust's copper 
using the LME Settlement Price \16\ and information provided by the 
Valuation Agent.\17\
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    \15\ A Business Day is a day that the Exchange is open for 
regular trading and that is not a holiday in London, England. See 
Notice, supra note 3, 77 FR at 23775, n.18.
    \16\ 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 
Notice, supra note 3, 77 FR at 23775 n.17.
    \17\ 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 Notice, supra note 3, 77 
FR at 23779.
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    NYSE Arca anticipates requiring that a minimum of 100,000 Shares be 
outstanding at the start of trading,\18\ which represents 1,000 metric 
tons of copper. The Trust seeks to register

[[Page 43622]]

6,180,000 Shares,\19\ which represents 61,800 metric tons of copper.
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    \18\ See Notice, supra note 3, 77 FR at 23786.
    \19\ See Registration Statement, supra note 9.
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    The Exchange states that it intends to utilize its existing 
surveillance procedures applicable to derivative products (including 
commodity-based trust shares) to monitor trading in the Shares, and 
represents that such 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.\20\ In discussing its ability to obtain information relevant to 
trading of the Shares on its facilities, the Exchange states that it is 
able to obtain information: (1) regarding trading in physical copper, 
the Shares, and other copper derivatives by ETP Holders registered as 
Exchange market makers, pursuant to NYSE Arca Equities Rule 8.201(g); 
(2) from the LME, with which the Exchange has a comprehensive 
surveillance sharing agreement; and (3) via the Intermarket 
Surveillance Group (``ISG'') from other exchanges who are members of 
the ISG, such as Commodity Exchange, Inc. (``COMEX'').
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    \20\ See Notice, supra note 3, 77 FR at 23787.
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    The Notice and in 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.\21\
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    \21\ See Notice and the Registration Statement, supra notes 3 
and 9, respectively.
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III. Summary of the Comments Received and the Exchange's Response

    The two commenters on the proposal (collectively, ``Commenters'') 
oppose the proposed rule change.\22\ According to the Commenters, 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 material 
reduction in the immediately available supply of global copper.\23\ 
They also assert that this reduction in short-term supply would 
increase both volatility in the copper market and the price of copper, 
which would in turn significantly harm the U.S. economy.\24\ The 
Commenters further state that the decrease in copper available for 
immediate delivery would make the physical copper market more 
susceptible to manipulation.\25\
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    \22\ See supra notes 4, 7, and 8. One of the Commenters, V&F, 
identified itself as a U.S. law firm that represents an 
international copper merchant and four U.S. copper fabricators. See 
supra note 4.
    \23\ See V&F Letter, supra note 4, at 3, 6 and Sen. Levin 
Letter, supra note 8, at 1, 4.
    \24\ See V&F Letter, supra note 4, at 5-7 and Sen. Levin Letter, 
supra note 8, at 1, 7.
    \25\ See V&F Letter, supra note 4, at 1, 10 and Sen. Levin 
Letter, supra note 8, at 7.
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    In its response letter, NYSE Arca states that V&F's arguments 
either are based on incorrect information or are unsubstantiated.\26\ 
The Exchange's response, as discussed in further detail below, 
addresses in particular V&F's conclusions about the impact of the Trust 
on the price of physical copper.\27\ In its second letter, V&F responds 
to the Exchange's arguments by reiterating some of its positions and 
providing additional information.
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    \26\ See Arca's Response, supra note 6, at 1.
    \27\ See id. at 4-5.
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A. Adverse Copper Market Impact

1. Impact on Supply of Copper Available for Immediate Delivery
    V&F states that almost all of the copper produced worldwide is 
delivered pursuant to long-term contracts to copper fabricators, and 
that at any given time, there is only a limited supply of copper 
available for immediately delivery.\28\ V&F further states that this 
copper, which generally is stored in LME warehouses, usually is 
deposited by producers with excess supply or by copper merchants 
looking for purchasers and is sold to traders seeking to close out 
short positions or to fabricators in sudden need of additional 
supply.\29\
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    \28\ See V&F Letter, supra note 4, at 3.
    \29\ See id.
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    V&F states that the only ``visible'' copper available to satisfy 
the Trust's requirements for copper to be delivered to the Trust to 
create shares is copper stored in LME warehouses.\30\ V&F estimates 
that, if the Trust sells all of the 6,180,000 Shares it seeks to 
register, creation of the Trust could result in as much as 61,800 
metric tons of copper being removed from LME warehouses, which is more 
than 30% of the 200,000 metric tons currently available for immediate 
delivery.\31\
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    \30\ See id.
    \31\ See id. at 1, 3.
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    V&F believes the Trust is likely to acquire copper from locations 
with the lowest premiums.\32\ According to V&F, based on the present 
level of demand, locational premiums for copper in the U.S. are at 
least ten times lower than they are in Europe and Asia.\33\ 
Accordingly, V&F predicts that much of the copper used to fund the 
Trust will come from the immediately available supply in the U.S.\34\
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    \32\ See id. at 4.
    \33\ See id.
    \34\ V&F states that the total amount of copper available in New 
Orleans and Chicago (two of the three U.S. warehouses proposed to be 
used by the Trust) is 45,000 and 25,000 metric tons respectively 
and, as mentioned above, the Trust may acquire as much as 61,800 
tons of copper in connection with the initial offering of Shares. 
V&F predicts that the removal of large quantities of copper from LME 
warehouses in the U.S. also will result in the emptying out of 
substantial quantities of copper from COMEX warehouses. V&F believes 
that this copper either would be delivered to LME warehouses, where 
the demand is greatest, or it would be shipped to fabricators in 
other parts of the U.S. that are no longer able to get copper for 
immediate delivery from the LME. See id.
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    In response to these concerns raised by V&F, the Exchange points 
out that the Trust will hold only copper that is not under LME 
warrant.\35\ NYSE Arca states that the Sponsor of the Trust does not 
believe that ``huge quantities'' of LME warranted copper will be 
removed from the LME system, as V&F predicts, because of: (1) The cost 
and time that would be required to take copper off warrant; and (2) the 
availability of large supplies of non-warranted physical copper to 
create Shares.\36\ NYSE Arca provides data from the Sponsor of the 
Trust indicating that the amount of non-warranted copper is 
approximately ten times larger than the amount of LME warranted 
copper.\37\
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    \35\ See Arca's Response, supra note 6, at 1-2.
    \36\ See id. at 3. The Exchange states that the Sponsor expects 
that the initial Shares will be created using 10,185 metric tons of 
copper, none of which will be taken off LME warrant for the 
creation. See id. at 4.
    \37\ See id. at 3.
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    NYSE Arca further states that the Trust will not immediately remove 
from the market as much as 61,800 metric tons of copper.\38\ According 
to the Exchange, the Trust seeks to register 6,180,000 Shares but, like 
the other physical metal exchange-traded products, the Trust seeks to 
register significantly more Shares than it intends to sell 
initially.\39\ NYSE Arca notes that the number of Shares that will be 
issued will depend on investor demand for the Shares and the extent to 
which authorized participants seek to fulfill such demand by ordering 
additional creation units from the Trust.\40\
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    \38\ See id. at 4.
    \39\ The Exchange states that currently the Sponsor expects that 
the value of the initial creation units will not exceed $75 million, 
which corresponds to approximately 10,185 metric tons, or 
approximately 407 lots of copper in the current cheapest-to-deliver 
location for the Trust as of June 6, 2012. See id.
    \40\ See id.
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    In its second letter, V&F reiterates its view that ``the only 
substantial source of copper available to meet the Trust's requirements 
* * * is warranted copper in LME warehouses.'' \41\ V&F states that

