Document ID: SEC-2013-0406-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2013-02-28T05:00Z

[Federal Register Volume 78, Number 40 (Thursday, February 28, 2013)]
[Notices]
[Pages 13726-13742]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-04623]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68973; File No. SR-NYSEArca-2012-66]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Amendments No. 1 and No. 2 and Order Granting Accelerated Approval 
of a Proposed Rule Change as Modified by Amendments No. 1 and No. 2 To 
List and Trade Shares of the iShares Copper Trust Pursuant to NYSE Arca 
Equities Rule 8.201

February 22, 2013.

I. Introduction

    On June 19, 2012, NYSE Arca, Inc. (``Exchange'' or ``NYSE Arca'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
list and trade shares (``Shares'') of the iShares Copper Trust 
(``Trust'' or ``iShares Trust'') pursuant to NYSE Arca Equities Rule 
8.201. BlackRock Asset Management International Inc. is the sponsor of 
the Trust (``Sponsor''). The proposed rule change was published for 
comment in the Federal Register on June 27, 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. 67237 (June 22, 2012), 
77 FR 38351 (``Notice'').
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    The Commission initially received one comment letter, which opposed 
the proposed rule change.\4\ On August 8, 2012, the Commission 
instituted proceedings to determine whether to approve or disapprove 
the proposed rule change.\5\ Subsequently, the Commission received 
additional comments on the proposed rule change.\6\
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    \4\ See letter from Robert B. Bernstein, Vandenberg & Feliu, LLP 
(``V&F''), to Elizabeth M. Murphy, Secretary, Commission, dated July 
18, 2012 (``V&F July 18 Letter''). Comment letters are available at 
http://www.sec.gov/comments/sr-nysearca-2012-66/nysearca201266.shtml. This commenter states that he represents RK 
Capital LLC, an international copper merchant, and four end-users of 
copper: Southwire Company, Encore Wire Corporation, Luvata, and 
AmRod Corp (collectively, the ``Copper Fabricators''). The commenter 
states that these companies collectively comprise about 50% of the 
copper fabricating capacity in the United States. See V&F July 18 
Letter, supra, at 1.
    \5\ See Securities Exchange Act Release No. 67616, 77 FR 48181 
(August 13, 2012) (``Order Instituting Proceedings'').
    \6\ See letters from Robert B. Bernstein, V&F, to Elizabeth M. 
Murphy, Secretary, Commission, dated September 12, 2012 (``V&F 
September 12 Letter''); Ira P. Shapiro, Managing Director, and Deepa 
A. Damre, Director, Legal and Compliance, BlackRock, Inc., to 
Elizabeth M. Murphy, Secretary, Commission, dated September 12, 2012 
(``BlackRock Letter''); Janet McGinness, General Counsel, NYSE 
Markets, NYSE Euronext, to Elizabeth M. Murphy, Secretary, 
Commission, dated September 14, 2012 (``Arca September 14 Letter''); 
Robert B. Bernstein, V&F, to Elizabeth M. Murphy, Secretary, 
Commission, dated September 27, 2012 (``V&F September 27 Letter''); 
Robert B. Bernstein, V&F, to Elizabeth M. Murphy, Secretary, 
Commission, dated November 16, 2012 (``V&F November 16 Letter''); 
Robert B. Bernstein, Partner, Eaton & Van Winkle LLP (``EVW''), to 
Elizabeth M. Murphy, Secretary, Commission, dated December 7, 2012 
(``EVW December 7 Letter''); and email from Janet Klein dated 
January 7, 2013 (``Klein Email'').
    In the V&F September 27 Letter, the commenter incorporated by 
reference all of his prior comments in opposition to NYSE Arca's 
proposal to list and trade shares of the JPM XF Physical Copper 
Trust (``JPM Copper Trust'') (File No. SR-NYSEArca-2012-28). See V&F 
September 27 Letter, supra, at 6. Responding to that proposed rule 
change, the commenter submitted the following: Letters from 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 (``V&F July 13 Letter''); Robert B. Bernstein, V&F, to 
Elizabeth M. Murphy, Secretary, Commission, dated August 24, 2012 
(``V&F August 24 Letter''); and Robert B. Bernstein, V&F, to 
Elizabeth M. Murphy, Secretary, Commission, dated September 10, 2012 
(``V&F September 10 Letter''). The comment letters the commenter 
incorporated by reference are available at http://www.sec.gov/comments/sr-nysearca-2012-66/nysearca201266.shtml. Additionally, the 
commenter stated that he agrees with the arguments against that 
proposal set forth in a letter from U.S. Senator Carl Levin, to 
Elizabeth M. Murphy, Secretary, Commission, dated July 16, 2012 
(``Levin Letter''), and attached the Levin Letter to the V&F July 18 
Letter. See V&F July 18 Letter, supra, at 5. The Commission approved 
NYSE Arca's proposal to list and trade shares of the JPM Copper 
Trust on December 14, 2012, in an order that addressed these and 
other comments. See Securities Exchange Act Release No. 68440 
(December 14, 2012), 77 FR 75468, 75473-86 (December 20, 2012) (SR-
NYSEArca-2012-28) (``JPM Order'').
    In the V&F September 12 Letter, the commenter requested to make 
an oral presentation in the proceeding. The Commission denied the 
commenter's request. See letter from Kevin M. O'Neill, Deputy 
Secretary, Commission, to Robert B. Bernstein, EVW, dated December 
5, 2012, available at http://www.sec.gov/comments/sr-nysearca-2012-66/nysearca201266.shtml. By letter dated November 29, 2012, Mr. 
Bernstein informed the Commission that he had left V&F and would 
continue to represent the Copper Fabricators and RK Capital LLC in 
this proceeding.
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    On December 12, 2012, the Exchange filed Amendment No. 1 to the 
proposed rule change.\7\ On December 21, 2012, the Commission 
designated February 22, 2013, as the date by which the Commission 
should either approve or

[[Page 13727]]

disapprove the proposed rule change.\8\ On December 27, 2012, the 
Exchange filed Amendment No. 2 to the proposed rule change.\9\
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    \7\ In Amendment No. 1, the Exchange represented that it: (1) 
Has obtained representations from the Sponsor that the Sponsor is 
affiliated with one or more broker-dealers and other entities, that 
the Sponsor will implement a fire wall with respect to such 
affiliate(s) prohibiting access to material non-public information 
of the Trust concerning the Trust and the Shares, and that the 
Sponsor and such affiliate(s) will be subject to procedures designed 
to prevent the use and dissemination of material non-public 
information of the Trust regarding the Trust and the Shares; and (2) 
can obtain information regarding the activities of the Sponsor and 
its affiliates under the Exchange's listing rules. Additionally, the 
Exchange supplemented its description of surveillance applicable to 
the Shares contained in the proposed rule change as originally 
filed. Specifically, the Exchange represented that trading in the 
Shares would be subject to the existing trading surveillances, 
administered by Financial Industry Regulatory Authority, Inc. 
(``FINRA'') on behalf of the Exchange, and that, in addition, FINRA 
would augment those existing surveillances with a review specific to 
the Shares that is designed to identify potential manipulative 
trading activity through use of the creation and redemption process. 
The Exchange represented that all those procedures would be 
operational at the commencement of trading in the Shares on the 
Exchange and that, on an ongoing basis, NYSE Regulation, Inc. (on 
behalf of the Exchange) and FINRA would regularly monitor the 
continued operation of those procedures. In addition, the Exchange 
has represented that it will communicate as needed regarding trading 
in the Shares with other markets that are members of Intermarket 
Surveillance Group (``ISG'') or with which the Exchange has in place 
a comprehensive surveillance sharing agreement. On December 13, 
2012, the Exchange submitted a comment letter attaching Amendment 
No. 1. See letter from Janet McGinness, General Counsel, NYSE 
Markets, NYSE Euronext, to Elizabeth M. Murphy, Secretary, 
Commission, dated December 13, 2012.
    \8\ See Securities Exchange Act Release No. 68511, 77 FR 77151 
(December 31, 2012).
    \9\ In Amendment No. 2, the Exchange supplemented the 
representations in the proposed rule change regarding Web site 
disclosure and made clear that the Trust's Web site will provide 
detailed information, updated on a daily basis, regarding the copper 
lot holdings of the Trust, including warehouse locations, warehouse 
identification numbers, lot numbers, weights, and brands. 
Additionally, in Amendment No. 2, the Exchange represented that the 
Trust's Web site will list the copper lots in the order in which 
they will be delivered in a redemption pursuant to the applicable 
algorithm. See infra text accompanying note 27.
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    The Commission is publishing this notice to solicit comments from 
interested persons, including whether Amendments No. 1 and No. 2 to the 
proposed rule change are consistent with the Act, and is approving the 
proposed rule change, as modified by Amendments No. 1 and No. 2, on an 
accelerated basis.

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.\10\ The Trust's investment objective is 
for the value of the Shares to reflect, at any given time, the value of 
the copper owned by the Trust at that time, less the Trust's expenses 
and liabilities at that time. The Trust will create Shares only in 
exchange for copper that: (1) Meets the requirements to be delivered in 
settlement of copper futures contracts traded on the LME; and (2) is 
eligible to be placed on London Metal Exchange (``LME'') warrant at the 
time it is delivered to the Trust.\11\ The Trust will not be actively 
managed and will not engage in any activities designed to obtain a 
profit from, or to prevent losses caused by, changes in the price of 
copper.\12\
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    \10\ Commodity-Based Trust Shares are securities issued by a 
trust that represent investors' discrete identifiable and undivided 
interest in and ownership of the net assets of the trust.
    \11\ See Notice, supra note 3, 77 FR at 38356.
    \12\ See id. at 38352.
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A. Description of the Copper Market \13\
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    \13\ See Notice, supra note 3, for a more detailed description 
of the copper market.
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    The following is a summary of the description of the copper market 
that the Exchange included in its filing. Copper is traded in the over-
the-counter (``OTC'') market and on commodities exchanges. There are 
spot sales in the physical market, as well as forward contracts, 
options contracts, and other derivative transactions. A major portion 
of annual copper production and use is covered through physical 
transactions, often through renewable annual supply contracts.
    Participants in the copper market include primary and secondary 
producers; fabricators; manufacturers and end-use consumers; physical 
traders and merchants; the banking sector; and the investment 
community. Physical traders and merchants generally facilitate the 
domestic and international trade of copper supplies along the value 
chain and support the distribution of supplies to consumers. Banking 
institutions may provide market participants an assortment of services 
to assist copper market transactions. This investment community is 
composed of non-commercial market participants engaged in investment in 
copper or speculation about copper prices. This may range from large-
scale institutional investors to hedge funds to small-scale retail 
investors. In addition, the investment community includes sovereign 
wealth funds as well as other governmental bodies that stockpile metal 
for strategic purposes.
1. OTC Copper Market
    Physical traders, merchants, and banks participate in OTC spot, 
forward, option, and other derivative transactions for copper. OTC 
contracts are principal-to-principal agreements traded and negotiated 
privately between two principal parties, without going through an 
exchange or other intermediary. As such, both participants in OTC 
transactions are subject to counter-party risk, including credit and 
contractual obligations to perform. The OTC derivative market remains 
largely unregulated with respect to public disclosure of information by 
the parties, thus providing confidentiality among principals.
    The terms of OTC contracts are not standardized and market 
participants have the flexibility to negotiate all terms of the 
transaction, including delivery specifications and settlement terms. 
The OTC market facilitates long-term transactions, such as life-of-mine 
off-take agreements,\14\ which otherwise could be constrained by 
contract terms on a futures exchange.
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    \14\ A life-of-mine off-take agreement is an agreement between a 
producer and a buyer to purchase/sell portions of the producer's 
future production over the life of the operation. Off-take 
agreements are commonly negotiated prior to the construction of a 
project as they can assist in obtaining financing by showing future 
revenue streams.
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2. Copper Exchanges
    According to the registration statement for the Trust 
(``Registration Statement''),\15\ the LME is the longest standing 
exchange trading copper futures, with the greatest number of open 
copper futures and options contracts (open interest). The Commodity 
Exchange, Inc. (``COMEX'') (a division of CME Group, Inc.), the 
Shanghai Futures Exchange (``SHFE''), and the recently launched Multi 
Commodity Exchange of India (``MCX'') also trade copper futures. At the 
end of March 2012, the LME held roughly 64% of copper open interest 
across the four futures exchanges with copper contracts (adjusted for 
lot size).
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    \15\ The Registration Statement was most recently amended on 
September 2, 2011 (No. 333-170131).
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    The LME falls under the jurisdiction of the United Kingdom 
Financial Services Authority (``FSA''). The FSA is responsible for 
ensuring the financial stability of the exchange member businesses, 
whereas the LME is largely responsible for the oversight of day-to-day 
exchange activities, including conducting arbitration proceedings under 
the LME arbitration regulations.
    The SHFE is a self-regulatory body under the supervision and 
governance of the China Securities Regulatory Commission (``CSRC''). 
The SHFE is the day-to-day overseer of exchange activities, and is 
expected to carry out regulation as per the laws established by the 
CSRC. The CSRC serves as the final authority on exchange regulation and 
policy development and ultimately determines the effectiveness of the 
SHFE as a regulatory entity. It has the right to overturn or revoke the 
SHFE's regulatory privileges at any time.
    Commodity futures and options traded on the COMEX are subject to 
regulation by CME Group's Market Regulation Oversight Committee 
(``MROCC''), under rules of the Commodity Futures Trading Commission 
(``CFTC'').\16\ The MROCC is a self-regulatory body created in 2004 to 
actively ensure competitive and financially sound trading activity on 
the CME and its subsidiary exchanges.
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    \16\ Copper is traded over two CME platforms: CME Globex and 
Open Outcry. CME Globex, which offers electronic trading, operates 
Sunday through Friday, 6:00 p.m., Eastern Time (``E.T.'') through 
5:15 p.m. E.T. with a 45-minute break each day beginning at 5:15 
p.m. E.T. The Open Outcry operates Monday through Friday 8:10 a.m. 
E.T. through 1:00 p.m. E.T.
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    Regulation of the MCX falls under the responsibility of the 
Governing Board of the MCX and the Forward Markets Commission of India 
pursuant to the Forward Contracts (Regulation) Act of 1952 and 
amendments made thereafter.

