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


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SECURITIES AND EXCHANGE COMMISSION

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


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

August 8, 2012.

I. Introduction

    On June 19, 2012, NYSE Arca, Inc. (``Exchange'' or ``NYSE Arca'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
list and trade shares (``Shares'') of iShares Copper Trust (``Trust'') 
pursuant to NYSE Arca Equities Rule 8.201. The proposed rule change was 
published for comment in the Federal Register on June 27, 2012.\3\ The 
Commission received one comment letter on the proposed rule change.\4\
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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'').
    \4\ See letter from Robert B. Bernstein, Vandenberg & Feliu, LLP 
(``V&F''), to Elizabeth M. Murphy, Secretary, Commission, dated July 
18 2012 (``July 18 V&F Letter''). The July 18 V&F Letter is 
available at http://www.sec.gov/comments/sr-nysearca-2012-66/nysearca201266-1.pdf. V&F identified itself as a U.S. law firm that 
represents RK Capital LLC, an international copper merchant, and 
four end-users of copper: Southwire Company, Encore Wire 
Corporation, Luvata, and AmRod. V&F states that these companies 
collectively comprise about 50% of the copper fabricating capacity 
of the United States. See July 18 V&F Letter at 1.
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    This order institutes proceedings under Section 19(b)(2)(B) of the 
Act to determine whether to approve or disapprove the proposed rule 
change. The institution of proceedings does not indicate that the 
Commission has reached any conclusions with respect to any of the 
issues involved, nor does it mean that the Commission will ultimately 
disapprove the proposed rule change. Rather, as described in greater 
detail below, the Commission seeks and encourages interested persons to 
provide additional comment on the proposed rule change to inform the 
Commission's analysis of whether to approve or disapprove the proposed 
rule change.

II. Description of the Proposal

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

[[Page 48182]]

