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 New Tricks?
Dispute Resolution Initiatives In The Commodity
Markets

• PRESENTED BY
• Jennifer Warta

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DISCUSSION OVERVIEW

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

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INTRODUCTION TO FINACIAL MARKETS
Basically 2 Market Types

• Security Markets
• Stocks, Bonds, Notes
• Commodity Markets
• Grains Financials
• Futures Options, Swaps, Forwards

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INTRODUCTION TO FINACIAL MARKETS
Type of Transaction

• Exchange Traded
• Over-the-Counter

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FOCUS ON CHICAGO COMMODITY EXCHANGE
Seminar Topic

• Commodity Markets
• Exchange Traded Institutions
• Chicago Board of Trade for discussion purposes
• Improving Access to Dispute Resolution

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FOCUS ON CHICAGO COMMODITY EXCHANGE
Background Information

• Who Trades Commodity Markets
• Investors
• Hedgers
• Speculators

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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

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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

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FOCUS ON CHICAGO COMMODITY EXCHANGE
Background Information

• How Does An Investor Place a Trade?

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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

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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

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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)

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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.

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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

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CURRENT DISPUTE RESOLUTION PROCESS
How To Resolve Disputes?

• NFA
• Arbitration

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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

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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

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CURRENT DISPUTE RESOLUTION PROCESS
Self-Regulatory Arbitration Process

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

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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.

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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

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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

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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

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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

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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

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IMPROVING ACCESS FOR INVESTORS
Solutions

• Dispute Resolution Initiatives
• On-Line Arbitration
• System to Consider
• Square Trade

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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

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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.

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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.