[[Page 13728]]

B. Description of the Proposed Rule Change and the Trust \17\
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    \17\ See Notice, supra note 3, for a more detailed description. 
Additional details regarding the Trust also are set forth in the 
Registration Statement, supra note 15.
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    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. The Bank of New York Mellon is the 
trustee of the Trust (``Trustee''). Metro International Trade Services 
LLC is the custodian of the Trust (``Custodian'').
    As mentioned above,\18\ the Trust will hold only copper that, at 
the time it was delivered to the trust, (1) met the requirements to be 
delivered in settlement of copper futures contracts traded on the LME; 
and (2) was eligible to be placed on LME warrant. The Trust will not be 
actively managed and will not engage in any activities designed to 
obtain a profit from, or to prevent losses caused by, changes in the 
price of copper.\19\
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    \18\ See supra text accompanying note 11.
    \19\ See supra text accompanying note 12.
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    The Custodian may keep the Trust's copper at locations within or 
outside the United States that are agreed from time to time by the 
Custodian and the Trustee. As of the date of the Registration 
Statement, the Custodian is authorized to hold copper owned by the 
Trust at warehouses located in: East Chicago, Indiana; Mobile, Alabama; 
New Orleans, Louisiana; Saint Louis, Missouri; Hull, England; 
Liverpool, England; Rotterdam, Netherlands; and Antwerp, Belgium 
(collectively, ``Approved Warehouses''). Unless otherwise agreed in 
writing by the Trustee, each of the warehouses where the Trust's copper 
will be stored must be LME-approved at the time copper is delivered to 
the Custodian for storage in such warehouse. Unless otherwise 
instructed by the Trustee, no copper held by the Custodian on behalf of 
the Trust may be on LME warrant.\20\
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    \20\ See Notice, supra note 3, 77 FR at 38356 n.23.
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    The Trustee will calculate the net asset value (``NAV'') of the 
Trust as promptly as practicable after 4:00 p.m. EST on each business 
day. The Trustee will value the Trust's copper at that day's announced 
LME Bid Price.\21\ If there is no announced LME Bid Price on a business 
day, the Trustee will be authorized to use the most recently announced 
LME Bid Price unless the Sponsor determines that such price is 
inappropriate as a basis for valuation.\22\ The Exchange will obtain a 
representation from the Trust prior to the commencement of trading in 
the Shares that the NAV per Share will be calculated daily and made 
available to all market participants at the same time.\23\
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    \21\ The ``LME Bid Price'' is announced by the LME at 1:20 p.m. 
London Time and represents the price that a buyer is willing to pay 
to receive a warrant in any warehouse within the LME system. See id. 
at 38356 n.25. LME warrants, which are documents representing 
possession, are used as the means of delivering metal or plastics 
under LME contracts. See id. at 38355. The ownership of copper 
represented by warrants is transferred through LMEsword, an 
electronic transfer system for the purchase and sale of exchange 
issued warrants that facilitates the reporting of inventories. See 
id. Each warrant is invoiced at the contract weight, which is 
permitted to vary +/-2% from the specified 25 tonne lot of copper. 
Only registered LME copper brands are approved for delivery. See id.
    \22\ See id. at 38358.
    \23\ See id. at 38359.
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    The Trust expects to create and redeem Shares on a continuous basis 
but only with authorized participants in blocks of five or more baskets 
of 2,500 Shares each (each basket of 2,500 Shares, a ``Basket'').\24\ 
In connection with the creation of Baskets, only copper that meets the 
requirements to be delivered in settlement of copper futures contracts 
traded on the LME and that is eligible to be placed on LME warrant at 
the time of delivery to the Trust may be delivered to the Trust in 
exchange for Shares.\25\ Upon deposit of the corresponding amount of 
copper with the Custodian and the payment of applicable fees by an 
authorized participant, the Trustee will deliver the appropriate number 
of Baskets to the Depository Trust Company (``DTC'') account of the 
authorized participant.\26\ Conversely, authorized participants may 
redeem Shares by surrendering five or more Baskets, each in exchange 
for the Basket Copper Amount announced by the Trustee on the first 
business day on which the LME Bid Price is announced following the date 
of receipt of the redemption order. Upon surrender of the Baskets and 
payment of applicable fees, expenses, taxes, and charges, the Custodian 
will transfer from the Trust's account to the authorized participant's 
account the aggregate Basket Copper Amount corresponding to the Baskets 
surrendered for redemption and will send written confirmation thereof 
to the Trustee, which will then cancel all Shares so redeemed. The 
specific copper to be transferred to the redeeming authorized 
participant's account will be selected by the Custodian pursuant to an 
algorithm that gives priority to the delivery of copper that no longer 
meets LME requirements (e.g., is of a brand, or held at a location, 
that is no longer LME approved) or is on LME warrant (in the rare 
instances where some of the Trust's copper may be on LME warrant).\27\ 
Within each category, copper will be selected for transfer to redeeming 
authorized participants on a last-in-first-out basis. If the copper 
transferred to the redeeming authorized participant's account meets the 
requirements of the LME to be placed on warrant, and the Custodian is 
able to issue LME warrants at such time, promptly after a redemption, 
the Custodian will issue to the redeeming authorized participant one or 
more LME warrants representing as much copper transferred to the 
authorized participant's account as may be placed on LME warrant in 
compliance with the LME rules and without the Custodian having to break 
apart any specific parcel of copper so transferred pursuant to the 
algorithm referred to above.\28\
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    \24\ See id. at 38356.
    \25\ See id.
    \26\ In exchange for each Basket purchased, an authorized 
participant must deposit the Basket Copper Amount announced by the 
Trustee on the first business day on which the LME Bid Price is 
announced following the date of receipt of the purchase order. See 
id. at 38356. The ``Basket Copper Amount'' is the amount of copper 
(measured in tonnes and fractions thereof), determined on each 
business day by the Trustee, which authorized participants must 
transfer to the Trust in exchange for a Basket, or are entitled to 
receive in exchange for each Basket surrendered for redemption. See 
id. at 38356 n.24.
    \27\ Generally, authorized participants desiring to create with 
copper on warrant will be required to take such copper off warrant 
prior to delivery to the Custodian. See id. at 38357 n.29. See also 
id. at 38356 n.23 (``Unless otherwise instructed by the Trustee, no 
copper held by the Custodian on behalf of the Trust may be on 
Warrant.'').
    \28\ In the normal course of the Trust's operations, it is 
anticipated that authorized participants will receive LME warrants 
(not warehouse receipts) following a redemption transaction. See id. 
at 38358. If it is not possible for the Custodian to issue LME 
warrants in connection with a redemption of Shares, the Custodian 
will deliver to the redeeming authorized participant one or more 
negotiable warehouse receipts representing the copper transferred to 
the authorized participant's account in connection with such 
redemption. See id. at 38357-58.
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    To facilitate the issuance of Baskets,\29\ the Sponsor has arranged 
for J. Aron & Company (``J. Aron''), an international commodities 
dealer and subsidiary of The Goldman Sachs Group, Inc. (which owns the 
Custodian), to stand ready to: (i) Make available for sale to eligible 
authorized participants any fractional amounts of copper needed to meet 
the obligation to transfer to the Trust the exact Basket Copper Amount 
in exchange for each Basket purchased from the Trust; and (ii) to the 
extent the lots of copper an eligible authorized

[[Page 13729]]

participant intends to use in connection with an issuance of a Basket 
exceed the corresponding Basket Copper Amount, purchase any amount of 
such copper from such authorized participant.\30\
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    \29\ The Exchange states that because copper usually trades in 
lots of 25 tonnes, with plus or minus 2% deviations being accepted 
in the industry, an authorized participant may not find readily 
available in the market the exact Basket Copper Amount needed in 
connection with the issuance of a new Basket. See id. at 38356.
    \30\ The Goldman Sachs Group, Inc. and its affiliates (``GS 
Entities'') have represented to the Sponsor that they maintain 
policies that are reasonably designed to prevent misuse or improper 
dissemination of nonpublic information, including a ``need-to-know'' 
standard that states that confidential information may be shared 
only with persons who have a need to know the information to perform 
their duties and to carry out the purpose(s) for which the 
information was provided. See id. at 38357 n.26. In addition, GS 
Entities have represented to the Sponsor that they maintain specific 
policies and procedures that are reasonably designed to protect 
confidential and commercially sensitive information associated with 
the Custodian's business from being shared with GS Entity 
individuals engaged in commodity sales and trading activities. See 
id.
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    Quotation and last-sale information for the Shares will be 
available via the Consolidated Tape Association.\31\ The Exchange also 
will make available via the Consolidated Tape trading volume, closing 
prices, and the NAV for the Shares from the previous day.\32\ The 
intraday indicative value (``IIV'') per Share,\33\ updated at least 
every 15 seconds, as calculated by the Exchange or a third-party 
financial data provider, will be widely disseminated by one or more 
major market data vendors during the Core Trading Session on the 
Exchange (9:30 a.m. to 4:00 p.m. E.T.).\34\
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    \31\ See id. at 38358.
    \32\ See id. at 38359.
    \33\ The IIV will be calculated by multiplying the indicative 
spot price of copper (the three-month LME copper contract) by the 
quantity of copper backing each Share as of the last calculation 
date. See id.
    \34\ See id.
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    The Trust's Web site will contain the following information, on a 
per-Share basis, for the Trust: (a) The NAV as of the close of the 
prior business day and the mid-point of the bid-ask price at the close 
of trading in relation to such NAV (``Bid/Ask Price''), and a 
calculation of the premium or discount of such price against such NAV; 
and (b) data in chart format displaying the frequency distribution of 
discounts and premiums of the Bid/Ask Price against the NAV, within 
appropriate ranges, for each of the four previous calendar 
quarters.\35\ The Trust's Web site also will disclose the list of 
copper held by the Trust, updated on a daily basis, and display the 
following information: The Basket Copper Amount; the Trust's 
prospectus; the two most recent reports to stockholders; and the last 
sale price of the Shares as traded in the U.S. market.\36\
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    \35\ See id.
    \36\ See id. See also Amendment No. 2, supra note 9 (providing 
more details regarding the information about the Trust's copper 
holdings that will be available on the Trust's Web site).
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    The Exchange states that investors may obtain, almost on a 24-hour 
basis, copper pricing information based on the spot price of copper 
from various financial information service providers, such as Reuters 
and Bloomberg.\37\ Reuters and Bloomberg provide at no charge on their 
Web sites delayed information regarding the spot price of copper and 
last-sale prices of copper futures, as well as information and news 
about developments in the copper market.\38\ Reuters and Bloomberg also 
offer a professional service to subscribers for a fee that provides 
information on copper prices directly from market participants.\39\ 
Moreover, there are a variety of public Web sites providing information 
on copper, ranging from those specializing in precious metals to sites 
maintained by major newspapers, such as The Wall Street Journal.\40\ 
The Exchange will provide on its Web site (www.nyx.com) a link to the 
Trust's Web site.\41\
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    \37\ See Notice, supra note 3, 77 FR at 38359.
    \38\ See id.
    \39\ See id.
    \40\ See id. For example, the LME publishes LME official price 
information on its Web site with a one-day delay; LME official price 
information also is published on Basemetals.com and Metal-Page.com 
with a one day delay; COMEX publishes on its Web site delayed 
futures and options information on current and past trading sessions 
and market news free of charge. See id. The Exchange also states 
that the current day's LME official prices (such as the LME Bid 
Price used to calculate the NAV of the Shares) are available from 
major market data vendors for a fee. See id.
    \41\ See id.
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    NYSE Arca will require that a minimum of 100,000 Shares be 
outstanding at the start of trading,\42\ which represents 1,000 metric 
tons of copper. The Trust seeks to register 12,120,000 Shares.\43\
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    \42\ See id.
    \43\ See Registration Statement, supra note 15.
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    Under NYSE Arca Equities Rule 7.34(a)(5), if the Exchange becomes 
aware that the NAV is not being disseminated to all market participants 
at the same time, it must halt trading on the Exchange until such time 
as the NAV is available to all market participants at the same time. If 
the IIV is not being disseminated as required, the Exchange may halt 
trading during the day in which the disruption occurs; if the 
interruption persists past the day in which it occurred, the Exchange 
will halt trading no later than the beginning of the trading day 
following the interruption.\44\ Further, the Exchange will consider 
suspension of trading pursuant to NYSE Arca Rule 8.201(e)(2) if, after 
the initial 12-month period following commencement of trading: (1) The 
value of copper is no longer calculated or available on at least a 15-
second delayed basis from a source unaffiliated with the Sponsor, 
Trust, or Custodian, or the Exchange stops providing a hyperlink on its 
Web site to any such unaffiliated source providing that value; or (2) 
if the IIV is no longer made available on at least a 15-second delayed 
basis. More generally, with respect to trading halts, the Exchange may 
consider all relevant factors in exercising its discretion to halt or 
suspend trading in the Shares.\45\ Trading on the Exchange in the 
Shares may be halted because of market conditions or for reasons that, 
in the view of the Exchange, make trading in the Shares 
inadvisable.\46\ These may include: (1) The extent to which conditions 
in the underlying copper market have caused disruptions and/or lack of 
trading; or (2) whether other unusual conditions or circumstances 
detrimental to the maintenance of a fair and orderly market are 
present.\47\ Additionally, trading in the Shares will be subject to 
trading halts caused by extraordinary market volatility pursuant to the 
Exchange's circuit breaker rule, NYSE Arca Equities Rule 7.12.\48\
---------------------------------------------------------------------------

    \44\ See Notice, supra note 3, 77 FR at 38359.
    \45\ See id.
    \46\ See id.
    \47\ See id.
    \48\ See id.
---------------------------------------------------------------------------

    NYSE Arca represents that its surveillance procedures are adequate 
to properly monitor Exchange trading of the Shares in all trading 
sessions and to deter and detect violations of NYSE Arca rules and 
applicable federal securities laws.\49\ The Exchange states that its 
existing trading surveillances, which are administered by FINRA, 
generally focus on detecting securities trading outside their normal 
patterns, which could be indicative of manipulative or other violative 
activity.\50\ NYSE Arca states that, in addition to those 
surveillances, FINRA will implement a product-specific review designed 
to identify potential manipulative trading activity through the use of 
the creation and redemption process, and that NYSE Regulation, Inc., on 
behalf of the Exchange, will monitor to ensure that these procedures 
continue to be operational.\51\
---------------------------------------------------------------------------

    \49\ See id.
    \50\ See Amendment No. 1, supra note 7.
    \51\ See id.
---------------------------------------------------------------------------

    The Exchange also states that, pursuant to NYSE Arca Equities Rule 
8.201(g), it is able to obtain information regarding trading in the 
Shares, physical copper, copper futures contracts, options on copper 
futures, or any other

[[Page 13730]]

copper derivative from Equity Trading Permit holders (``ETP Holders'') 
acting as registered market makers, in connection with their 
proprietary or customer trades.\52\ More generally, NYSE Arca states 
that it has regulatory jurisdiction over its ETP Holders and their 
associated persons, which include any person or entity controlling an 
ETP Holder, as well as a subsidiary or affiliate of an ETP Holder that 
is in the securities business.\53\ With respect to a subsidiary or 
affiliate of an ETP Holder that does business only in commodities or 
futures contracts, the Exchange states that it can obtain information 
regarding the activities of such subsidiary or affiliate through 
surveillance sharing agreements with regulatory organizations of which 
such subsidiary or affiliate is a member.\54\ Further, NYSE Arca states 
that it may obtain trading information via the ISG from other exchanges 
that are members of the ISG, including CME Group, Inc., which includes 
COMEX, and that it has entered into a comprehensive surveillance 
sharing agreement with the LME that applies with respect to trading in 
copper and copper derivatives.\55\
---------------------------------------------------------------------------

