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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.

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

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

PRESENTED BY:

Jennifer Warta

discussion overview
DISCUSSION OVERVIEW
  • Introduction to Financial Markets
  • Focus on Chicago Commodity Exchange
  • Current Dispute Resolution Process
  • Improving Access for Investors
introduction to finacial markets
INTRODUCTION TO FINACIAL MARKETS

Basically 2 Market Types

  • Security Markets
    • Stocks, Bonds, Notes
  • Commodity Markets
    • Grains & Financials
        • Futures & Options, Swaps, Forwards
introduction to finacial markets4
INTRODUCTION TO FINACIAL MARKETS

Type of Transaction

  • Exchange Traded
  • Over-the-Counter
focus on chicago commodity exchange
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 exchange6
FOCUS ON CHICAGO COMMODITY EXCHANGE

Background Information

  • Who Trades Commodity Markets
    • Investors
      • Hedgers
      • Speculators
focus on chicago commodity exchange7
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 exchange8
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 exchange9
FOCUS ON CHICAGO COMMODITY EXCHANGE

Background Information

  • How Does An Investor Place a Trade?
focus on chicago commodity exchange10
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 exchange11
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
        • CBoT Member Firm
        • Pit Trader
      • Must Determine Who Regulates Each Party?
        • CFTC (Commodity Futures Trading Commission)
        • NFA (National Futures Association)
        • CBoT
focus on chicago commodity exchange12
FOCUS ON CHICAGO COMMODITY EXCHANGE

Regulation of Market Participants

  • 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)
focus on chicago commodity exchange13
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
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
      • CBoT Reg. 601.00
        • voluntary for customer, mandatory for member
current dispute resolution process15
CURRENT DISPUTE RESOLUTION PROCESS

How To Resolve Disputes?

  • NFA
    • Arbitration
current dispute resolution process16
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 process17
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 process18
CURRENT DISPUTE RESOLUTION PROCESS

Self-Regulatory Arbitration Process

  • Advantages
    • Cost Savings
    • Quicker Resolution
    • Case Heard by Experts
    • Less Time Consuming
current dispute resolution process19
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 process20
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
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 investors22
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 investors23
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 investors24
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 investors25
IMPROVING ACCESS FOR INVESTORS

Solutions

  • Dispute Resolution Initiatives
    • On-Line Arbitration
      • System to Consider
        • Square Trade
improving access for investors26
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 investors27
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 investors28
IMPROVING ACCESS FOR INVESTORS

Solutions

  • 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.