RULE ENFORCEMENT REVIEW

CBOE Futures Exchange, LLC 

Division of Market Oversight

September 6, 2013
2

RULE ENFORCEMENT REVIEW OF

CBOE FUTURES EXCHANGE, LLC – AUDIT TRAIL PROGRAM

Commodity Futures Trading Commission – Division of Market Oversight

I. Introduction............................................................................................................................. 3

II. Methodology........................................................................................................................... 5

III. Summary of Findings and Recommendations.................................................................... 6

A. Findings............................................................................................................................... 6

B. Recommendations............................................................................................................... 8

IV. CFE Operations................................................................................................................... 9

A. Designation as a Contract Market....................................................................................... 9

B. CFE Governance............................................................................................................... 10

1. Ownership and Board of Directors............................................................................... 10

2. Regulatory Oversight Committee ................................................................................. 11

C. Regulatory Services Provided by NFA............................................................................. 12

D. Products and Trading Volume During the First and Second Target Periods.................... 13

V. Staffing, Organization and Training ..................................................................................... 14

VI. Audit Trail Program.......................................................................................................... 19

A. Order Entry and Creation of Electronic Audit Trail ......................................................... 21

1. Trading Platform Order Entry Systems and Process.................................................... 21

2. Identification of “Authorized Traders”......................................................................... 25

3. Identification of “Responsible Traders” ....................................................................... 26

4. Findings and Recommendations Regarding Order Entry and Creation of Electronic 

Audit Trail............................................................................................................................. 27

B. Audit Trail Enforcement................................................................................................... 27

1. Audit Trail Routine Surveillance and Reviews ............................................................ 28

2. TPH Audit Trail Examination Program........................................................................ 30

3. Services Provided by NFA Related to the Audit Trail ................................................ 34

4. Disposition of Audit Trail Investigations and Examinations........................................ 35

5. Findings and Recommendations Regarding the Exchange’s Audit Trail Enforcement 

Program................................................................................................................................. 36

C. Audit Trail Examinations and Audit Trail Investigations Process ................................... 37

D. Audit Trail Examinations and Audit Trail Investigations Completed During the Second 

Target Period............................................................................................................................. 40

1. Number and Sources of Investigations and Examinations Completed During the Second 

Target Period............................................................................................................................. 40

2. Timeliness of Investigations and Examinations ............................................................... 40

3. Adequacy of Investigations and Examinations................................................................. 45
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I. Introduction

The Division of Market Oversight (“Division”) has completed a rule enforcement review 

of the audit trail program of CBOE Futures Exchange, LLC (“CFE” or the “Exchange”).1

 The 

review focused on compliance with two core principles under Section 5(d) of the Commodity 

Exchange Act (“Act” or “CEA”) and Part 38 of the Commission’s regulations.2 The Division’s 

review focused on Core Principles 10 (Trade Information) and 17 (Recordkeeping), which relate 

to an exchange’s audit trail program for the recording and safe storage of trade information in a 

manner which enables prevention of customer and market abuses and enforcement of exchange 

rules. This examination is a follow-up to the Division’s initial review of the Exchange’s audit 

trail program which covered the period from November 1, 2009 through November 1, 2010 

(“first target period”). 

 1 Rule enforcement reviews prepared by the Division are intended to present an analysis of an exchange’s overall 

compliance capabilities during the period under review. Such reviews deal only with programs directly addressed in 

the review and do not assess all programs or core principles. The Division’s analyses, conclusions, and 

recommendations are based, in large part, upon the Division’s evaluation of a sample of investigations and other 

exchange documents. This evaluation process, in some instances, identifies specific deficiencies in particular 

exchange investigations or methods but is not designed to uncover all instances in which an exchange does not 

address effectively all exchange rule violations or other deficiencies. Neither is such a review intended to go beyond 

the quality of the exchange’s self-regulatory systems to include direct surveillance of the market, although some 

direct testing is performed as a measure of quality control.

The findings and recommendations in this rule enforcement review are limited to CFE and its respective products. 

This rule enforcement review, and the findings and recommendations herein, represent the view of the Division 

only, and do not necessarily represent the position or view of the Commission or of any other office or division of 

the Commission.

2 The Division's rule enforcement review of CFE was commenced prior to the effective date of the Dodd-Frank Wall 

Street Reform and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010) ("Dodd-Frank"). Accordingly, 

the core principles cited above refer to Core Principles 10 and 17 prior to their amendment by Dodd-Frank. The 

Division notes that the substantive audit trail requirements of Core Principle 10 are unchanged by Dodd-Frank, 

while the recordkeeping requirements of former Core Principle 17 have been moved to a new Core Principle 18, as 

amended by Dodd-Frank. Accordingly, the Division’s review also incorporates elements of the Core Principles 10 

and 18, as amended by Dodd-Frank. 

Furthermore, on May 10, 2012, the Commission issued its Final Rules, Core Principles and Other Requirements for 

Designated Contract Markets, 77 Fed. Reg. 36612 (June 19, 2012) (“Final DCM Rules”), which became effective 

on October 17, 2012, to codify rules in lieu of guidance and acceptable practices for certain core principles, 

including new Core Principles 10 and 18. Although these Final DCM Rules were not in effect during the first or 

second target periods, the Division considered the changes to Part 38 in its review. 
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The Division’s initial review revealed that CFE had a minimal audit trail enforcement 

program, which raised serious concerns regarding CFE’s compliance with Core Principle 10. 

During the Division’s on-site interview for the initial review on April 21, 2011, Division staff 

expressed its concerns regarding the Exchange’s lack of an audit enforcement program and the 

Exchange promptly responded to the Division’s concerns by committing to create and implement 

an audit trail enforcement program. CFE submitted a proposed audit trail enforcement program 

on July 11, 2011, which the Division found inadequate to demonstrate compliance with Core 

Principle 10. Accordingly, by letter dated November 4, 2011 (“November 4, 2011 letter”), the 

Division suspended its rule enforcement review of CFE, and requested, pursuant to its authority 

under Commission Regulation 38.5(b), that the Exchange demonstrate the form and manner of 

its compliance with the audit trail requirements under Core Principle 10. The letter also provided 

CFE a final opportunity to explain the measures it had taken or was prepared to take to achieve 

compliance with Core Principle 10, and to address deficiencies in the Exchange’s audit trail 

program with respect to the following: (1) monitoring for potential recordkeeping or audit trail 

violations; (2) reviewing paper order tickets for orders that cannot be entered immediately upon 

receipt; (3) reviewing any sample front-end audit trail data; (4) monitoring for post-execution 

changes to trade information, such as account numbers or customer type indicator (“CTI”) codes; 

(5) monitoring error account activity; (6) reviewing the accuracy of order entry data points; or 

(7) auditing, examining, and enforcing the proper assignment and usage of login IDs. 