    \52\ See Notice, supra note 3, 77 FR at 38359.
    \53\ See Amendment No. 1, supra note 7.
    \54\ See id.
    \55\ See Notice, supra note 3, 77 FR at 38360. The Exchange will 
communicate as needed regarding trading in the Shares with other 
markets that are members of the ISG or with which the Exchange has 
in place a comprehensive surveillance sharing agreement. See 
Amendment No. 1, supra note 7.
---------------------------------------------------------------------------

    Prior to the commencement of trading, the Exchange represents that 
it will inform its ETP Holders in an Information Bulletin of the 
special characteristics and risks associated with trading the Shares. 
Specifically, the Information Bulletin will discuss the following: (a) 
The procedures for purchases and redemptions of Baskets (including 
noting that Shares are not individually redeemable); (b) NYSE Arca 
Equities Rule 9.2(a), which imposes a duty of due diligence on ETP 
Holders to learn the essential facts relating to every customer prior 
to trading the Shares; (c) how information regarding the IIV is 
disseminated; (d) the requirement that ETP Holders deliver a prospectus 
to investors purchasing newly issued Shares prior to or concurrently 
with the confirmation of a transaction; (e) the possibility that 
trading spreads and the resulting premium or discount on the Shares may 
widen as a result of reduced liquidity of physical copper trading 
during the Core and Late Trading Sessions after the close of the major 
world copper markets; \56\ and (f) trading information.\57\
---------------------------------------------------------------------------

    \56\ The Exchange's Core Trading Session is between 9:30 a.m. to 
4:00 p.m. E.T. See Notice, supra note 3, 77 FR at 38359. The 
Exchange's Late Trading Session begins after the end of the Core 
Trading Session and concludes at 8:00 p.m. E.T. See NYSE Arca 
Equities Rule 7.34(a)(3).
    \57\ See Notice, supra note 3, 77 FR at 38360.
---------------------------------------------------------------------------

    The Notice and the Registration Statement include additional 
information regarding: the Trust; the Shares; the Trust's investment 
objectives, strategies, policies, and restrictions; fees and expenses; 
creation and redemption of Shares; the physical copper market; 
availability of information; trading rules and halts; and surveillance 
procedures.\58\
---------------------------------------------------------------------------

    \58\ See Notice and Registration Statement, supra notes 3 and 
15, respectively.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    After careful review and for the reasons discussed below, the 
Commission finds that the proposed rule change is consistent with the 
requirements of the Act, including Section 6 of the Act,\59\ and the 
rules and regulations thereunder applicable to a national securities 
exchange. In particular, the Commission finds that the proposed rule 
change is consistent with Section 6(b)(5) of the Act,\60\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, and to remove impediments to and perfect 
the mechanism of a free and open market and a national market system, 
and, in general, to protect investors and the public interest. In 
addition, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(8) of the Act,\61\ which requires that the 
rules of a national securities exchange not impose any burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Act. The Commission also finds that the proposed rule change is 
consistent with Section 11A(a)(1)(C)(iii) of the Act,\62\ which sets 
forth Congress's finding that it is in the public interest and 
appropriate for the protection of investors to assure the availability 
to brokers, dealers, and investors of information with respect to 
quotations for and transactions in securities. Further, pursuant to 
Section 3(f) of the Act,\63\ the Commission has considered whether the 
proposed rule change will promote efficiency, competition, and capital 
formation.
---------------------------------------------------------------------------

    \59\ 15 U.S.C. 78f.
    \60\ 15 U.S.C. 78f(b)(5).
    \61\ 15 U.S.C. 78f(b)(8).
    \62\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \63\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    One commenter submitted five comment letters to explain its 
opposition to the proposed rule change.\64\ Generally, the opposing 
commenter asserts that the proposed rule change is inconsistent with 
Section 6(b)(5) of the Act.\65\ The commenter asserts that the issuance 
by the Trust of all of the Shares covered by the Registration Statement 
within a short period of time would result in a substantial reduction 
in the supply of global copper available for immediate delivery, and 
that this reduction in short-term supply would increase both the price 
of copper and volatility in the copper market, which would in turn 
significantly harm the U.S. economy.\66\ The commenter further states 
that the predicted decrease in copper available for immediate delivery 
would make the physical copper market more susceptible to 
manipulation.\67\
---------------------------------------------------------------------------

    \64\ See V&F July 18 Letter, supra note 4; V&F September 12 
Letter, supra note 6; V&F September 27 Letter, supra note 6; V&F 
November 16 Letter, supra note 6; and EVW December 7 Letter, supra 
note 6. As discussed above, the commenter also attached to his 
letters other comment letters, or incorporated other comment letters 
by reference. See supra note 6 (citing V&F September 27 Letter). 
This commenter is referred to as ``the commenter,'' although the 
Commission also received an email from another commenter who opposes 
the proposed rule change. Ms. Janet Klein asserted that approval of 
the proposed rule change: (1) Would be ``contrary to rational 
oversight of wise practice,'' without explaining the basis for her 
judgment; (2) would not contribute to the economy; and (3) would 
promote ``speculative swings of a commodity price not related to 
supply/demand,'' again without explaining the basis for her 
conclusion. See Klein Email, supra note 6. The impact of the 
proposed rule change on the price of copper is discussed below in 
Section III.B.
    \65\ 15 U.S.C. 78f(b)(5).
    \66\ See V&F May 9 Letter, supra note 6, at 5-7.
    \67\ See id. at 1, 10.
---------------------------------------------------------------------------

    In response, the Sponsor generally states the Trust will provide a 
more liquid and cost-effective vehicle for investment in the physical 
copper market.\68\ The Sponsor expects that much of the initial demand 
for the Shares will represent a reallocation of current investments in 
physical copper by professional copper market participants rather than 
new incremental demand.\69\ The Sponsor does not anticipate that 
creation of the Trust will impact copper prices,\70\ and disagrees with 
the notion that the Trust will render the copper market more 
susceptible to manipulation.\71\
---------------------------------------------------------------------------

    \68\ See BlackRock Letter, supra note 6, at 1.
    \69\ See id. at 4.
    \70\ See id. at 5.
    \71\ See id. at 6.

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

[[Page 13731]]

    Given the concerns expressed by the commenter that the Trust would 
remove a substantial amount of the supply of copper available for 
immediate delivery over a short period of time, which would render the 
physical copper market more susceptible to manipulation, and that the 
Trust therefore would provide market participants an effective means to 
manipulate the price of copper and thereby the price of the Shares,\72\ 
the Commission analyzes the comments to examine, among other things, 
the extent to which the listing and trading of the Shares may (1) 
impact the supply of copper available for immediate delivery and the 
ability of market participants to manipulate the price of copper, and 
(2) be susceptible to manipulation. The sections below summarize and 
respond to the comments received.
---------------------------------------------------------------------------

    \72\ See V&F May 9 Letter, supra note 6, at 1, 10.
---------------------------------------------------------------------------

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

    The commenter believes that the issuance by the Trust of all of the 
Shares covered by the Registration Statement within a short period of 
time would result in the withdrawal of substantial quantities of copper 
from LME and COMEX warehouses, thus negatively impacting the supply of 
copper available for immediate delivery.\73\ As discussed below, this 
belief assumes that: (1) Copper held by the Trust would not be 
available for immediate delivery; (2) the global supply of copper 
available for immediate delivery that could be used to create Shares 
consists almost exclusively of copper already under LME or COMEX 
warrant, and therefore the Shares would be created primarily using 
copper already under LME or COMEX warrant; and (3) the Trust would 
acquire a substantial amount of copper within a short period of time, 
such that copper suppliers would not be able to adjust production to 
replace the copper removed from the market by the Trust. The Commission 
believes the record does not support the commenter's conclusions, which 
are based on his contentions, and thus, for the reasons discussed 
below, the Commission does not believe that the listing and trading of 
the Shares is likely to disrupt the supply of copper available for 
immediate delivery.
---------------------------------------------------------------------------

    \73\ See V&F July 18 Letter, supra note 4, at 1-2.
---------------------------------------------------------------------------

1. Availability of the Trust's Copper
    The commenter asserts that copper held by the Trust would not be 
available for immediate delivery, and therefore copper deposited into 
the Trust would be removed from the market and would be unavailable to 
end-users.\74\ In response, the Sponsor asserts that the Trust would 
not remove immediately available copper inventory from the market.\75\ 
The Sponsor predicts that demand for the Shares is most likely to come 
from current metals dealers and others who already hold physical copper 
inventory or investments, and that the creation of Shares by these 
entities will not affect available supply.\76\ The Sponsor also notes 
that Shares can be redeemed as well as created, thus allowing the 
Trust's copper to be withdrawn by authorized participants.\77\
---------------------------------------------------------------------------

    \74\ See id. at 5.
    \75\ See BlackRock Letter, supra note 6, at 3-4. See also V&F 
September 12 Letter, supra note 6, at 2 (``Copper backed ETFs will 
also not affect the aggregate inventory of copper. But the ETF will 
move the inventory that resides within the LME outside of the 
LME.'').
    \76\ See BlackRock Letter, supra note 6, at 4.
    \77\ See id. at 3.
---------------------------------------------------------------------------

    The Commission agrees with the Sponsor that copper held by the 
Trust will remain available to consumers and other participants in the 
physical copper market because: (1) The Trust will not consume copper; 
(2) Shares are redeemable (in size) for copper on every business day; 
and (3) provided certain conditions are met, on the third business day 
after the day on which the LME Bid Price is announced following the 
placement of a redemption order, the Custodian will transfer from the 
Trust's account to the redeeming authorized participant's account the 
parcels of copper identified pursuant to the Trustee's algorithm and 
corresponding to the number of Baskets surrendered, and promptly 
thereafter, the Custodian will issue either (a) one or more LME 
warrants, if the copper transferred can then be placed on LME warrant 
and the Custodian is able to issue LME warrants, or (b) negotiable 
warehouse receipts, if the copper transferred cannot be placed on LME 
warrant or if the Custodian cannot issue LME warrants.\78\ Accordingly, 
in the normal course of the Trust's operations, redeeming authorized 
participants will receive copper that the commenter acknowledges is 
available for immediate delivery (i.e., copper on LME warrant).\79\ 
Given the structure of the Trust, the Commission believes that the 
amount of copper accessible to industrial users will not meaningfully 
change as a result of the listing and trading of the Shares. 
Accordingly, the Commission believes that the proposed rule change will 
not burden capital formation for users who acquire copper for 
industrial and other purposes.
---------------------------------------------------------------------------

    \78\ See Registration Statement, supra note 15. The Exchange 
states that, in the normal course of the Trust's operations, it is 
anticipated that authorized participants will receive LME warrants 
following a redemption transaction and that, in the event that its 
copper is no longer warrantable, the Trust will have operational 
procedures in place to put such metal on LME warrant when possible. 
See Notice, supra note 3, 77 FR at 38357-58.
    \79\ See, e.g., V&F July 18 Letter, supra note 4, at 1 (``[T]he 
copper in the LME and [COMEX] warehouses is the only refined copper 
generally available for immediate delivery.''). The Commission 
believes that the wait time discussed above to receive a LME 
warrant--or in some cases a negotiable warehouse receipt--is not a 
significant enough delay to consider the copper held by the Trust 
unavailable for immediate delivery because, as mentioned above, on 
the third business day after the day on which the LME Bid Price is 
announced following the placement of a redemption order, the 
Custodian will transfer from the Trust's account to the redeeming 
authorized participant's account the parcels of copper identified 
pursuant to the Trustee's algorithm and corresponding to the number 
of Baskets surrendered, and promptly thereafter, the Custodian will 
issue to the authorized participant either one or more LME warrants, 
which will be delivered whenever possible, or negotiable warehouse 
receipts.
    The commenter expresses further concern in the EVW December 7 
Letter about an increasing length of time that it takes to withdraw 
metal, including copper, from LME warehouses. The commenter argues 
that this ``troubling new development'' may, together with the 
proposed listing and trading of the Shares, jeopardize the ability 
of United States copper consumers to obtain the physical copper they 
need in a timely manner. See generally EVW December 7 Letter, supra 
note 6. The commenter previously acknowledged, however, that taking 
copper off LME warrant takes time; according to the commenter: (1) 
the amount of time it takes to take copper off LME warrant depends 
``on the length of the loading out queue'' at the LME warehouse; and 
(2) queues ``are currently ranging from 275 working days (more than 
one year) in Vlissingen, Netherlands, 91 working days (4.5 months) 
in New Orleans, 51 working days (2.5 months) in Johor, Malaysia to 
under one month in Korea and Rotterdam, Netherlands.'' V&F August 24 
Letter, supra note 6, at 14. By his December 7 letter, the commenter 
appears to be updating information previously provided about the 
length of queues, but does not assert any new reason for 
disapproving the listing and trading of the Shares that is distinct 
from his original assertion, responded to in the text above, that 
listing and trading of the Shares will reduce the supply of copper 
available for immediate delivery. The Commission notes that the LME 
appears to be attempting to address the unloading queue issue, see 
London Metal Exchange, Consultation on Changes to LME Policy for 
Approval of Warehouses in Relation to Delivery Out Rates, Notice 12/
296: A295: W152 (November 15, 2012), available at http://www.lme.com/downloads/notices/12_296_A295_W152_Consultation_on_Changes_to_LME_Policy_for_Approval_of_Warehouses_in_Relation_to_Delivery_Out_Rates.pdf, which applies to LME 
warehoused aluminum and zinc, not just copper. See also EVW December 
7 Letter, supra note 6, at 3.
---------------------------------------------------------------------------

    The commenter states that end users would not acquire Shares for 
the purpose of redeeming them to acquire copper because the copper they 
would receive in exchange for Shares might be in a location far from 
their plants or might be of brands that are not acceptable to their 
plants.\80\ Regardless

[[Page 13732]]

of the preferences of these consumers, authorized participants may 
redeem Shares for copper and the record does not contain any evidence 
that these or any other consumers of copper could not use the Shares to 
obtain copper through an authorized participant. Further, the record 
supports that the same logistical issues currently exist and are 
addressed by market participants holding LME warrants. For example, it 
is the Commission's understanding that when a market participant buys a 
long-dated copper futures contract on the LME and settles for a 
warrant, or when an LME member buys a cash futures contract in ring 
trading,\81\ these market participants do not know the location or 
brand of the underlying copper. Accordingly, LME warrant holders 
sometimes swap warrants to acquire copper of a preferred brand in a 
convenient location,\82\ and nothing in the record indicates that 
redeeming authorized participants would not be able to swap LME 
warrants received in connection with Share redemptions for other LME 
warrants for more suitable copper.
---------------------------------------------------------------------------

