[Federal Register Volume 78, Number 64 (Wednesday, April 3, 2013)]
[Notices]
[Pages 20164-20166]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-07717]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69256; File No. SR-NYSEArca-2012-28]


Self-Regulatory Organizations; NYSE Arca, Inc.; Response to 
Comments Submitted After the Issuance on December 14, 2012, of a 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

March 28, 2013.

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 the 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\
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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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    On December 14, 2012, the Commission approved the proposed rule 
change,\4\ finding that it was consistent with the requirements of the 
Act. In its Approval Order, the Commission invited interested persons 
to submit written data, views, and arguments concerning the Approval 
Order, including whether Amendment No. 1 to the proposed rule change is 
consistent with the Act.\5\
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    \4\ See Securities Exchange Act Release No. 68440, 77 FR 75468 
(December 20, 2012) (``Approval Order''). Prior to approving the 
proposed rule change, the Commission: (1) Extended the time period 
for Commission action to July 19, 2012, see Securities Exchange Act 
Release No. 67075 (May 30, 2012), 77 FR 33258 (June 5, 2012); (2) 
instituted proceedings to determine whether to approve or disapprove 
the proposed rule change, see Securities Exchange Act Release No. 
67470 (July 19, 2012), 77 FR 43620 (July 25, 2012); and (3) issued a 
notice of designation of longer period for Commission action on 
proceedings to determine whether to approve or disapprove the 
proposed rule change, see Securities Exchange Act Release No. 67965 
(October 2, 2012), 77 FR 61457 (October 9, 2012).
    \5\ See Approval Order, supra note 4, 77 FR 75487.
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    In response to the solicitation of comments, the Commission 
received two comment letters.\6\ Both letters opposed the approval of 
the proposed rule change, and one commenter specifically requested that 
the Commission reconsider and reverse its decision, and disapprove the 
proposed rule change.\7\ This Response addresses those comments.
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    \6\ See letter from Robert B. Bernstein, Partner, Eaton & Van 
Winkle LLP (``EVW''), to Elizabeth M. Murphy, Secretary, Commission, 
dated January 9, 2013 (``EVW January 9 Letter''); and email from 
Janet Klein, dated January 7, 2013 (``Klein Email''). Comment 
letters are available at http://www.sec.gov/comments/sr-nysearca-2012-28/nysearca201228.shtml. Ms. Klein asserted that approval of 
the proposed rule change would: (1) Be ``contrary to rational 
oversight of wise practice,'' without explaining the basis for her 
judgment; (2) not contribute to the economy; and (3) promote 
``speculative swings of a commodity price not related to supply/
demand,'' again without explaining the basis for her conclusion. See 
Klein Email, supra. The Commission discussed the likelihood of any 
impact of the proposed rule change on the price of copper in the 
Approval Order. See Approval Order, supra note 4, 77 FR 75477-82.
    \7\ See EVW January 9 Letter, supra note 6. This commenter 
submitted seven comment letters opposing the proposed rule change 
prior to the Commission's issuance of the Approval Order. See 
letters from Vandenberg & Feliu, LLP (``V&F''), received May 9, 2012 
(``V&F May 9 Letter''); Robert B. Bernstein, V&F, to Elizabeth M. 
Murphy, Secretary, Commission, dated July 13, 2012; Robert B. 
Bernstein, V&F, to Elizabeth M. Murphy, Secretary, Commission, dated 
August 24, 2012 (``V&F August 24 Letter''); Robert B. Bernstein, 
V&F, to Elizabeth M. Murphy, Secretary, Commission, dated September 
10, 2012 (``V&F September 10 Letter''); Robert B. Bernstein, V&F, to 
Elizabeth M. Murphy, Secretary, Commission, dated October 23, 2012; 
Robert B. Bernstein, V&F, to Elizabeth M. Murphy, Secretary, 
Commission, dated November 16, 2012; and Robert B. Bernstein, EVW, 
to Elizabeth M. Murphy, Secretary, Commission, dated December 7, 
2012 (``EVW December 7 Letter'').
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II. Response to Comments

    One commenter (referred to herein as ``the commenter'') repeated 
many concerns that had been previously raised, considered by the 
Commission, and expressly addressed in the Approval Order. This 
commenter, however, expanded upon and clarified some of his prior 
arguments.\8\ Accordingly, the Commission responds below to certain 
comments made by the commenter after the Commission approved the 
proposed rule change.\9\
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    \8\ See supra note 7.
    \9\ The other comment is addressed supra at note 6.
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A. Direct Participation in Trading on the London Metal Exchange 
(``LME'')

