Bloomberg News

CBOE Tightens Trader Rules After Paying $6 Million SEC Fine

March 05, 2014

Nine months after regulators fined the Chicago Board Options Exchange for failing to police its members, the biggest U.S. options market approved a rule aimed at preventing fraud.

Firms trading at the unit of CBOE Holdings Inc. (CBOE:US) will be required to write down how they supervise their businesses, according to a Securities and Exchange Commission filing from the Chicago-based options exchange. They must also carry out regular office inspections and send CBOE an annual report on regulatory practices.

Stiffening oversight will help firms trading at the CBOE “prevent fraudulent and manipulative acts and practices and improve investor protection,” according to the document, which was posted on the SEC website.

CBOE was fined $6 million in June by the SEC after regulators said the exchange’s staff interfered with their investigation of illegal short selling at a member firm. The penalty followed an administrative law judge’s ruling that CBOE member OptionsXpress Inc., a unit of Charles Schwab Corp., helped facilitate sham transactions that violated U.S. securities laws known as Regulation SHO.

When penalizing CBOE last year, the SEC said the exchange had an “ineffective surveillance program that failed to detect wrongdoing despite numerous red flags.”

Another Pillar

Options Clearing Corp., an unrelated organization that’s another pillar of the options industry in Chicago, was told last year by the SEC that its market supervision was inadequate, according to a letter obtained by Bloomberg News in October. OCC clears all trades of exchange-listed options in the U.S., a business that saw $1.2 trillion of volume last year.

Gail Osten, a CBOE spokeswoman, said the rule change formalized practices that were already in place “but not in writing” in order to make “supervision and control more effective.” Judith Burns of the SEC declined to comment.

The CBOE’s new policy affects firms known as trading permit holders, CBOE’s term for individuals and companies that have permission to buy and sell at the exchange. In the filing dated yesterday, CBOE said its current rulebook doesn’t specifically require “the establishment and maintenance of a system of supervision or written procedures covering each line of business” at permit holders, which are known as TPHs.

“The proposed rule would clearly place responsibility on TPHs to establish and maintain a formal plan of supervision that covers each of their business activities and associated persons,” according to CBOE’s filing. “CBOE believes that the proposed rule would provide greater utility for enforcing TPH obligations for all its business areas such as proprietary trading.”

To contact the reporter on this story: Sam Mamudi in New York at smamudi@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net


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Companies Mentioned

  • CBOE
    (CBOE Holdings Inc)
    • $48.83 USD
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