    \80\ See V&F September 10 Letter, supra note 6, at 4; V&F July 
13 Letter, supra note 6, at 7.
    \81\ Open outcry trading includes, for each metal traded on the 
exchange, four five-minute sessions taking place around the ring of 
the exchange (each such session, a ``ring''). See Notice, supra note 
3, 77 FR at 38355.
    \82\ See V&F September 12 Letter, supra note 6, at 5.
---------------------------------------------------------------------------

    The commenter also expresses concern that investors who hold the 
Shares would not sell them, and therefore Shares would not be readily 
available for redemption.\83\ This claim is unsupported. There is no 
evidence in the record to suggest that investors holding the Shares 
will be unwilling to sell them, particularly in response to market 
movements or changes in investor needs.\84\
---------------------------------------------------------------------------

    \83\ See V&F September 10 Letter, supra note 6, at 3. See also 
V&F September 12 Letter, supra note 6, at 4.
    \84\ The commenter provides a chart that it says shows the 
number of shares outstanding for the SPDR Gold Trust and the iShares 
Silver Trust, and states that ``[i]n spite of price volatility in 
the market there has been very little volatility in the aggregate 
number of shares listed.'' See V&F September 12 Letter, supra note 
6, at 4. The commenter asserts that if the same occurs in relation 
to the Shares, it would pose ``a substantial risk to the unit 
redemption process.'' See id. The Commission does not believe this 
chart supports the commenter's claim that Shares would be 
unavailable for redemption. Rather, the Commission believes the 
chart reveals that redemptions of shares of those other trusts did 
occur, as evidenced by the data showing that the number of shares 
outstanding in those trusts has increased and decreased over time. 
Accordingly, the Commission believes that this data does not show 
investors will not redeem their Shares, as the commenter claims.
---------------------------------------------------------------------------

    The Commission believes that the listing and trading of the Shares, 
as proposed, could provide another way for market participants and 
investors to trade copper, and could enhance competition among trading 
venues. Further, the Commission believes that the listing and trading 
of the Shares will provide investors another investment alternative, 
which could enhance a well-diversified portfolio. By broadening the 
securities investment alternatives available to investors, the 
Commission believes that trading in the Shares could increase 
competition among financial products and the efficiency of financial 
investment.
2. Source of Copper Used To Create Shares
    The commenter asserts that the global supply of copper available 
for immediate delivery, and eligible to be used to create Shares, 
consists almost exclusively of copper already under LME or COMEX 
warrant, and therefore the commenter believes that Shares would be 
created primarily using copper already under LME or COMEX warrant.\85\ 
The commenter states that the size of the market for copper available 
for immediate delivery is small relative to the size the commenter 
expects the Trust to attain, asserting that there are only 240,000 
metric tons available on the LME, with an additional 60,000 metric tons 
available on the COMEX, and projects that the Trust would remove as 
much as 121,200 metric tons from the market of copper available for 
immediate delivery.\86\ The commenter also asserts that the Trust would 
be funded with copper on warrant in the United States, which would 
result in a shortage of copper in the United States.\87\ The commenter 
further urges that the Commission consider collectively the supply 
impacts of the iShares Trust and the JPM Copper Trust.\88\
---------------------------------------------------------------------------

    \85\ See V&F July 18 Letter, supra note 4, at 2; and V&F 
September 27 Letter, supra note 6, at 2.
    \86\ See V&F July 18 Letter, supra note 4, at 1. How the 
commenter measures the projected size of the Trust is discussed 
infra in Section III.A.3.
    \87\ See V&F July 18 Letter, supra note 4, at 4.
    \88\ The commenter asserts that the collective impact of the 
iShares Trust and the JPM Copper Trust could result in the removal 
of 183,000 metric tons of copper from the market, or 63% of the 
copper available in LME and COMEX warehouses. See id. at 1. For the 
reasons discussed in Section III.A, the Commission does not believe 
that the listing and trading of the Shares is likely to disrupt the 
supply of copper available for immediate delivery. The Commission 
also notes that, in approving the listing and trading of shares of 
the JPM Copper Trust, the Commission explained why it does not 
believe that the listing and trading of those shares is likely to 
disrupt the supply of copper available for immediate delivery. See 
JPM Order, supra note 6, 77 FR 75468, 75473-77. Similarly, the 
Commission does not believe that the trusts, considered 
collectively, are likely to disrupt the supply of copper available 
for immediate delivery.
---------------------------------------------------------------------------

    In contrast, the Sponsor believes that there are very substantial 
copper inventories available outside of the LME and COMEX that are 
deliverable on a short-term basis and that could be used to fund the 
Trust.\89\ The Sponsor states that the Trust will accept creations 
using both copper already held in, as well as warrantable copper newly 
delivered to, LME-approved warehouses of the Custodian.\90\
---------------------------------------------------------------------------

    \89\ See BlackRock Letter, supra note 6, at 2. The Sponsor 
asserts that ``[d]uring years when the refined copper market is in a 
deficit copper fabricators and other end users can consume supplies 
from warehouses [sic] stocks held by producers, consumers, merchants 
and traders, governments, and exchange warehouses.'' See BlackRock 
Letter, supra note 6, at Exhibit B. But see V&F September 12 Letter, 
supra note 6, at 3 (``The only other theoretical source of ETF 
feedstock copper is current off-warrant stock held by investors, 
assuming such stock even exists. It is possible that hoarding of 
copper outside of China has been taking place to the possible 
benefit of such holders upon commencement of physically backed 
copper ETF unit creation. We are however unaware of any such 
inventory.'')
    \90\ See BlackRock Letter, supra note 6, at 2. Not all of the 
approved warehouses are in the United States. See Notice, supra note 
3, 77 FR at 38356 n.23.
---------------------------------------------------------------------------

    The Commission believes that there is significant uncertainty about 
the locations from which copper will be purchased to create Shares.\91\ 
Based on the description of the Trust in the proposed rule change, 
authorized participants and their customers will choose what eligible 
copper to deposit with the Trust. As discussed further

[[Page 13733]]

below,\92\ the Commission also believes that the amount of copper that 
the Trust will hold is uncertain.\93\
---------------------------------------------------------------------------

    \91\ The Sponsor provided data estimating that total worldwide 
warrantable copper supply was 2.926 million tons as of July 2012, of 
which 1.358 million tons were considered to be ``liquid''; and of 
the 1.358 million tons of ``liquid'' stock, 434,105 tons are held in 
LME, COMEX, and SHFE warehouses. See BlackRock Letter, supra note 6, 
at 2 (citing Metal Bulletin Research, ``Independent Assessment of 
Global Copper Stocks,'' August 22, 2012). This leaves 923,895 tons 
of liquid stock that is not held in LME, COMEX, or SHFE warehouses. 
The data provided by the Sponsor is substantially similar to data 
referenced in the JPM Order. See JPM Order, supra note 6, 77 FR at 
75475. The differences between the sets of data appear to be a 
function of rounding and the inclusion of copper held in SHFE 
warehouses as part of the liquid stock held in exchanges in the data 
provided by the Sponsor of the iShares Trust.
    The Sponsor asserts that ``[t]he large size of the total copper 
market as compared to exchange inventories belies the assertion that 
only exchange inventories will be available for creations into the 
Trust.'' See id. In contrast, the commenter states that ``[e]xcept 
for copper that may be stored in bonded warehouses in China, all 
such copper is, as far as we know, subject to long-term supply 
contracts and is `liquid,' only in the sense that it is en route to 
fabricators around the world.'' V&F September 27 Letter, supra note 
6, at 2. The Commission believes that it is plausible that some 
portion of the estimated 923,895 metric tons of liquid copper 
inventory identified by the Sponsor currently would be available for 
authorized participants to use to create Shares.
    \92\ See infra Section III.A.3.
    \93\ The Commission drew the same conclusion regarding the size 
of the JPM Copper Trust. See JPM Order, supra note 6, 77 FR 75468, 
75476-77.
---------------------------------------------------------------------------

    However, even assuming that authorized participants will need to 
remove copper from LME warrant to deposit the copper into the Trust, as 
discussed above, the Commission believes that the Trust's copper will 
remain available for immediate delivery to consumers and participants 
in the physical markets.\94\ Accordingly, the Commission does not 
believe that the listing and trading of the Shares is likely to disrupt 
the supply of copper available for immediate delivery.
---------------------------------------------------------------------------

    \94\ See supra Section III.A.1.
---------------------------------------------------------------------------

3. Growth of the Trust
    The commenter states it is reasonable to expect that the Trust 
would sell all of the Shares covered by the Registration Statement in 
the three months after the registration becomes effective because of: 
(1) What the commenter characterizes as the Sponsor's stated desire to 
remove enough copper from the market for copper available for immediate 
delivery to cause an artificial rise in price and cover the monthly 
costs of storage; (2) the commenter's view that there is a very limited 
quantity of copper available for immediate delivery to accomplish the 
Trust's objective; and (3) the increase in copper prices in the three 
months following October 2010, when the iShares Trust, JPM Copper 
Trust, and ETFS Physical Copper were announced.\95\ The commenter also 
asserts that the copper supply is inelastic and that supply, therefore, 
is unlikely to increase fast enough to account for the increased demand 
that the commenter believes would be unleashed by the creation and 
growth of the Trust.\96\ The commenter asserts that the Trust would 
hold as much as 121,200 metric tons of copper if the Sponsor sells all 
of the Shares it seeks to register pursuant to the Registration 
Statement.\97\
---------------------------------------------------------------------------

    \95\ See V&F August 24 Letter, supra note 6, at 20. ETFS 
Physical Copper is a trust that holds copper under LME warrant; its 
shares are traded on the London Stock Exchange and Deutsche 
B[ouml]rse. See http://www.etfsecurities.com/en/updates/document_pdfs/ETFS_Physical_Industrial_Copper_Fact_Sheet.pdf. A 
discussion of the effect of ETFS Physical Copper on the price of 
copper is included below. See infra Section III.B.
    \96\ See V&F May 9 Letter, supra note 6, at 5. See also V&F 
September 12 Letter, supra note 6, at 2 (``In the short term, any 
resulting price appreciation from copper-backed ETF share owners 
will not affect mine production and may minutely benefit refined 
production, to the extent that higher copper prices encourage 
additional scrap recovery and processing. The copper ETF is unlikely 
to affect the supply of copper from copper refineries in a 0-12 
month timeframe.''). The commenter states that, in the longer term, 
copper miners are likely to respond to price signals and increase 
production. See V&F August 24 Letter, supra note 6, at 28.
    \97\ See V&F July 18 Letter, supra note 4, at 1.
---------------------------------------------------------------------------

    The Sponsor argues that it is not possible to extrapolate the 
ultimate size of the Trust from the number of Shares initially 
registered because the Trust may not issue any Shares if it is 
unsuccessful, or the Trust may need to file additional registration 
statements if it is very successful.\98\ The Sponsor also argues that 
prior experience of other existing commodity-based trusts contradicts 
the commenter's assertions; \99\ specifically, the Sponsor states that 
it took over two years to sell the shares initially registered for the 
SPDR Gold Trust and ETFS Physical Platinum and one year to sell the 
shares initially registered for the iShares Silver Trust.\100\
---------------------------------------------------------------------------

    \98\ See BlackRock Letter, supra note 6, at 3.
    \99\ See id.
    \100\ See id. The Sponsor also notes that ETFS Physical 
Palladium has yet to deplete the shares initially registered in 
December 2009. See id.
---------------------------------------------------------------------------

    As a preliminary matter, as the Sponsor pointed out, the commenter 
appears to conflate the amount of copper held by the Trust with the 
number of Shares issued. When commodity-based trusts redeem shares, 
those redeemed shares do not get put ``back on the shelf''; once 
securities are redeemed, the issuer cannot resell securities of the 
same amount unless there is either sufficient capacity left on the 
registration statement (i.e., enough registered securities to cover the 
new issuance of shares by the issuer) or unless a new registration 
statement is filed to register the offer and sale of the 
securities.\101\ Accordingly, 12,120,000 issued Shares will correspond 
to 121,200 metric tons of copper held by the Trust only if authorized 
participants do not redeem any Shares.\102\ Based on the existence of 
the arbitrage mechanism of the Trust,\103\ which is common to many 
exchange-traded vehicles, the Commission believes it is very unlikely 
that no Shares will be redeemed.
---------------------------------------------------------------------------

    \101\ See Sections 5 and 6 of the Securities Act, 15 U.S.C. 77e 
and 15 U.S.C. 77f, respectively.
    \102\ The Commission drew a similar conclusion regarding the 
size of the JPM Copper Trust. See JPM Order, supra note 6, 77 FR 
75468, 75476 (``6,180,000 issued Shares will correspond with 61,800 
metric tons of copper held by the [JPM Copper Trust] only if 
authorized participants do not redeem any Shares'').
    \103\ The arbitrage mechanism allows authorized participants to 
create and redeem Shares, and is designed to align the secondary 
market price per Share to the NAV per Share. See, e.g., BlackRock 
Letter, supra note 6, at 7 n.32.
---------------------------------------------------------------------------

    The Commission believes that the amount of copper held by the Trust 
will depend on investor demand for the Shares and the extent to which 
authorized participants fulfill such demand by exchanging copper for 
Baskets of Shares and do not redeem issued Shares. Investor demand for 
the Shares is currently unknown. The Commission notes that ETFS 
Physical Copper has not grown to a substantial size since its 
inception.\104\
---------------------------------------------------------------------------

    \104\ According to the commenter, on December 17, 2010 (one week 
after the product was launched), ETFS Physical Copper held 1,445.4 
metric tons of copper, and on August 3, 2012, it held 1,763.7 metric 
tons of copper, although there have been periods where ETFS Physical 
Copper has held greater quantities of copper, reaching as high as 
7,072.9 metric tons of copper in March and April of 2012. See V&F 
August 24 Letter, supra note 6, at 15.
---------------------------------------------------------------------------

    The commenter also predicts that copper supply will not increase 
fast enough to accommodate what he views as the new demand that will be 
created by the Trust. The Commission believes that the commenter has 
not provided evidence to support this projection. Data submitted by the 
commenter provides that the global supply of refined copper has 
increased every year since 2000--except 2002 and 2003--and in those 
years where supply increased, in all but one year (2009), it increased 
by more than the amount of copper that the commenter predicts the 
iShares Trust and the JPM Copper Trust will hold collectively.\105\ 
Further, data provided by the commenter project 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 
iShares Trust and the JPM Copper Trust will hold collectively.\106\
---------------------------------------------------------------------------

    \105\ See id. at 2.
    \106\ See id. (providing data indicating that global refined 
copper production 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).
---------------------------------------------------------------------------

    As discussed above, the Commission believes that copper held by the 
Trust will be available for immediate delivery.\107\ However, even 
assuming that the Trust's copper will be unavailable for immediate 
delivery, the Commission believes that the commenter has not supported 
his predictions that the Trust will grow so quickly, and that the 
supply of copper will not increase sufficiently, such that that the 
Trust will significantly disrupt the supply of copper available for 
immediate delivery.
---------------------------------------------------------------------------

    \107\ See supra Section III.A.1.