From January 10, 2012 through August 8, 2012, CFE worked to develop an audit trail 

enforcement program that addressed the concerns identified in the Division’s November 4, 2011 

letter and provided the Division with continuous updates on the progress it had made towards 

implementing such a program. The Division resumed its rule enforcement review of CFE on 
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August 15, 2012, and requested information to evaluate the audit trail program of CFE and its 

compliance with Core Principles 10 and 17, including the results of the audit trail enforcement 

program during the period from November 1, 2010 through August 1, 2012 (“second target 

period”). The Division commends the significant efforts undertaken by CFE to demonstrate its 

compliance with Core Principle 10 and believes that the program developed by the Exchange 

meets applicable requirements for an audit trail enforcement program. The Division further 

commends CFE for its commitment to enforcing the Exchange’s audit trail and recordkeeping 

requirements through its audit trail enforcement program. 

II. Methodology

To evaluate the Exchange’s audit trail program and its compliance with the above core 

principles, Division staff interviewed compliance officials and staff from CFE and its regulatory 

services provider, the National Futures Association (“NFA”). The Division also received a 

demonstration of the electronic systems Exchange staff uses to perform audit trail enforcement. 

The Division also reviewed numerous documents created by both CFE staff and NFA staff on 

behalf of the Exchange, including the following:

• CBOE’s Regulatory Services Division Manual, CFE’s Investigation and 

Surveillance Procedures Manual (“CFE Manual”), Regulatory Circulars issued 

by the Exchange, and CFE’s Rulebook; 

• Organizational charts and summaries of personnel and staffing;

• Meeting minutes of the Board of Directors and the Regulatory Oversight 

Committee (“ROC”) held during the first and second target periods;

• Computer reports and other outputs used routinely for audit trail enforcement;

• Audit trail investigations and examinations logs;
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• Audit trail investigation and examination case reports and files; and

• The Regulatory Services Agreement (“RSA”) between the Exchange and NFA, 

which describes the scope of the self-regulatory services to be performed by NFA 

on behalf of the Exchange. 

The Division provided CFE with an opportunity to review and comment on a draft of this 

report on July 25, 2013. On August 15, 2013, Division staff conducted an exit conference with 

Exchange officials to discuss the report’s findings and recommendations. 

III. Summary of Findings and Recommendations

A. Findings

• During the first target period, CFE’s regulatory program was administered by the CBOE 

Member and Regulatory Services Division (“Regulatory Services Division”). As a result 

of a reorganization of the Regulatory Services Division in March 2012, CFE staff was 

separated into a discrete department – the Department of CFE Regulation (“CFER”). 

Consequently, the number of personnel solely dedicated to CFE regulation increased 

from one investigator to seven individuals, including a Chief Regulatory Officer

(“CRO”), a Manager, and five investigators. 

• CFER maintains a small but highly experienced staff. The CRO and CFE Manager have 

considerable experience in futures industry and compliance. The Exchange promptly 

increased staffing levels during the second target period in response to additional 

responsibilities undertaken by the Exchange with respect to implementing the audit trail 

enforcement program. 

• The Exchange provides adequate training and education for its new hires and experienced 

staff, including specific training related to the audit trail enforcement program, the 

investigatory process and the surveillance tools used by staff. 

• CBOE Command, the Exchange’s electronic trading platform, maintains a complete 

electronic record of all orders entered and transactions executed, including all messages 

entered into the system, all order modifications and cancellations, and all matched trades. 

This record enables CFE to identify customer and market abuses and provide evidence of 

rule violations. Exchange staff can reconstruct trading through the Market Replay

system, which provides a near real-time review of trading as it occurs on CBOE 

Command, as well as all archived data since trading began on CFE. 

• As of April 30, 2012, the Exchange began requiring an Order Entry Operator ID (“OEO 

ID”) to identify the natural person or automated trading system (“ATS”) responsible for 
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entering the order or quote into CBOE Command. Exchange rules require that an OEO 

ID must not be associated with more than one natural person or ATS, and must be unique 

at the clearing firm-level. Trading Privilege Holders (“TPHs”) are responsible for 

assigning OEO IDs and must maintain and keep current certain identifying information

regarding the natural person or ATS for which an OEO ID is issued. 

• During the first target period, the Exchange had a minimal audit trail enforcement 

program, which did not include a review of TPHs’ compliance with audit trail and 

recordkeeping requirements. This raised serious concerns regarding the Exchange’s 

compliance with Core Principle 10. The Exchange promptly committed to developing

and implementing an audit trail enforcement program that comprised of routine audit trail 

surveillance and annual examinations of every TPH. 

The Division found that the Exchange’s audit trail enforcement program adequately 

implements the following: (1) monitoring for potential recordkeeping and audit trail 

violations; (2) reviewing paper order tickets for orders that cannot be entered 

immediately upon receipt; (3) reviewing sample front-end audit trail data; (4) monitoring 

for post-execution changes to trade information, including account numbers and CTI

codes; (5) monitoring error account activity; (6) reviewing the accuracy of order entry 

data points; and (7) auditing, examining, and enforcing the proper assignment and usage 

of login IDs. 

• The audit trail investigation and examination logs provided by the Exchange do not 

include open and closed dates that accurately reflect the actual time Exchange staff spent 

conducting examination or investigatory work on a matter. In particular, the Division 

found that: (1) the open date does not appear to reflect the date that staff began working 

on the matter; and (2) the Exchange does not maintain a discrete “pens down” date on 

which all examination and investigatory work conducted by staff was completed. 

• The Exchange opened twelve audit trail investigations during the second target period, 

five of which were also completed during the second target period. Of the five completed 

investigations, three arose from CFER’s Multiple User/Single Account monthly review, 

while two arose from NFA referrals. Four of the completed investigations were “filed 

without action,”3 while one resulted in a Statement of Charges. All seven of the 

investigations that remained open after the second target period pertained to the 

Exchange’s routine audit trail surveillance. 

• The Exchange opened 85 audit trail exams during the second target period, 25 of which 

were also completed during the second target period. Twenty of these 25 exams were 

filed without action, while five resulted in Letters of Caution4 issued to five separate

 3 The Exchange uses the term “filed without action” to describe a matter that has been closed upon review and 

approval of CFE management.

4 The Exchange issues a Letter of Caution where a party violates a technical rule for the first time and it appears a 

letter is sufficient to prevent a recurrence. The letter serves as notice that another similar violation may result in a 

Statement of Charges.
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TPHs. Thirteen of the completed exams were completed within 90 days, while the 

remaining 12 exams took between 91 and 279 days to complete. 

o With respect to four exams that took between 144 and 279 days to complete, the 

Division is concerned that although work was steadily ongoing, these exams took 

an average of 207 days to complete. 

o In four exams that took between 127 and 227 days to complete, the Division 

noted a prolonged and unexplained period of time where it appeared that no 

examination work related to the matter was being conducted, and no mitigating 

factors existed to warrant an average of 176 days to complete these exams. 