[[Page 43623]]

the fact that the Trust will hold only copper that is not warranted 
does not mean, as NYSE Arca concludes, that copper will not be taken 
off LME warrant and held by the Trust.\42\ V&F also challenges the 
Exchange's assertion about the availability of a large supply of off-
warrant copper that may be used to create Shares, and argues that the 
copper not on LME warrant actually is largely unavailable for Share 
creation.\43\ For example, V&F states that the overall physical copper 
stocks include copper that is subject to long-term contracts, and is 
generally held in the normal course by producers and consumers as 
buffer stocks to ensure smooth running of their logistics and to meet 
contingencies.\44\ V&F further states that there is no evidence that 
any of the non-registered copper stocks would be available for the 
Trust to purchase, and concludes that the only copper available to 
create Shares would be the copper in the LME and COMEX warehouses.\45\ 
In addition, V&F states its view that the potential size of the Trust 
is large relative to the size of market for copper available for 
immediate delivery.\46\ Specifically, V&F asserts that the Trust could 
remove as much as 21.3% of copper available for immediate delivery on 
the LME and COMEX markets combined.\47\ Senator Levin also comments 
that there is ample evidence that the proposed commodity-based exchange 
traded product (``CB-ETP'') will disrupt the supply of copper by 
removing from the market a substantial percentage of the copper 
available for immediate delivery.\48\
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    \41\ See V&F Letter II, supra note 7, at 1.
    \42\ See id. at 2. V&F further states that the Trust would have 
to take the copper off-warrant because otherwise the holding of such 
warranted copper in an LME warehouse would subject the Trust to the 
LME's lending obligations and the draft registration statement makes 
clear that, consistent with its intent to take the Trust's copper 
off-market, the Trust does not intend to be subject to any of the 
LME's rules, including rules that would require the Trust to lend 
any of its copper. See id.
    \43\ See id. at 2-4.
    \44\ See id. at 3. V&F further states that ``[o]ther such stocks 
consist of stock [sic] in bonded warehouses outside China* * *which 
are destined for the Chinese market,'' none of which is available 
for purchase by authorized participants to create Shares. See id. 
V&F also states that they have heard it is usual for both producers 
and consumers to have a considerable holding of copper stock, but at 
present this is not the case because consumers, in particular, have 
drawn down inventories to the bare minimum in order to reduce 
working capital requirements at a time of high copper prices. See 
id. at 4.
    \45\ See id. at 2-4. V&F states that the Exchange compounds 
misinformation about the availability of copper stocks by including 
a table it obtained from the Sponsor of the Trust purporting to 
break down registered and non-registered market stocks as of May 
2012. See id. at 3. V&F states that the use of the term ``market'' 
by the Exchange in reference to total non-registered stocks suggests 
that such tonnage is actually available for purchase at market, but 
V&F believes that there is no evidence that any of the non-
registered stocks would be available for the Trust to purchase. See 
id. To support its statements about the tightness of the supply of 
immediately available copper, V&F submitted portions of a report 
prepared by Bloomsbury Minerals Economics Ltd. for RK Capital 
Management LLP. See id. Exhibit A.
    \46\ See id. at 8.
    \47\ See id. at 8-9. V&F states that the size of the market for 
copper available for immediate delivery is relatively small in that 
there is only 230,000 metric tons available on the LME, with an 
additional 60,000 metric tons available on the COMEX. See id. at 8. 
V&F further states that therefore, the Trust proposes to remove as 
much as 61,800 metric tons, or about 21.3% of the copper available 
for immediate delivery. See id.
    \48\ See Sen. Levin Letter, supra note 8, at 1. For example, 
Senator Levin notes that ``it appears that most of the remaining 
copper stocks available for immediate delivery are on the LME and 
[COMEX].'' See id. at 5.
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    With respect to the number of shares registered by the Trust and 
the size of the Trust, V&F states that there is no assurance that the 
Exchange-required minimum will have any bearing on the ultimate size of 
the offering.\49\ V&F points to the Trust's registration statement, 
which contains an estimate that the number of shares under the 
registration statement is roughly equivalent to the holding of 
approximately 61,800 metric tons of copper by the Trust.\50\ V&F also 
notes that the Trust Agreement places no limit on the amount of copper 
the Trust may hold; thus the Trust may issue an unlimited number of 
shares, subject to registration requirements, and may, in theory, 
acquire an unlimited amount of copper.\51\
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    \49\ See V&F Letter II, supra note 7, at 7.
    \50\ See id. at 8.
    \51\ See id.
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    In response to NYSE Arca's statement that the sponsor of the Trust 
believes that LME warranted copper will not be removed from the LME 
system because of the cost and time that would be required to take 
copper off warrant, V&F states its view that, although an authorized 
participant can obtain LME grade copper available for immediate 
delivery from owners of LME grade copper in LME warehouses by 
purchasing long positions on the LME and taking delivery, the 
authorized participant would have no guarantee of the location of its 
copper, creating a risk that the authorized participant's copper is at 
a location (or locations) that might be too expensive to transfer to a 
Trust warehouse.\52\ V&F further states that, in comparison, an 
authorized participant can create Shares at little or not cost by 
purchasing LME warrants for copper in LME warehouses with the lowest 
location cost premiums.\53\
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    \52\ See id. at 6.
    \53\ See id.
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    V&F believes that investors' ability to redeem Shares for the 
Trust's physical copper would not limit the impact of removing 
substantial quantities of copper from the market.\54\ According to V&F, 
most investors in a copper-backed CB-ETP would not have any real 
economic incentive to redeem their Shares for physical delivery as 
investors would benefit from a rise in the price of copper and can do 
so through sale of the Shares on the Exchange without having to assume 
any risk of delivery.\55\ In its response, NYSE Arca points out that 
Share creations may be offset by Share redemptions, which result in 
copper being released from the Trust and becoming available to the 
physical markets.\56\ V&F reiterates in its second letter its views 
expressed in its first comment letter on the Exchange's assertion that 
copper may return to the market through redemptions.\57\
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    \54\ See V&F Letter, supra note 4, at 5.
    \55\ See id.
    \56\ See Arca's Response, supra note 6, at 3.
    \57\ See V&F Letter II, supra note 7, at 7. V&F states that 
while fabricators may purchase Shares and redeem them whenever they 
need supply, doing so: (1) Would add cost and risk to fabricators 
who otherwise would simply purchase available stocks from LME 
warehouses; (2) may not have any appreciable effect on price or 
supply in a rising market with tight supply; and (3) would be an 
inefficient and perhaps impracticable way of obtaining copper 
because the copper delivered by the Trust may be warehoused in an 
unhelpful location (e.g., a fabricator in Alabama may need copper in 
New Orleans, not Shanghai) or of an unacceptable brand or quality. 
See V&F Letter, supra note 4, at 5-6.
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    Additionally, both Commenters reference another proposed CB-ETP, 
the iShares Copper Trust. In a separate proposed rule change, NYSE Arca 
proposes to list and trade shares of the iShares Copper Trust, which 
would also hold physical copper.\58\ V&F states that this CB-ETP:
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    \58\ See Securities Exchange Act Release No. 67237 (June 22, 
2012), 77 FR 38351 (June 27, 2012) (SR-NYSEArca-2012-66) (``iShares 
Notice''). BlackRock Asset Management International Inc. is the 
sponsor of this trust. See the iShares Notice and Pre-Effective 
Amendment No. 4 to Form S-1 for iShares Copper Trust, filed with the 
Commission on September 2, 2011 (No. 333-170131) for a detailed 
description of the iShares Copper Trust and the Exchange's proposal 
to list and trade the iShares Copper Trust.