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

[[Page 13734]]

4. Other Physical Commodity Trusts
    The commenter admits that the introduction of commodity-based 
trusts that hold other metals had virtually no impact on the available 
supply, but asserts that these other metals--gold, silver, platinum, 
and palladium--are fundamentally different because they have 
traditionally been held for investment purposes and currently are used 
as currency, and that, as a result, there were ample stored sources 
available to fund commodity-based trusts overlying those metals.\108\ 
The commenter asserts that copper, in contrast, generally is not held 
as an investment, but rather is used exclusively for industrial 
purposes, with the annual demand generally exceeding the available 
supply, and, therefore, believes that the introduction of the Trust 
would impact supply.\109\
---------------------------------------------------------------------------

    \108\ See V&F May 9 Letter, supra note 6, at 2.
    \109\ See V&F May 9 Letter, supra note 6, at 2-3. The Levin 
Letter, which the commenter attached to the V&F July 18 Letter, 
states that because copper is very expensive to store and difficult 
to transport, relative to precious metals, copper is not currently 
held for investment purposes, and predicts that holding copper for 
investment purposes will have a significantly greater impact on the 
copper market than the precious metals commodity-based trusts had on 
their markets and the broader economy. See Levin Letter, supra note 
6, at 7.
---------------------------------------------------------------------------

    In response, the Sponsor states that while gold is used primarily 
as a currency equivalent and perhaps silver is as well, ``there is 
little plausible reason to regard platinum and palladium as currency 
equivalents in a manner that copper is not;'' \110\ the Sponsor states 
that silver, platinum, and palladium are used primarily for industrial 
purposes.\111\ The Sponsor also asserts that copper trading on the OTC 
market and futures exchanges ``clearly demonstrates that copper is 
utilized for investment purposes and is viewed by the investment 
community as an investable asset.'' \112\
---------------------------------------------------------------------------

    \110\ See BlackRock Letter, supra note 6, at 7.
    \111\ See id. at 7-8.
    \112\ See id. at 8. For example, the Sponsor cites data showing 
that non-commercial market participants trading copper futures on 
the COMEX accounted for, on average, 40% of total reported copper 
positions in the first half of 2012, which the Sponsor suggests is 
similar to the non-commercial market participation in the precious 
metals markets. See id. at 8 n.35.
---------------------------------------------------------------------------

    Given the industrial usage of silver, platinum, and palladium as 
compared to copper,\113\ the Commission believes that it is reasonable 
to project that any impact of the listing and trading of the Shares 
will not be meaningfully different than that of the listing and trading 
of shares of these other commodity-based trusts due solely to the 
nature of the underlying commodity markets. In any event, the 
Commission's analyses above in Sections III.A.1-3 are the primary bases 
for the Commission's belief that the listing and trading of the Shares 
is not likely to disrupt the supply of copper available for immediate 
delivery. The non-impact of those other trusts on the supplies in the 
underlying precious metals markets is consistent with this view, but it 
is not a significant factor underlying it.
---------------------------------------------------------------------------

    \113\ In the Order Instituting Proceedings, the Commission asked 
for comment regarding how much gold, silver, platinum, and palladium 
has been used for investment and industrial purposes in each of the 
last 10 years. See Order Instituting Proceedings, supra note 5, 77 
FR 48181, 48187. In response, the Sponsor stated that silver, 
platinum, and palladium are used ``primarily for industrial 
purposes.'' BlackRock Letter, supra note 6, at 7-8. The Sponsor also 
provided data to support its contention that the investment 
community regards copper--like gold, silver, platinum, and 
palladium--as an investable asset. See id. While declining to 
provide data regarding the industrial usage of silver, the commenter 
presented evidence that gold, platinum, and palladium are put to 
industrial use. See V&F August 24 Letter, supra note 6, at 18-19. 
Further, in approving the listing and trading of shares of the JPM 
Copper Trust, the Commission similarly noted the industrial use of 
silver, platinum, and palladium. See JPM Order, supra note 6, 77 FR 
75468, 75477.
---------------------------------------------------------------------------

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

    Due to what he predicts will be a rapid growth of the Trust, the 
commenter believes a substantial portion of the supply of immediately 
available LME-warranted copper would be removed from the market,\114\ 
which would drive up the price of copper.\115\ As noted above, the 
commenter estimates that the iShares Trust, which would hold up to 
121,200 metric tons of copper, and the JPM Copper Trust, which would 
hold up to 61,800 metric tons of copper, collectively would hold 
approximately 63% of the copper available in LME and COMEX warehouses, 
which the commenter asserts is the only refined copper generally 
available for immediate delivery.\116\ The commenter concludes that the 
removal of so much copper from LME and COMEX warehouses will lead to 
artificially inflated prices.\117\ The commenter also states: ``[t]he 
LME settlement price is axiomatically affected by the quantity of 
copper on warrant * * * because the quantity on warrant defines how 
much copper is eligible to be delivered against a cash contract, i.e. 
it is the total supply that is available when setting the settlement 
price.'' \118\ The commenter further asserts that the launch of the UK-
listed ETFS Physical Copper security and announcements about the 
proposed copper trusts in the United States were part of the cause of a 
copper price run up,\119\ and predicts that the price increases for 
copper would be especially dramatic in the U.S., where copper currently 
is relatively inexpensive.\120\ The commenter further argues that the 
listing and trading of the Shares would ``risk endangering the price 
discovery functions of the LME and [COMEX].'' \121\
---------------------------------------------------------------------------

    \114\ See supra Section III.A.1.
    \115\ See V&F May 9 Letter, supra note 6, at 5. See also V&F 
September 12 Letter, supra note 6, at 4.
    \116\ See V&F July 18 Letter, supra note 4, at 1.
    \117\ See id. at 1-2.
    \118\ See V&F August 24 Letter, supra note 6, at 7.
    \119\ See id. at 16.
    \120\ See V&F July 18 Letter, supra note 4, at 4.
    \121\ See id. The commenter does not explain why he believes the 
listing and trading of the Shares would endanger the price discovery 
functions of the LME and COMEX.
---------------------------------------------------------------------------

    In contrast, the Sponsor asserts that copper prices are a function 
of demand and supply, as well as other factors, and that it would be 
difficult to predict the impact of the introduction of an exchange-
traded vehicle backed by physical copper on copper prices given the 
many variables that exist.\122\ The Sponsor argues that it is 
impossible to predict demand for the Shares; the future behavior of 
investors and copper market participants; the supply and demand 
dynamics of the copper market outside of the Trust; or fundamental 
economic factors that impact demand for copper.\123\ In addition, the 
Sponsor asserts that data show that there is a weak correlation between 
LME copper prices and global supply and demand balances.\124\ The 
Sponsor also states its disagreement with contentions that any increase 
in copper prices that results from the listing and trading in the 
Shares will be especially dramatic in the U.S.\125\ According to the 
Sponsor, ``[t]here exists widespread lack of consensus in the 
marketplace regarding where authorized participants will have the most 
ready access to copper and where an authorized participant will be 
economically incentivized to deliver copper in connection with a 
creation of Shares of the Trust.'' \126\
---------------------------------------------------------------------------

    \122\ See BlackRock Letter, supra note 6, at 5.
    \123\ See id.
    \124\ See id. The Sponsor provided charts showing correlation 
coefficients between monthly and annual changes in copper prices and 
copper supply/demand balance. As discussed below, Commission staff 
performed its own analyses to look for evidence of price impact 
related to changes in copper inventory levels and fund flows. See 
infra note 128.
    \125\ See BlackRock Letter, supra note 6, at 5 n.26. See also 
supra notes 91-93 and accompanying text (stating the Commission's 
belief that there is significant uncertainty about the locations 
from which copper will be purchased to create Shares).
    \126\ See BlackRock Letter, supra note 6, at 5 n.26.
---------------------------------------------------------------------------

    As discussed above,\127\ the Commission does not believe that the 
listing and trading of the Shares is likely

[[Page 13735]]

to disrupt the supply of copper available for immediate delivery, which 
is what the commenter predicts would increase the price of copper. 
However, even if the supply of copper under LME warrant would decrease 
because previously warranted copper were transferred to the Trust, for 
the reasons discussed below, the Commission does not believe that lower 
LME inventory level by itself will increase the LME Bid Price (or any 
other price of copper).
---------------------------------------------------------------------------

    \127\ See supra Section III.A.
---------------------------------------------------------------------------

    To analyze the potential impact of changes in the LME inventory 
level on changes in the LME Bid Price, Commission staff performed two 
regression analyses.\128\ The first analysis was a linear regression of 
daily copper price changes, using five years of daily data from 2007-
2012, against the following explanatory variables: the change in LME 
copper inventory from the previous day (i.e., the lagged change in LME 
copper inventory), and the changes in spot prices of nickel, tin, gold, 
silver, platinum, and palladium, and the S&P 500, VIX index, and the 
China A-Shares index returns. The results indicate that LME copper 
inventories do not appear to have any independent statistical effect on 
prices.\129\
---------------------------------------------------------------------------

    \128\ See Memorandum to File, dated November 6, 2012, from the 
Division of Risk, Strategy, and Financial Innovation (``RF 
Analysis''). The RF Analysis was designed to look for evidence of 
price impact related to changes in copper inventory levels and fund 
flows.
    \129\ See id. at 10.
---------------------------------------------------------------------------

    Commission staff also performed a similar regression analysis using 
monthly data from January 2000 until June 2012 obtained from the 
International Copper Study Group (``ICSG'') to determine whether a 
relation between copper prices and LME inventories exists over a longer 
time horizon. The second analysis was a linear regression of monthly 
copper price changes against the following explanatory variables: the 
previous month's change in LME copper inventory, total exchange copper 
inventory (i.e., combined inventory from LME, COMEX, and SHFE), non-
exchange copper inventory (i.e., inventory from merchants, producers, 
and consumers), and spot price changes for nickel, tin, and platinum. 
This analysis again indicates that LME inventories specifically do not 
appear to have any independent statistical effect on prices.\130\
---------------------------------------------------------------------------

    \130\ See id. at 11.
---------------------------------------------------------------------------

    Based on these analyses, even if the listing and trading of Shares 
were to result in the removal of copper on warrant from LME 
inventories, the Commission does not believe that such a supply 
reduction will by itself directly impact the LME Bid Price (or any 
other price of copper). Although total exchange inventories, in 
contrast to LME inventories, appear to have some effect on monthly 
copper prices in this linear regression analysis, the coefficient 
estimate associated with total exchange inventories indicates that 
copper prices should decrease when copper is taken off-exchange.\131\
---------------------------------------------------------------------------

    \131\ See id. The commenter asserts that Commission staff 
``included likely heteroskedastic variables of other LME and LBMA 
metals prices in the regression, which may in the least, have 
undermined the cogency of the coefficient pertaining to LME copper 
inventory levels.'' See V&F November 16 Letter, supra note 6, at 1-
2. There is no evidence in the record of the existence of 
heteroskedasticity in these variables that would affect the results 
of the RF Analysis.
---------------------------------------------------------------------------

    Commission staff also performed Granger causality analyses\132\ to 
test the causal effect the holdings of other commodity-based trusts 
historically have had on the prices of their underlying commodities. 
Specifically, to evaluate whether the introduction of the SPDR Gold 
Trust, iShares Silver Trust, ETFS Platinum Trust, ETFS Physical 
Palladium Shares, and ETFS Physical Copper had an impact on the return 
of the metals underlying those trusts, using monthly data from their 
inceptions until September 2012, Commission staff examined flows into 
these funds and subsequent changes in underlying prices over time.\133\ 
This analysis revealed no observable relation between the flow of 
assets and subsequent price changes of the underlying metal 
prices.\134\ Commission staff repeated this analysis on a daily 
frequency for iShares Silver Trust, ETFS Platinum Trust, ETFS Physical 
Palladium Shares, and ETFS Physical Copper.\135\ Again, Commission 
staff found no evidence that fund flows were statistically related to 
subsequent changes in the underlying metals prices. Given the 
industrial usage of silver, platinum, and palladium as compared to 
copper,\136\ the Commission believes that it is reasonable to project 
that any impact of the listing and trading of the Shares will not be 
meaningfully different from that of the listing and trading of shares 
of other commodity-based trusts due solely to the nature of the 
underlying commodity markets.
---------------------------------------------------------------------------

    \132\ Granger causality is a statistical concept of causality 
that is based on prediction. If a signal X ``Granger-causes'' a 
signal Y, past values of X should contain information that helps 
predict Y above and beyond the information contained in past values 
of Y alone. See RF Analysis, supra note 128, at 3 n.9.
    \133\ See id. at 2-9. Because ETFS Physical Copper is small 
relative to the potential size of the Trust--holding only 
approximately 2,000 metric tons of copper as of August 2012--
Commission staff augmented its analysis by comparing asset growth of 
SPDR Gold Trust, iShares Silver Trust, ETFS Platinum Trust, and ETFS 
Physical Palladium Shares with changes in spot prices for the 
underlying metals.
    \134\ See id. at 4.
    \135\ Daily asset data was not available for the SPDR Gold Trust 
within the Commission's existing data sources.
    \136\ See supra note 113.
---------------------------------------------------------------------------

    In connection with the proposed rule change, the Commission 
received one comment letter regarding the Commission staff's 
analysis.\137\ This letter includes comments on both the substantive 
conclusions reached as well as the methodology used. As described 
further below, the Commission believes the staff's analysis reasonably 
evaluates whether historical price impacts are associated with changes 
in copper supply, one of the commenter's contentions.
---------------------------------------------------------------------------

    \137\ See V&F November 16 Letter, supra note 6.
---------------------------------------------------------------------------

    The commenter states that the Granger causality analyses appear on 
their face to be incongruous.\138\ The commenter asserts that 
Commission staff appears to be comparing assets under management to the 
respective price of the commodity held by the trust, and provides a 
chart that the commenter purports to show that there is a 92% 
correlation between the rolling monthly change in NAV of the iShares 
Silver Trust and the silver price.\139\ The Granger causality analysis 
from Tables 1 and 2 of the RF Analysis examines the relation between 
dollar flows into the funds and subsequent changes in the prices of the 
underlying metals. It does not examine the relation between changes in 
assets under management, which are driven by both flows and returns of 
the underlying, and the concurrent change in the prices of the 
underlying metals. Therefore, the Commission believes that the relation 
between the change in NAV for these funds and the concurrent change in 
the prices of the underlying metal is irrelevant for the purposes of 
the cited analysis.
---------------------------------------------------------------------------