listing and trading of commodity-based trust shares. BlackRock Asset 
Management International Inc. is the sponsor of the Trust 
(``Sponsor''). The Bank of New York Mellon is the trustee of the Trust 
(``Trustee''). Metro International Trade Services LLC is the custodian 
of the Trust (``Custodian'').
    The Trust's investment objective is for the value of the Shares to 
reflect, at any given time, the value of the copper owned by the Trust 
at that time, less the Trust's expenses and liabilities at that time. 
The Trust would not be actively managed and would not engage in any 
activities designed to obtain a profit from, or to prevent losses 
caused by, changes in the price of copper.
    The Trust will create Shares only in exchange for copper that: (1) 
Meets the requirements to be delivered in settlement of copper futures 
contracts traded on the LME; and (2) is eligible to be placed on London 
Metal Exchange (``LME'') warrant at the time it is delivered to the 
Trust.\5\ The Trust expects to create and redeem Shares on a continuous 
basis but only with authorized participants in blocks of five or more 
baskets of 2,500 Shares each.\6\ Unless otherwise instructed by the 
Trustee, no copper held by the Custodian on behalf of the Trust may be 
on LME warrant.\7\ The Custodian may keep the Trust's copper at 
locations within or outside the United States that are agreed from time 
to time by the Custodian and the Trustee. As of the date of the 
Registration Statement,\8\ the Custodian is authorized to hold copper 
owned by the Trust at warehouses located in: East Chicago, Indiana; 
Mobile, Alabama; New Orleans, Louisiana; Saint Louis, Missouri; Hull, 
England; Liverpool, England; Rotterdam, Netherlands; and Antwerp, 
Belgium (collectively, ``Approved Warehouses''). Unless otherwise 
agreed in writing by the Trustee, each of the warehouses where the 
Trust's copper will be stored must be LME-approved at the time copper 
is delivered to the Custodian for storage in such warehouse.
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    \5\ See Notice, supra note 3, 77 FR at 38356.
    \6\ See id.
    \7\ See id.
    \8\ Pre-Effective Amendment No. 4 to Form S-1 for iShares Copper 
Trust, filed with the Commission on September 2, 2011 (No. 333-
170131) (``Registration Statement'').
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    The net asset value (``NAV'') of the Trust will be calculated as 
promptly as practicable after 4:00 p.m. EST on each business day. The 
Trustee will value the Trust's copper at that day's announced LME Bid 
Price.\9\ If there is no announced LME Bid Price on a business day, the 
Trustee will be authorized to use the most recently announced LME Bid 
Price unless the Sponsor determines that such price is inappropriate as 
a basis for valuation.\10\
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    \9\ The ``LME Bid Price'' is announced by the LME at 1:20 p.m. 
London Time and represents the price that a buyer is willing to pay 
to receive a warrant in any warehouse within the LME system. See 
Notice, supra note 3, 77 FR at 38356 n. 25.
    \10\ See id. at 38358.
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    NYSE Arca indicates that it will require that a minimum of 100,000 
Shares be outstanding at the start of trading,\11\ which represents 
1,000 metric tons of copper. The Trust seeks to register 12,120,000 
Shares,\12\ which represents 121,200 metric tons of copper.
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    \11\ See id. at 38359.
    \12\ See Registration Statement, supra note 8.
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    The Exchange states that it intends to utilize appropriate 
surveillance procedures applicable to derivative products, including 
commodity-based trust shares, to monitor trading in the Shares, and 
represents that such procedures will be adequate to properly monitor 
Exchange trading of the Shares in all trading sessions and to deter and 
detect violations of Exchange rules and applicable federal securities 
laws.\13\ The Exchange further represents that all trading in the 
Shares will be subject to applicable surveillance procedures.\14\ In 
discussing its ability to obtain information relevant to trading of the 
Shares on its facilities, the Exchange states that it is able to obtain 
information: (1) Regarding trading in physical copper, the Shares, and 
other copper derivatives by ETP Holders acting as registered market 
makers, pursuant to NYSE Arca Equities Rule 8.201(g); (2) from the LME, 
with which the Exchange has a comprehensive surveillance sharing 
agreement that applies with respect to trading in copper and copper 
derivatives; and (3) via the Intermarket Surveillance Group (``ISG'') 
from other exchanges who are members of the ISG, of which CME Group, 
Inc., which includes Commodity Exchange, Inc. (``COMEX''), is a 
member.\15\
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    \13\ See Notice, supra note 3, 77 FR at 38360.
    \14\ See id.
    \15\ See id.
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    The Notice and the Registration Statement include additional 
information regarding: The Trust; the Shares; the Trust's investment 
objectives, strategies, policies, and restrictions; fees and expenses; 
creation and redemption of Shares; the physical copper market; 
availability of information; trading rules and halts; and surveillance 
procedures.\16\
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    \16\ See Notice and Registration Statement, supra notes 3 and 8, 
respectively.
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III. Summary of V&F's Comments

    V&F opposes the proposed rule change.\17\ As discussed in greater 
detail below, V&F states its belief that the issuance by the Trust of 
all of the Shares covered by the Registration Statement within a short 
period of time would result in: (1) A material reduction in the 
immediately available supply of global copper; (2) increased volatility 
in the price of copper, which would in turn significantly harm the U.S. 
economy; and (3) a destabilization of the physical copper market that 
would make it more susceptible to manipulation.
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    \17\ The Commenter also opposes a separate pending proposed rule 
change by NYSE Arca to list and trade shares of the JPM Copper Trust 
(``JPM Copper Trust Proposal''). See generally Securities Exchange 
Act Release No. 67470 (July 19, 2012), 77 FR 43620 (July 25, 2012). 
In the July 18 V&F Letter, V&F incorporated by reference a letter it 
submitted in opposition to the JPM Copper Trust Proposal, which was 
received by the Commission on May 9, 2012 (``May 9 V&F Letter''). 
See July 18 V&F Letter, supra note 4, at 5. The May 9 V&F Letter is 
available at http://www.sec.gov/comments/sr-nysearca-2012-28/nysearca201228.shtml. V&F also attached to the July 18 V&F Letter 
(1) another letter dated July 13, 2012 that it submitted in 
opposition to the JPM Copper Trust Proposal (``July 13 V&F 
Letter''); and (2) a letter from U.S. Senator Carl Levin dated July 
16, 2012 submitted in opposition to the JPM Copper Trust Proposal 
(``Senator Levin Letter''). See id. The July 13 V&F Letter and the 
Senator Levin Letter are available, along with the July 18 V&F 
Letter, at http://www.sec.gov/comments/sr-nysearca-2012-66/nysearca201266-1.pdf. Additionally, the July 13 V&F Letter and the 
Senator Levin Letter are available at http://www.sec.gov/comments/sr-nysearca-2012-28/nysearca201228-5.pdf and http://www.sec.gov/comments/sr-nysearca-2012-28/nysearca201228-6.pdf, respectively.
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A. Adverse Copper Market Impact

