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 Security Markets –Stocks, Bonds, Notes Commodity Markets –Grains & Financials –Futures & Options, Swaps, Forwards Basically 2 Market Types

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

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

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

7. FOCUS ON CHICAGO COMMODITY EXCHANGE 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

8. FOCUS ON CHICAGO COMMODITY EXCHANGE 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

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

10. FOCUS ON CHICAGO COMMODITY EXCHANGE 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

11. FOCUS ON CHICAGO COMMODITY EXCHANGE 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

12. FOCUS ON CHICAGO COMMODITY EXCHANGE 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

13. FOCUS ON CHICAGO COMMODITY EXCHANGE 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

14. CURRENT DISPUTE RESOLUTION PROCESS 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?

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

16. CURRENT DISPUTE RESOLUTION PROCESS 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?

17. CURRENT DISPUTE RESOLUTION PROCESS 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?

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

19. CURRENT DISPUTE RESOLUTION 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. Self-Regulatory Arbitration Process

20. CURRENT DISPUTE RESOLUTION PROCESS 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

21. IMPROVING 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

22. IMPROVING 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

23. IMPROVING 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

24. IMPROVING 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

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

26. IMPROVING 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

27. IMPROVING 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

28. IMPROVING 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