    would remove as much as 120,000 metric tons of copper from the 
market. And like JPM, BlackRock also intends to acquire LME-grade 
copper from the LME warehouses where the location premiums being 
charged are the lowest. Thus, approval of this rulemaking could lead 
to the removal of all or nearly all of the LME and Comex supply of 
copper available for immediate delivery.\59\
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    \59\ See V&F Letter, supra note 4, at 6.

    V&F further states that the collective effect of the Trust and the 
iShares Copper Trust (collectively, ``Copper

[[Page 43624]]

Trusts'') would be ``far-reaching and potentially devastating to the 
U.S. and world economies,'' including ``shortages of copper, higher 
prices to consumers, and increased volatility.'' \60\ Senator Levin 
also states that, if the Commission approves the listing and trading of 
the Shares and shares of the iShares Copper Trust, the trusts would 
hold approximately 34% of the copper stocks available for immediate 
delivery and would remove from the U.S. market over 55% of the 
available copper.\61\
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    \60\ See id. at 10.
    \61\ See Sen. Levin Letter, supra note 8, at 5-6.
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2. Impact on Copper Prices
    According to V&F, removing large amounts of copper from LME 
warehouses would disrupt the supply of copper available for immediate 
delivery and thereby cause a substantial rise in near-term copper 
prices.\62\ V&F argues that this also would cause an immediate spike in 
the cash-to-three-month spread price of copper, as near-term prices for 
delivery accelerate compared to prices for delivery later in time.\63\ 
V&F is concerned that manufacturers and fabricators that rely on the 
supply of copper available in LME warehouses would be forced to pay 
substantially higher prices in the short term, and, in turn, 
manufacturers and fabricators would pass these price increases on to 
their customers.\64\ V&F predicts that the price increases both for 
copper and copper products will be especially dramatic in the U.S., 
where copper currently is relatively inexpensive.\65\ Additionally, V&F 
asserts that the supply of copper generally is inelastic and that 
supply, therefore, will not increase fast enough to account for the 
increased demand unleashed by the creation and growth of the Trust.\66\
---------------------------------------------------------------------------

    \62\ See V&F Letter, supra note 4, at 5.
    \63\ See id.
    \64\ See id.
    \65\ See id. at 4-5.
    \66\ See id. at 5. According to V&F, it is difficult for copper 
producers to increase supply, sometimes taking 15 years or longer to 
open a new mine, and even in areas where copper is considered 
plentiful, political instability can keep a mine from producing. See 
id. Moreover, V&F states that U.S. producers do not have surplus 
product to deliver. See id. Therefore, V&F asserts that once copper 
stored in warehouses disappears, it likely will not be replenished 
any time soon. See id. Senator Levin concurs that the copper market 
is inelastic. See Sen. Levin Letter, supra note 8, at 3.
---------------------------------------------------------------------------

    V&F characterizes the physical copper market as currently volatile, 
and believes that the successful creation and growth of the Trust would 
create a bubble, and the bursting of the bubble would result in 
increased price volatility in the physical copper market.\67\ V&F 
states that, with
---------------------------------------------------------------------------

    \67\ See V&F Letter, supra note 4, at 2, 9.
---------------------------------------------------------------------------

    the risk of an ETF removing indefinitely all or substantially 
all of the copper available for immediate delivery, the risk of 
price volatility becomes enormous. This is because the greater 
amount of copper artificially kept off-the-market, the greater the 
chance that investors will eventually no longer keep propping up the 
price with further purchases, and the greater the likelihood that 
the bubble will burst, thus flooding the market with surplus copper, 
and severely depressing the price.\68\
---------------------------------------------------------------------------

    \68\ See id. at 5.