    The commenter asserts that the Approval Order contained an 
incorrect statement of fact regarding who may trade directly on the 
LME. The commenter asserts that the Commission was incorrect in stating 
that ``[o]nly eligible organizations or members are able to participate 
directly in trading on the LME,'' and asserts that only ``open outcry'' 
trading on the LME is limited to eligible organizations or members, and 
that most trading on the LME takes place in inter-office trading that 
is open to anyone who has a telephone and a computer screen.\10\ The 
commenter further states that the Commission relied on this conclusion 
in reaching its decision.\11\
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    \10\ See EVW January 9 Letter, supra note 6, at 4-5 (quoting 
Approval Order, supra note 4, 77 FR 75469).
    \11\ See EVW January 9 Letter, supra note 6, at 5.
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    The Commission believes that the description in the Approval Order 
regarding trading on the LME is correct.\12\ The Commission understands 
that trading on the LME can occur in a number of ways, all of which 
must occur through a member.\13\ Trading can occur in the LME's open-
outcry trading floor (the ``Ring''), but such trading is limited to 
ring-dealing members.\14\ Electronic trading can occur through 
LMEselect; although clients can access LMEselect, such access is 
available only via member systems or member-

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sponsored Independent Software Vendor (``ISV'') platforms.\15\ 
Similarly, the LME's inter-office telephone market, which operates 24 
hours a day, facilitates trading between LME members.\16\ However, even 
assuming that direct trading on the LME were not limited to eligible 
organizations or members, such an assumption was not a basis for the 
Commission's findings.\17\
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    \12\ The Approval Order expressly states that this description 
comes from the description of the copper market that the Exchange 
included in its filing. See Approval Order, supra note 4, 77 FR 
75469. In the notice of the proposed rule change, the Exchange 
stated: ``The LME is a principal-to-principal market where only 
eligible organizations or `members' are able to participate directly 
in trading.'' Notice, supra note 3, 77 FR 23776. The commenter did 
not raise any concerns about the Exchange's description of the LME 
in any of the comment letters he previously submitted.
    \13\ See Approval Order, supra note 4, 77 FR 75469.
    \14\ See LME, Trading, Venues and Systems, The Ring, http://lme.com/trading/venues-and-systems/ring/.
    \15\ See LME, Trading, Venues and Systems, Electronic, http://lme.com/trading/venues-and-systems/electronic/. In the case of 
member systems, client traffic must pass through a member order-
routing bridge and/or a pre-trade risk engine fully controlled by 
the sponsoring member's compliance team. Client traffic can also 
pass through an ISV pre-trade risk engine endorsed and controlled by 
the sponsoring member's compliance team.
    \16\ See LME, Trading, Venues and Systems, Telephone, http://lme.com/trading/venues-and-systems/telephone/.
    \17\ See Approval Order, supra note 4, 77 FR 75474-75 
(discussing the availability of the Trust's copper); and id. at 
75486-87 (discussing the Commission's findings).
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B. The Impact of Queues

