can you teach an old exchange new tricks?: dispute resolution initiatives in the commodity markets...

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Can You Teach An Old Exchange Can You Teach An Old Exchange New Tricks?: Dispute Resolution New Tricks?: Dispute Resolution Initiatives In The Commodity Initiatives In The Commodity Markets Markets PRESENTED BY: Jennifer Warta

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Can You Teach An Old Exchange New Can You Teach An Old Exchange New Tricks?: Dispute Resolution Initiatives In Tricks?: Dispute Resolution Initiatives In

The Commodity MarketsThe Commodity Markets

PRESENTED BY: Jennifer Warta

DISCUSSION OVERVIEWDISCUSSION OVERVIEW

• Introduction to Financial Markets

• Focus on Chicago Commodity Exchange

• Current Dispute Resolution Process

• Improving Access for Investors

INTRODUCTION TO FINACIAL INTRODUCTION TO FINACIAL MARKETSMARKETS

• Security Markets– Stocks, Bonds, Notes

• Commodity Markets– Grains & Financials

– Futures & Options, Swaps, Forwards

Basically 2 Market Types

INTRODUCTION TO FINACIAL INTRODUCTION TO FINACIAL MARKETSMARKETS

• Exchange Traded• Over-the-Counter

Type of Transaction

FOCUS ON CHICAGO COMMODITY FOCUS ON CHICAGO COMMODITY EXCHANGEEXCHANGE

• Commodity Markets• Exchange Traded Institutions

– Chicago Board of Trade for discussion purposes

• Improving Access to Dispute Resolution

Seminar Topic

FOCUS ON CHICAGO COMMODITY FOCUS ON CHICAGO COMMODITY EXCHANGEEXCHANGE

• Who Trades Commodity Markets– Investors

• Hedgers• Speculators

Background Information

FOCUS ON CHICAGO COMMODITY FOCUS ON CHICAGO COMMODITY EXCHANGEEXCHANGE

• What is a Hedger?– trades to protect underlying assets– buys and sells to offset price risk

• Who Is a Hedger?– Classic Example

• Farmer

Background Information

FOCUS ON CHICAGO COMMODITY FOCUS ON CHICAGO COMMODITY EXCHANGEEXCHANGE

• What is a Speculator?– Trade to make a profit– Buy and sell based upon price information

• Who Is a Speculator?– Classic Example

• Day Trader

Background Information

FOCUS ON CHICAGO COMMODITY FOCUS ON CHICAGO COMMODITY EXCHANGEEXCHANGE

• How Does An Investor Place a Trade?

Background Information

Trad er in W h eat P itC on firm s : B /5 W @ 2 .9 5 1 /2

M em b er F irm o f C B oT

B rokerag e F irm , in C h icag o

B roker, In K an sasB /5 W h eat @ 2 .8 6 1 /4 S top

C u s tom er In K an sas

FOCUS ON CHICAGO COMMODITY FOCUS ON CHICAGO COMMODITY EXCHANGEEXCHANGE

• How Does An Investor Place a Trade? Cont.– Trade Confirmation

– 5 Wheat at 2.95 1/2» 9 1/4 cents higher than stop price of order

Background Information

FOCUS ON CHICAGO COMMODITY FOCUS ON CHICAGO COMMODITY EXCHANGEEXCHANGE

• What Can the Investor Do?• Must Determine If Error Occurred & Who Committed Error

– Local Broker– Chicago Brokerage Firm– CBoT Member Firm– Pit Trader

• Must Determine Who Regulates Each Party?– CFTC (Commodity Futures Trading Commission)– NFA (National Futures Association)– CBoT

Background Information

FOCUS ON CHICAGO COMMODITY FOCUS ON CHICAGO COMMODITY EXCHANGEEXCHANGE

• CBoT & Members– Self Regulated under supervision of Commodity

Futures Trading Commission (CFTC)• Established under Commodity Exchange Act (CEA) §

2(a)(2)-(11); 7 U.S.C. § 4a (1988).

– Exchange Members Include:• Futures Commission Merchants (FCM), Futures Brokers

(FB) and Futures Traders (FT)

Regulation of Market Participants

FOCUS ON CHICAGO COMMODITY FOCUS ON CHICAGO COMMODITY EXCHANGEEXCHANGE

• Commodity Brokers & Traders– National Futures Association (NFA)

• registered futures association• self-regulatory• screens professionals for membership & audits members

for compliance– Established under CFTC Act of 1974.

• FCMs, IB, CPO, CTA, AP, FB and FT must register unless exception applies.