    V&F further states that investors in a copper CB-ETP would benefit 
immediately from any increase in the price of copper because the more 
copper removed from the market to satisfy the demand for the copper CB-
ETP, the higher the price not only of copper, but of the copper CB-ETP 
itself.\69\ V&F notes that, like all bubbles, as investor demand for 
this product wanes, the bubble will burst, leaving in its wake a glut 
of physical copper that the Trust will be forced to dump on the market, 
causing prices to plummet, and leaving in its wake unsuspecting 
investors who will have lost the value of their investment.\70\ Senator 
Levin also makes statements about the potential effect of the Shares, 
stating that the ``supply disruption is likely to affect the cash and 
futures market for copper, increasing volatility and driving up [the 
Share] price to create a bubble and burst cycle.'' \71\
---------------------------------------------------------------------------

    \69\ See id.
    \70\ See id. at 2.
    \71\ See Sen. Levin Letter, supra note 9, at 1.
---------------------------------------------------------------------------

    V&F further believes that investors in the Trust would be able to 
measure how much impact their collective removal of copper from the 
supply available for immediate delivery would have on copper prices 
each day, and could adjust their purchasing strategies accordingly.\72\ 
V&F questions, therefore, whether the increased market transparency 
that the Exchange asserts will result from the formation and operation 
of the Trust will be in the public interest.\73\
---------------------------------------------------------------------------

    \72\ See V&F Letter, supra note 4, at 9.
    \73\ See id. at 10.
---------------------------------------------------------------------------

    The Exchange, in its response letter, states that V&F's concerns 
about price volatility are speculative and misplaced.\74\ NYSE Arca 
asserts that, because of the arbitrage mechanism common to all types of 
CB-ETPs, CB-ETP share prices generally follow the price of the 
underlying asset(s), rather than drive the price as V&F predicts.\75\ 
The Exchange agrees that, in theory, if extremely high demand for 
shares of a CB-ETP caused it to grow very rapidly relative to the size 
of the market for the underlying asset, such demand could place upward 
pressure on the price of the underlying asset.\76\ The Exchange states 
that Share redemptions would be able to drive down the price of copper 
only if the size of the redemptions is extremely large relative to the 
size of the physical copper markets and those redemptions occurred over 
a very short period of time.\77\ The Exchange acknowledges that this is 
a theoretical possibility, but states that V&F has not provided any 
evidence to support its prediction.\78\ According to NYSE Arca, given 
the anticipated size of the Trust relative to the size and depth of the 
physical copper markets, the Sponsor of the Trust has informed the 
Exchange that it does not expect the Trust to cause a spike in copper 
prices.\79\
---------------------------------------------------------------------------

    \74\ See Arca's Response, supra note 6, at 4.
    \75\ See id.
    \76\ See id. at 5.
    \77\ See id.
    \78\ See id.
    \79\ See id.
---------------------------------------------------------------------------

    In response to the Exchange, V&F reiterates its concern that the 
Trust, if launched, could trigger an increase in the price of 
copper.\80\ Senator Levin also voices a concern that the Trust, if 
launched, would have an impact on the price of copper.\81\ V&F and 
Senator Levin refer to language in the Trust's Registration Statement 
in which the issuer discusses the potential for the growth of the Trust 
to impact the price of copper and the Shares. Specifically, the 
Commenters reference statements from the Registration Statement that: 
(1) because there is no limit on the amount of copper that the Trust 
may acquire, the Trust, as it grows, may have an impact on the supply 
and demand for copper that ultimately may affect the price of the 
Shares in a manner unrelated to other factors affecting the global 
markets for copper; and (2) if the amount of copper acquired by the 
Trust were large enough in relation to global copper supply and demand, 
in-kind creations and redemptions of Shares could have an impact on the 
supply and demand for copper unrelated to other factors affecting the 
global markets for copper, which in turn could affect the price at 
which Shares are traded on the Exchange.\82\ V&F also states that 
because the potential size of the Trust is large relative to the size 
of the market for copper available for immediate delivery, even modest 
investor demand for the Shares could place upward pressure on the price 
of copper.\83\
---------------------------------------------------------------------------

    \80\ See V&F Letter II, supra note 7, at 8.
    \81\ See Sen. Levin Letter, supra note 8, at 5.
    \82\ See V&F Letter II, supra note 7, at 8 and Sen. Levin 
Letter, supra note 8, at 5-6.
    \83\ See V&F Letter II, supra note 7, at 8-9.

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

[[Page 43625]]

3. Increased Likelihood of Copper Market Manipulation
    V&F asserts generally that the tightened supply of copper it 
believes would be caused by fully funding the Trust would render the 
physical copper market more susceptible to manipulation.\84\ V&F 
compares the possible effect of funding the Trust to the conspiracy 
(described in the V&F Letter) between Sumitomo Corporation and a U.S. 
trader to squeeze the price of copper on the LME in the U.S. by, among 
other things, removing 100% of the copper from the LME warehouse in 
Long Beach, California.\85\
---------------------------------------------------------------------------

    \84\ See V&F Letter, supra note 4, at 1, 10.
    \85\ See id. at 6, 10 (describing the conspiracy).
---------------------------------------------------------------------------

    NYSE Arca, in its response letter, highlights several structural 
features of the Trust and the Shares that are intended to prevent 
fraudulent and manipulative practices, promote just and equitable 
principles of trade, remove impediments to and perfect the mechanism of 
a free and open market, and in general, protect investors and the 
public interest, including that:
     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; \86\
---------------------------------------------------------------------------

    \86\ See Arca's Response, supra note 6, at 5.
---------------------------------------------------------------------------

     The Trust would be transparent, publishing information 
about its holdings and operations through its Web site; \87\
---------------------------------------------------------------------------

    \87\ See id.
---------------------------------------------------------------------------

     The Trust would utilize a consistent, transparent, non-
discretionary, rules-based, and fully disclosed selection protocol for 
redemptions; \88\ and
---------------------------------------------------------------------------

    \88\ See id.
---------------------------------------------------------------------------