• The Exchange’s audit trail examination program resulted in the issuance of Letters of 

Caution to five separate TPHs during the second target period. Two TPHs received 

Letters of Caution for failing to maintain audit trail data, two for incorrect account origin 

code, and one for incorrect account origin code and failing to notify CFE of change in 

responsible trader.

• The Exchange issued a Statement of Charges for one audit trail investigation that arose

from a NFA referral for improper CTI code usage. None of the investigations arising 

from the Exchange’s monthly Multiple User/Single Account review, which was the only 

audit trail surveillance activity completed during the second target period, resulted in 

disciplinary action. 

• The case reports for audit trail examinations do not include the date on which the report 

was approved by CFER staff or the signature of the approving senior CFER staff. 

• The Division typically found the quality and documentation of the investigations and 

examinations work to be thorough and complete. With one exception, the Division 

generally found that the Exchange’s actions, and its decisions whether or not to pursue 

disciplinary action, were appropriate. 

• In one investigation involving a Subject TPH that submitted numerous orders with the 

incorrect CTI codes on behalf of its clients, at least nine of whom were also CFE TPHs, 

the Exchange took disciplinary action against the Subject TPH but did not take action 

against the client TPHs that were also found responsible for submitting incorrect CTI 

codes. 

B. Recommendations

Although the Division believes that the Exchange maintains a generally adequate audit 

trail and audit trail enforcement program, the Division identified areas for improvement in 

response to certain findings listed above, and is making the following recommendations:

• All logs maintained by CFE should note the date that staff completed all examination and 

investigatory work related to a matter. 
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• CFE should include in its case report the date on which the report was approved by senior 

CFER staff and the signature of the approving senior CFER staff. 

• CFE should continue to focus on reducing the time it takes to complete its annual audit 

trail examinations of TPHs. 

• CFE should reduce the time it takes to complete audit trail investigations, including 

prompt review of the outputs generated by the automated systems used to conduct routine 

audit trail surveillance.

• CFE should promptly take appropriate disciplinary action when it identifies violations of 

its audit trail or recordkeeping requirements by persons subject to CFE’s rules. At a 

minimum, CFE should remind persons subject to its rules of their continuing compliance 

obligations even when services are received from third parties

IV. CFE Operations

A. Designation as a Contract Market

CFE was created as a wholly-owned subsidiary of the Chicago Board Options Exchange, 

Inc. (“CBOE”).5 CFE, which was designated as a contract market by the Commission in August 

2003, was created to offer automated trading on futures and options on futures contracts based on 

volatility and variance indices. Trading on CFE began on March 26, 2004. CFE contracted with 

the Options Clearing Corporation (“OCC”) for clearing and settlement service for all futures 

transactions conducted on the Exchange. CFE is also notice registered as a National Securities 

Exchange with the Securities and Exchange Commission for the purposes of trading securities 

futures products. 

All trading on CFE is electronic on CBOE’s trading platform, CBOE Command.

6

 

Individuals and organizations that wish to trade on CFE must apply to become TPHs. 

Individuals and organizations applying for trading privileges on CFE can be further classified as 

 5 As discussed in Section IV(B)(1), CBOE demutualized in 2010 and converted to a holding company structure. 

Consequently, CFE, CBOE and other CBOE affiliates became wholly-owned subsidiaries of CBOE Holdings, Inc. 6 CBOE Command also supports trading on CBOE, C2 Options Exchange, CBOE Stock Exchange and OneChicago. 
10

those with existing trading privilege on CBOE (“CBOE TPHs”), and those without existing

trading privileges on CBOE (“non-CBOE TPHs”). CBOE TPHs do not need to satisfy any 

additional criteria to obtain trading privileges on CFE, so long as they are not subject to any 

statutory disqualifications, are registered or otherwise permitted by the Commission and/or NFA 

to conduct business on the Exchange and are guaranteed by a clearing member.7

 Conversely, 

non-CBOE TPHs must submit an application for trading privileges,8 which may be denied on the 

same basis for which NFA may deny or revoke a Futures Commission Merchant’s (“FCM”) 

registration.9 As of December 2012, CFE had 109 TPHs, 75 of which were also CBOE TPHs. 

B. CFE Governance

1. Ownership and Board of Directors

As stated above, CFE was created as a wholly-owned subsidiary of CBOE. On June 18, 

2010, CBOE demutualized and converted to a holding company structure, at which time CFE 

became a wholly-owned subsidiary of CBOE Holdings, Inc. (“CBOE Holdings”). Other CBOE 

Holdings subsidiaries include: CBOE, CBOE Stock Exchange (“CBSX”), 10 C2 Options 

Exchange (“C2”), and Market Data Express, LLC (“MDX”).

CBOE Holdings, as sole shareholder of CFE, elects the CFE Board of Directors. The 

Boards of Directors for CBOE Holdings and CFE are independent of each other and carry out 

different functions. During the first and second target periods, the Boards of CBOE Holdings 

and CFE consisted of different directors that did not overlap between the two boards.11 The 

CBOE Holdings’ Board is concerned with macro-level issues related to the public company, 

 7 CFE Rule 304.

8 CFE Rule 305.

9 Such reasons include that the applicant (1) is unable to demonstrate an ability to adhere to all applicable rules of 

the Exchange, OCC and Commission Regulation; (2) would bring the Exchange into disrepute; or (3) for such other 

cause as the Exchange may reasonably deny. CFE Rule 304. 10 CBOE holds a 49.96% interest in CBSX. 11 As of May 23, 2013, the individual serving as Chairman of the CFE Board became a member of the CBOE 

Holdings Board. 
11

while CFE’s Board is focused solely on Exchange-specific issues. During the first target period, 

CFE’s Board consisted of five directors, including two public directors, which satisfied the 

thirty-five percent standard set forth in the Acceptable Practices for Core Principle 16.12 On 

September 19, 2012, CFE expanded its board to include an additional public director and an 

additional market participant, for a total of seven board members. As a result of this change, 

CFE’s Board is currently comprised of three public directors, three market participant directors, 

and one managing director.13

2. Regulatory Oversight Committee14

CFE’s self-regulatory program is overseen by the ROC, a Board-level committee 

comprised of the Exchange’s three public directors. The Exchange’s ROC was created on April 

26, 2010. The ROC’s charter outlines the responsibilities, functions, authority and composition 

of the committee, all of which are modeled after the Acceptable Practices for Core Principle 16. 

