
[Federal Register Volume 77, Number 245 (Thursday, December 20, 2012)]
[Notices]
[Pages 75464-75466]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-30646]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68439; File No. TP 11-10]


Order Granting Limited Exemptions From Exchange Act Rules 101 and 
102 of Regulation M to Shares of JPM XF Physical Copper Trust Pursuant 
to Exchange Act Rules 101(d) and 102(e)

December 14, 2012.
    By letter dated December 14, 2012 (the ``Letter''),\1\ as 
supplemented by conversations with the staff of the Division of Trading 
and Markets, counsel for J.P. Morgan Commodity ETF Services LLC 
(``Sponsor'') on behalf of the Sponsor, JPM XF Physical Copper Trust 
(``Trust''), and persons or entities engaging in transaction in the 
shares of the Trust requested that the Securities and Exchange 
Commission (``Commission'') issue an exemption from Rules 101 and 102 
of Regulation M in connection with secondary market transactions in the 
shares of the Trust, and the creation or redemption of shares of the 
Trust.\2\
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    \1\ See Letter from John Crowley to Josephine Tao (December 14, 
2012), re: Request of J.P. Morgan Commodity ETF Services LLC for 
Relief from Certain Provisions of Regulation M, available at: http://www.sec.gov/divisions/marketreg/mr-noaction.shtml.
    \2\ For additional information regarding the Trust please see 
the Order Approving a Proposed Rule Change to List and Trade Shares 
of the JPM XF Physical Copper Trust Pursuant to NYSE Arca Equities 
Rule 8.201, Securities Exchange Act Release No. 68440;----FR----
(``Approval Order'').
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    According to the Trust's registration statement, the Trust was 
formed as a Delaware statutory trust on October 15, 2010. The Trust, 
based on representations in the Letter, is a passive, unmanaged 
investment vehicle and will have no directors, officers, or employees. 
Additionally, the Letter represents that the Trust is an exchange-
traded investment vehicle that will hold only Grade A Copper in 
physical form. The Letter also states that each share of the Trust 
represents a fractional undivided interest in the net assets of the 
Trust (``Share''). The Trust's investment objective, according to the 
Letter, is for the value of the Shares to reflect, at any given time, 
the value of copper owned by the Trust less the Trust's expenses and 
liabilities at that time.
    The Letter contains the following representations:
     Shares of the Trust will trade on a national securities 
exchange.\3\
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    \3\ See also Approval Order, supra, note 1.
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     Shares will be issued and redeemed in basket-size 
aggregations (``Creation Units'') to registered broker-dealers or 
certain other persons that have entered into a participation agreement 
with the Trust and the Sponsor (``Authorized Participants'').
     Creation Units will be issued and redeemed daily in 
exchange for a specified amount of physical metal that represents a pro 
rata share of the metal then held in the Trust.
     The Sponsor does not expect the difference in price based 
on the locational premia to be significant.\4\
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    \4\ According to the Letter, the copper will be held in one or 
more warehouses in locations throughout the world. The value of 
copper depends in part on its location, i.e., copper stored in a 
location that is low in supply and high in demand carries a higher 
premium than copper that is stored in a location where supply is 
high and demand is low. To assist in valuing the Trust's copper, by 
9:00 a.m. EST, an independent valuation agent will provide the 
administrative agent (the administrative agent, which initially will 
by J.P. Morgan Treasury Securities Services, will administer various 
daily functions of the Trust (``Administrative Agent'')) the 
locational premia for the locations at which the Trust is permitted 
to hold copper. The locational premium for a warehouse location for 
a business day will be calculated as an amount expressed in U.S. 
dollars that is equal to the average value of copper per metric ton 
in such location minus the LME Settlement Price of copper on such 
business day. See Securities Exchange Act Release No. 66816 (April 
16, 2012); 77 FR 23772, 23779 (``Notice'').
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     The Sponsor believes that the copper selection 
protocol,\5\ the independent third-party valuation agent,\6\ and 
information transparency measures \7\ will cause the price of Shares in 
the secondary market to closely track the net asset value per Share of 
the Trust.
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    \5\ According to the Letter, the selection protocol is intended 
to provide a consistent and transparent method of selecting lots to 
satisfy redemption orders and calculating and paying expenses, by 
requiring the Administrative Agent to select lots in the following 
manner: (1) Lots will be selected first from the warehouse where it 
holds available copper that has the lowest locational premium at a 
particular time (i.e., the ``cheapest-to-deliver location''), and 
then from other warehouse locations successively based on a ranking 
of their respective locational premia from lowest to highest; (2) if 
there are multiple lots in the same warehouse location specified by 
the first step, lots in such warehouse location will be selected 
based on the date such lots were first delivered to the relevant 
account, with the earliest delivered lot being selected first; and 
(3) if there are multiple lots in the same warehouse location that 
were first delivered to the relevant account on the same date, lots 
will be selected based on the actual weight of the lot, with the lot 
having the lowest actual weight being selected first. For additional 
information, see Notice, supra, note 3, 77 FR at 23781-82.
    \6\ According to the Letter, the valuation agent, which is 
independent from and unaffiliated with the Sponsor, is responsible 
for providing the locational premium for each permitted warehouse 
location, which is used to calculate the Trust's net asset value, 
determine the cheapest-to-deliver location, and make other 
determinations for the Trust.
    \7\ According to the Letter, the Administrative Agent will 
provide full transparency on its Web site of the Trust's assets. The 
Sponsor anticipates that, through a combination of the use of the 
selection protocol and transparency of information, each Authorized 
Participant will be able to assess which lots of copper are likely 
to be delivered in connection with a redemption order by the 
Authorized Participant. Additionally, the Exchange will publish two 
intraday indicative values throughout the course of the day. These 
two intraday indicative values, discussed in subsequent bullets 
below, will provide Authorized Participants with an indication of 
the underlying value of the Trust's Shares during the trading day, 
on any day the Exchange is open for business.
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     The Trust will continuously redeem baskets of Shares at 
net asset value expressed as a pro rata portion of the weight of copper 
held by the Trust.
     The Sponsor states that it believes that, because 
Authorized Participants have full, transparent information about the 
Trust's copper, including the locational premium and the brand for each 
lot of copper held by the Trust and whether the brand of any such lot 
is or has ceased to be an Acceptable Delivery Brand,\8\ factors such as 
locational premia and de-registering of copper will not impair the 
price alignment process or the arbitrage mechanism.\9\
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    \8\ According to the Letter, the LME oversees the registration 
process for each refinery seeking to register its brand of copper as 
an acceptable delivery brand for LME registered transactions 
(``Acceptable Delivery Brand''). Any copper that is delivered to the 
Trust by an Authorized Participant must, at the time of delivery, be 
of an Acceptable Delivery Brand. If the LME de-registers a brand of 
copper that is held by the Trust, the Trust will use the de-branded 
copper to satisfy redemptions before using any other lots of copper, 
even if the de-branded copper is not held in the cheapest-to-deliver 
location.
    \9\ See supra notes 4 and 9.
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     NYSE Arca will calculate and disseminate, approximately 
every 15 seconds during the Exchange's core