     The Trust's copper would be valued by a recognized, 
independent valuation agent.\89\
---------------------------------------------------------------------------

    \89\ See id. at 6.
---------------------------------------------------------------------------

    In response, V&F states that, although the Trust may hold its 
copper in various locations worldwide, the Trust makes clear that it 
intends to acquire copper from locations where the premiums are the 
lowest, and that is in the United States.\90\ Senator Levin also states 
that it is likely that the Trust's copper will come from LME warehouses 
in the United States since the Trust will likely acquire its initial 
copper holdings from the location with the lowest locational premia, 
and the United States currently is the country with the lowest 
locational premia.\91\
---------------------------------------------------------------------------

    \90\ See V&F Letter II, supra note 7, at 9. V&F states its view 
that the most cost-efficient manner to create Shares would be to 
acquire warrants for copper held in the New Orleans warehouse where 
the Trust's copper may be stored and take that copper off warrant; 
by doing so, an authorized participant would avoid transportation 
costs and pay the lowest premium for the copper. See id. at 6.
    \91\ See Sen. Levin Letter, supra note 8, at 6.
---------------------------------------------------------------------------

    V&F further responds to Arca's statements about the structure of 
the Trust by stating that the transparency of the Trust's holdings will 
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.'' 
\92\
---------------------------------------------------------------------------

    \92\ See V&F Letter II, supra note 7, at 10.
---------------------------------------------------------------------------

    Senator Levin states that approval of the proposed rule change 
would make the copper market more susceptible to squeezes and corners 
by speculators.\93\ According to Senator Levin, market participants 
could use the Shares to remove copper from the available supply with 
the intent to artificially inflate the price of copper, and this 
activity would go undetected by the LME because CB-ETPs currently are 
not subject to any form of commodity regulations.\94\ Senator Levin 
states that, by holding physical copper rather than LME warrants, the 
Trust can control more of the available supply of copper without 
triggering LME reporting or rules.\95\ Senator Levin further states the 
view that creating this market condition would be inconsistent with the 
requirements in Section 6(b)(5) of the Act that exchange rules be 
designed to prevent manipulative acts and protect investors and the 
public interest.\96\
---------------------------------------------------------------------------

    \93\ See Sen. Levin Letter, supra note 8, at 7.
    \94\ See id.
    \95\ See id.
    \96\ See id. at 1, 7.
---------------------------------------------------------------------------

    Finally, V&F questions whether NYSE Arca's surveillance procedures 
are adequate to prevent fraudulent and manipulative trading in the 
Shares.\97\ According to V&F, NYSE Arca's surveillance procedures are 
not adequate because they are the kind of garden-variety measures that 
are always in place to prevent collusion and other forms of 
manipulation by traders.\98\
---------------------------------------------------------------------------

    \97\ See V&F Letter, supra note 4, at 10.
    \98\ See id.
---------------------------------------------------------------------------

    In response, NYSE Arca asserts that it will be able to obtain 
information regarding trading in the Shares and the underlying copper, 
copper futures contracts, options on copper futures, or any other 
copper derivative.\99\ NYSE Arca further states that it can obtain 
trading information via the ISG from other exchanges that are members 
of the ISG, including the New York Mercantile Exchange, of which COMEX 
is a division.\100\ The Exchange also notes that it has entered into a 
comprehensive surveillance sharing agreement with the LME that applies 
with respect to trading in copper.\101\
---------------------------------------------------------------------------

    \99\ See Arca's Response, supra note 6, at 6.
    \100\ See id.
    \101\ See id.
---------------------------------------------------------------------------

B. Comparison to Other Commodity-Based Trusts

    V&F distinguishes the Trust from prior commodity-based trusts whose 
shares have been approved for listing and trading by the 
Commission.\102\ According to V&F, gold, silver, platinum, and 
palladium are all precious metals that have traditionally been held for 
investment purposes and are currently used as currency.\103\ As a 
result, there are ample stored sources available to back physical CB-
ETPs holding precious metals, and the introduction of such CB-ETPs had 
virtually no impact on the available supply.\104\ In contrast, V&F 
states that copper generally is not held as an investment, but rather 
is used exclusively for industrial purposes, with the annual demand 
generally exceeding the available supply.\105\
---------------------------------------------------------------------------

    \102\ See V&F Letter, supra note 4, at 2-3.
    \103\ See id. at 2.
    \104\ See id.
    \105\ See id. at 2-3. V&F states that the consensus among 
experts is that copper is in deficit, has been in deficit for the 
past three years, and is expected to remain in deficit for at least 
the next couple of years. See id. at 3.
---------------------------------------------------------------------------

    NYSE Arca states that: (1) The Trust will not be the first CB-ETP 
to hold a metal that is used primarily for industrial purposes; (2) 
NYSE Arca is unaware of empirical evidence demonstrating that the 
launches of CB-ETPs that hold a metal that is used primarily for 
industrial purposes (e.g., platinum and palladium) have disrupted the 
markets for the underlying physical commodities or caused those 
commodity prices to increase; and (3) V&F has not provided any evidence 
that a copper-based CB-ETP would have such effects.\106\
---------------------------------------------------------------------------

    \106\ See Arca's Response, supra note 6, at 6.
---------------------------------------------------------------------------

    In its second letter, V&F states in response that platinum and 
palladium are used for both industrial and investment purposes and 
that, unlike copper, there is enough of a supply of platinum and 
palladium available in storage and being produced that the introduction 
of CB-ETPs backed by these metals did not cause the kind of disruption 
to the market that a copper-backed CB-ETPs would cause.\107\ 
Specifically, V&F states that: (1) In recent years, there has been a 
surplus in palladium due to the Russian

[[Page 43626]]

government's sell-off of its stockpile; (2) there is about a year's 
supply of platinum reserves above ground; and (3) there is only a 1-2 
week supply of copper available on the LME.\108\ Senator Levin states 
that gold, silver, platinum, and palladium are substantially different 
than copper because these four metals are the only precious metals that 
are currently treated as world currencies and commonly held for 
investment purposes, and as a result there are substantial existing 
supplies of these metals that could be acquired to back an CB-ETPs 
without affecting the world market price in these metals.\109\ Senator 
Levin observes that copper is not currently held for investment 
purposes because it is very expensive to store and difficult to 
transport, and there is not the same existing supply of copper for the 
Trust to acquire to back its CB-ETP, and concludes that holding copper 
for investment purposes will have a significantly greater impact on the 
copper market than CB-ETPs holding platinum, palladium, silver, or gold 
had on their respective markets and the broader economy.\110\
---------------------------------------------------------------------------

