Two firms that produce copper wire filed legal paperwork to appeal a Securities and Exchange Commission ruling late last year that cleared the way for J.P. Morgan to bring to market a physically backed copper ETF, again arguing that the new security could create price spikes by pulling crucial supplies off the market at a time when more copper is consumed globally than is produced.
The move by the two companies, Encore Wire Corp. and Southwire Co., has created a new delay in a regulatory process that began in October 2010 when the J.P. Morgan Physical Copper Shares ETF first went into registration. The SEC has taken its time ruling on the feasibility of the fund, but finally green-lighted the ETF Dec. 14 of last year saying the fund would track rather than drive copper prices.
“We think the SEC missed the evidence,” Robert Bernstein, a lawyer with Eaton ' Van Winkle LLP in New York, who is representing the two copper wire companies, said in an interview. In a “Petition For Review” dated Feb. 12, 2013, Bernstein asked the U.S. Court of Appeals, District of Columbia Circuit to vacate the SEC’s OK and thereby block the ETF.
Bernstein said his clients are concerned about two aspects of the proposed copper ETF that could tighten supplies through what was described in the paperwork as “an investor-financed squeeze of the market for LME grade copper for immediate delivery in the United States.” The risk is that such a squeeze could raise copper prices and therefore cut into the firms’ profit margins, Bernstein said.
Firstly, he said shareholders in the ETF don’t have a clear motivation to redeem their shares for physical copper should the price spike because they are hoping for the price of the copper to go up, so why would they sell, Bernstein asked.
Moreover, Bernstein argued, the redemption mechanism of the ETF that could in theory lead to more copper supplies coming onto the market is far too slow and cumbersome to actually serve any kind of safety-valve function in a tight copper marketplace.
“No one is planning an ETF in metals markets that are in surplus,” Bernstein said, highlighting what he said was general concern among consumers of copper.
Tempest In A Teapot?
Still, according to some ETF industry sources, all the arguments put forth by producers like Encore and Southwire are quite possibly nothing more than a tempest in a teapot.
John Hyland, chief investment officer at Oakland, Calif.-based United States Commodity Funds, a purveyor of the futures-based United States Copper Index Fund (CPER), is one such doubter.
Hyland reckons, in part, that it’s a leap of faith to assume the proposed J.P. Morgan ETF will get enough traction for any of the concerns underlying the latest petition to even become germane.
Indeed, a similar security listed on the London Stock Exchange by ETF Securities under the name ETFS Physical Copper ETF has barely garnered any assets since its launch in December 2010.
Meanwhile, another physical copper fund in registration in the United States, the iShares Copper Trust, has also been delayed by the SEC. In December, the commission put off a ruling it was set to make on the fund that month.
Officials at the SEC and at J.P. Morgan weren’t immediately available to comment on the latest delay.
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