    In a comment submitted prior to issuance of the Approval Order, the 
commenter discussed the existing unloading queues for metals, including 
copper, at LME warehouses.\18\ The commenter asserted that queues to 
unload copper from LME warehouses appear to be lengthening because 
owners of LME warehouses are ``paying producers with surplus metal huge 
financial incentives to deposit their metal in LME warehouses, at which 
point such product may be sold, reportedly in some cases to owners of 
other LME warehouses, which is what is reportedly creating and 
perpetuating the ever-growing queue.'' \19\ According to the commenter, 
the development of these queues ``creates a scarcity of free units of 
metal that not only forces up premiums above LME cash prices in local 
geographic markets'' but may ultimately prevent end-users of copper 
from obtaining access to needed copper in a timely fashion.\20\
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    \18\ See EVW December 7 Letter, supra note 7.
    \19\ See id. at 2.
    \20\ See id.
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    In the Approval Order, the Commission addressed this comment. In 
concluding that the Trust's copper will remain available to consumers 
and other participants in the physical copper market, the Commission 
assumed, based on the record, that copper would be transferred to a 
redeeming authorized participant's book-entry account within three 
business days, and that a redeeming authorized participant taking 
delivery of copper from an LME warehouse would then have to wait in the 
queues just like other owners withdrawing metal from that 
warehouse.\21\ The Commission stated its belief 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, and noted 
that the commenter, who acknowledged that taking copper off of LME 
warrant takes time, considers copper on LME warrant to be available for 
immediate delivery.\22\ In addition, the Commission pointed out that 
the Trust's copper may be held in both LME-approved warehouses and non-
LME-approved warehouses, and there was nothing in the record concerning 
the existence of unloading queues in non-LME warehouses.\23\ Further, 
the Commission stated that the LME appears to be attempting to address 
the problem of unloading queues.\24\
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    \21\ See Approval Order, supra note 4, 77 FR 75474 n.83.
    \22\ See id.
    \23\ See id.
    \24\ See id.
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    In the post-Approval Order comment letter, the commenter expands 
upon his prior comment about queues by asserting that ``the placement 
of additional copper in LME warehouses may lead to substantially longer 
queues that will make it even more difficult for all consumer [sic] and 
other market participants to obtain physical copper that otherwise used 
to be available for immediate delivery.'' \25\ The commenter also 
argues in his post-Approval Order letter that the longer queues that he 
predicts will occur, combined with the ``huge costs of storage'' that 
will be borne by anyone choosing to take physical delivery of copper, 
``may itself discourage the exercise of redemption rights.'' \26\
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    \25\ EVW January 9 Letter, supra note 6, at 13. According to the 
commenter, queue formation is a function of the demand to unload all 
metals stored in LME warehouses. See EVW December 7 Letter, supra 
note 7. Accordingly, even if Shares were created and redeemed in a 
manner that could exacerbate the existing queues, that activity 
could be offset entirely by fewer requests to take physical delivery 
of other metals stored in the warehouses.
    \26\ See EVW January 9 Letter, supra note 6, at 13.
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    Several factors would impact how much copper will be deposited into 
each approved warehouse during the creation process, and how quickly. 
Authorized participants will determine where to deliver copper in 
exchange for Shares, choosing from among the eight permitted warehouse 
locations, which include LME and non-LME warehouses.\27\ Authorized 
participants may determine to deliver copper to non-LME warehouses in 
exchange for Shares. As noted in the Approval Order, there is nothing 
in the record concerning the existence of unloading queues in non-LME 
warehouses.\28\ Further, it is unknown how many Shares would be created 
(i.e., how much copper would be deposited at permitted warehouse 
locations), and how quickly they would be created (i.e., how quickly 
the copper would be deposited at the permitted warehouse 
locations).\29\ Thus, based on the record, the Commission cannot 
conclude that the placement of additional copper in LME warehouses due 
to the creation of Shares would lead to longer queues.
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    \27\ ``The Trust will store its copper in both LME-approved 
warehouses and non-LME-approved warehouses * * *. 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).'' Approval Order, supra note 4, 77 FR 
75471.
    \28\ See id. at 75474 n.83.
    \29\ See id. at 75476-77. The commenter states that queues would 
be exacerbated only to the extent that additional copper is 
deposited into LME warehouses. See EVW January 9 Letter, supra note 
6, at 13. In a prior comment letter, the commenter stated that 
authorized participants would likely create Shares by taking copper 
off warrant at an LME warehouse and using that copper to create 
Shares without ever removing it from the LME warehouse (referred to 
as ``white lining''). See V&F September 10 Letter, supra note 7, at 
2. Even assuming that the commenter is correct that authorized 
participants will elect to create Shares through white lining, then 
no additional copper would be added to an LME warehouse's inventory. 
If the commenter is now asserting that copper will be delivered from 
another source, this supports the Commission's belief that it is 
more plausible that copper that is not on LME warrant would be used 
to create Shares. See Approval Order, supra note 4, 77 FR 75476.
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    With respect to redemptions, it is unknown how often Share 
redemptions will occur and whether they will be followed by physical 
delivery.\30\ Redeeming authorized participants (or their customers) 
will determine whether to retain the warehouse receipt or request 
physical delivery of copper. Some authorized participants who redeem 
Shares may choose to hold the warehouse receipt rather than withdraw 
the copper from the warehouse.\31\ Thus, based on the record, the 
Commission

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cannot conclude that redemptions of Shares would lead to longer queues.
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    \30\ Additionally, when physical delivery is demanded after the 
redemption of Shares, for the reasons discussed above in the 
discussion of creations, it is unclear how often withdrawals would 
be from LME warehouses.
    \31\ As discussed in the Approval Order, copper received in 
exchange for redeemed Shares could be: (1) Sold in the over-the-
counter (``OTC'') market for cash; (2) swapped in the OTC market for 
copper in a different location or for a different brand; (3) placed 
on LME warrant and traded on the LME; or (4) removed from the 
warehouse and consumed. See Approval Order, supra note 4, 77 FR 
75474. The commenter does not assert that the existence of queues 
would discourage authorized participants from redeeming Shares with 
the intent to sell or trade the copper, rather than take physical 
delivery.
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    According to the commenter, anyone choosing to take physical 
delivery of copper following redemption will have to bear ``huge 
storage costs.'' \32\ The holders of Shares, however, also will pay 
storage costs indirectly through the Trust.\33\ The commenter does not 
explain how storage costs, together with the longer queues that the 
commenter asserts would occur, would discourage redemption, because 
those who purchase Shares would have to pay storage costs, whether the 
Shares are redeemed or held.
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    \32\ See EVW January 9 Letter, supra note 6, at 13.
    \33\ The Trust's expenses will include both the Sponsor's fee, 
including storage costs, and other expenses. Registration statement 
for the Trust, amended on July 12, 2011 (No. 333-170085), at 57 
(``Registration Statement'').
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    For the reasons discussed above, and based on the record, the 
Commission cannot conclude that storage costs, together with ``longer'' 
queues that the commenter asserts would occur, would discourage the 
exercise of redemption rights.