    \107\ See V&F Letter II, supra note 7, at 11.
    \108\ See id.
    \109\ See Sen. Levin Letter, supra note 8, at 6-7.
    \110\ See id. at 7.
---------------------------------------------------------------------------

IV. Proceedings To Determine Whether to Approve or Disapprove SR-
NYSEArca-2012-28 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \111\ to determine whether this proposed rule 
change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change. As noted above, the 
institution of proceedings does not indicate that the Commission has 
reached any conclusions with respect to any of the issues involved. 
Rather, as described in greater detail below, the Commission seeks and 
encourages interested persons to provide additional comment on the 
proposed rule change to inform the Commission's analysis of whether to 
approve or disapprove the proposed rule change.
---------------------------------------------------------------------------

    \111\ 15 U.S.C. 78s(b)(2)(B). Section 19(b)(2)(B) of the Act 
also provides that proceedings to determine whether to disapprove a 
proposed rule change must be concluded within 180 days of the date 
of publication of notice of the filing of the proposed rule change. 
Id. The time for conclusion of the proceedings may be extended for 
up to 60 days if the Commission finds good cause for such extension 
and publishes its reasons for so finding. Id.
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2)(B),\112\ the Commission is providing 
notice of the grounds for disapproval under consideration. The 
Commission believes that questions remain about whether the proposed 
rule change is consistent with the requirements of Section 6(b)(5) of 
the Act,\113\ which requires that the rules of an exchange be designed, 
among other things, to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system and, in general, to protect investors and the 
public interest.
---------------------------------------------------------------------------

    \112\ Id.
    \113\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    As discussed above, the Commission received comment letters from 
two parties opposing the proposed rule change. The Commenters assert 
that the successful creation of the Trust would materially reduce the 
supply of copper available for immediate delivery, which would increase 
the price of copper and volatility in the copper market, and, in turn, 
would harm the U.S. economy.\114\ In addition, the Commenters argue 
that, by decreasing the amount of copper available for immediate 
delivery, the Trust will make the copper market more susceptible to 
manipulation.\115\ V&F also believes the Exchange's surveillance 
procedures are inadequate to prevent fraudulent and manipulative 
trading in the Shares.\116\
---------------------------------------------------------------------------

    \114\ See V&F Letter, supra note 4, at 5-7 and Sen. Levin 
Letter, supra note 8, at 1, 7.
    \115\ See V&F Letter, supra note 4, at 1, 10 and Sen. Levin 
Letter, supra note 8, at 7.
    \116\ See V&F Letter, supra note 4, at 10.
---------------------------------------------------------------------------

    In response, the Exchange believes V&F's arguments either are based 
on incorrect information or are unsubstantiated,\117\ and disputes 
V&F's conclusions regarding the Trust's impact on the copper 
market.\118\ NYSE Arca states different expectations regarding the 
source and amount of copper that would be used to create Shares of the 
Trust, as well as the potential impact on the price of copper.\119\
---------------------------------------------------------------------------

    \117\ See Arca's Response, supra note 6, at 1.
    \118\ See id. at 4.
    \119\ See id. at 2-4.
---------------------------------------------------------------------------

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

V. Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
concerns identified above, as well as any others they may have 
regarding the proposed rule change. In particular, the Commission 
invites the written views of interested persons concerning whether the 
proposed rule change is consistent with Section 6(b)(5) or any other 
provision of the Act, or the rules and regulations thereunder. The 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\120\
---------------------------------------------------------------------------

    \120\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views and 
arguments regarding whether the proposed rule change should be 
disapproved by August 24, 2012. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
September 10, 2012.
    The Commission asks that commenters address the sufficiency and 
merit of the Exchange's statements in support of the proposed rule 
change and the comments received, in addition to any other comments 
they may wish to submit about the proposed rule change. The Commission 
requests that commenters support their responses to the questions below 
with empirical data sufficient to inform the Commission's decision 
making. In particular, the Commission seeks comment on the following:
    1. In light of the comments received, the Commission is soliciting 
further comments regarding copper usage and supply trends. For example:
    [cir] What was the world mine production capacity in each of the 
past 10 years? What data is available regarding projected world mine 
production over the next 3 to 5 years? What factors impact the ability 
to increase or decrease mine production?
    [cir] What was the refined production in each of the past 10 years? 
How much of the refined production was from primary and secondary 
sources? What was the world refinery capacity in each of the past 10 
years? What data is available regarding projected refined production 
over the next 3 to 5 years? What factors impact the ability to increase 
or decrease refinery production?
    [cir] What was the world refined usage in each of the past 10 
years? What data is available regarding projected usage over the next 3 
to 5 years?

[[Page 43627]]

    [cir] How much copper has been held for investment purposes over 
the past 10 years? How much of this copper was taken off LME warrant? 
How much of this copper has been eligible to be placed on LME warrant?
    2. According to the International Copper Study Group (``ICSG'), 
world refined usage of copper exceeded world refined production by 
approximately 417,000 tons in 2010 and 231,000 tons in 2011, and world 
refined stocks decreased by 161,000 tons in 2010 and increased by 
13,000 tons in 2011.\121\ What factors account for refined stocks 
decreasing less than the deficit amount (or even increasing) in 2010 
and 2011? Are there any factors with respect to the supply of copper 
available for immediate delivery that the Commission should consider in 
evaluating the market's ability to meet demand for copper? When a 
deficit occurs, are copper fabricators and other end users able to 
access copper to meet excess demand? If so, what are the sources of 
that copper? How much copper is available for immediate delivery that 
is not on LME warrant?
---------------------------------------------------------------------------

    \121\ Press Release, ICSG, Copper: Preliminary Data for February 
2012 (June 20, 2012), available at http://www.icsg.org/index.php?option=com_content&task=view&id=63&Itemid=64.
---------------------------------------------------------------------------