1. Impact on Supply of Copper Available for Immediate Delivery
    V&F states that almost all of the refined copper produced annually 
worldwide is subject to long-term delivery contracts with copper 
fabricating companies, and that at any given time, there is only a 
limited supply of copper available for immediately delivery.\18\ In 
particular, according to V&F, most American copper fabricators enter 
into long-term supply contracts for ``about 85% of their annual 
requirements.'' \19\ V&F states that U.S. copper fabricators depend on 
the market for copper available for immediate delivery to ``protect 
against the risk of reductions in demand for product without having to 
incur the added expense of storing inventory they cannot use.'' \20\
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    \18\ See July 18 V&F Letter, supra note 4, at 1.
    \19\ Id. at 4.
    \20\ Id. at 4-5. Additionally, V&F states that copper stored at 
LME warehouses usually is deposited there by producers with excess 
supply or by copper merchants looking for purchasers and is sold to 
traders seeking to close out short positions or to fabricators in 
sudden need of additional supply. See May 9 V&F Letter, supra note 
17, at 3.

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[[Page 48183]]

    V&F believes that the only refined copper generally available for 
immediate delivery is the copper in LME and COMEX warehouses.\21\ V&F 
states that, at present, there is only approximately 240,000 metric 
tons of copper in LME warehouses worldwide, and an additional 60,000 
metric tons of copper in COMEX warehouses in the United States, or 
about 290,000 total metric tons of copper available for immediate 
delivery.\22\ V&F states that as much as 121,200 metric tons of 
immediately available copper would be removed from the market if the 
Trust sells all of the Shares it seeks to register pursuant to the 
Registration Statement.\23\ Taking into account the sale of all of the 
shares of the JPM Copper Trust, another proposed commodity-based 
exchange traded product (``CB-ETP'') that would hold physical 
copper,\24\ V&F states that as much as 183,000 metric tons, or 63%, of 
immediately available copper would be removed from the market.\25\
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    \21\ See July 18 V&F Letter, supra note 4, at 1.
    \22\ See id.
    \23\ See id.
    \24\ See supra note 17. See also Securities and Exchange Act 
Release No. 66816 (April 16, 2012), 77 FR 23772 (April 20, 2012) 
(SR-NYSEArca-2012-28) (notice of the JPM Copper Trust Proposal) 
(``JPM Notice''). Recently, the Commission instituted proceedings to 
determine whether to approve or disapprove the JPM Copper Trust 
Proposal. See Securities and Exchange Act Release No. 67470, supra 
note 17. The Trust and the JPM Copper Trust are referred to 
collectively as the ``Copper Trusts.''
    \25\ See July 18 V&F Letter, supra note 4, at 1. The Senator 
Levin Letter, which V&F attached to the July 18 V&F Letter, states 
that, if the Commission approves the listing and trading of the 
shares of the Copper Trusts, the trusts would hold approximately 34% 
of the copper stocks available for immediate delivery and would 
remove from the U.S. market over 55% of the available copper. See 
Senator Levin Letter, supra note 17, at 5-6.
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    V&F also expects that much of the copper used to fund the Trust 
will come from the immediately available supply in the U.S., stating:

    What is more, these effects are, as a practical matter, most 
likely to be felt most directly in the United States. The reason is 
that, as with the JPM offering, the copper that is cheapest to 
acquire will most likely be copper on warrant in United States 
warehouses. This is because, for the most part, the cheapest 
location premiums for copper on warrant is from copper in LME 
warehouses in the United States. The ``Authorized Participants,'' 
like Goldman Sachs, who will be authorized to acquire copper for the 
BlackRock Trust will want to acquire copper at the cheapest location 
premiums possible in order for the price of ETF shares to be issued 
in exchange for the copper to mirror as closely as possible, the 
price per metric ton of copper on the LME. Thus, depletion of copper 
from the LME warehouses will most likely be felt the hardest in the 
United States and, once copper from the LME warehouses is depleted, 
copper from the Comex warehouses will be depleted as well, as copper 
there is moved to LME warehouses in order to take advantage of 
higher prices.\26\
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    \26\ See July 18 V&F Letter, supra note 4, at 4.