    \138\ See id.
    \139\ See id. at 6-7.
---------------------------------------------------------------------------

    The commenter also asserts that the Commission staff should have 
examined alternative price variables in its analysis. The commenter 
suggests that Commission staff should have examined the cash to three 
month time spread and provides its own analysis, which the commenter 
concludes demonstrates a strong relationship between LME inventory 
changes and the cash to three month time spread.\140\ The commenter 
states that if the iShares Trust and the JPM Copper Trust were to sell 
all of the

[[Page 13736]]

shares registered through their respective registration statements, the 
cash to three month time spread ``would blow out to a massive 
backwardation, potentially approaching record levels, making it 
impossible for copper consumers to finance their inventory.'' \141\ The 
analysis provided by the commenter, however, does not provide the 
significance level of any test statistics associated with these 
findings, which would provide an assessment of the likelihood that 
relations were observed in the data by statistical chance. Without an 
assessment of statistical significance, it is difficult to conclude 
whether observed relations in the commenter's data are systematic or 
anecdotal. Furthermore, an assessment of the statistical significance 
of these results is not possible without knowing which alternative 
tests of the hypothesis were also examined and reported. The commenter 
did not provide any information about which alternative tests were 
examined, if any. In addition, the commenter's analysis appears to 
analyze inventory changes against concurrent price changes. The 
Commission does not believe that such a concurrent analysis can isolate 
the effect of inventory changes on prices because such an analysis 
cannot distinguish whether price changes lead to inventory changes or 
vice versa.
---------------------------------------------------------------------------

    \140\ See id. at 3.
    \141\ See id. The commenter further states that the mechanics of 
unit creation for commodity-based trusts backed by precious metals 
are fundamentally different than those for commodity-based trusts 
backed by industrial metals, citing the lack of copper in 
unallocated accounts that could be used in creating Shares. 
According to the commenter, neither producers nor consumers carry 
meaningful inventories of copper, which would require authorized 
participants to acquire copper from LME and COMEX inventories to 
create Shares. The commenter asserts that a backwardation would be 
necessary to trigger the movement of copper to authorized 
participants, and that consumers would have to compete for this 
metal or lend to authorized participants. See id. at 4.
---------------------------------------------------------------------------

    Further, as discussed above, the Commission does not believe that 
the listing and trading of the Shares is likely to disrupt the supply 
of copper available for immediate delivery,\142\ and believes that the 
commenter has not supported its prediction that the Trust would grow so 
quickly that it would significantly disrupt the supply of copper 
available for immediate delivery.\143\
---------------------------------------------------------------------------

    \142\ See supra Section III.A.
    \143\ See supra Section III.A.3.
---------------------------------------------------------------------------

    The commenter also states that Commission staff should have 
considered the impact on locational premia.\144\ The commenter asserts 
that the relationship between COMEX inventory and locational premia in 
the U.S. is strong, and provides data that the commenter suggests shows 
that when COMEX inventories are at anemic levels, locational premia can 
be very high (above $200 per metric ton).\145\ Thus, the commenter 
argues that if the Trust results in the removal of inventory from LME 
and COMEX warehouses, the associated market impact will be much higher 
locational premia.\146\ The analysis provided by the commenter, 
however, does not provide the significance level of any test statistics 
associated with these findings.\147\ In addition, the commenter's 
analysis appears to analyze inventory changes against concurrent price 
changes. The Commission does not believe that such a concurrent 
analysis can isolate the effect of inventory changes on prices, as 
discussed previously.\148\ In addition, according to data provided by 
the commenter, locational premia typically appear to be no greater than 
2%.\149\ Therefore, the Commission believes the degree to which such 
premia can be influenced is limited. Further, even assuming that copper 
was taken off LME warrant to be deposited into the Trust, the 
Commission believes that the Trust's copper will remain available for 
immediate delivery to consumers and participants in the physical 
markets,\150\ which will limit the possible effect on locational 
premia.
---------------------------------------------------------------------------

    \144\ See V&F November 16 Letter, supra note 6, at 3, 5. The 
commenter refers to ``physical'' premia in describing the manner in 
which the Trust will value its copper holdings: ``Another market 
price that the SEC could have done well to look into is the physical 
premia, especially in light of the [Trust's] implied objective to 
value metal . . . on an in-situ basis, taking into account regional 
physical price variations.'' See id. at 5. Consistent with this 
description, the Commission refers to locational premia rather than 
physical premia. The Trust will value its copper using the LME Bid 
Price, and unlike the JPM Copper Trust, will not take into account 
locational premia. See infra note 216.
    \145\ See V&F November 16 Letter, supra note 6, at 3, 5.
    \146\ See id.
    \147\ See supra text following note 141.
    \148\ See supra text following note 141.
    \149\ See V&F August 24 Letter, supra note 6, at 11-12. The data 
provided relates to locational premia for warehouses that would be 
used to store copper held in the JPM Copper Trust, which are 
different from the warehouses that would be used by the iShares 
Trust. As the locational premia provided do not reflect all of the 
cities in which the iShares Trust's warehouses will be located, the 
Commission evaluated the data only to understand the significance of 
locational premia as compared to copper prices.
    \150\ See supra text accompanying note 94.
---------------------------------------------------------------------------

    The commenter also believes that Commission staff erred by using 
lagged daily LME stock data. The commenter asserts that because there 
are ``many consecutive and non-consecutive days that LME stock levels 
and LME traded metals do not change while LME prices do * * *, running 
a daily LME stock series through a regression analysis will yield 
statistically weak results in most cases.'' \151\ The commenter states 
that LME inventory data for the prior day is released at 9:00 a.m. in 
the London trading day, thereby giving the market a full trading day to 
digest the data.\152\ The lagged daily LME inventory change used in the 
RF Analysis in fact was regressed against the change in copper prices 
for the day on which this information was released at 9:00 a.m.\153\
---------------------------------------------------------------------------

    \151\ See V&F November 16 Letter, supra note 6, at 2.
    \152\ See id. at 5-6.
    \153\ To confirm this, Commission staff reconciled a sample of 
historical LME stock data from the LME Web site (http://www.lme.com/dataprices.asp) and the Bloomberg LME stock data used in the RF 
Analysis. Additional reconciliation was done against historical LME 
copper warehouse stock data found at http://www.metalprices.com/historical/database/copper/lme-copper-warehouse-stocks.
---------------------------------------------------------------------------

    In addition, the commenter asserts that there is not a strong 
statistical relationship between lagged copper inventories and 
contemporaneous copper prices because the LME represents the copper 
market's ``warehouse of last resort.'' \154\ According to the 
commenter, when LME stocks are drawn down or added to, market 
participants ``should have already fully discounted the fundamental 
information contained within that particular stock move.'' \155\ This 
assertion seems consistent with a hypothesis that price changes precede 
inventory changes, which is contrary to the commenter's assertions that 
inventory changes precede price changes.\156\ The Commission believes 
that this argument provides further weight to the Commission staff's 
finding that the LME copper inventory changes do not appear to precede 
price changes. In sum, the Commission believes the daily periods used 
in the RF Analysis were reasonable and appropriate because evidence of 
the relationship between inventories and prices would likely be seen at 
daily intervals.\157\
---------------------------------------------------------------------------

    \154\ See V&F November 16 Letter, supra note 6, at 6.
    \155\ See id. (stating that LME stocks are drawn down by 
consumers because neither producers nor traders have material to 
sell to consumers and consumers are willing to go through the 
logistical hassle of being long LME warrants, swapping the warrants 
for their preferred brands, and transporting the copper to their 
individual plant, and that ``[i]t is nonsensical to assume that the 
trading community has not already discounted this information into 
the LME price''). But see id. at 2 (``Intuitively it doesn't make 
sense to argue that in a physically settled exchange system that 
fungible stock levels don't exert some statistically robust 
influence on metals prices.'').
    \156\ See supra notes 115-120 and accompanying text.
    \157\ In particular, LME inventory data for the previous day is 
released on the morning of each trading day so that prices are able 
to react over the course of that day. Moreover, the use of the 
monthly lag period confirmed the results of the daily analysis and 
allowed for the examination of the effect of non-exchange copper 
inventories for which only monthly data were available within the 
Commission's existing data sources.

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

[[Page 13737]]

    The commenter suggests that, instead of looking at lagged daily LME 
stock data, the Commission staff should have looked at the 30 largest 
quarter-to-quarter LME inventory declines against changes in the LME 
cash price over the same time periods. The commenter asserts that such 
analysis, which the commenter submitted, shows that for the 30 largest 
observations, the median stock decline was 28.6%, and that the LME cash 
price rose in 25 out of 30 observations, for a median increase of 
10.5%.\158\ The commenter states that these findings suggest that if 
LME and COMEX inventories were to decline by more than 50%, which the 
commenter asserts could happen if the iShares Trust and the JPM Copper 
Trust were to sell all of the shares registered through their 
respective registration statements, prices could increase 20-60% in the 
quarter that the LME and COMEX inventory decline occurs.\159\
---------------------------------------------------------------------------

    \158\ See V&F November 16 Letter, supra note 6, at 2.
    \159\ See id.
---------------------------------------------------------------------------

    The analysis provided by the commenter, however, does not provide 
the significance level of any test statistics associated with these 
findings.\160\ In addition, the commenter's analysis appears to analyze 
inventory changes against concurrent price changes. The Commission does 
not believe that such a concurrent analysis can isolate the effect of 
inventory changes on prices.\161\ Further, as discussed above, the 
Commission does not believe that the listing and trading of the Shares 
is likely to disrupt the supply of copper available for immediate 
delivery,\162\ and believes that the commenter has not supported his 
prediction that the Trust would grow so quickly that it would 
significantly disrupt the supply of copper available for immediate 
delivery.\163\
---------------------------------------------------------------------------

    \160\ See supra text following note 141.
    \161\ See supra text following note 141.
    \162\ See supra Section III.A.
    \163\ See supra Section III.A.3.
---------------------------------------------------------------------------

    Finally, the commenter asserts that the listing and trading of the 
Shares could change the fundamental structure of the copper market, and 
that Commission staff should ``ponder'' such a structural change in the 
copper market.\164\ The commenter states that the ex-post implications 
for copper outright prices in a market that involves listing and 
trading of the Shares cannot be accurately inferred from what the 
commenter characterizes as ``an overly-simplistic ex-ante statistical 
analysis of LME/global inventories and LME settlement prices.'' \165\ 
According to the commenter, never before has it been possible for 
financial players to ``lock up'' significant amounts of LME and COMEX 
inventory in a short period of time and remove that copper from the 
market.\166\ Further, while the commenter indicates that ``[o]verall 
historically the level of LME inventories has been generally indicative 
of the trading environment, not a driver of the metal price per se,'' 
the commenter believes creation of the Trust could change the role of 
LME inventories from being a function of the fundamentals to being a 
fundamental, and ``arguably THE fundamental, as has become the case in 
precious metals.'' \167\
---------------------------------------------------------------------------

    \164\ See V&F November 16 Letter, supra note 6, at 3-4.
    \165\ See id. at 4.
    \166\ See id. at 3-4, 8.
    \167\ See id. at 6 (emphasis in original). The commenter states 
that exchange-traded vehicles backed by silver, platinum, and 
palladium have become the largest single holder of those metals in a 
remarkably short period of time (less than eight years) and that 
exchange-traded vehicles backed by gold are eclipsed at a national 
level only by the U.S. and Germany. According to the commenter, 
while the cumulative impact of exchange-traded vehicles on prices 
has dissipated as these products have matured, ``the reality is that 
they have become a key fundamental in terms of analyzing the 
precious metals markets,'' and have become the main asset class. See 
id. at 7. The commenter asserts that it is not certain, and that it 
should not be assumed, that potential investors in the Trust will 
``be as sticky as they have been in gold and silver, and to a lesser 
degree in platinum and palladium.'' See id. The commenter's 
``stickiness'' argument has been addressed above. See supra Section 
III.A.1.
---------------------------------------------------------------------------

    The Commission believes that such assertions are speculative and 
unsupported by the record. As discussed in detail throughout this 
order, the Commission does not believe that the listing and trading of 
the Shares is likely to alter the supply and demand fundamentals of the 
copper market. Further, as discussed above, the Commission does not 
believe that the listing and trading of the Shares is likely to disrupt 
the supply of copper available for immediate delivery \168\ and, even 
assuming that copper was taken off LME warrant to be deposited into the 
Trust, the Commission believes that the Trust's copper will remain 
available for immediate delivery to consumers and participants in the 
physical markets.\169\
---------------------------------------------------------------------------

    \168\ See supra Section III.A. Even assuming that the Trust's 
copper will be unavailable for immediate delivery, the Commission 
believes that the commenter has not supported his prediction that 
the Trust would grow so quickly that it would significantly disrupt 
the supply of copper available for immediate delivery. See supra 
Section III.A.3.
    \169\ See supra text accompanying note 94.
---------------------------------------------------------------------------

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

C. The Trust's Impact on Copper Price Volatility

    The commenter asserts that the successful creation and growth of 
the Trust would make the price of copper, which the commenter states 
already is volatile, even more volatile.\170\ Specifically, the 
commenter asserts that the successful creation and growth of the Trust, 
which the commenter believes would substantially restrict supply and 
increase copper prices, would create a boom and bust cycle in copper 
prices.\171\ The commenter predicts that this ultimate sell-off would 
be quick, and that the expected ``dumping'' of thousands of metric tons 
of copper back onto the market would depress the price of copper and 
negatively impact the world economy at large.\172\
---------------------------------------------------------------------------

    \170\ See V&F May 9 Letter, supra note 6, at 5.
    \171\ See id. But see V&F November 16 Letter, supra note 6, at 8 
(stating that if Commission staff were to analyze whether the 
discrete flow of ounces in and out of exchange-traded vehicles 
drives underlying metals price, it would likely show that volatility 
in precious metals is not solely a function of net metal flow in and 
out of the exchange-traded vehicles). The commenter cites to a 
statement in the Registration Statement to argue that the Sponsor 
admits that this boom and bust cycle may occur. See V&F July 18 
Letter, supra note 4, at 4 (citing Registration Statement, supra 
note 15, at 10).
    \172\ More specifically, the commenter states that, because of 
this predicted boom and bust, mines will go bust and resources will 
be needlessly misallocated. See V&F August 24 Letter, supra note 6, 
at 28.
---------------------------------------------------------------------------

    In contrast, the Sponsor asserts that it would be difficult to 
predict the impact of the introduction of an exchange-traded vehicle 
backed by physical copper on price volatility given that many variables 
exist.\173\ The Sponsor asserts that the arguments presented in the 
Levin Letter based on research reports and hearing testimony related to 
futures and other derivative-based instruments do not demonstrate that 
an exchange-traded vehicle backed by physical copper would contribute 
to price volatility.\174\ Further, the Sponsor believes that ``the 
physical-backed nature of the Trust may in fact reduce price volatility 
as the Trust may take up excess supply during times when the market is 
oversupplied and provide an inventory of metal ready for delivery