[[Page 75465]]

trading session, two different intraday indicative values for the 
Shares: the First-Out IIV and the Liquidation IIV.\10\
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    \10\ The ``First-Out IIV'' is designed to facilitate arbitrage 
activity by authorized participants by indicating whether the Shares 
are trading at a discount or premium during the trading day. See 
Notice, supra, note 3, 77 FR at 23785. It represents, as of the time 
of such calculation, the hypothetical U.S. dollar value per Share of 
the copper that would need to be transferred to or from the Trust to 
create or redeem one Share included in a Creation Unit, assuming 
that copper in the cheapest-to-deliver location was used for such 
creation or redemption. See id. at 23783. The ``Liquidation IIV'' is 
an intraday indicative value that represents, as of the time of the 
calculation, the hypothetical U.S. dollar value per Share of all of 
the copper owned by the Trust divided by the number of Shares then 
outstanding. See id. at 23783. For a description of how the Exchange 
will calculate the First-Out IIV and the Liquidation IIV, see id. at 
23784-86.
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     Authorized Participants can generally expect to receive 
copper from the cheapest-to-deliver location whenever they redeem 
Creation Units of Shares and are expected to seek to create Creation 
Units of Shares by transferring copper from the cheapest-to-deliver 
location at which they have copper available.\11\
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    \11\ See Notice, supra, note 3, 77 FR at 23784.
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     Arbitrage activity by Authorized Participants is expected 
to result in the Shares trading within a limited range, with the lower 
end of that range approximating the first-out intraday indicative value 
and the higher end of that range approximating the value of copper in 
the cheapest-to-deliver location at which the Authorized Participants 
have copper available.\12\
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    \12\ Id. at 23785.
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Rule 101 of Regulation M