V&F further states that the collective effect of the Copper Trusts 
would be ``far-reaching and potentially devastating to the U.S. and 
world economies,'' and could cause ``shortages of copper, higher prices 
to consumers, and increased volatility.'' \27\
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    \27\ May 9 V&F Letter, supra note 17, at 10. The Senator Levin 
Letter, which V&F attached to the July 18 V&F Letter, asserts that 
there is ample evidence that the potentially smaller JPM Copper 
Trust would disrupt the supply of copper by removing from the market 
a substantial percentage of the copper available for immediate 
delivery. See Senator Levin Letter, supra note 17, at 1.

    V&F asserts that the supply of copper generally is inelastic and 
that supply, therefore, will not increase fast enough to account for 
the increased demand from the creation and growth of the Trust.\28\ V&F 
further states that U.S. producers do not have surplus product to 
deliver and therefore asserts that, once copper stored in warehouses 
disappears, it likely will not be replenished any time soon.\29\
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    \28\ See May 9 V&F Letter, supra note 17, at 5 (``[I]t is 
difficult for copper producers to increase supply, sometimes taking 
15 years or longer before a new mine is opened up, and even in areas 
where copper is considered plentiful, political instability can keep 
a mine from producing''). Further, V&F states that the consensus 
among experts is that copper is in deficit, has been in deficit for 
the past three years, and is expected to remain in deficit for at 
least the next couple of years. See id. at 3. The Senator Levin 
Letter, which V&F attached to the July 18 V&F Letter, also states 
that the copper market is inelastic. See Senator Levin Letter, supra 
note 17, at 3.
    \29\ May 9 V&F Letter, supra note 17, at 5.
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    V&F states that the Registration Statement ``tries to convey the 
false impression that because there is copper tonnage outside of LME 
and Comex warehouses, such copper must therefore be available for [the 
Trust] to acquire.''\30\ V&F states that the only copper eligible for 
Share creation is copper already under LME warrant or stored in COMEX 
warehouses,\31\ and that all other eligible copper is unavailable 
because it is: (1) Already part of the supply chain and subject to 
long-term contracts between producers and consumers; (2) held in bonded 
warehouses in China and destined for the Chinese market; \32\ or (3) 
held as strategic reserves by the governments of China and South 
Korea.\33\
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    \30\ July 18 V&F Letter, supra note 4, at 2.
    \31\ See id. See also Senator Levin Letter, supra note 17, at 5 
(``[I]t appears that most of the remaining copper stocks available 
for immediate delivery are on the LME and [COMEX]'').
    \32\ V&F asserts such copper is delivered only rarely to LME 
warehouses in Asia. See July 18 V&F Letter, supra note 4, at 2.
    \33\ See id.
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    V&F also believes that investors' ability to redeem Shares for the 
Trust's physical copper would not mitigate the impact of removing 
substantial quantities of copper from the market.\34\ According to V&F, 
most investors in a copper-backed CB-ETP would not have any real 
economic incentive to redeem their Shares because: (1) They would 
benefit from a rise in the price of copper; and (2) investors seeking 
to recognize their profits likely would sell their Shares rather than 
redeeming them because redeeming them would require assuming delivery 
risk.\35\
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    \34\ See May 9 V&F Letter, supra note 17, at 5.
    \35\ See id. V&F believes that it is unlikely that fabricators 
would use Shares to manage their inventory because doing so: (1) 
Would add cost and risk to fabricators who otherwise would simply 
purchase available stocks from LME warehouses; (2) may not have any 
appreciable effect on price or supply in a rising market with tight 
supply; and (3) would be an inefficient and perhaps impracticable 
way of obtaining copper because the copper delivered by the Trust 
may be warehoused in an unhelpful location (e.g., a fabricator in 
Alabama may need copper in New Orleans, not Shanghai) or of an 
unacceptable brand or quality. See id. at 5-6.
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2. Impact on Copper Prices
    According to V&F, removing large amounts of copper from LME and 
COMEX warehouses would disrupt the supply of copper available for 
immediate delivery and thereby cause a substantial rise in near-term 
copper prices.\36\ V&F argues that this also would cause an immediate 
spike in the cash-to-three-month spread price of copper, as near-term 
prices for delivery accelerate compared to prices for delivery later in 
time.\37\ V&F is concerned that manufacturers and fabricators that rely 
on the supply of copper available in LME warehouses would be forced to 
pay substantially higher prices in the short term, and, in turn, 
manufacturers and fabricators would pass these price increases on to 
their customers.\38\
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    \36\ See id. at 5.
    \37\ See id.
    \38\ See id. See also July 18 V&F Letter, supra note 4, at 4 
(``The principal victims will in the first instance be United States 
consumers who typically rely on supplies of copper for immediate 
delivery to augment their long-term supply. These fabricators will 
not only be forced to pay higher prices, and incur the risk of price 
volatility once prices collapse, but there may be periods of time 
when those who can least afford it will be unable to get supply.'')
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    According to V&F, price increases both for copper and copper 
products will be especially dramatic in the U.S., where copper 
currently is relatively

