Can You Teach An Old Exchange New Tricks

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

DISCUSSION OVERVIEW • Introduction to Financial Markets • Focus on Chicago Commodity Exchange • Current Dispute Resolution Process • Improving Access for Investors

INTRODUCTION TO FINACIAL MARKETS Basically 2 Market Types • Security Markets – Stocks, Bonds, Notes • Commodity Markets – Grains & Financials – Futures & Options, Swaps, Forwards

INTRODUCTION TO FINACIAL MARKETS Type of Transaction • Exchange Traded • Over-the-Counter

FOCUS ON CHICAGO COMMODITY EXCHANGE Seminar Topic • Commodity Markets • Exchange Traded Institutions – Chicago Board of Trade for discussion purposes • Improving Access to Dispute Resolution

FOCUS ON CHICAGO COMMODITY EXCHANGE Background Information • Who Trades Commodity Markets – Investors • Hedgers • Speculators

FOCUS ON CHICAGO COMMODITY EXCHANGE Background Information • What is a Hedger? – trades to protect underlying assets – buys and sells to offset price risk • Who Is a Hedger? – Classic Example • Farmer

FOCUS ON CHICAGO COMMODITY EXCHANGE Background Information • What is a Speculator? – Trade to make a profit – Buy and sell based upon price information • Who Is a Speculator? – Classic Example • Day Trader

FOCUS ON CHICAGO COMMODITY EXCHANGE Background Information • How Does An Investor Place a Trade?

FOCUS ON CHICAGO COMMODITY EXCHANGE Background Information • 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

FOCUS ON CHICAGO COMMODITY EXCHANGE Background Information • What Can the Investor Do? • Must Determine If Error Occurred & Who Committed Error – – Local Broker Chicago Brokerage Firm CBo. T Member Firm Pit Trader • Must Determine Who Regulates Each Party? – CFTC (Commodity Futures Trading Commission) – NFA (National Futures Association) – CBo. T

FOCUS ON CHICAGO COMMODITY EXCHANGE Regulation of Market Participants • CBo. T & 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. § 4 a (1988). – Exchange Members Include: • Futures Commission Merchants (FCM), Futures Brokers (FB) and Futures Traders (FT)

FOCUS ON CHICAGO COMMODITY EXCHANGE Regulation of Market Participants • 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.

CURRENT DISPUTE RESOLUTION PROCESS How To Resolve Disputes? • 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 • CBo. T Reg. 601. 00 – voluntary for customer, mandatory for member

CURRENT DISPUTE RESOLUTION PROCESS How To Resolve Disputes? • NFA – Arbitration

CURRENT DISPUTE RESOLUTION PROCESS How To Resolve Disputes? • CFTC – Reparation Proceedings • to assert claims based on violations of federal commodity laws • heard by administrative law judge • decisions reviewed by CFTC

CURRENT DISPUTE RESOLUTION PROCESS How To Resolve Disputes? • 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

CURRENT DISPUTE RESOLUTION PROCESS Self-Regulatory Arbitration Process • Advantages – – Cost Savings Quicker Resolution Case Heard by Experts Less Time Consuming

CURRENT DISPUTE RESOLUTION PROCESS Self-Regulatory Arbitration Process • 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.

CURRENT DISPUTE RESOLUTION PROCESS Self-Regulatory Arbitration Process • Disadvantages, Cont. – Costs still significant • • hire attorney transportation accommodations (food & lodging) loss of wages – Outcome • May not give the investor the desired outcome

IMPROVING ACCESS FOR INVESTORS Investors as Pro-Se Litigants • Similarities – Difficulty determining process – Little access to information – Must hire attorney for success • forum is not friendly for pro-se

IMPROVING ACCESS FOR INVESTORS Solutions • 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

IMPROVING ACCESS FOR INVESTORS Solutions • 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

IMPROVING ACCESS FOR INVESTORS Solutions • Grievance Reporting – Enhance Filing of Complaint • on-line form • email contact – Benefits • • encourage complaint reporting more efficient reduce costs of reporting remains anonymous

IMPROVING ACCESS FOR INVESTORS Solutions • Dispute Resolution Initiatives – On-Line Arbitration • System to Consider – Square Trade

IMPROVING ACCESS FOR INVESTORS Solutions • 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

IMPROVING ACCESS FOR INVESTORS Solutions • 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.

IMPROVING ACCESS FOR INVESTORS Solutions • Dispute Resolution Initiatives, Cont. – Mediation Services (Off-Line) • CBo. T 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.