The JP Morgan XF Physical Copper Trust has finally gotten the regulatory rubber stamp it has sought for more than two years, as market participants and regulators fretted over the impact a physical copper ETF could have on the supply and demand balances of the copper market.
In a statement released Friday, the SEC put to rest a lengthy regulatory debate that took more than two years to play out, arguing that the trust would not affect the copper market’s integrity, but rather would serve as a transparent and accessible alternative by which participants in the copper market can access or offload physical copper inventory and associated price risk.
“The Sponsor believes that the trust would move copper from one type of liquid stock to another type of liquid stock, rather than removing inventory from the market, and would track, rather than drive, copper prices,” the SEC statement read.
Indeed, the approval process was mired, among other things, by a complaint a New York law firm filed on behalf of copper merchants and fabricators arguing that the proposed trust would remove as much as 30 percent of the copper available for immediate delivery worldwide, creating an artificial squeeze.
Many who oppose the trust have suggested that a physically backed copper ETF would require the ETF trust to hold onto supplies that they say are crucial to the global economy today. The tighter supplies should also cause prices to rise.
J.P. Morgan’s copper trust is looking to register 6.18 million shares, or 61,800 metric tons, of copper. The trust will hold “grade A” copper in physical form, and will not trade in copper futures. The copper will be stored in LME-approved and non-LME approved warehouses in the Netherlands, Singapore, South Korea, China and the U.S.
But hoarding copper is something that the JP Morgan Trust cannot do, United States Commodity Funds’ CIO John Hyland recently told IndexUniverse in an interview . Hyland’s firm is behind the only other copper ETF in the market today, the futures-based United States Copper Index Fund (CPER).
“Every institutional player in copper can buy copper, store it in an LME warehouse, or store it in a non-LME warehouse, and refuse to sell it to anybody else, no matter what happens to the price,” Hyland said.
“That is how that market works. That is how basically all commodities work. You just hold onto it if you want, except for the proposed physical copper ETF. It would be the only participant who cannot hoard copper.”
On the contrary, Hyland makes the argument that a physical copper ETF would actually increase liquidity in the market, as investors would be able to trade the ETF.
The SEC’s latest move likely means that iShares’ planned physical copper ETF—a fund that has also been sitting in the regulatory pipeline since late 2010 —might also actually come to fruition.
However, both funds must be approved for listing by the exchange where they will have their primary listings.
The iShares Copper Trust would go head-to-head with J.P. Morgan’s planned ETF.
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