[[Page 48184]]

inexpensive.\39\ V&F states that U.S. copper fabricators will be forced 
to pay more for copper and in some instances may not be able to 
purchase the copper they need.\40\ According to V&F:
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    \39\ See supra note 26 and accompanying text.
    \40\ See July 18 V&F Letter, supra note 4, at 4-5.

[m]anufacturers and fabricators will have to pass these increases in 
price on to their customers, and because it is the U.S. supplies 
that will be hit the hardest, it will be U.S. consumers that will be 
hit the hardest. Everything that requires copper, including copper 
pipes in new homes, to copper wiring for electricity, to the copper 
used in the air conditioning units and also in automotive wiring, 
will all increase in price.'' \41\
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    \41\ See May 9 V&F Letter, supra note 17, at 5.

V&F believes that the ``chief beneficiary'' of a tighter copper supply 
in the U.S. will likely be competitors in China, because Chinese 
manufacturers will have the copper feedstock on hand to produce copper 
rod, tubing, and wire, while at least some of their American 
counterparts will not.\42\
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    \42\ See July 18 V&F Letter, supra note 4, at 5. V&F also states 
that the launch of a copper-backed ETF is likely to upset the 
delicate balance of copper supplied to the United States, with 
potentially devastating consequences economically across a wide 
spectrum of industries. See May 9 V&F Letter, supra note 17, at 3.

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

a very enthusiastic reception of the Shares by the market, or the 
proliferation of similar investment vehicles that issue shares 
backed by physical copper, would result in purchases of copper for 
deposit into the trust or such similar investment vehicles that 
could be large enough to result in an increase in the price of 
physical copper. If that were the case, the price of the Shares 
would be expected to reflect that increase.\43\
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    \43\ See July 18 V&F Letter, supra note 4, at 3-4.

V&F also states that, because the potential size of the Trust is large 
relative to the size of the market for copper available for immediate 
delivery, even modest investor demand for the Shares could place upward 
pressure on the price of copper.\44\
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    \44\ See July 13 V&F Letter, supra note 17, at 8-9.

    V&F characterizes the current physical copper market as volatile, 
and believes that the successful creation and growth of the Trust would 
create a bubble, and the bursting of the bubble would result in 
increased price volatility in the physical copper market.\45\ V&F 
states that investors in a copper CB-ETP would benefit immediately from 
any increase in the price of copper because the more copper removed 
from the market to satisfy the demand for the copper CB-ETP, the higher 
the price not only of copper, but of the copper CB-ETP itself.\46\ V&F 
further believes that investors in the Trust would be able to measure 
how much impact their collective removal of copper from the supply 
available for immediate delivery would have on copper prices each day, 
and could adjust their purchasing strategies accordingly.\47\
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    \45\ See May 9 V&F Letter, supra note 17, at 2, 9.
    \46\ See id. at 5.
    \47\ See id. at 9. V&F therefore questions whether the increased 
market transparency that the Exchange asserts will result from the 
formation and operation of the Trust (see Notice, supra note 3, 77 
FR at 38361) will be in the public interest. See May 9 V&F Letter, 
supra note 17, at 10.
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    V&F states that the copper bubble will be no different than others, 
predicting that, as investor demand for this product wanes, the bubble 
will burst, leaving in its wake a glut of physical copper that the 
Trust will be forced to dump on the market, causing prices to plummet, 
and leaving in its wake unsuspecting investors who will have lost the 
value of their investment.\48\ In describing why the bubble it predicts 
will burst, V&F states that, with
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    \48\ See May 9 V&F Letter, supra note 17, at 2.