Regulation of Market Participants

CURRENT DISPUTE RESOLUTION CURRENT DISPUTE RESOLUTION PROCESSPROCESS

• Chicago Board of Trade– Contact Investigations Department

• Review Order Flow of Exchange Members

• Look for order manipulation• Only Disciplinary Action against members - USUALLY NO

MONEY TO CUSTOMERS

– Arbitration• CBoT Reg. 601.00

– voluntary for customer, mandatory for member

How To Resolve Disputes?

CURRENT DISPUTE RESOLUTION CURRENT DISPUTE RESOLUTION PROCESSPROCESS

• NFA– Arbitration

How To Resolve Disputes?

CURRENT DISPUTE RESOLUTION CURRENT DISPUTE RESOLUTION PROCESSPROCESS

• CFTC– Reparation Proceedings

• to assert claims based on violations of federal commodity laws

• heard by administrative law judge• decisions reviewed by CFTC

How To Resolve Disputes?

CURRENT DISPUTE RESOLUTION CURRENT DISPUTE RESOLUTION PROCESSPROCESS

• Go to Court– File suit in Federal Court for Violation of CEA.

• Exception– Signed an Arbitration Agreement when Opened

Account.• Held: Arbitration agreements are binding

How To Resolve Disputes?

CURRENT DISPUTE RESOLUTION CURRENT DISPUTE RESOLUTION PROCESSPROCESS

• Advantages– Cost Savings– Quicker Resolution– Case Heard by Experts– Less Time Consuming

Self-Regulatory Arbitration Process

CURRENT DISPUTE RESOLUTION CURRENT DISPUTE RESOLUTION PROCESSPROCESS

• Disadvantages – Confusing

• Who should investor contact?– Who has jurisdiction

– How do the dispute systems work

– Cost of each

– Location May Not be Convenient• Investor (farmer) may not live close to arbitration sites.

Self-Regulatory Arbitration Process

CURRENT DISPUTE RESOLUTION CURRENT DISPUTE RESOLUTION PROCESSPROCESS

• Disadvantages, Cont.– Costs still significant

• hire attorney• transportation• accommodations (food & lodging)• loss of wages

– Outcome• May not give the investor the desired outcome

Self-Regulatory Arbitration Process

IMPROVING ACCESS FOR INVESTORSIMPROVING ACCESS FOR INVESTORS

• Similarities– Difficulty determining process– Little access to information– Must hire attorney for success

• forum is not friendly for pro-se

Investors as Pro-Se Litigants

IMPROVING ACCESS FOR INVESTORSIMPROVING ACCESS FOR INVESTORS

• Access to Information– Centralized Information

• 1 contact number for information (hotline)• 1 website for information

– Information to Include• Dispute Resolution Available• Customer Rights• List of Attorneys who specialize• Listing of self-regulatory agencies & their jurisdiction

Solutions

IMPROVING ACCESS FOR INVESTORSIMPROVING ACCESS FOR INVESTORS

• Access to Information, Cont.– Getting the Word Out

– Provide contact information in Opening Account Documents (required by CFTC).

– Provide to Self-Regulatory Exchanges

– Provide to Brokerage Houses

Solutions

IMPROVING ACCESS FOR INVESTORSIMPROVING ACCESS FOR INVESTORS

• Grievance Reporting– Enhance Filing of Complaint

• on-line form• email contact

– Benefits• encourage complaint reporting• more efficient • reduce costs of reporting• remains anonymous

Solutions

IMPROVING ACCESS FOR INVESTORSIMPROVING ACCESS FOR INVESTORS

• Dispute Resolution Initiatives– On-Line Arbitration

• System to Consider– Square Trade

Solutions

IMPROVING ACCESS FOR INVESTORSIMPROVING ACCESS FOR INVESTORS

• Dispute Resolution Initiatives, Cont.– On-Line Arbitration

– Benefits» Reduce Costs (to parties & exchange) » Less Time» Anonymous for D» Available to remote users

– Disadvantages» No more than usual arbitration

Solutions

IMPROVING ACCESS FOR INVESTORSIMPROVING ACCESS FOR INVESTORS

• Dispute Resolution Initiatives, Cont.– On-Line Arbitration

– Reasons It Might Work» Like ebay auction users, most investors using commodity

markets are a bit more sophisticated than average mom & pop stock investors. May be more accepting of on-line resolution.

» More trading is moving to electronic markets which would bring financial markets closer to ebay type auction system.

Solutions

IMPROVING ACCESS FOR INVESTORSIMPROVING ACCESS FOR INVESTORS

• Dispute Resolution Initiatives, Cont.– Mediation Services (Off-Line)

• CBoT does not offer mediation services. In many cases, disputes arise out of a misunderstanding. A mediation conference may be all that is required to settle a dispute

– Mediation Services (on-line)• Doubt this would be successful because conversation

would be difficult, but it might be worth trying on pilot basis.

Solutions