    Generally, Rule 101 of Regulation M is an anti-manipulation 
regulation that, subject to certain exemptions, prohibits any 
``distribution participant'' and its ``affiliated purchasers'' from 
bidding for, purchasing, or attempting to induce any person to bid for 
or purchase, any security which is the subject of a distribution until 
after the applicable restricted period, except as specifically 
permitted in the rule. Rule 100 of Regulation M defines 
``distribution'' to mean any offering of securities that is 
distinguished from ordinary trading transactions by the magnitude of 
the offering and the presence of special selling efforts and selling 
methods. The provisions of Rule 101 of Regulation M apply to 
underwriters, prospective underwriters, brokers, dealers, or other 
persons who have agreed to participate or are participating in a 
distribution of securities, and affiliated purchasers of such persons. 
Shares of the Trust are in a continuous distribution and, as such, the 
restricted period in which distribution participants and their 
affiliated purchasers are prohibited from bidding for, purchasing, or 
attempting to induce others to bid for or purchase extends 
indefinitely. As a result, absent an exemption from Rule 101 of 
Regulation M, the distribution participants would be prohibited from 
bidding for or purchasing Shares during the distribution without 
violating Rule 101 of Regulation M.
    On the basis of the representations and the facts presented in the 
Letter, particularly that the Trust will continuously redeem baskets of 
Shares at net asset value expressed as a pro rata portion of the weight 
of copper held by the Trust and that the secondary market price of 
Shares is expected to trade within a limited range with the lower end 
of that range approximating the first-out intraday indicative value and 
the higher end of that range approximating the value of copper in the 
cheapest-to-deliver location at which the Authorized Participants have 
copper available, the Commission finds that it is appropriate in the 
public interest, and is consistent with the protection of investors, to 
grant the Shares of the Trust a limited exemption from Rule 101 of 
Regulation M pursuant to paragraph (d) thereof,\13\ to permit persons 
participating in the distribution of Shares and their affiliated 
purchasers to bid for or purchase Shares during their participation in 
such distribution.\14\ In particular, the price alignment process and 
arbitrage mechanism, which are expected to align the price of the 
Shares in the secondary market to the copper held by the Trust, should 
mitigate the potential manipulation concerns that Rule 101 of 
Regulation M is designed to prevent. Accordingly, granting such relief 
to the Shares to permit persons participating in the distribution of 
Shares and their affiliated purchasers to bid for or purchase Shares 
during their participation in such distribution is appropriate in the 
public interest, and is consistent with the protection of investors.
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    \13\ Rule 101(d) of Regulation M specifies the Commission may 
grant an exemption from the provision of Rule 101, either 
unconditionally or on specified terms and conditions, to any 
transaction or class of transactions, or to any security or class of 
securities.
    \14\ The Commission, pursuant to delegated authority, has 
granted similar exemptive relief from Rule 101 to other exchange-
traded vehicles that hold only physical metal. See, e.g., Letters 
from James A. Brigagliano, Assistant Director, Division of Market 
Regulation, (i) to Kathleen Moriarty, Esq., Carter Ledyard & 
Milburn, dated November 17, 2004, with respect to the trading of 
StreetTRACKS Gold Trust, (ii) to David Yeres, dated January 27, 
2005, with respect to the trading of the iShares COMEX Gold Trust, 
and (iii) to David Yeres, dated April 27, 2006, with respect to the 
trading of iShares Silver Trust.
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Rule 102 of Regulation M

