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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