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SEC ignored risks of copper ETF: Southwire

Keywords: Tags  ETF, copper, Southwire, JP Morgan, SEC, Blackrock, Encore, Amrod Red Kite


NEW YORK — The Securities and Exchange Commission (SEC) ignored warnings over the impact a physical copper exchange-traded fund (ETF) sponsored by JPMorgan Chase & Co. could have on lengthy queues at London Metal Exchange warehouses and on the incentives and premiums paid for metal, according to a court filing by a major U.S. copper consumer.

Carrollton, Ga.-based copper fabricator Southwire Co. said in documents filed with the U.S. Court of Appeals in Washington that the SEC failed to consider evidence it had provided showing the launch of a physical ETF could exacerbate a "bidding war" for copper among competing warehouse owners and end users.

The market is "already being severely constricted as a result of owners of LME warehouses paying huge premiums to metal producers to place copper that otherwise would be available for immediate delivery into warehouses with lengthy queues for physical delivery," the filing said.

Copper premiums in Antwerp jumped to as much as $100 per tonne last week, in line with incentives being offered by traders and warehouses to draw the metal into storage, according to AMM sister publication Metal Bulletin.

"Such practices by warehouse owners have led to vast amounts of such copper being stored in LME warehouses in New Orleans, Antwerp and Johor (Malaysia) where, when sold, it may not be available for physical delivery for months," the filing said. This is "a phenomenon which has effectively eliminated those warehouses as markets for copper available for immediate delivery, thus substantially shrinking the market for copper available for immediate delivery to whatever is delivered to a port where it could go on warrant in an LME warehouse or sold to an end user."

"The SEC not only failed to analyze the market as it exists today, but failed to analyze what the impact would be as authorized participants begin to vie with warehouse owners and end users for the limited supply of copper when it arrives in an LME port city such as New Orleans, Antwerp or Johor," the filing said. "The SEC looked only at existing premiums, concluded that they fluctuate, and failed completely to analyze what the premiums would be—and the cost to industrial end users and their customers—when shares of the (ETF) begin to be listed and traded."

Southwire made the comments in its continuing appeal of a decision by the U.S. regulator to allow JPMorgan’s physical copper ETF (amm.com, Feb. 13).

The filing written by lawyer Robert Bernstein, a partner at New York law firm Eaton & Van Winkle, listed a number of factors Southwire alleges the SEC had failed to examine despite having been alerted to the company’s concerns, including how much copper is currently being held by JPMorgan’s LME-approved warehouse subsidiary Henry Bath, as well as the development of queues at those sites’ warehouses.

The filing said the SEC had not examined the impact on copper consumers of the premiums they must now pay as a result of the warehouse queues, and how those premiums might change once the physical ETF is introduced.

JPMorgan argued that any copper taken out of LME warehouses for the ETF would not disrupt copper supplies because it would "remain available for immediate delivery to consumers and participants in the physical markets."

The bank plans to start small and build up. The product will be backed by less than 10,000 tonnes of copper when it initially launches and eventually reach an estimated 61,800 tonnes, although JPMorgan could seek to increase this if the product proves to be successful.

Southwire said in the filing that the ETF will create an "investor-financed squeeze" of the market, and together with the recently approved BlackRock Inc. physical copper ETF the products could remove 180,000 tonnes of copper from the market—nearly 40 percent of LME copper stocks (amm.com, Feb. 25).

Southwire has not yet formally appealed the SEC’s decision to approve the BlackRock ETF, but the company’s comments in the JPMorgan filing indicate it will do so and then move to consolidate the two appeals, a person familiar with the matter said.

The SEC did not identify or discuss alternatives to alleviate concerns over the ETF, the filing said, such as imposing "reasonable limits" on the amount of copper the ETF may hold or requiring that LME-grade copper held in the physical ETF be limited to metal that is on warrant, "which would at least keep copper acquired by the (ETF) subject to the LME’s anti-squeeze rules."

Southwire complained that the SEC held a meeting with representatives of JPMorgan and its counsel to discuss the ETF Dec. 6 that it did not disclose until January, when the rule had already been approved (amm.com, Dec. 17). But on Dec. 5 the SEC formally denied a request for a similar meeting by Southwire and other industrial users who were part of a consortium opposed to the ETF before it was launched, the filing said.

The consortium included Southwire, AmRod Corp., Newark, N.J., Encore Wire Corp., McKinney, Texas, and London-based Luvata UK Ltd., along with metals-focused hedge fund RK Capital Management LLC, London. The other consortium members have dropped out of the appeal process, which is likely to be time consuming and costly.


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