CBOE Stock Exchange
Regulatory Program
September 14, 2010
Lawrence J. Bresnahan
Patrick J. Fay
Stanley Leimer
Anthony Seisser
Agenda
• Introduction of participants
• Overview of Regulatory and Disciplinary
Process
• Member Firm Regulation
• Registration
• Regulated Entities
• Q&A
Participants
•
Patrick J. Fay
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Senior Vice President, Registration and Regulatory Services
fayp@cboe.com
312-786-7925
Member Firm Regulation
–
Larry Bresnahan
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•
•
Registration
–
Stan Leimer
•
•
•
Bresnahl@cboe.com
(312) 786-7713
Leimer@cboe.com
(312) 786-7299
Regulated Entities
–
Tony Seisser
•
•
Seisser@cboe.com
(312) 786-7755
Regulatory Process
• CBSX Regulatory work performed by CBOE staff
– Member Firm Regulation
• Financial and Operational
– Regulated Entities
• Market Surveillance
• CBOE as a serious, committed regulator
• CBOE maintains good regulatory reputation
• CBOE collaborates with FINRA and others on common issues, areas
of concern to ensure uniform approach – eliminate regulatory arbitrage
• CBSX Firms and their activity are garnering attention of SEC and
other SROs
Disciplinary Process
• CBOE Disciplinary Rules Apply (Chapter 17 of CBOE
Rules)
• Business Conduct Committee
– Comprised of members, persons associated with
members and public representation
• Required to cooperate
– Provide information/testimony in the time and manner
prescribed by CBOE
Disciplinary Process
• Disposition of matters:
• Department/Sr. Management Review
– Informal regulatory actions
– Formal disciplinary action
(in all matters that staff is recommending formal
disciplinary action, you will be issued a “Wells
Letter”)
Disciplinary Process
• BCC disposition
– If formal action authorized you have 120 days from notice of
action to resolve
– Allowed 2 offers of settlement during 120 day period
– If staff is not recommending acceptance of offer of settlement you
are allowed a personal appearance before BCC to present why you
believe your offer should be accepted.
• BCC shares staff’s views on vigorous but fair regulation
Disciplinary Process
• If no settlement is reached, the matter will
proceed to Disciplinary Hearing before a
panel of BCC
• Appeal of hearing decision to Board
Disciplinary Process
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Disciplinary Sanctions can include
Censure
Fine
Suspension / Bar
Limitations on Activities
Undertakings
– Independent consultant reviews
– Requalification by examination
– Enhancements to staff, supervisory controls
Member Firm Regulation
• Financial Monitoring
– Daily
– Monthly
• Examinations
– Routine
• Annual
• Generally scheduled
• May be conducted with other regulators
– Special or Sweep
• Investigations
Member Firm Regulation
Examination Focus
– Net Capital
• One year lock-up of capital contributions
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Books and Records
AML
Fingerprints, applications, ITSFEA
Reg SHO
Ownership, financing
Supervision
Member Firm Regulation
Examination Findings
• AML
– Failure to conduct Independent testing
– Failure to provide training
• ITSFEA
– Failure to obtain/review personal statements of Associated Persons
• Electronic Record Retention
– Incomplete or improper retention of records or emails; generally
not in WORM format.
Member Firm Regulation
Examination Findings
• Reg SHO
– Order Mismarkings
– Inadequate or missing Aggregation Unit Plan
• Employment Applications/fingerprints
– Failure to maintain employment applications for all associated
persons
– Failure to fingerprint all associated persons
– Inadequate review of disclosures on employment applications or
results of fingerprints.
– Statutory Disqualifications
Member Firm Regulation
Examination Findings
• Net Capital
– Instances of minor discrepancies (over/under statements).
• Late FOCUS/Annual Audit Filing
• LLC Agreements
– not all class participants have executed the necessary agreement.
– Therefore these individuals and their investments have been treated
as customers
– Resulting in violation of the customer protection, AML, net capital
and other requirements
Member Firm Regulation
• Issues on Radar
– Master-Sub Accounts
– Trader Payout Rates
– Affiliation/Relationship with “educational firms”
– Registration and Qualification Examination
– Increase in number of traders/supervisors
Registration
• Associated Person Review & Approval
– Form BD, Schedule A – Executive Officer,
Control Person, at least 5% ownership in Firm
– Consent to Jurisdiction
– Investigation
– Fingerprints
Department of Regulated Entities
Responsible for detecting violations of CBSX/CBOE rules and regulations
Use a robust Web-Based Surveillance (WBS) application to detect exceptions that warrant further
review
Has jurisdiction over Exchange Trading Permit Holders and all of their associated persons
Presents cases to the Exchange’s Business Conduct Committee (BCC)
Sources for Investigations :
Automated Surveillances
Routine Reviews
Complaints
SRO Referrals
Written Inquiries
17 d-2 Agreements
A coordinated regulatory program between Self
Regulatory Organizations (SROs) to propose joint
plans for the allocation of regulatory
responsibilities with respect to common members.
Determines regulatory responsibility
Shared regulatory information
ISG (Intermarket Surveillance Group)
Web-Based Surveillances
Automated Web-Based Surveillances provide daily trade data and
exception details based on predetermined criteria (regularly updated)
Regulatory Cases are created from routine surveillances, general
investigations, complaints, and regulatory exams in various areas
including:
Qualified Contingent Trades
Stock Manipulation
Marking the Close
Pre-Arranged Trading
Intermarket Sweep Orders (ISO)
Short Sale (Nov. 2010)
Qualified Contingent Trade (QCT)
Trade components must share a derivative relationship
The trade must have at least one NMS component
The NMS component must be fully hedged
A QCT Exemption may be invoked
Executing broker(s) must have proper documentation
Timing (at or near the same time)
Reg Circular RG10-90
REG NMS Exams
Applicable Reg NMS Rules include Rule 610 (Access Rule),
611 (Order Protection), 612 (Minimum pricing), and Rules
601-609 (Market Data Access Rules)
Exams focus on the following areas:
Written Supervisory Procedures (WSPs)
Regularly Scheduled Testing
Continuing Education
Monitoring vendors and service providers
A Books and Records review
Pre-Arranged Trading
Wash Sales – two or more market participants develop a
pattern of trading with each other with no change in
beneficial ownership.
New Short Sale Rule
November 2010
10% circuit breaker
Short sale tick rule (remainder of day and T+1)
Short sale marking guidelines
No market maker exemption
Limited broker dealer exemptions
Sponsored Access
A sponsored user enters into an arrangement with a sponsored
member (SM or TPH) for the purposes of receiving electronic
access to the CBSX
A Sponsored User Agreement must be completed by both
parties
Exam and Surveillance focus – Are both the SM and SU in
compliance with CBSX rules?
New Circuit Breakers
An immediate response to the May 6, 2010 “Flash Crash”
Current terms:
A Mandatory 5 minute halt occurs when a stock moves 10% or
more in a 5-minute interval
The current program includes the S&P 500 and additional securities
The current pilot program expires December 10, 2010
Department of Regulated Entities
Direct Line:
(312) 786-7315
Website: www.cbsx.com