OMAHA (DTN) -- In 2007, Iowa grain farmer Doug Bell got crossways of price movements in the soybean market, at the painful price of more than $191,000 in margin calls. His brokerage company liquidated his margin account and sued him for the deficit. He argued the brokerage didn't notify him about margin calls in a timely manner, allowing them to build to an unmanageable level.

Bell and the broker went to arbitration, where the case was dismissed -- with no explanation and no recourse. Bell doesn't even know what evidence or testimony the broker supplied.

The farmer has learned a lot about how futures brokerage accounts are regulated, the difference between arbitration and a court case and how a farmer can avoid similar problems. He learned, for example, that the timeliness and by what method clients have to be notified of margin calls -- and how rapidly they need to pay them -- are details up to each brokerage house to set.

"I'll bet a lot of producers might be surprised that commodity brokers, unlike many of the people we do business with, are not regulated by the state," Bell told DTN. "It is up to us to know the rules and hold brokers -- and their regulators -- accountable to those rules."

Here are the basics regarding what you should know about futures market regulation, brokerage accounts, and what to do if you do have a dispute.

"As a former commodity broker myself, I can tell you there is considerably more to these issues than what most commodity brokers would know," Jeffrey Peterson, an attorney at Gray Plant Mooty in St. Cloud, Minn., told DTN. "The devil is in the details and the details are the logs of regulations that oversee these issues."

THE RIGHT BROKER

First, work with an experienced broker who understands hedging, advised Kurtis Ward, a securities and commodities attorney in Oklahoma City, Okla., who represents clients in disputes with brokerage firms. "Hedging and speculating are two different things and there are many ways that may affect your account," he said.

You can use the "Investor" tab on the National Futures Association's (NFA) Web site to check a broker's history regarding complaints or arbitration cases against them. "NFA also has a phone bank of people who can answer questions about situations," said Alison Archer, senior counsel with Bowman and Brooke LLP in Minneapolis, who was a compliance officer for NFA and later served as compliance manager for Cenex Harvest States.

Another place to check is the Commodity Futures Trading Association's (CFTC) Web site tab for Consumer Protection. There, you can look up brokers under (active) Case Status, Disciplinary History and Sanctions in Effect.

YOUR OPTIONS

If you can't resolve an issue with your broker, "ask for the firm's compliance person," said Archer. "It is their job to be certain all trades are handled correctly and brokers are in compliance with the regulations." Don't be afraid to call the main office of a brokerage firm or grain elevator rather than your local branch, she added.

"Next, I would explore hiring a third-party mediator if the other side will agree," she added. "Often, just having an unbiased source facilitate discussion can resolve the issue. You can find mediators in your area on the Internet, through a lawyer or through your local court."

There are several more formal avenues to make complaints against a broker, including state or even federal court, the CFTC or the NFA. Most lawyers say that clients are best served if they have the option of either arbitration or court. When you open a brokerage account, read the client agreement so you don't give up your right to go to court if there is a dispute. If there is a separate arbitration agreement, don't sign it, one lawyer advised. That doesn't shut you out of arbitration, it just doesn't limit your choices.

Arbitration often has the benefit of being quicker and less costly, but you give up the chance for an appeal. "Generally, the only grounds for contesting an award in an arbitration would be some conflict of interest or other malfeasance on the part of an arbitrator," said Henry Becker, an attorney in Oak Park, Ill., who specializes in financial industry cases. In addition, "NFA arbitration awards typically don't make findings or explain their reasoning, unlike a court of law. It's just a bottom-line ruling and award number."

Going to arbitration through the NFA also gives up the right to trial by jury, which might be more disposed toward an individual client with a dispute, lawyers said. It also gives up the processes set out by the state's legislation, including rules for discovery, depositions and finding the truth in the case. The discovery process can be crucial in presenting a case, Ward said. In arbitration, the first time you may hear the other side's argument is at the live event. In a court case, you can request records, take depositions and otherwise find out what the other side's case includes.

According to the CFTC's Web site, administrative action through its Reparations Program provides an inexpensive, impartial, and efficient forum for customer complaints against futures industry professionals. Reparations cases are decided by judgment officers or administrative law judges. Unlike NFA arbitration, you can appeal a CFTC decision.

YOUR RESPONSIBILITY

There are no standard rules regarding margin call deadlines, Becker said. It is really up to the brokerage company and it may vary by broker and even by client. "Very likely, the broker can require immediate payment and can liquidate your position at any time, without even notifying you."

That makes it imperative that you understand how margin calls are calculated and plan for them in advance. "It isn't possible to accurately calculate the total margin you may need because it is based on market moves," said Darin Newsom, DTN senior analyst. "For a hedge account, corn's initial margin is $1,750 per 5,000 contract, or 35 cents a bushel. Suppose you enter a hedge at $6, and corn goes to $8. That's $2 a bushel or $10,000 you would need to add to the account to keep the $1,750 margin intact." Hedge 50,000 bushels and that's 10 contracts or $100,000. "Margins are increased as volatility rises and decrease as volatility drops, adding another level of uncertainty to how much cash flow you might need."

The key is to discuss your risk management strategy and what you deem to be worse-case scenarios with your bankers so you have cash readily available.

Margin is one of the most sacred things in the brokerage business, Ward added. If you fail to meet margin requirements, it will be hard to make a case against your broker, even if you say you didn't get the notices. "You would have to prove the broker did a lot of bad things," said Ward. "It is not hard to know that the market is moving against you and margin calls are likely," he pointed out. In the end, your account is your responsibility.

Linda Smith can be reached at linda.h.smith@telventDTN.com

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