To conduct oversight of the Exchange’s regulatory program, including the regulatory services 

provided by NFA, the charter confers upon the ROC specific responsibilities, such as monitoring 

the Exchange’s regulatory program for sufficiency, effectiveness, and independence; overseeing 

all facets of the regulatory program; supervising the CRO; and recommending changes that 

would ensure fair, vigorous, and effective regulation. Additionally, the ROC is responsible for 

reviewing the size and allocation of the regulatory budget, and evaluating regulatory proposals 

and advising the Board as to whether and how such changes may impact regulation. On an 

annual basis, the ROC must prepare a report assessing the self-regulatory program of the 

 12 Dodd-Frank renumbered former Core Principle 15, Conflicts of Interest, to new Core Principle 16. The 

Acceptable Practices adopted for the core principle, both prior to and after its amended by Dodd-Frank, state that 

“[a]t least thirty-five percent of the directors on a contract market’s board of directors shall be public directors.” 13 Currently CFE’s public directors consist of approximately 43 percent of the total number of directors. 14 The discussion relating to the ROC is solely to increase the understanding of the operations of the ROC and 

CFE’s overall regulatory program. This review does not contain any judgments with respect to the Exchange’s 

compliance with Core Principle 16, as amended by Dodd-Frank. 
12

Exchange for the Board and the Commission. The ROC’s responsibilities go beyond the 

Acceptable Practices for Core Principle 16 to include overseeing compliance functions and 

supervising the Chief Compliance Officer.15 Finally, the ROC reviews decisions by the Business 

Conduct Committee (“BCC”) not to issue Statements of Charges that were recommended by 

Exchange staff and may bring such decisions to the Board’s attention. 

The CRO meets with the ROC at least three times a year to give the committee a formal 

presentation about the status of CFE’s compliance program. These presentations summarize the 

activities performed for the Exchange by NFA and highlight the status of any pending 

investigations and disciplinary proceedings. CFE staff members provide summaries of any new 

product offerings and CFE rule changes. The ROC is also informed of any proposals and 

rulemakings issued by the Commission and their impact on CFE. During the course of the 

Division’s rule enforcement review, CFE staff provided the ROC periodic updates regarding the 

status of the review, including the actions CFE was taking with respect to its audit trail program 

to address the issues and recommendations identified by the Division. Finally, the CRO makes 

an annual budget recommendation to the ROC, and once reviewed and approved by the ROC, it 

is presented to the full Board for approval. 

C. Regulatory Services Provided by NFA

As discussed above, CFE has contracted with NFA to provide certain regulatory services 

to the Exchange pursuant to an RSA. According to the RSA, NFA is responsible for performing 

trade practice and market surveillance on behalf of the Exchange, as well as conducting most of 

the investigatory work relating to trade practice and market surveillance. Although the Exchange 

is primarily responsible for conducting real-time market monitoring, it provides NFA with a 

view-only market supervision screen of CFE’s markets. On the monthly basis, NFA is required 

 15 The ROC’s charter was amended on September 19, 2012 to include these functions. 
13

to prepare for the Exchange’s review reports detailing the number and type of exception reports 

generated. Furthermore, NFA must provide the Exchange with a monthly report specifying the 

number of inquiries and investigations commenced, the status of the each investigation, and the 

nature of the violations alleged to be found. NFA does not perform any audit trail-related 

services on behalf of the Exchange.16 During the first and second target periods, NFA had 

executed agreements to provide similar regulatory services for other U.S. futures exchanges, 

including ELX Futures, NYSE Liffe U.S., Chicago Climate Futures Exchange, NASDAQ OMX 

Futures Exchange (“NFX”), Eris Exchange and trueEx.

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D. Products and Trading Volume During the First and Second Target Periods

CFE offered four futures contracts during the first target period: CBOE Volatility Index 

(“VIX”) Futures (“VX”), CBOE Mini-VIX Futures (“VM”), CBOE S&P 500 Twelve-Month 

Variance Futures (“VA”), and CBOE S&P 500 Three-Month Variance Futures (“VT”). CFE 

also introduced its first options contract during the first target period – the Weekly Options on 

CBOE VIX Futures (“VOW”). Subsequently, the Exchange launched security futures contracts 

on the CBOE Gold ETF Volatility Index (“GV”) and futures on a Radar Logic 28-Day Real 

Estate index (“RPX”) during the second target period. CFE continued to expand its volatility 

index futures offerings to include CBOE Nasdaq-100 Volatility Index (“VXN”) futures, as well 

as security futures on various sector-specific ETF and single-stock VIX products. However, the 

VIX futures contract has remained the Exchange’s leading product.

 16 As discussed further in section VI(B)(3), the Exchange utilizes an alert generated as part of NFA’s trade practice 

surveillance program to identify instances where multiple CTI codes are utilized by a single account on a given trade 

date in its audit trail enforcement program. 

17 NFA ceased providing regulatory services for Chicago Climate Futures Exchange on December 31, 2010.
14

Figure 1 illustrates CFE’s total monthly contract volume from January 2008 through 

December 2012. Trading volume was relatively stable until it began steadily increasing in late 

2009. Volume grew from 1.2 million contracts in 2009 to 4.4 million contracts in 2010, and then

nearly tripled to 12 million contracts in 2011. In 2012, trading volume reached 23.8 million 

contracts, an increase of 98 percent from the preceding year. Ninety-nine percent of this volume 

can be attributed to the Exchange’s trademark product, the VIX futures contract. 

V. Staffing, Organization and Training

During the first target period, CFE’s regulatory program was administered by the 

CBOE’s Regulatory Services Division, which was also responsible for regulatory programs of 
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other CBOE entities, including CBOE, CBSX, and C2.

18 The Regulatory Services Division was 

led by a CRO, who held this title across all CBOE entities. The following five departments 

comprised the Regulatory Services Division: the Department of Member Firm Regulation, the 

Department of Market Regulation, the Department of Regulated Entities, the Department of 

Information Access and Development, and the Department of Regulatory Planning and Strategy. 

The Department of Regulated Entities (“DRE”) was tasked with carrying out the 

investigatory programs of CFE, CBSX, and the Options Regulatory Surveillance Authority 

(“ORSA”).

19 For CFE, this included all trade practice and market surveillance activities that 

NFA did not conduct on behalf of the Exchange. During the first target period, DRE staff 

dedicated to CFE regulation consisted of the CRO who spent between approximately ten to 

fifteen percent of his time on CFE matters, one director who spent approximately twenty-five 

percent of her time on CFE matters and the remainder of her time on CBSX and ORSA matters, 

one director who spent approximately half of his time on CFE matters and the other half on 

CBSX matters, and a chief investigator who was solely dedicated to CFE matters. Additional 

DRE staff was available to assist in CFE regulatory matters should the need arise. 

In March 2012, the Regulatory Services Division was reorganized and CFE staff was 

separated into a discrete department within the Regulatory Services Division, creating the 

Department of CFE Regulation (“CFER” or “Department”).