C. Availability of Particular Copper Brands

    In comments submitted prior to approval of the proposed rule 
change, the commenter expressed concern regarding the ability of end 
users to acquire copper of a preferred brand or in a preferred 
location.\34\ The commenter asserted that end users would not acquire 
Shares and redeem them for physical copper because the copper they 
would receive in exchange for the Shares might be in a location far 
from, or might be of brands that are not acceptable to, their 
plants.\35\
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    \34\ See V&F September 10 Letter, supra note 7.
    \35\ See Approval Order, supra note 4, at 75474 (citations 
omitted).
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    The Commission addressed these comments in the Approval Order, 
stating that, 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.\36\ Further, the Commission stated that the record 
supports that the same logistical issues exist and are regularly 
addressed by end-users of copper holding LME warrants,\37\ and that 
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.\38\
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    \36\ See id.
    \37\ See id.
    \38\ See id.
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    In the post-Approval Order letter, the commenter augments his prior 
argument by asserting that the purchase and sale of physical copper 
held by the Trust will not operate in the same way as the trading of 
copper on LME warrants because copper held by the Trust will not be for 
sale until after Shares are redeemed. The commenter further argues that 
the only ``copper that can conceivably be traded by merchants for 
desired brands is copper on warrant in LME warehouses.'' \39\ 
Accordingly, the commenter concludes that if, as he predicts, only 
copper on LME warrant is used to create Shares (and is thereby taken 
off warrant and unavailable for sale), ``there is a much greater 
likelihood of there not being copper of the desired brands in the 
desired locations available for copper merchants to trade.'' \40\
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    \39\ See EVW January 9 Letter, supra note 6, at 17.
    \40\ See id.
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    In the Approval Order, the Commission stated that, while the 
sources of copper used to create Shares are uncertain,\41\ it believes 
it is more plausible that a sufficient portion of the estimated 1.4 
million metric tons of liquid copper inventories not on LME warrant 
would be available to authorized participants to use to create 
Shares.\42\ Further, as mentioned above, authorized participants will 
choose the location of copper used to create Shares,\43\ which makes it 
difficult to predict the location(s) from which the Trust's copper will 
come. Moreover, there is no data in the record concerning the 
availability of particular brands of copper, much less the availability 
of particular brands in particular locations.\44\ The commenter does 
not provide in his post-Approval Order letter any new evidence to 
suggest that this scenario of brand scarcity in particular locations is 
likely to occur as a result of Share creation. Therefore, the 
Commission does not believe that the record supports the commenter's 
argument that, as a result of the Trust, it is much more likely that 
brand-sensitive end-users of copper will not be able to obtain their 
desired brands of copper at their desired locations.
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    \41\ See Approval Order, supra note 4, 77 FR 75475.
    \42\ See id. at 75475-76.
    \43\ This may be informed by the locational premia in the 
various authorized warehouse locations, but ``premia in different 
locations have fluctuated historically relative to one another and 
will continue to change over time * * * '' and ``a region with the 
highest locational premia at a given time may have the lowest 
locational premia at a later date.'' Id. at 75475.
    \44\ The commenter, however, did provide projections that 
production will increase through 2016 in amounts that also exceed--
and in most years greatly exceed--the amount of copper that the 
commenter predicts the Trust will hold. See V&F August 24 Letter, 
supra note 7, at 2 (providing data indicating that global refined 
copper is projected to increase by 519,000 metric tons in 2012; 
1,603,000 metric tons in 2013; 1,195,000 metric tons in 2014; 
1,091,000 metric tons in 2015, and 375,000 metric tons in 2016). 
While this data does not support the proposition that particular 
brands of copper will be more widely available at particular 
locations in the future, it also does not support the commenter's 
contention that particular brands of copper will be more scarce at 
particular locations in the future.
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* * * * *

    By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-07717 Filed 4-2-13; 8:45 am]
BILLING CODE 8011-01-P