December 22, 2014 / 8:45 PM / 5 years ago

UPDATE 1-CBOE to pass regulatory duties to FINRA

(Adds comments from CBOE, FINRA, lawyer, stock price)

By Tom Polansek

CHICAGO, Dec 22 (Reuters) - CBOE Holdings Inc, operator of the biggest U.S. stock options market, will cede regulatory duties to the securities industry’s largest independent regulator next week, the company said on Monday.

CBOE’s Chicago Board Options Exchange and C2 Options Exchange hired the Financial Industry Regulatory Authority, or FINRA, to perform “the majority of the exchanges’ regulatory services,” according to a statement.

The exchange operator also hired FINRA to take over CBOE’s regulatory duties for the Options Regulatory Surveillance Authority (ORSA), an entity that U.S. options exchanges established in 2006 to collaborate on insider trading surveillance and investigations.

With the change, CBOE is “reinforcing the integrity” of its markets, Chief Executive Officer Ed Tilly said in the statement.

FINRA will take over market surveillance, examinations, investigations, disciplinary services and other duties for the CBOE starting on Jan. 1. About 125 CBOE employees, comprising the “vast majority” of Chicago Board Options Exchange, C2 and ORSA regulatory staffers, have accepted jobs with FINRA, according to the company.

The exchange operator likely decided to hire FINRA to please the U.S. Securities and Exchange Commission after the government fined CBOE $6 million last year for failing to enforce short sale rules properly, said Andrew Stoltmann, a Chicago-based securities lawyer. The penalties were the first ever against a U.S. exchange for violating the duty to self-police a marketplace.

“These actions by the CBOE are likely to get the SEC off its back without causing any real pain or material changes,” Stoltmann said of the shift of regulatory oversight.

The SEC did not immediately respond to questions.

The CBOE in September said it was considering joining other U.S. stock options exchanges in contracting for regulatory services from FINRA.

The non-governmental regulator will work with the CBOE “to detect and deter manipulative and abusive trading,” FINRA CEO Richard Ketchum said in a statement.

After Jan. 1, FINRA will be able to perform cross-market surveillance on approximately 60 percent of the U.S. options market, according to the statement. The regulator said it will conduct surveillance for insider trading for all equities and options trading in the United States.

CBOE employees will continue to oversee the CBOE Futures Exchange.

CBOE’s stock, which hit a record high $64.79 on Friday, was up 0.7 percent at $64.66 at 2:30 p.m. CST (2030 GMT).

Reporting by Tom Polansek; Editing by Dan Grebler

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