20 As of December 2012, CFER 

consisted of seven fully dedicated personnel, including a CRO, a Manager, and five 

 18 All Regulatory Services Division personnel are dually employed by CBOE and CFE. 19 ORSA is responsible for conducting insider trading investigations related to options on behalf of all options 

exchanges. CBOE is the Regulatory Services Provider (“RSP”) for ORSA.

20 The reorganization also separated ORSA staff into a new department, reorganized the Department of Market 

Regulation, and created an Office of the CRO. Additionally, the Office of Enforcement moved from the Legal 

Division to the Regulatory Services Division. 
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investigators. CFER is led by a highly-experienced CRO who is solely dedicated to CFE.21 The 

CRO’s responsibilities include overseeing the Exchange’s regulatory program and managing 

NFA as its regulatory services provider. The CRO reports directly to the ROC, but is also 

managed administratively by the Senior Vice President of the Regulatory Services Division.

22 

The CRO is assisted by a Manager,23 whose responsibilities include the day-to-day management 

of the Department, such as selecting, training and supervising Department staff; implementing 

any new requirements mandated by new CFE, CFTC or SEC rules; and conducting special 

projects as assigned. CFER investigators are responsible for conducting investigatory work 

related to the Exchange’s regulatory program. Market surveillance responsibilities including 

conducting daily real-time surveillance, monthly preliminary reviews of security futures quoting 

obligations for market-makers, monthly security futures settlement review, monthly VIX 

expiration review, and position accountability surveillance. While most of the trade practice 

surveillance is performed by NFA, Exchange staff remains responsible for reviewing NFA 

referrals and conducting any additional investigatory work as needed. However, the bulk of the 

investigators’ time is spent on the Exchange’s audit trail program. Since implementation of the 

program, investigators have been dedicating approximately three-quarters of their time to 

conducting audit trail exams. Finally, investigators also support the Office of Enforcement

throughout various stages of the disciplinary process and may act as an expert witness in 

disciplinary hearings. 

One of the five investigator positions was added in response to a backlog of examinations

that developed while the Exchange was hiring and training staff to administer the new audit trail 

 21 The CRO has 32 years of financial markets experience and has served in various roles within the CBOE 

organization. 

22 The Senior Vice President of the Regulatory Services Division also serves as the CRO for CBOE, CBSX and C2. 23 The CFE Manager has 13 years of futures compliance experience.
17

examination program. CFER further intends to add a staff position for an individual who will be 

dedicated to calculating margin requirements and conducting financial surveillance for the 

Exchange.

In addition to the seven individuals dedicated to its regulatory program, CFER receives 

support from other groups within the Regulatory Services Division, the Legal Division, and the 

Trading Systems Development Division. 

• The Legal Division, which is led by a general counsel who serves this position for 

CFE and CBOE, provides legal support for the Exchange. Two attorneys within 

the Legal Division handle all legal matters on behalf of the Exchange, including 

rule filings and interpretations. 

• The Office of Enforcement, which moved to the Regulatory Services Division 

from the Legal Division as part of the reorganization, includes two attorneys who 

are responsible for CFE’s enforcement program, which includes handling all 

aspects of the enforcement process before the BCC and resolving disciplinary 

matters on behalf of the Exchange. 

• Department of Member Firm Regulation supports CFE in conducting financial 

reviews of TPHs;

• The Information Access and Development (“IAD”) group, which is housed in the 

Office of the CRO, develops and supports surveillance tools and reports and 

provides ad hoc reports upon request by Exchange staff; 

• CFE Help Desk, which resides in Trading Systems Development Division,

accepts and monitors off-exchange transactions, such as Exchange of Contract for 

Related Position transactions and block trades.
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CFER staff meets on a weekly basis to review completed exams and investigations and 

other routine matters. The weekly meeting also provides an opportunity to discuss any new 

rules, policies and procedures, as well as new product launches or changes to Exchange trading 

procedures. Topics that are more complex or require lengthy discussion are addressed at a 

separate meeting to ensure that sufficient time is provided. CFER staff also attends a monthly

“Pre-BCC meeting” which is a meeting of all of the departments within the Regulatory Services 

Division to review the cases that will be presented at the next BCC meeting. 

The Exchange has an annual training requirement of eight hours for all staff, including 

training regarding self-regulatory organization (“SRO”) obligations and staff’s responsibilities 

under Exchange policies an as employees of SROs and entities that are owned by a public 

company. CFE offers new hire training which consists of general orientation as well as on-thejob training and specific training relating to the investigatory process and the surveillance tools 

used by staff. During the second target period, staff attended training sessions that focused on 

the audit trail exam program. In addition, CFE staff attended training led by OCC addressing 

trade allocations, adjustments and transfers, and training from the Options Institute covering 

exchange traded funds and exchange traded notes that are based on the VIX. 

The Division believes that the CFER personnel are qualified and experienced. The 

Exchange provides adequate training and education for its new hires and experienced staff, 

including training pertaining to the audit trail enforcement program. The Exchange promptly 

increased staffing levels during the second target period in response to additional responsibilities 

undertaken by the Exchange with respect to implementing its audit trail enforcement program. 

Based on the foregoing, the Division has no recommendations in this area.
19

VI. Audit Trail Program

Former Core Principle 10 – Trade Information: 

The board of trade shall maintain rules and procedures to provide for the recording 

and safe storage of all identifying trade information in a manner that enables the contract 

market to use the information for purposes of assisting in the prevention of customer and 

market abuses and providing evidence of any violations of the rules of the contract market. 

Former Core Principle 17 – Recordkeeping: 

The board of trade shall maintain records of all activities related to the business of 

the contract market in a form and manner acceptable to the Commission for a period of 

five years.

New Core Principle 10 – Trade Information

The board of trade shall maintain rules and procedures to provide for the recording 

and safe storage of all identifying trade information in a manner that enables the contract 

market to use the information–

(A)to assist in the prevention of customer and market abuses; and 

(B) to provide evidence of any violations of the rules of the contract market. 

New Core Principle 18 – Recordkeeping

The board of trade shall maintain records of all activities relating to the business of 

the contract market –

(A)in a form and manner that is acceptable to the Commission; and 

(B) for a period of at least 5 years.

The audit trail requirements under the Final DCM Rules are consistent with previous 

guidance issued by the Division in rule enforcement reviews and the guidance and acceptable 

practices found in Part 38 of the Commission’s regulations prior to its amendment.

