* SEC ruling ‘arbitrary and capricious’ – letter
* Takes fabricators step closer to legal challenge
* JPM’s commodities chief met with SEC a week before
approval
* SEC’s ruling on BlackRock due Feb. 22
Jan 10 (Reuters) – U.S. copper users criticized U.S.
regulators as “arbitrary and capricious” and requested they
reverse their ruling in favor of JPMorgan Chase & Co’s
controversial plan for a copper exchange-traded fund.
The letter, filed with the U.S. Securities and Exchange
Commission by a group representing half the U.S. demand for
copper, could delay the ETF launch further and be the last step
before a court challenge of the SEC’s ruling.
The fabricators in their Jan. 9 letter said the SEC had not
presented enough evidence to show the fund would not distort
supply and prices of the metal used widely in plumbing and
cooling systems.
“It appears the commission categorically rejected all of the
substantial evidence presented as to the catastrophic damage
that the proposed (fund) could have for industrial users of
copper,” Robert Bernstein, an attorney with the law firm Eaton &
Van Winkle LLP, who is representing the consortium of
fabricators, said in the letter.
While the SEC is not obligated to respond to the
consortium’s latest filing, the issues are the same as those to
be considered by the SEC in its ruling on BlackRock Inc’s
similar fund due on Feb. 22.
If the commission doesn’t reconsider, Bernstein has until
Feb. 18 – 60 days after the ruling’s publication in the Federal
Register on Dec. 20 – to take his case to federal appeals court.
“We haven’t made up our mind yet, but we certainly laid the
groundwork to do that,” Bernstein said in an interview on
Thursday.
Legal action could further frustrate JPMorgan’s efforts to
launch the fund, more than two years after it first filed for
approval.
The filing came on the deadline set by the SEC for
interested parties to respond to its Dec. 14 ruling giving the
go-ahead for the JPM XF Physical Copper Trust.
JPMorgan declined to comment, but in giving the green light,
the SEC said it did not believe the fund would affect supplies
of metal for immediate delivery.
‘DISTURBING’
The U.S. bank has much riding on the launch as the big banks
that swept into trading commodities over the past decade look
for new ways to make money in the wake of the world financial
crisis and amid tighter regulations.
With frantic work going on behind the scenes, the bank’s
commodities chief Blythe Masters met with outgoing SEC chairman
Mary Schapiro and her successor Elisse Walter on Dec. 6, a week
before receiving the green light, according to an SEC
memorandum.
Masters has built the bank’s commodities business from
scratch in just five years. Under her watch, the bank bought
Sempra which gave it a preeminent franchise in oil and metals
trading, as well as one of the world’s biggest metals
warehousing companies, UK-based Henry Bath. The company’s
facilities in the United States and Asia would be used for
storing the metal used to back the first ETF of its kind.
Bernstein said on Thursday he found news of the meeting
“very disturbing.”
HARD FIGHT
The consortium – SouthWire Co, Encore Wire Corp,
Luvata and AmRod – as well as Red Kite, a large hedge fund and
physical trader, have fought hard to get the SEC to block the
JPMorgan and BlackRock funds.
Industrial users fear it would have a “devastating” affect
on the market by disrupting supplies and inflating prices since
it will use physical copper cathode as collateral against shares
of the fund, effectively removing a chunk of metal from the
market.
In its defense, JPMorgan and BlackRock say such fears are
unfounded because the funds, which would effectively allow U.S.
retail investors to trade physical copper easily for the first
time, would be miniscule compared with the 20-million-tonne
global market. Up to 183,000 tonnes of copper would be taken off
the market, according to filings by both companies.
The BlackRock iShares Copper Trust and JPMorgan products are
very similar, although BlackRock’s is twice as large.
JPMorgan’s fund would store LME brand-approved copper valued
at up to $499,761,150 – equivalent to about 62,000 tonnes based
on a copper price of $8,000 per tonne. BlackRock’s trust would
use up to 121,200 tonnes of copper as guarantee against shares
in its fund.