[[Page 13738]]

during times when the market is in a shortage.'' \175\
---------------------------------------------------------------------------

    \173\ See BlackRock Letter, supra note 6, at 5. See also supra 
text accompanying note 123 (discussing the Sponsor's view of the 
variables that can impact price volatility).
    \174\ See BlackRock Letter, supra note 6, at 5-6.
    \175\ See id. at 6.
---------------------------------------------------------------------------

    The commenter's prediction that the listing and trading of the 
Shares would cause a boom and bust is premised upon both the supply and 
price impacts he predicts. As discussed above, the Commission does not 
believe that the listing and trading of the Shares is likely to disrupt 
the supply of copper available for immediate delivery \176\ or increase 
the price of copper.\177\ In addition, this boom and bust prediction is 
unsupported by any empirical evidence. As a result, the Commission does 
not believe that the proposed listing and trading of the Shares will 
impact copper volatility in the manner that the commenter suggests. 
Further, the Commission does not believe that approval of the proposed 
rule change will impede the use of copper because the listing and 
trading of the Shares is not expected to, as discussed above, result in 
heightened volatility. Therefore, the Commission does not believe that 
the listing and trading of the Shares will have an adverse effect on 
the efficiency of copper allocation and capital formation.
---------------------------------------------------------------------------

    \176\ See supra Section III.A.
    \177\ See supra Section III.B.
---------------------------------------------------------------------------

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

    The commenter sets forth a number of arguments about why the Trust 
would increase the potential for manipulation of the copper market. The 
commenter asserts that the Trust, in effect, would introduce so much 
transparency into the copper market that it would allow the Trust to 
manipulate, or alternatively provide market participants an effective 
means to manipulate, the price of copper and thereby the price of the 
Shares.\178\ According to the commenter, investors in the Trust would 
be able to measure how much impact their collective removal of copper 
from the supply available for immediate delivery would have on copper 
prices each day, and could adjust their purchasing strategies 
accordingly.\179\ Therefore, the commenter argues that the increased 
market transparency would not be in the public interest.\180\ Instead, 
the commenter believes the transparency of the Trust's holdings would 
provide market participants with critical information about ``how much 
copper needs to be removed on any given day in order to artificially 
inflate [copper] prices and thus the price of the Trust's shares.'' 
\181\
---------------------------------------------------------------------------

    \178\ See V&F May 9 Letter, supra note 6, at 9-10.
    \179\ See id. at 9.
    \180\ See id. at 10.
    \181\ See V&F July 13 Letter, supra note 6, at 10. The commenter 
also states that anyone who knows that market participants are 
buying LME warrants to create Shares could front-run the creation by 
buying Shares on the Exchange and profit thereby. See V&F September 
12 Letter, supra note 6, at 9. The profitability of such action 
appears premised upon the commenter's belief that the creation of 
Shares will cause the LME Bid Price, and correspondingly the price 
of the Shares, to increase. As discussed above, the Commission does 
not believe that the listing and trading of the Shares is likely to 
disrupt the supply of copper available for immediate delivery, which 
is what the commenter predicts would cause the price of copper to 
increase. See supra Section III.B. With respect to other types of 
front-running, the Exchange's surveillance program for the Trust, 
which is designed in part to identify and deter manipulative 
activity, is described in Section III.E.
---------------------------------------------------------------------------

    The commenter also predicts that the Trust would make the copper 
market more susceptible to squeezes and corners by reducing the supply 
of copper available for immediate delivery.\182\ According to the 
commenter, after a substantial portion of the copper market is 
deposited in one or more physical copper trusts, the costs of acquiring 
the remaining inventory would be relatively inexpensive, thus reducing 
a hurdle to engineering a corner or squeeze.\183\ The Levin Letter, 
which the commenter attached to the V&F July 18 Letter, also states 
that such manipulative activities could go undetected by the LME 
because trusts that hold physical commodities are not subject to any 
form of commodity regulations; by holding physical copper rather than 
LME warrants, the Trust would be able to control more of the available 
supply of copper without triggering LME reporting or rules.\184\
---------------------------------------------------------------------------

    \182\ See V&F May 9 Letter, supra note 6, at 1, 10. The Levin 
Letter, which the commenter attached to the V&F July 18 Letter, 
describes a squeeze on the copper market as occurring ``when a lack 
of supply and excess demand forces the price upward, and a corner is 
when one party acquires enough copper to be able to manipulate its 
price.'' Levin Letter, supra note 6, at 7. Senator Levin asserts 
that the Trust will make the copper market more susceptible to 
squeezes because it could be used by market participants to remove 
copper from the available supply in order to artificially inflate 
the price. See id. at 7.
    \183\ See V&F September 10 Letter, supra note 6, at 7. The 
commenter also suggests that mere launch of the Trust could create a 
corner and squeeze given the relatively small amount of copper on 
LME warrant.
    \184\ See Levin Letter, supra note 6, at 7.
---------------------------------------------------------------------------

    The Sponsor does not believe that the presence of the Trust would 
increase the likelihood of market squeezes because in the Sponsor's 
view: (1) market squeezes have been occurring in the markets since long 
before the introduction of commodity-based trusts; (2) no evidence has 
been presented to show that the introduction of the Trust will 
contribute to a market squeeze; (3) current investors in the physical 
copper markets, which the Sponsor expects will be the most likely 
investors in the Trust, are not ```speculators in the guise of 
purchasers' seeking to create a squeeze on the copper market;'' (4) 
incremental demand from new investors will broaden the investor base in 
copper, which could reduce the possibility of collusion among market 
participants to manipulate the copper market; and (5) trading in the 
Shares would be overseen by the Exchange and the Commission, while the 
CFTC would police for manipulation in the underlying copper 
market.\185\
---------------------------------------------------------------------------

    \185\ See BlackRock Letter, supra note 6, at 6.
---------------------------------------------------------------------------

    The Sponsor also identifies a number of features of the Trust 
designed to meet the requirements of Section 6(b)(5) of the Act.\186\ 
Specifically, the Sponsor states that ``[t]he Trust offers complete 
transparency through its Web site, where information on the Trust's 
copper holdings as well as additional detailed data regarding the Trust 
will be available.'' \187\ In addition, the Trust will provide daily 
valuations of the Trust's copper based on that day's announced LME Bid 
Price.\188\ The Sponsor also expects the Trust's arbitrage mechanism 
will facilitate the correction between the Share price and the price of 
the Trust's copper.\189\
---------------------------------------------------------------------------

    \186\ 15 U.S.C. 78f(b)(5).
    \187\ See BlackRock Letter, supra note 6, at 9. More 
specifically, the Trust will disclose on its Web site: (1) for each 
copper lot held by the Trust, the warehouse location, warehouse 
identification number, lot number, net weight, and brand; and (2) 
the order in which lots will be delivered to redeeming authorized 
participants pursuant to the algorithm. See Amendment No. 2, supra 
note 9. See also notes 27-28 and accompanying text (describing the 
Trust's redemption procedure).
    \188\ See BlackRock Letter, supra note 6, at 10.
    \189\ See id.
---------------------------------------------------------------------------

    The Sponsor also argues ``that the physical copper market is no 
more susceptible to manipulation than other existing commodity markets, 
particularly given the[] many layers of regulatory oversight.'' \190\ 
The Sponsor states that (1) trading in the Shares would be subject to 
the oversight of both NYSE Arca and the Commission, and (2) 
manipulation of physical copper would be subject to the oversight 
jurisdiction and enforcement authority of the CFTC.\191\ The Sponsor 
also asserts the introduction of exchange-traded vehicles backed by 
other metals ``has not led to any credible evidence of an increase in 
manipulation of the markets for their underlying metals.'' \192\
---------------------------------------------------------------------------

    \190\ See id. at 6.
    \191\ See id.
    \192\ See id. While the commenter states that ``traders and 
investors have sought to manipulate silver on at least two 
occasions,'' the commenter does not identify any instances of 
manipulation tied to exchange-trade vehicles. Nonetheless, the 
commenter asserts that ``[f]undamentally the copper market is much 
easier to manipulate'' based on its reasoning, discussed above. See 
V&F September 12 Letter, supra note 6, at 8.

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

[[Page 13739]]

    The Commission does not believe that the listing and trading of the 
Shares is likely to increase the likelihood of manipulation of the 
copper market and, correspondingly, of the price of the Shares. 
Generally, the Commission believes that increased transparency helps 
mitigate risks of manipulation. For example, in approving the listing 
and trading of shares of the iShares Silver Trust, the Commission 
stated that the dissemination of information about the silver shares 
would ``facilitate transparency with respect to the Silver Shares and 
diminish the risk of manipulation or unfair informational advantage.'' 
\193\ In this case, the Commission believes the transparency that the 
Trust will provide with respect to its holdings,\194\ as well as the 
dissemination of quotations for and last-sale prices of transactions in 
the Shares and the IIV and NAV of the Trust,\195\ all are expected to 
help reduce the ability of market participants to manipulate the 
physical copper market or the price of Shares.\196\ Also, the 
Commission believes that the listing and trading of the Shares on the 
Exchange (and any other national securities exchange that trades the 
Shares pursuant to unlisted trading privileges) \197\ may serve to make 
the overall copper market more transparent if OTC trading of unreported 
warehouse receipts shifts to trading Shares on exchanges.\198\ In 
particular, additional information regarding the supply of copper will 
be disseminated, which will enable users of copper to make better-
informed decisions. Over the long term, this additional transparency 
could enhance efficiency in the market for copper and capital formation 
for participants in this market. In addition, the Commission believes 
that the listing and delisting criteria for the Shares are expected to 
help to maintain a minimum level of liquidity and therefore minimize 
the potential for manipulation of the Shares.\199\
---------------------------------------------------------------------------

    \193\ See Securities Exchange Act Release No. 53521 (March 20, 
2006), 71 FR 14967, 14975 (March 24, 2006) (approving the listing 
and trading of shares of the iShares Silver Trust).
    \194\ See supra note 187 and accompanying text.
    \195\ See supra notes 31-36 and accompanying text.
    \196\ Further, the Trust is a passive vehicle, and therefore the 
commenter's concerns about manipulation by the Trust itself are 
misplaced.
    \197\ When a national securities exchange extends ``unlisted 
trading privileges'' to a security, it allows the trading of a 
security that is not listed and registered on that exchange. See 
Securities Exchange Act Release No. 35637 (April 24, 1995), 60 FR 
20891, 20891-92 (April 28, 1995) (adopting rules to reduce the 
period that exchanges have to wait before extending unlisted trading 
privileges to any listed initial public offering security). A number 
of national securities exchanges have rules that allow the extension 
of unlisted trading privileges to issues such as the Shares. See, 
e.g., Securities Exchange Act Release No. 57806 (May 9, 2008), 73 FR 
28541 (May 16, 2008) (SR-Phlx-2008-34); Securities Exchange Act 
Release No. 58623 (September 23, 2008), 73 FR 57169 (October 1, 
2008) (SR-BATS-2008-004).
    \198\ Market participants that acquire a large percentage of the 
Shares must identify themselves to the Commission by filing 
Schedules 13D or 13G. See 17 CFR 240.13d-1. Specifically, Section 
13(d) of the Act, 15 U.S.C. 78m(d), and the rules thereunder require 
that a person file with the Commission, within ten days after 
acquiring, directly or indirectly, beneficial ownership of more than 
five percent of a class of equity securities, a disclosure statement 
on Schedule 13D, subject to certain exceptions. See 17 CFR 240.13d-
1. Section 13(g) and the rules thereunder enable certain persons who 
are the beneficial owners of more than five percent of a class of 
certain equity securities to instead file a short form Schedule 13G, 
assuming certain conditions have been met. Beneficial owners are 
also required to report changes in the information filed.
    In addition, Section 13(f)(1) of the Act and Rule 13f-1 
thereunder require every ``institutional investment manager,'' as 
defined in Section 13(f)(5)(A) of the Act, that exercises investment 
discretion with respect to ``section 13(f) securities,'' as defined 
in Rule 13f-1, having an aggregate fair market value of at least 
$100 million (``Reportable Securities''), to file with the 
Commission quarterly reports on Form 13F setting forth each 
Reportable Security's name, CUSIP number, the number of shares held, 
and the market value of the position.
    \199\ For example, under NYSE Arca Equities Rule 
8.201(e)(2)(ii), the Exchange will consider suspending trading in 
the Shares or delisting the Shares if, following the initial 12-
month period following commencement of trading, there are fewer than 
50,000 Shares issued and outstanding.
---------------------------------------------------------------------------

    The commenter asserts that serious disruptions in the supply of 
copper would make corners and squeezes more likely.\200\ As discussed 
above, the Commission does not believe that the listing and trading of 
the Shares is likely to disrupt the supply of copper available for 
immediate delivery.\201\ Depending on the size of the Trust though, it 
is possible that copper holdings may be dispersed across an additional 
market--i.e., less copper may be held under LME and/or COMEX warrant 
and more copper may be held by the Trust. However, the availability of 
inter-market arbitrage is expected to help mitigate any potential 
increase in the ability of market participants to engage in corners or 
squeezes as a result of any dispersion of copper holdings across 
markets (as distinguished from a reduction in the copper supply). For 
example, if the Trust grows large relative to the market for warrants 
on the LME, LME market participants faced with a potential corner or 
squeeze may acquire Shares, redeem them (through an authorized 
participant) for LME warrants, and deliver the warrants.\202\ Further, 
although the Exchange currently provides for the listing and trading of 
shares of commodity-based trusts backed by physical gold, silver, 
platinum, and palladium, the commenter has not identified any evidence 
that the trading of shares of these commodity-based trusts has led to 
manipulation of the gold, silver, platinum, or palladium markets.
---------------------------------------------------------------------------

    \200\ See supra notes 182-184 and accompanying text.
    \201\ See supra Section III.A. Similarly, the Commission has 
recently stated that it does not believe that the listing and 
trading of shares of the JPM Copper Trust is likely to disrupt the 
supply of copper available for immediate delivery. See JPM Order, 
supra note 6, 77 FR 75468, 75474.
    \202\ See supra notes 80-82 and accompanying text.
---------------------------------------------------------------------------

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

E. Surveillance

    The commenter questions whether NYSE Arca's surveillance procedures 
are adequate to prevent fraudulent and manipulative trading in the 
Shares. According to the commenter, NYSE Arca's surveillance procedures 
are not adequate because they are the kind of ``garden-variety 
measures'' that are always in place to prevent collusion and other 
forms of manipulation by traders.\203\
---------------------------------------------------------------------------

    \203\ See V&F May 9 Letter, supra note 6, at 10.
---------------------------------------------------------------------------