    Rule 102 of Regulation M prohibits issuers, selling security 
holders, or any affiliated purchaser of such persons from bidding for, 
purchasing, or attempting to induce any person to bid for or purchase a 
covered security \15\ during the applicable restricted period in 
connection with a distribution of securities effected by or on behalf 
of an issuer or selling security holder, except as specifically 
permitted in the rule. As a result, absent an exemption from Rule 102 
of Regulation M, the Shares could not be redeemed by the Trust without 
violating Rule 102 of Regulation M.
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    \15\ Covered security is defined as any security that is the 
subject of a distribution, or any reference security. Rule 100(b), 
17 CFR 242.100(b).
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    On the basis of the representations and the facts presented in the 
Letter, particularly that the Trust will continuously redeem baskets of 
Shares at net asset value expressed as a pro rata portion of the weight 
of copper held by the Trust and that the secondary market price of 
Shares is expected to be within a limited range with the lower end of 
that range approximating the first-out intraday indicative value and 
the higher end of that range approximating the value of copper in the 
cheapest-to-deliver location at which the Authorized Participants have 
copper available, the Commission finds that it is appropriate in the 
public interest, and is consistent with the protection of investors, to 
grant the Shares of the Trust a limited exemption from Rule 102 of 
Regulation M, pursuant to paragraph (e) thereof,\16\ to permit the 
Trust and any of its affiliated purchasers to redeem Shares during the 
distribution of the Shares.\17\ In particular, the price alignment 
process and arbitrage mechanism, which are expected to align the price 
of the Shares in the secondary market to the copper held by the Trust, 
should mitigate the potential manipulation concerns that Rule 102 of 
Regulation M is designed to prevent.

[[Page 75466]]

Accordingly, granting such relief to the Shares to permit the Trust and 
any of its affiliated purchasers to redeem Shares during the 
distribution of the Shares is appropriate in the public interest, and 
is consistent with the protection of investors.
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    \16\ Rule 102(e) specifies the Commission may grant an exemption 
from the provision of Rule 102, either unconditionally or on 
specified terms and conditions, to any transaction or class of 
transactions, or to any security or class of securities.
    \17\ The Commission, pursuant to delegated authority, has 
granted similar exemptive relief from Rule 102 to other exchange-
traded vehicles that hold only physical metal. See, e.g., Letters 
from James A. Brigagliano, Assistant Director, Division of Market 
Regulation, (i) to Kathleen Moriarty, Esq., Carter Ledyard & 
Milburn, dated November 17, 2004, with respect to the trading of 
StreetTRACKS Gold Trust, (ii) to David Yeres, dated January 27, 
2005, with respect to the trading of the iShares COMEX Gold Trust, 
and (iii) to David Yeres, dated April 27, 2006, with respect to the 
trading of iShares Silver Trust.
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Conclusion

    It is hereby ordered, pursuant to Rule 101(d) of Regulation M, 
that, based on the representations and facts presented in the Letter, 
the Shares of the Trust are exempt from the requirements of Rule 101 to 
permit persons participating in the distribution of Shares of the Trust 
and their affiliated purchasers to bid for or purchase such Shares 
during their participation in such distribution.
    It is further ordered, pursuant to Rule 102(e) of Regulation M, 
that, based on the representations and facts presented in the Letter, 
the Shares of the Trust are exempt from the requirements of Rule 102 to 
permit the Trust and any of its affiliated purchasers to redeem Shares 
of the Trust during the distribution of such Shares.
    This exemptive relief is subject to modification or revocation at 
any time the Commission determines that such action is necessary or 
appropriate in furtherance of the purposes of the Exchange Act. Persons 
participating in the distribution of Shares of the Trust shall 
discontinue creations and redemptions involving the Shares of the 
Trust, in the event that any material change occurs with respect to any 
of the facts or representations made by the Trust, the Sponsor, or its 
counsel. In addition, persons relying on this exemption are directed to 
the anti-fraud and anti-manipulation provisions of the Exchange Act, 
particularly Sections 9(a), 10(b), and Rule 10b-5 thereunder. 
Responsibility for compliance with these and any other applicable 
provisions of the federal securities laws and rules must rest with the 
persons relying on this exemption. This order does not represent the 
Commission views with respect to any other question that the proposed 
transactions may raise, including, but not limited to the adequacy of 
the disclosure concerning, and the applicability of other federal or 
state laws and rules to, the proposed transactions.

    By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-30646 Filed 12-19-12; 8:45 am]
BILLING CODE 8011-01-P