24 Therefore, 

a designated contract market’s (“DCM”) obligations with respect to its audit trail program 

remain largely unchanged. A DCM must capture and retain sufficient audit trail data to detect, 

investigate, and prevent customer and market abuses and to reconstruct transactions within a 

 24 Although the Final DCM Rules were not in effect during the first or second target periods, the Division 

considered the changes to Part 38 and the Act in its review. See supra note 2.
20

reasonable period of time. In addition, the DCM must create and maintain an electronic 

transaction history database that contains information with respect to transactions executed on 

the designated contract market. An acceptable audit trail also must be able to track a customer 

order from time of receipt through fill allocation or other disposition. Further, an acceptable 

audit trail should include original source documents, transaction history, electronic analysis 

capability, and safe storage capability.25

The Final DCM Rules codified certain guidance regarding an exchange’s audit trail 

enforcement program previous issued by the Division through its rule enforcement reviews. 

These requirements include annual audit trail and recordkeeping reviews of all members and 

persons and firms subject to the DCM’s recordkeeping rules to enforce compliance with the 

DCM’s audit trail and recordkeeping requirements. Audit trail reviews must include the 

following: (1) review of randomly selected sample front-end audit trail data; (2) review of the 

process by which user identifications are assigned and records relating to user identifications are 

maintained; (3) review of the usage patterns of user identifications to identify violations of user 

identification rules; and (4) review of account numbers and customer type indicator codes for 

accuracy and proper use. In addition, DCMs must develop programs to ensure effective 

enforcement of their audit trail and recordkeeping requirements, which includes the ability to 

identify members and market participants that routinely failed to comply with Core Principle 10 

 25 Original source documents include unalterable, sequentially identified records on which trade execution 

information is originally recorded, whether manually or electronically. A transaction history consists of an 

electronic history of each transaction, including all data that are input into the trade entry or matching system for the 

transaction to match and clear. These data should include the customer type indicator code; timing and sequencing 

data adequate to reconstruct trading; and the identification of each account to which fills are allocated. An 

electronic analysis capability with respect to all audit trail data in the transaction history database permits the DCM 

to reconstruct trading and identify possible trading violations, while safe storage capability provides for a method of 

storing the data included in the transaction history in a manner that protects the data from unauthorized alteration, 

accidental erasure, or other loss. Since the Division conducts separate examinations of DCMs’ compliance with the 

safe storage requirements, this review does not contain any judgments with respect to the Exchange’s compliance 

with the safe storage requirements found in Core Principle 10, Trade Information. 
21

and to levy meaningful sanctions when deficiencies are found. Sanctions must not include more 

than one warning letter or other non-financial penalty for the same violation within a rolling 

twelve month period. 

Finally, the recordkeeping requirements under the Final DCM Rules continue to require 

that all books and records, including trade records and investigatory and disciplinary files, must 

be maintained for five years and be readily accessible during the first two years. 

A. Order Entry and Creation of Electronic Audit Trail

1. Trading Platform Order Entry Systems and Process 

Only individuals or organizations that hold trading privileges on the Exchange (i.e., that 

are TPHs) may enter orders directly to CBOE Command; those that do not hold privileges must 

trade through a TPH. Individual TPHs can use their trading privileges to trade their proprietary 

accounts or to execute trades on behalf of customers. Organizations with trading privileges on 

the Exchange include proprietary trading firms; retail brokerage firms and futures commission 

merchants (“FCMs”); and executing brokerage firms. To become a clearing firm, a TPH must 

become a member of CFE’s clearinghouse, OCC. Any TPH that is not also a member of OCC 

must have a clearing firm guarantee in place to access CBOE Command. As of December 2012, 

28 of CFE’s 109 TPHs were also members of OCC. 

TPHs can directly access CBOE Command by utilizing their own proprietary interface, 

through front-end systems provided by Independent Software Vendors (“ISV”), or by writing 

directly to one of the application programming interfaces (“APIs”), such as the Financial 

Information Exchange (“FIX”) or CBOE Market Interface (“CMi”). To place an order on CBOE 

Command, a TPH must log into the system with its assigned user identification and password

(collectively, “CFE login” or “login”). CBOE Command will not accept an order that does not 
22

meet the following three conditions: (1) contains a valid CFE login; (2) placed from an IP 

address that matches the IP address on file with the Exchange, and (3) contains the information 

required for all orders. In addition, risk controls implemented by the Exchange in October 2012 

impose pre-trade order size limits and price reasonability checks prior to the execution of 

transactions on CBOE Command.

26

All orders transmitted to CBOE Command must include the product, executing firm, buy 

sell code, quantity, price, the time in force, account name, open close code, CBOE account type, 

and expiration date. The CTI code is populated in the Exchange’s audit trail via the CBOE 

account type code, which is subsequently translated into the equivalent CTI and origin codes. 27 

 26 These risk controls include rejection of off-market limit orders that exceed a defined price away from the market 

and market order protection checks that reject market orders when the bid/ask spread is greater than a pre-defined 

width. 27 The Exchange defines the CTI codes as follows:

CTI 1- Transactions initiated and executed by an individual TPH for the TPH's own account, for an account 

the TPH controls, or for an account in which the TPH has an ownership or financial interest.

CTI 2- Transactions executed for the proprietary account of a clearing member or non-clearing member 

TPH.

CTI 3- Transactions where an individual TPH or authorized trader executes for the personal account of 

another individual TPH, for an account the other individual TPH controls or for an account in which the 

other individual TPH has an ownership or financial interest.

CTI 4- Any transaction not meeting the definition of CTI 1, 2 or 3. 

The translation of the CBOE account type to CTI code and Options Clearing Corporation (“OCC”) account type 

occurs as follows:

CBOE Account Type CTI Code OCC Account Type

(“Origin Code”)

D (FIX Interface) 1 Customer

V (CMi Interface) 1 Customer

E 1 Firm

F 2 Firm

O 2 Customer

M 2 Market Maker

A (FIX Interface) 3 Customer

G (CMi Interface) 3 Customer

H 3 Firm

C 4 Customer

L 4 Firm
23

The origin code identifies whether an order clears in the customer, firm or market maker range at 

OCC. Market maker quotes and orders are populated with the CBOE account type based upon

the profile established for that TPH, while non-market makers must enter the CBOE account 

type at the time of order entry. Additionally, all orders for options must also include the strike 

price, whether the option is a put or call, and the expiration month. As of April 30, 2012, the 

Exchange began requiring an Order Entry Operator ID (“OEO ID”) with every order or quote 

submitted. 

