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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. 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

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

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

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

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

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

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

  7. 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

  8. 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

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

  10. 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

  11. 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

  12. 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)

  13. 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.

  14. 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

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

  16. 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

  17. 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

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

  19. 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.

  20. 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

  21. 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

  22. 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

  23. 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

  24. 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

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

  26. 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

  27. 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.

  28. 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.

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