the risk of an ETF removing indefinitely all or substantially all of 
the copper available for immediate delivery, the risk of price 
volatility becomes enormous. This is because the greater amount of 
copper artificially kept off-the-market, the greater the chance that 
investors will eventually no longer keep propping up the price with 
further purchases, and the greater the likelihood that the bubble 
will burst, thus flooding the market with surplus copper, and 
severely depressing the price.\49\
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    \49\ Id. at 5. The Senator Levin Letter, which V&F attached to 
the July 18 V&F Letter, also makes statements about the potential 
effect of the JPM Copper Trust, stating that the ``supply disruption 
is likely to affect the cash and futures market for copper, 
increasing volatility and driving up [the share] price to create a 
bubble and burst cycle.'' See Senator Levin Letter, supra note 17, 
at 1.
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3. Increased Likelihood of Copper Market Manipulation
    V&F asserts generally that the tightened supply of copper it 
believes would be caused by fully funding the Trust would render the 
physical copper market more susceptible to manipulation.\50\ V&F also 
states that copper CB-ETPs such as the Copper Trusts ``risk endangering 
the price discovery functions of the LME and Comex'' because they would 
drawdown and remove from the market of most of the copper in LME and 
COMEX warehouses.\51\
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    \50\ See May 9 V&F Letter, supra note 17, at 1, 10.
    \51\ July 18 V&F Letter, supra note 4, at 4.
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    According to V&F, the Trust ``is unlike any other metal ETF 
currently listed on the Exchange and would allow speculators in the 
guise of purchasers of shares to create a squeeze on the market.''\52\ 
Therefore, V&F concludes that the ``proposed rule change is therefore 
inconsistent with Section 6(b)(5) of the Securities Exchange Act of 
1934, which requires that rules be designed to prevent manipulative 
acts and protect investors and the public interest.''\53\
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    \52\ Id. at 5.
    \53\ See id. The Senator Levin Letter, which V&F attached to the 
July 18 V&F Letter, also states that the JPM Copper Trust may 
encourage manipulative acts by allowing ``speculators to squeeze or 
corner the market in copper.'' Senator Levin Letter, supra note 17, 
at 7. According to Senator Levin, market participants could use the 
shares to remove copper from the available supply with the intent to 
artificially inflate the price of copper, and this activity would go 
undetected by the LME because CB-ETPs currently are not subject to 
any form of commodity regulations. Id. Senator Levin states that, by 
holding physical copper rather than LME warrants, the Trust can 
control more of the available supply of copper without triggering 
LME reporting rules. Id. Senator Levin further believes that 
creating this market condition would be inconsistent with the 
requirements in Section 6(b)(5) of the Act that exchange rules be 
designed to prevent manipulative acts and protect investors and the 
public interest. Id.
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    Finally, V&F questions whether NYSE Arca's surveillance procedures 
are adequate to prevent fraudulent and manipulative trading in shares 
of the JPM Trust.\54\
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    \54\ See May 9 V&F Letter, supra note 17, at 10. According to 
V&F, NYSE Arca's surveillance procedures are not adequate because 
they are the kind of garden-variety measures that are always in 
place to prevent collusion and other forms of manipulation by 
traders. See id.
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B. Comparison to Other Commodity-Based Trusts

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

[[Page 48185]]

