ISE has adopted a hybrid model of regulation in partnership with the Financial Industry Regulatory Authority, or FINRA. ISE operates a highly automated surveillance system and employs in-house surveillance analysts: to monitor trading on the Exchange; to review trading alerts and reports; and to conduct investigations into potential violations of ISE rules and the federal securities laws. The ISE surveillance group may close investigations without action, pursue disciplinary sanctions, or refer investigations to FINRA for further development.
With respect to investigations referred to FINRA, ISE staff works closely with FINRA personnel. At the conclusion of an investigation, FINRA consults with ISE with respect to what type of disciplinary action, if any, is appropriate. If ISE takes formal disciplinary action, ISE works closely with FINRA either to reach a settlement of the case or to prosecute the case before an ISE hearing panel. Thus, the contractual relationship with FINRA is highly interactive. Throughout the process, ISE retains complete responsibility for all disciplinary matters.
While ISE maintains surveillance and disciplinary programs for conduct related to the trading of options on the Exchange, certain other aspects of ISE’s self-regulatory responsibilities are outside of ISE's legal responsibility. For example, ISE is not a designated examining authority, or DEA under Section 17d-1 of the Exchange Act for any of its members. Thus, ISE does not conduct any financial responsibility examinations.
In addition, ISE is a participant in the Options Sales Practices Agreement approved by the Commission under Section 17d-2 of the Exchange Act. Under this agreement, the six options exchanges and FINRA allocate responsibility for conducting examinations and enforcing rules with respect to options sales practices. ISE is not allocated any responsibility under this agreement; therefore, ISE is not responsible for conducting sales practices examinations. In addition, we have entered into a joint agreement with the other options exchanges to form the Options Regulatory Surveillance Authority, or ORSA. The purpose of ORSA is to consolidate insider trading surveillance, which traditionally has been done separately by each of the options exchanges. Under this joint agreement, CBOE performs the function on behalf of all of the options exchanges, but each exchange continues to monitor the activities conducted under the joint agreement and continues to have regulatory responsibility in this area.
We believe that this hybrid model of regulation works very well. On the one hand, we benefit from having dedicated surveillance analysts who are experts on ISE rules and are intimately familiar with the Exchange’s policies, practices and trading system. We also operate an automated surveillance system that is designed specifically for our market and that is maintained by our in-house development staff. This assures that the front-line people who initially review trading alerts and reports have the knowledge and instinct necessary to recognize trading behavior that violates ISE rules and the federal securities laws, and that the automated surveillance system is tailored to the unique aspects of our electronic trading system. On the other hand, ISE has access to the resources and expertise of FINRA to conduct investigations, as well as to prosecute enforcement cases.
The following are also available:
|