For any order that cannot be immediately entered into CBOE Command, the Exchange 

rules require the TPH to prepare an order ticket in “a non-alterable written medium, which shall 

be time-stamped and include the account designation, date, and other required information.”28 

An order ticket must be retained for at least five years from the time that it was prepared, and the 

order must be entered sequentially into CBOE Command as soon as it can be entered.29 

Furthermore, each TPH is responsible for maintaining front-end audit trail information for all 

electronic orders entered into CBOE Command, including “all order entry, modification, 

cancellation, and response receipt time(s) as well as all FIX tag information and fields or CMi 

order structure, as applicable.”30 Exchange rules require TPHs to maintain all books and records 

for five years, and have such books and records readily accessible for the most recent two 

years.31

CBOE Command executes orders based on the allocation method set for that product –

either price-time priority or pro rata priority.32 Once the trade has been executed, CBOE 

 28 CFE Rule 403(b).

29 Id. 30 CFE Rule 403(c). 31 CFE Rule 502. 32 The price-time method prioritizes orders at the best price in the order in which they were received, while the pro 

rata method prioritizes orders at the best price on a pro rata basis. In addition to these base allocation methods, CFE 

rules permit it to overlay certain priorities. The public customer priority prioritizes orders place by or on behalf of a 
24

Command transmits a trade confirmation to the initiating TPH through the originating network 

and sends a copy of the trade to its trade match system, Continuous Trade Match (“CTM”). 

CTM then submits those trades near real-time to OCC for clearing and settlement. Postexecution changes to trades can only be made by using OCC’s Trade Management System and 

are limited to the following fields: account name and subaccount name, order ID, CMTA firm 

code,

33 and CBOE account type. These changes appear in the audit trail as allocations or 

transfers. OCC reports any changes made prior to the end of the business day to the Exchange, 

and these changes are included in the audit trail data transmitted to NFA. Any changes that 

occur after the trade day are sent to directly to NFA from OCC. 

CBOE Command creates a comprehensive audit trail by automatically recording all 

messages entered into the system. The retained information includes all orders, including all 

modifications, cancellations, and all responses by the system to such messages, and all trades 

matched by the system. It also includes all quotes submitted by market makers. Every action 

with respect to an order or execution is time-stamped to the millisecond. A complete record of 

all trade and market data is entered into the Consolidated Database (“CDB”), which replicates all 

trading activity on a near real-time basis. Once logged into the CDB database, the data is then 

transmitted it to the CBOE data warehouse, which is used to store, retrieve and manage the audit 

trail data. The data warehouse loads the audit trail data into database tables and stores the data 

on archive servers. The system does not allow TPHs or Exchange staff to erase or alter any 

messages from the audit trail. Exchange staff can access the audit trail data through the Market 

 

public customer over orders place by or on behalf of non-public customers. Furthermore, the market turner priority 

permits a TPH or its authorized trader who enters an order or quote at a price that is better than the best price 

previously available, to retain priority at the highest bid or lowest offer made by it. Finally, the Exchange also 

provides designated primary market makers (“DPMs”) certain trade participation rights.

33 This field represents the give-up firm, the firm for whom the trade was executed for by the executing firm. The 

CMTA is an agreement between two OCC Clearing Members allowing one Clearing Member to execute trades on 

an exchange for another Clearing Member. The executing Clearing member indicates on its trade entry that it wishes 

to give-up the trade to another Clearing Member. Valid CMTA trades clear and settle in the give-up firm’s account. 
25

Replay system, which is a front-end system that accesses the CDB database, to view near realtime trading as it occurs on CBOE Command, as well as all archived data since trading began on 

CFE. 

Once CFE receives cleared trade data from OCC overnight, the Exchange formats and 

electronically transmits the audit trail records to NFA. As discussed, the audit trail data provided 

to NFA includes any post-execution changes made prior to the end of the business day, while 

changes that occur after the trade day are provided directly from OCC. The records are

processed overnight through NFA’s system and are available the following business day, on a 

trade date plus one (“T+1”) basis. NFA populates the CTI code in the Exchange’s audit trail data 

by translating the CBOE account type to the equivalent CTI and origin codes.

2. Identification of “Authorized Traders”

Each TPH may designate one or more natural persons as its “authorized trader” for 

purposes of accessing CBOE Command.34 As a practical matter, organizations with trading 

privileges must assign an authorized trader, whereas individual TPHs may themselves act as the 

authorized trader. Exchange rules require that each TPH must ensure that none of its authorized 

traders are subject to any statutory disqualification and that each of its authorized traders is 

technically proficient and conducts its business in a fair and equitable manner.35 Each trading 

permit entitles its holder up to three CFE logins to access CBOE Command. During the first

target period, the Exchange rules did not require TPHs to assign a unique CFE login for each of 

its authorized traders. Therefore, TPHs could permit multiple authorized traders to use a single 

 34 CFE Rules 105 and 303. 35 CFE Rule 303.
26

CFE login, so long as the TPH maintained a record of the authorized trader responsible for a

given order, bid, offer, or other message transmitted to CBOE Command.36 

As of April 30, 2012, the Exchange rules require that each natural person who enters an 

order into CBOE Command must have and enter an OEO ID that identifies the individual 

physically responsible for entering the order or quote into CBOE Command.37 Each Automated 

Trading System (“ATS”) that generates and routes an order to CBOE Command must also 

submit an OEO ID for that ATS.

38 Exchange rules require that an OEO ID must not be 

associated with more than one natural person or ATS.

39 Each TPH is responsible for assigning 

OEO IDs and ensuring that the OEO ID is unique at the clearing firm level.40 TPHs are also 

required to maintain and keep current the following information for each OEO ID assigned to a

natural person or ATS: name; business address; business telephone; business email; and position 

or relationship to the TPH of the natural person, or if the OEO ID is issued to an ATS, the head 

operator of the ATS.41 

3. Identification of “Responsible Traders” 

CFE rules require each TPH to designate a “responsible trader” as its administrator with 

respect to the TPH’s use of CBOE Command.42 Responsible traders designated by non-CBOE 

TPHs must undergo a background investigation by CFE’s Registration Services Department. 

Once designated, responsible traders have full control over access to CBOE Command by the 

TPH and its authorized traders and have the ability to access, and, if required, modify and 

 36 CFE Rule 501(b). 37 CFE Rule 303A. 38 CFE Rule 303A(c).

39 CFE Rule 303A(b). 40 CFE Rule 303A(d). 41 Id. 42 CFE Rule 513(a).
27

withdraw, any and all orders placed by such TPH and its authorized traders.43 TPHs are 

encouraged to designate more than one responsible trader to allow for sufficient back-up.

4. Findings and Recommendations Regarding Order Entry and Creation of 

Electronic Audit Trail 

The Division believes that CFE maintains an adequate audit trail. The audit trail 

maintained by the Exchange records trade data in a manner that enables it to identify customer 

and market abuses and provide evidence of rule violations. CBOE Command creates a 

comprehensive audit trail by automatically recording all messages entered into the system, 

including all orders, including all modifications, cancellations, and all responses by the system to 

such messages, and all trades matched by the system. The system does not allow TPHs or 

Exchange staff to erase or alter any messages from the audit trail. Exchange staff can reconstruct 

trading through the Market Replay system, which provides a near real-time review of trading as 

it occurs on CBOE Command, as well as all archived data since trading began on CFE. As of 

April 30, 2012, Exchange rules require that each natural person who enters an order into CBOE 

Command must have an OEO ID that identifies the individual physically responsible for entering 

the order or quote. Each ATS that generates and routes orders to CBOE Command must also 

submit an OEO ID for that ATS. Based on the foregoing, the Division has no recommendations 

in this area.