    3. The Commenters state that a material reduction in the supply of 
copper available for immediate delivery will increase the price of 
copper and volatility in the copper market, and, in turn, would harm 
the U.S. economy.\122\ The Commission requests comment on whether 
commenters agree or disagree with these concerns, and why or why not. 
For example:
---------------------------------------------------------------------------

    \122\ See V&F Letter, supra note 4, at 5-7 and Sen. Levin 
Letter, supra note 8, at 1.
---------------------------------------------------------------------------

    [cir] Do commenters believe creation of the Trust will have an 
impact on the supply of copper? If so, what will that impact be? If 
not, why not?
    [cir] How does a change in the supply of copper impact the price of 
copper? To what extent do copper stocks need to be reduced or increased 
to impact the price of copper?
    [cir] To what extent is the LME Settlement Price affected by the 
amount of copper on LME warrant? To what extent must copper on LME 
warrant be reduced to impact the LME Settlement Price? To what extent, 
if at all, is the LME Settlement Price affected by the supply of copper 
ineligible to be placed on LME warrant?
    [cir] How does a change in the supply of copper impact volatility 
in the physical copper and copper derivatives markets?
    [cir] Is there empirical evidence that creation of the Trust will 
impact copper prices and volatility? What impact, if any, will creation 
of the Trust have on the US economy?
    4. V&F and Senator Levin state that the Trust and the proposed 
iShares Copper Trust,\123\ collectively, will remove from the market a 
substantial percentage of the copper available for immediate delivery, 
with Senator Levin stating that the Copper Trusts would hold 
approximately 34% of the copper stocks available for immediate delivery 
and would remove from the U.S. market over 55% of the available 
copper.\124\ V&F further states that the collective effect of the Trust 
and the iShares Copper Trust would be ``far-reaching and potentially 
devastating to the U.S. and world economies,'' including ``shortages of 
copper, higher prices to consumers, and increased volatility.'' \125\ 
Do commenters agree or disagree with these statements? If so, why or 
why not?
---------------------------------------------------------------------------

    \123\ See iShares Notice, supra note 58 (describing the iShares 
Copper Trust).
    \124\ See V&F Letter, supra note 4, at 6 and Sen. Levin Letter, 
supra note 8, at 5-6.
    \125\ See V&F Letter, supra note 4, at 10.
---------------------------------------------------------------------------

    5. V&F states that the only ``visible'' copper available to satisfy 
the Trust's requirements is copper stored in LME warehouses.\126\ NYSE 
Arca represents that it has been informed by the Sponsor that overall 
physical copper stocks, including stocks that are immediately available 
for sale, are substantially larger than V&F would suggest.\127\ V&F 
responded, arguing that the copper stocks identified in Arca's Response 
mainly consist of metal in the supply chain, which would not be 
generally available for creation of Shares.\128\ The Commission is 
soliciting further comments regarding physical copper stocks. For 
example:
---------------------------------------------------------------------------

    \126\ See id. at 3.
    \127\ See Arca's Response, supra note 6, at 3.
    \128\ See V&F Letter II, supra note 7, at 5.
---------------------------------------------------------------------------

    [cir] How much copper is currently held in LME warehouses? How much 
of the copper currently held in LME warehouses is on warrant? How much 
copper in LME warehouses is available for investment purposes?
    [cir] How much copper is held in COMEX, Shanghai Futures Exchange 
(``SHFE''), and Multi Commodity Exchange of India (``MCX'') warehouses? 
How much copper held in COMEX, SHFE, and MCX warehouses is eligible to 
be placed on LME warrant (i.e., is of a brand registered with the LME)? 
How much of this LME warrant-eligible copper is available for 
investment purposes? Where is this copper located?
    [cir] What quantity of copper stock, if any, is held in other 
locations that would be eligible to be placed on LME warrant (if it 
were located at an LME warehouse)?
    [cir] How accessible are stocks of copper eligible to be placed on 
warrant that are not held in LME warehouses?
    [cir] Are commenters aware of any activities involving the 
stockpiling of copper? If so, how much copper has been stockpiled? 
Where is such copper located? How accessible is such copper? How much 
of this stock was taken off LME warrant? How much of this copper is 
eligible to be placed on LME warrant?
    6. The Trust will store copper in warehouses that are maintained by 
the Warehouse-keeper. Initially, the permitted warehouse locations are 
in the Netherlands (Rotterdam), Singapore (Singapore), South Korea 
(Busan and Gwangyang), China (Shanghai), and the United States 
(Baltimore, Chicago, and New Orleans) (each an ``Approved Warehouse'' 
and, collectively, the ``Approved Warehouses'').\129\ What is the 
locational premium at each of the Approved Warehouses? What impact 
would changes in locational premia have on supply and demand for copper 
at each of the Approved Warehouses? How much copper is held at each of 
the Approved Warehouses? How much of the copper held at each of the 
Approved Warehouses is on LME warrant? How much is eligible to be 
placed on LME warrant? How much copper eligible for LME warrant is 
available for investment purposes? How much is not eligible to be 
placed on LME warrant?
---------------------------------------------------------------------------

    \129\ See Notice, supra note 3, at 23779.
---------------------------------------------------------------------------

    7. V&F states that Shares will be created by acquiring LME-
warranted copper and taking it off warrant to be deposited in the 
Trust.\130\ NYSE Arca represents that it has been informed by the 
Sponsor that the economics do not support this suggestion, given the 
large supply of non-warranted physical copper and the cost and time 
that would be required in order to take LME warranted copper off 
warrant solely for the purposes of creating Shares.\131\ V&F responded, 
arguing that taking copper off LME warrant would involve little or no 
cost if LME warrants are purchased for copper that is already stored at 
the Approved Warehouses.\132\ The Commission requests comment on these 
opposing views. Specifically:
---------------------------------------------------------------------------

    \130\ See V&F Letter, supra note 4, at 3.
    \131\ See Arca's Response, supra note 6, at 3.
    \132\ See V&F Letter II, supra note 7, at 6.
---------------------------------------------------------------------------

    [cir] What costs are involved in taking copper off LME warrant? 
What costs are involved in putting copper on LME warrant?
    [cir] How long does it take to take copper off LME warrant? How 
long does it take to put copper on LME warrant?