    NYSE Arca states that its surveillance procedures will be adequate 
to properly monitor Exchange trading of the Shares in all trading 
sessions and to deter and detect violations of Exchange rules and 
applicable federal securities laws.\204\ In particular, the Exchange 
represents the following:
---------------------------------------------------------------------------

    \204\ See Notice, supra note 3, 77 FR at 38360. The Exchange 
also states that its existing surveillances will be augmented with a 
product-specific review designed to identify potential manipulative 
trading activity through the use of the creation and redemption 
process. See Amendment No. 1, supra note 7.
---------------------------------------------------------------------------

     Pursuant to NYSE Arca Equities Rule 8.201(g), an ETP 
Holder acting as a registered Market Maker in Commodity-Based Trust 
Shares must file with the Exchange and keep current a list identifying 
all accounts for trading in an underlying commodity, related commodity 
futures or options on commodity futures, or any other related commodity 
derivatives, which the

[[Page 13740]]

Market Maker may have or over which it may exercise investment 
discretion. No Market Maker shall trade in an underlying commodity, 
related commodity futures or options on commodity futures, or any other 
related commodity derivatives, in an account in which a Market Maker, 
directly or indirectly, controls trading activities, or has a direct 
interest in the profits or losses thereof, which has not been reported 
to the Exchange as required by NYSE Arca Equities Rule 8.201.
     In addition, pursuant to NYSE Arca Equities Rule 8.201(g), 
the Exchange is able to obtain information regarding trading in the 
Shares and the underlying copper, copper futures contracts, options on 
copper futures, or any other copper derivative, through ETP Holders 
acting as registered Market Makers, in connection with their 
proprietary or customer trades that they effect on any relevant 
market.\205\
---------------------------------------------------------------------------

    \205\ See Notice, supra note 3, 77 FR at 38360. See also Arca 
September 14 Letter, supra note 6, at 2-3.
---------------------------------------------------------------------------

     NYSE Arca has regulatory jurisdiction over its ETP Holders 
and their associated persons, which include any person or entity 
controlling an ETP Holder, as well as a subsidiary or affiliate of an 
ETP Holder that is in the securities business.\206\
---------------------------------------------------------------------------

    \206\ See Amendment No. 1, supra note 7.
---------------------------------------------------------------------------

     With respect to a subsidiary or affiliate of an ETP Holder 
that does business only in commodities or futures contracts, the 
Exchange can obtain information regarding the activities of such 
subsidiary or affiliate through surveillance sharing agreements with 
regulatory organizations of which such subsidiary or affiliate is a 
member.\207\
---------------------------------------------------------------------------

    \207\ See id.
---------------------------------------------------------------------------

     Commentary .04 of NYSE Arca Equities Rule 6.3 requires an 
ETP Holder acting as a registered Market Maker in the Shares, and its 
affiliates, to establish, maintain, and enforce written policies and 
procedures reasonably designed to prevent the misuse of any material 
nonpublic information with respect to such products, any components of 
the related products, any physical asset or commodity underlying the 
product, applicable currencies, underlying indexes, related futures or 
options on futures, and any related derivative instruments (including 
the Shares).\208\
---------------------------------------------------------------------------

    \208\ See Notice, supra note 3, 77 FR at 38360. See also Arca 
September 14 Letter, supra note 6, at 3.
---------------------------------------------------------------------------

     NYSE Arca may obtain trading information via ISG from 
other exchanges that are members of the ISG, including the COMEX.\209\ 
The Exchange also states that it has entered into a comprehensive 
surveillance sharing agreement with LME that applies to trading in 
copper and copper derivatives.\210\
---------------------------------------------------------------------------

    \209\ See Notice, supra note 3, 77 FR at 38360.
    \210\ See id.

    Further, in the context of preventing fraudulent and manipulative 
acts, the Exchange discusses its authority to halt trading in the 
Shares in the interest of promoting a fair and orderly market and 
protecting the interests of investors.\211\
---------------------------------------------------------------------------

    \211\ See Arca September 14 Letter, supra note 6, at 3 (``As 
stated in the Notice, the Exchange may consider all relevant factors 
in exercising its discretion to halt or suspend trading in the 
Shares, and trading on the Exchange in the Shares may be halted 
because of market conditions or for reasons that, in the view of the 
Exchange, make trading in the Shares inadvisable.'').
---------------------------------------------------------------------------

    In addition, NYSE Arca has obtained a representation from the 
Sponsor that it will: (1) Implement a firewall with respect to its 
affiliates regarding access to material non-public information of the 
Trust concerning the Trust and the Shares; and (2) will be subject to 
procedures designed to prevent the use and dissemination of material 
non-public information of the Trust regarding the Trust and the 
Shares.\212\ The Commission believes the firewall that the Exchange 
will require the Sponsor to erect is a reasonable measure to help 
prevent the flow of non-public information to the Sponsor's 
affiliates.\213\
---------------------------------------------------------------------------

    \212\ See Amendment No. 1, supra note 7.
    \213\ Further, NYSE Arca represents that it can obtain 
information about the activities of the Sponsor and its affiliates 
under the Exchange's listing rules. See Amendment No. 1, supra note 
7.
---------------------------------------------------------------------------

    More generally, based on the Exchange's representations, the 
Commission believes that the Exchange's surveillance procedures appear 
to be reasonably designed to permit the Exchange to monitor for, 
detect, and deter violations of Exchange rules and applicable federal 
securities laws and rules.\214\ In addition to all of the same 
surveillance procedures employed with respect to the trading of all 
other Commodity-Based Trust Shares, NYSE Arca states that a new 
product-specific review will be employed to monitor trading in the 
Shares to identify potential manipulative trading activity through the 
use of the creation and redemption process.\215\ The commenters have 
not identified any specific deficiency in the proposed procedures or 
provided any evidence that the Exchange's surveillance program has been 
ineffective with respect to trading in other Commodity-Based Trust 
Shares.
---------------------------------------------------------------------------

    \214\ The Commission has discussed above in Section III.D other 
reasons why it believes that the listing and trading of the Shares 
as proposed is unlikely to increase the likelihood of manipulation 
of the copper market and, correspondingly, of the price of the 
Shares.
    \215\ See Amendment No. 1, supra note 7.
---------------------------------------------------------------------------

F. Dissemination of Information About the Shares and Copper

    The Commission believes the proposal is reasonably designed to 
promote sufficient disclosure of information that may be necessary to 
price the Shares appropriately. Specifically, the Commission believes 
that dissemination of the NAV, IIV, and copper holdings information, as 
discussed above, will facilitate transparency with respect to the 
Shares and diminish the risk of manipulation or unfair informational 
advantage.\216\
---------------------------------------------------------------------------

    \216\ See supra notes 193-198 and accompanying text. The 
commenter asserts that, because the Trust will be valued using the 
LME Bid Price without taking into account locational premia, under 
certain circumstances, the NAV of the Trust may not be accurate. See 
V&F September 12 Letter, supra note 6, at 7-8. The commenter asserts 
that the values of LME-traded industrial metals are determined by 
their location, and that the LME Bid Price is the value of copper at 
the cheapest-to-deliver location. See id. The commenter predicts 
that, if the Trust accumulates all of the metal from LME warehouses 
in the cheapest-to-deliver location, then the cheapest-to-deliver 
location will change, and correspondingly the LME Bid Price will be 
based on a new location. See id. In that circumstance, the commenter 
argues, there may be a significant divergence between the NAV of the 
Trust and the actual value of the Trust's copper. See id. at 7-8.
    The Sponsor states that the Trust does not assign locational 
premia because any warrant, regardless of location, can be delivered 
at the LME Bid Price, and further asserts that this valuation method 
will allow an authorized participant to effectively reconcile its 
position in copper. See BlackRock Letter, supra note 6, at 9.
    The Commission believes that the use of the LME Bid Price to 
value the Trust's copper may lead to a divergence between the NAV of 
the Trust and the market value of the Trust's copper because the LME 
Bid Price is used to value the Trust's copper and the Trust's copper 
may not be in the cheapest-to-deliver location. The Commission does 
not expect any possible divergence to cause any problems with 
respect to trading in the Shares, and notes that the commenter did 
not assert it would. The Commission believes that the degree of 
divergence will be limited to the difference in the price of copper 
held by the Trust and the price of copper at the cheapest-to-deliver 
location. The Commission notes that the Trust will disclose on its 
Web site the location, warehouse identification number, lot number, 
net weight of the lot, and brand of each lot of copper it holds, as 
well as the order in which all lots will be delivered to redeeming 
authorized participants. See Amendment No. 2, supra note 9.
---------------------------------------------------------------------------

    Further, as noted above, quotation and last-sale information for 
the Shares will be available via the Consolidated Tape Association, and 
the Exchange will make available via the Consolidated Tape trading 
volume, closing prices, and NAV for the Shares from the previous 
day.\217\ Additionally, as discussed above, the Exchange has identified 
numerous sources of copper price information unconnected with the 
Exchange that are readily available to

[[Page 13741]]

investors.\218\ The Commission therefore believes that sufficient 
venues for obtaining reliable copper pricing information exist to allow 
investors in the Shares to adequately monitor the price of copper and 
compare it to the NAV of the Shares.
---------------------------------------------------------------------------

    \217\ See supra text accompanying notes 31-32.
    \218\ See Notice, supra note 3, 77 FR at 38358-59.
---------------------------------------------------------------------------

G. Listing and Trading of the Shares

    The Commission believes that the Exchange's proposed rules and 
procedures for the listing and trading of the Shares are consistent 
with the Act. For example, the Commission believes that the proposal is 
reasonably designed to prevent trading when a reasonable degree of 
transparency cannot be assured. As detailed above, NYSE Arca Equities 
Rules 7.34(a)(5) and 8.201(e)(2) respectively provide that: (1) If the 
Exchange becomes aware that the NAV is not being disseminated to all 
market participants at the same time, it will halt trading on the NYSE 
Marketplace until such time as the NAV is available to all market 
participants; \219\ and (2) the Exchange will consider suspension of 
trading if, after the initial 12-month period following commencement of 
trading: (a) the value of copper is no longer calculated or available 
on at least a 15-second delayed basis from a source unaffiliated with 
the Sponsor, Trust, or Custodian, or the Exchange stops providing a 
hyperlink on its Web site to any such unaffiliated source providing 
that value; or (b) if the IIV is no longer made available on at least a 
15-second delayed basis.\220\ In addition, the Exchange's general 
authority to halt trading because of market conditions or for reasons 
that, in the view of the Exchange, make trading in the Shares 
inadvisable, also will advance this objective. Further, trading in the 
Shares will be subject to NYSE Arca Equities Rule 7.12, the Exchange's 
circuit breaker rule, which governs trading halts caused by 
extraordinary market volatility.
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    \219\ See id. at 38359.
    \220\ Additionally, the Exchange represents that it may halt 
trading during the day in which an interruption to the dissemination 
of the IIV occurs. If the interruption persists past the trading day 
in which it occurred, the Exchange will halt trading no later than 
the beginning of the of the trading day following the interruption. 
See id.
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    Further, the Shares will be subject to Exchange rules governing the 
responsibilities of market makers and customer suitability 
requirements. In addition, the Shares will be subject to Exchange Rule 
8.201 for initial and continued listing of Shares.\221\ As discussed 
above,\222\ the Commission believes that the listing and delisting 
criteria for the Shares are expected to maintain a minimum level of 
liquidity and therefore minimize the potential for manipulation of the 
Shares. The Commission also believes that the Information Bulletin will 
adequately inform members and member organizations about the terms, 
characteristics, and risks of trading the Shares.
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    \221\ See id.
    \222\ See supra note 199 and accompanying text.
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H. Commission Findings

    After careful review, and for the reasons discussed in Sections 
III.A-G above, the Commission finds that the proposed rule change is 
consistent with the requirements of the Act, including Section 6 of the 
Act,\223\ and the rules and regulations thereunder applicable to a 
national securities exchange.\224\ In particular, the Commission finds 
that the proposed rule change is consistent with Section 6(b)(5) of the 
Act,\225\ which requires, among other things, that the rules of a 
national securities exchange be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, and to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest; with Section 6(b)(8) of the 
Act,\226\ which requires that the rules of a national securities 
exchange not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act; and with Section 
11A(a)(1)(C)(iii) of the Act,\227\ which sets forth Congress's finding 
that it is in the public interest and appropriate for the protection of 
investors to assure the availability to brokers, dealers, and investors 
of information with respect to quotations for and transactions in 
securities.\228\
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    \223\ 15 U.S.C. 78f.
    \224\ This approval order is based on all of the Exchange's 
representations.
    \225\ 15 U.S.C. 78f(b)(5).
    \226\ 15 U.S.C. 78f(b)(8).
    \227\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \228\ As noted above, quotation and last-sale information for 
the Shares will be available via the Consolidated Tape Association, 
and the Exchange will make available via the Consolidated Tape 
trading volume, closing prices, and NAV for the Shares from the 
previous day. See supra text accompanying notes 31-32.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendments No.1 
and No. 2 to the proposed rule change are consistent with the Act. 
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 rule-comments@sec.gov. Please include 
File Number SR-NYSEArca-2012-66 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSEArca-2012-66. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submissions, all subsequent amendments, all 
written statements with respect to the proposed rule changes that are 
filed with the Commission, and all written communications relating to 
the proposed rule changes between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filings also will be available 
for inspection and copying at the principal offices of the Exchanges. 
All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-NYSEArca-2012-
66 and should be submitted on or before March 21, 2013.

V. Accelerated Approval of Proposed Rule Change as Modified by 
Amendments No. 1 and No. 2

    As discussed above, the Exchange submitted Amendment No. 1 to make 
additional representations regarding the Exchange's surveillance 
program,\229\ and

[[Page 13742]]

submitted Amendment No. 2 to supplement representations regarding Web 
site disclosure of the Trust's copper holdings.\230\ The Commission 
believes these additional representations are, among other things, 
useful to help assure adequate information is available to the Exchange 
to support its monitoring of Exchange trading of the Shares in all 
trading sessions; to help the Exchange deter and detect violations of 
NYSE Arca rules and applicable federal securities laws; and to help 
assure adequate availability of information to support the arbitrage 
mechanism. Accordingly, the Commission finds good cause, pursuant to 
Section 19(b)(2) of the Act,\231\ for approving the proposed rule 
change, as modified by Amendments No. 1 and No. 2, prior to the 30th 
day after the date of publication of notice in the Federal Register.
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    \229\ See supra note 7.
    \230\ See supra note 9.
    \231\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\232\ that the proposed rule change (SR-NYSEArca-2012-66), as 
modified by Amendments No. 1 and No. 2, be, and hereby is, approved on 
an accelerated basis.
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    \232\ 15 U.S.C. 78s(b)(2).

    By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-04623 Filed 2-27-13; 8:45 am]
BILLING CODE 8011-01-P