copper generally is not held as an investment, but rather is used 
exclusively for industrial purposes,\57\ with the annual demand 
generally exceeding the available supply.\58\
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    \55\ July 18 V&F Letter, supra note 4, at 2.
    \56\ See May 9 V&F Letter, supra note 17, at 2. V&F states that, 
unlike copper, there is enough of a supply of platinum and palladium 
(which are used for both industrial and investment purposes) 
available in storage and being produced that the introduction of CB-
ETPs backed by these metals did not cause the kind of disruption to 
the market that a copper-backed CB-ETPs would cause. See July 13 V&F 
Letter, supra note 17, at 11. Specifically, V&F states that: (1) In 
recent years, there has been a surplus in palladium due to the 
Russian government's sell-off of its stockpile; (2) there is about a 
year's supply of platinum reserves above ground; and (3) there is 
only a 1-2 week supply of copper available on the LME. See id. 
Similarly, the Senator Levin Letter, which V&F attached to the July 
18 V&F Letter, also states that gold, silver, platinum, and 
palladium are substantially different than copper because these four 
metals are the only precious metals that are currently treated as 
world currencies and commonly held for investment purposes, and as a 
result there are substantial existing supplies of these metals that 
could be acquired to back an CB-ETPs without affecting the world 
market price in these metals. See Senator Levin Letter, supra note 
17, at 6-7.
    \57\ The Senator Levin Letter, which V&F attached to the July 18 
V&F Letter, states that copper is not currently held for investment 
purposes because it is very expensive to store and difficult to 
transport, and there is not the same existing supply of copper for 
the Trust to acquire to back its CB-ETP, and concludes that holding 
copper for investment purposes will have a significantly greater 
impact on the copper market than CB-ETPs holding platinum, 
palladium, silver, or gold had on their respective markets and the 
broader economy. See Senator Levin Letter, supra note 17, at 7.
    \58\ See May 9 V&F Letter, supra note 17, at 2-3.
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IV. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2012-66 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \59\ to determine whether this proposed rule 
change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change. As noted above, the 
institution of proceedings does not indicate that the Commission has 
reached any conclusions with respect to any of the issues involved. 
Rather, as described in greater detail below, the Commission seeks and 
encourages interested persons to provide additional comment on the 
proposed rule change to inform the Commission's analysis of whether to 
approve or disapprove the proposed rule change.
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    \59\ 15 U.S.C. 78s(b)(2)(B). Section 19(b)(2)(B) of the Act also 
provides that proceedings to determine whether to disapprove a 
proposed rule change must be concluded within 180 days of the date 
of publication of notice of the filing of the proposed rule change. 
Id. The time for conclusion of the proceedings may be extended for 
up to 60 days if the Commission finds good cause for such extension 
and publishes its reasons for so finding. Id.
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    Pursuant to Section 19(b)(2)(B) of the Act,\60\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission believes that questions remain about whether the 
proposed rule change is consistent with the requirements of Section 
6(b)(5) of the Act,\61\ which requires that the rules of an exchange be 
designed, among other things, to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
to remove impediments to and perfect the mechanism of a free and open 
market and a national market system and, in general, to protect 
investors and the public interest.
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    \60\ Id.
    \61\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    As discussed above, the Commission received one comment letter 
opposing the proposed rule change. V&F asserts that the successful 
creation of the Trust would materially reduce the supply of copper 
available for immediate delivery, which would increase the price of 
copper and volatility in the copper market, and, in turn, would harm 
the U.S. economy.\62\ In addition, V&F argues that, by decreasing the 
amount of copper available for immediate delivery, the Trust will make 
the copper market more susceptible to manipulation.\63\ V&F further 
believes the Exchange's surveillance procedures are inadequate to 
prevent fraudulent and manipulative trading in the Shares.\64\
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    \62\ See supra Section III.A.1-2.
    \63\ See supra Section III.A.3.
    \64\ See supra note 54 and accompanying text.
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    In light of the comments received, the Commission is soliciting 
further comments on the proposed rule change, including comments 
regarding the issues already commented upon.

V. Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
concerns identified above, as well as any others they may have 
regarding the proposed rule change. In particular, the Commission 
invites the written views of interested persons concerning whether the 
proposed rule change is consistent with Section 6(b)(5) or any other 
provision of the Act, or the rules and regulations thereunder. The 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\65\
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    \65\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views and 
arguments regarding whether the proposed rule change should be 
disapproved by September 12, 2012. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
September 27, 2012.
    The Commission asks that commenters address the sufficiency and 
merit of the proposed rule change and the comments received, in 
addition to any other comments they may wish to submit about the 
proposed rule change. The Commission requests that commenters support 
their responses to the questions below with empirical data sufficient 
to inform the Commission's decision making. In particular, the 
Commission seeks comment on the following:
    1. In light of the comments received, the Commission is soliciting 
further comments regarding copper usage and supply trends. For example:
    [cir] What was the world mine production capacity in each of the 
past 10 years? What data is available regarding projected world mine 
production over the next 3 to 5 years? What factors impact the ability 
to increase or decrease mine production?
    [cir] What was the refined production in each of the past 10 years? 
How much of the refined production was from primary and secondary 
sources? What was the world refinery capacity in each of the past 10 
years? What data is available regarding projected refined production 
over the next 3 to 5 years? What factors impact the ability to increase 
or decrease refinery production?
    [cir] What was the world refined usage in each of the past 10 
years? What data is available regarding projected usage over the next 3 
to 5 years?
    [cir] How much copper has been held for investment purposes over 
the past 10 years? How much of this copper was taken off LME warrant? 
How much of this copper has been eligible to be placed on LME warrant?
    2. According to the International Copper Study Group (``ICSG'), 
world refined usage of copper exceeded world refined production by 
approximately 417,000 tons in 2010 and 231,000 tons in 2011, and world 
refined stocks decreased by 161,000 tons in 2010 and increased by 
13,000 tons in 2011.\66\ What factors account for refined stocks 
decreasing less than the deficit amount (or even increasing) in 2010 
and 2011?

[[Page 48186]]

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

    \66\ Press Release, ICSG, Copper: Preliminary Data for February 
2012 (June 20, 2012), available at http://www.icsg.org/index.php?option=com_content&task=view&id=63&Itemid=64.
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    3. V&F states that the Trust and the proposed JPM Copper Trust,\67\ 
collectively, will remove from the market a substantial percentage of 
the copper available for immediate delivery.\68\ According to V&F, the 
Copper Trusts would remove 63% of the copper currently held in LME and 
COMEX warehouses.\69\ V&F states that the collective effect of the 
Copper Trusts would be ``far-reaching and potentially devastating to 
the U.S. and world economies,'' including ``shortages of copper, higher 
prices to consumers, and increased volatility.'' \70\ Do commenters 
agree or disagree with these statements? If so, why or why not? For 
example:
---------------------------------------------------------------------------

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

    [cir] Do commenters believe creation of the Trust will have an 
impact on the supply of copper? If so, what will that impact be? If 
not, why not?
    [cir] How does a change in the supply of copper impact the price of 
copper? To what extent do copper stocks need to be reduced or increased 
to impact the price of copper?
    [cir] To what extent is the LME Bid Price affected by the amount of 
copper on LME warrant? To what extent must copper on LME warrant be 
reduced to impact the LME Bid Price? To what extent, if at all, is the 
LME Bid Price affected by the supply of copper ineligible to be placed 
on LME warrant?
    [cir] How does a change in the supply of copper impact volatility 
in the physical copper and copper derivatives markets?
    [cir] Is there empirical evidence that creation of the Trust will 
impact copper prices and volatility? What impact, if any, will creation 
of the Trust have on the US economy?
    4. V&F states that Shares would be created by removing copper from 
LME and COMEX warehouses in the United States,\71\ thus driving up the 
cost of copper particularly in the United States.\72\ According to V&F, 
correspondingly:
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    \71\ V&F believes this to be true because it states that the 
copper that is cheapest to deliver to the Trust will most likely be 
on warrant in United States warehouses. See July 18 V&F Letter, 
supra note 4, at 4.
    \72\ See id. (``[D]epletion of copper from the LME warehouses 
will most likely be felt the hardest in the United States and, once 
copper from the LME warehouses is depleted, copper from the Comex 
warehouses will be depleted as well, as copper there is moved to LME 
warehouses in order to take advantage of higher prices'').

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

    \73\ See id.

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

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

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

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

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

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

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

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

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

[[Page 48187]]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (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.


[[Page 48188]]


All submissions should refer to File Number SR-NYSEArca-2012-66. These 
file numbers should be included on the subject line if email is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for Web site 
viewing and printing in the Commission's Public Reference Room, 100 F 
Street NE., Washington, DC 20549, on official business days between the 
hours of 10:00 a.m. and 3:00 p.m. Copies of such filings also will be 
available for inspection and copying at the principal office of the 
Exchanges. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
NYSEArca-2012-66 and should be submitted on or before September 12, 
2012. Rebuttal comments should be submitted by September 27, 2012.

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

    \89\ 17 CFR 200.30-3(a)(57).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-19790 Filed 8-10-12; 8:45 am]
BILLING CODE 8011-01-P