[[Page 43628]]

    [cir] How does the cost and time required to take copper off 
warrant compare to the cost and time to ship copper to an Approved 
Warehouse?
    8. The Commission understands that ETFS Physical Copper securities 
currently trade on the London Stock Exchange. How much copper did ETFS 
Physical Copper hold following the initial creation? How much copper 
does ETFS Physical Copper currently hold? What change, if any, was 
there in the price of copper following creation of ETFS Physical 
Copper? Did the creation of ETFS Physical Copper result in an 
observable impact on the copper market? Has ETFS Physical Copper 
engaged in the lending of copper?
    9. The Commission has previously approved listing on the Exchange 
under NYSE Arca Equities Rule 8.201 of other issues of CB-ETPs backed 
by gold, silver, platinum, and palladium (collectively ``precious 
metals''). While these precious metals are often held for investment 
purposes, the Commission understands they are also used for various 
industrial purposes. V&F asserts that copper is used exclusively for 
industrial purposes and is not generally held for investment.\133\ The 
Commission requests information regarding the production and use of 
precious metals. How much gold, silver, platinum, and palladium has 
been produced in each of the last 10 years? How much gold, silver, 
platinum, and palladium has been used for investment purposes in each 
of the last 10 years? How much gold, silver, platinum, and palladium 
has been used for industrial purposes in each of the last 10 years? Are 
there any other uses of gold, silver, platinum, and palladium relevant 
to understanding utilization of these precious metals? What are the 
current and historic stocks of gold, silver, platinum, and palladium? 
Is there any empirical evidence that the listing of CB-ETPs backed by 
gold, silver, platinum, or palladium impacted prices in these markets?
---------------------------------------------------------------------------

    \133\ See V&F Letter, supra note 4, at 2-3.
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    10. V&F estimates that creation of the Trust could result in the 
immediate removal of up to 61,800 metric tons of copper from LME 
warehouses.\134\ NYSE Arca states its understanding that the Sponsor 
currently expects that the value of the initial creation units to be 
issued by the Trust would not exceed 10,185 metric tons.\135\ Further, 
while the Trust is seeking to register 6,180,000 Shares, the Exchange 
states that like the other CB-ETPs, the Trust is seeking to register 
significantly more Shares than it intends to sell initially.\136\ What 
is the likelihood that the Trust will sell all registered Shares 
initially? What is the likelihood that the Trust will sell all 
registered Shares in the three months after the registration goes 
effective? How quickly did the CB-ETPs backed by gold, silver, 
platinum, and palladium sell the shares registered in the first 
registration statement?
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    \134\ See id. at 1, 3.
    \135\ See Arca's Response, supra note 6, at 4.
    \136\ See id.
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    11. V&F argues that, by decreasing the amount of copper available 
for immediate delivery, the Trust will make the copper market more 
susceptible to manipulation.\137\ Specifically, V&F states that ``the 
drawing down of stocks in LME and Comex warehouses'' resulting from the 
listing and trading of the Shares ``will make it much easier and 
cheaper for [copper market] speculators to engage in temporary market 
squeezes and corners.'' \138\ Senator Levin also argues that approval 
of the proposed rule change would make the copper market more 
susceptible to squeezes and corners by speculators.\139\ The Commission 
requests comment on these concerns, as well as whether commenters agree 
or disagree with the comments and why or why not. For example:
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    \137\ See V&F Letter, supra note 4, at 1, 10.
    \138\ See id. at 9.
    \139\ See Sen. Levin Letter, supra note 8, at 7.
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    [cir] Will creation of the Trust impact the ability to manipulate 
the physical copper or copper derivatives markets? If so, how? If not, 
why not?
    [cir] Has there been any increased manipulative behavior due to the 
reduction of copper available for immediate delivery that resulted from 
the prior years' deficits in copper production versus copper 
consumption?
    [cir] Are there any structural aspects of the copper market that 
render it more or less susceptible to manipulation?
    [cir] Is there empirical evidence that the creation of CB-ETPs 
backed by gold, silver, platinum, and palladium has led to manipulation 
of the physical markets for those precious metals? If so, please 
describe.
    12. Both Commenters discuss concerns about the potential impact of 
the Trust on the copper market, and how that potential impact could, in 
turn, affect the Shares. V&F states that, with

    the risk of an ETF removing indefinitely all or substantially 
all of the copper available for immediate delivery, the risk of 
price volatility becomes enormous. This is because the greater 
amount of copper artificially kept off-the-market, the greater the 
chance that investors will eventually no longer keep propping up the 
price with further purchases, and the greater the likelihood that 
the bubble will burst, thus flooding the market with surplus copper, 
and severely depressing the price.\140\

    \140\ See V&F Letter, supra note 4, at 5.

    V&F further states that investors in a copper CB-ETP would benefit 
immediately from any increase in the price of copper because the more 
copper removed from the market to satisfy the demand for the copper CB-
ETP, the higher the price not only of copper, but of the copper CB-ETP 
itself.\141\ V&F notes that, like all bubbles, as investor demand for 
this product wanes, the bubble will burst, leaving in its wake a glut 
of physical copper that the Trust will be forced to dump on the market, 
causing prices to plummet, and leaving in its wake unsuspecting 
investors who will have lost the value of their investment.\142\ 
Senator Levin also makes statements about the potential effect on the 
Shares, stating that the ``supply disruption is likely to affect the 
cash and futures market for copper, increasing volatility and driving 
up[hellip][the Share] price to create a bubble and burst cycle.'' \143\
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    \141\ See id.
    \142\ See id. at 2.
    \143\ See Sen. Levin Letter, supra note 9, at 1.
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    Do commenters agree or disagree with these comments? If so, why or 
why not? Comments may be submitted by any of the following methods:

Electronic Comments

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

Paper Comments

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

All submissions should refer to File Number SR-NYSEArca-2012-28. These 
file numbers should be included on the subject line if email is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the

[[Page 43629]]

proposed rule change between the Commission and any person, other than 
those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filings also will be available 
for inspection and copying at the principal office of the Exchanges. 
All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-NYSEArca-2012-
28 and should be submitted on or before August 24, 2012. Rebuttal 
comments should be submitted by September 10, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\144\
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    \144\ 17 CFR 200.30-3(a)(57).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-18107 Filed 7-24-12; 8:45 am]
BILLING CODE 8011-01-P