B. Audit Trail Enforcement

As discussed in Section I, the Exchange did not review TPHs’ compliance with audit trail 

and recordkeeping requirements during the first target period. To address this deficiency and the 

concerns expressed in the Division’s November 4, 2011 letter, CFE implemented a 

comprehensive audit trail enforcement program. As part of the new audit trail enforcement 

 43 Id.
28

program, the Exchange conducts audit trail investigations to investigate potential violative 

activity arising from CFE’s routine audit trail surveillance or NFA referral, as well as annual 

audit trail exams of every TPH to ensure compliance with Exchange’s audit trail and 

recordkeeping requirements. 

1. Audit Trail Routine Surveillance and Reviews

The Exchange’s audit trail surveillance program primarily relies on three reports created 

by IAD. These reports enable staff to identify unusual or potential violative activity relating to 

the Exchange’s audit trail requirements. First, Exchange staff conducts an Order Entry Operator 

review (“OEO review”) to identify every instance in which an order is received without the 

presence of the OEO ID.

44 Exchange staff has been conducting this review since June 2012 by 

using a monthly report generated by IAD to identify the total number of trades submitted without 

an OEO ID by a given TPH. Investigators can submit an ad-hoc request to IAD for the trade 

details for each trade submitted without an OEO ID. Generally, the OEO review for a given 

month is assigned to an investigator within two weeks after the month’s end. The investigator 

reviews and summarizes the results of the review in a case report, along with a recommendation 

to either initiate a separate investigation for any TPH that submitted trade without an OEO ID or 

to file the matter without action if no such orders are found. If an audit trail exam of the TPH is 

already underway, the Exchange may choose to address the matter in the exam rather than in a 

separate investigation. With the adoption of its summary fine program described below, 

Exchange staff will identify TPHs that have failed to provide OEO IDs for trades in a given 

month and levy fines according to the fine schedule.

45 

 44 Since CBOE Command will not reject orders or quotes that do not populate this field, the Exchange uses this 

surveillance report to enforce the requirement that an OEO ID must be included in every order submitted. 

45 See infra section VI(B)(4) for a discussion of the summary fine program. 
29

Second, as of September 2011, the Exchange began conducting a Multiple User/Single 

Account review to enforce the proper assignment and usage of CFE logins. This review uses

two reports – a report that identifies trading by a single login on behalf of an unusually large 

number of accounts, and a report that identifies trading by an usually large number of CFE logins 

on behalf of a single account.46 Generally, the Multiple User/Single Account review for a given 

month is assigned to an investigator within the first two weeks of the month’s end. The

investigator generates both reports for a given date or range of dates. Since the results of these

reports will not indicate, in and of themselves, unusual trading or potential violations of 

Exchange rules, investigators analyze the overall trend for a given month for each account, in 

addition to trading that exceeds certain pre-determined threshold, to identify unusual trading by 

an account. The investigators contact the TPH to whom any unusual trading is attributed and 

verify that the CFE logins identified were authorized to trade on behalf of the account. Once this 

inquiry is completed, the investigator summarizes the findings of this review in a case report, 

along with a recommendation to either initiate a separate investigation of any TPH for which 

unusual trading was identified or to close the matter without action if no unusual trading is 

found. 

Third, Exchange staff conducts an Invalid TPH review to identify any trades placed on 

CFE by a non-TPH, as proscribed by Exchange rules. The Exchange implemented this review in 

April 2012 to ensure that a technology malfunction or other system error does not permit access 

to an individual who does not hold Exchange trading privileges. On a daily basis, IAD generates 

a report for Exchange staff that identifies whether any non-TPHs accessed the CFE directly and 

 46 The Exchange will expand its use of this tool to identify trading by a single OEO ID on behalf of an unusually 

large number of accounts and trading by an usually large number of OEO IDs on behalf of a single account. The 

Exchange has started using this tool to identify unusual or violative activity with respect to OEO IDs during its audit 

trail exams.
30

traded the previous day. If trading by a non-TPH is identified, investigators submit a highpriority request to IAD to obtain additional information and notify CFER management of the 

activity. While these results are reviewed daily by all CFER investigators, one investigator is 

responsible for creating a case report summarizing the results of the review at the end of the 

month. 

2. TPH Audit Trail Examination Program

As part of its audit trail examination program, the Exchange conducts annual reviews of 

its TPHs to verify that all required audit trail data has been accurately recorded, submitted and

maintained. Investigators are assigned audit trail exams on a monthly basis, pursuant to the 

annual audit trail examination schedule established by the Department. The investigator 

commences the exam by sending an advisory letter notifying the TPH that an exam has been 

initiated to review its audit trail recordkeeping procedures. The advisory letter also requests

certain information from the TPH, including written supervisory procedures regarding the TPH’s 

audit trail recordkeeping practices, error account procedures, sample audit trail records, a list of 

OEO IDs and account numbers belonging to the TPH, and paper order tickets, if applicable. 

Although the exam focuses on a two-month period, investigators can expand the review period if 

it appears that a TPH is not adequately maintaining the requisite audit trail data or for other 

related issues. 

CFE investigators conduct the audit trail examinations in accordance with the audit trail 

exam module outlined in the CFE Manual. The exams include the following components: (1) 

obtaining and verifying TPH membership and ownership information; (2) reviewing sample 

front-end audit trail data and paper order tickets; (3) reviewing the accuracy of order entry data 

points; (4) monitoring for post-execution changes to CTI codes and account numbers; (5) 
31

monitoring error account activity; (6) reviewing adjustments and transfer activity; and (7) 

reviewing compliance with OEO ID requirements. These components are discussed further 

below.

i. Obtaining and Verifying TPH Membership and Ownership Information

Investigators begin the exam by gathering background information on the TPH by 

searching the CBOE Trading Permits System (“TPS”), a database that identifies the TPH’s 

membership types, primary contact information, name of responsible trader(s), as well the CFE 

logins assigned to the TPH. Investigators also use the Back Office Reporting System (“BORS”), 

to view the registration history for each CFE logins assigned to the TPH. Together, these 

systems enable the investigators to identify how the TPH accesses the Exchange and verify this 

information against the records provided by the TPH. Additionally, investigators query NFA’s 

BASIC,47 FINRA’s WebCRD,48 and SEC reports to verify ownership and management 

information provided by the TPH. 

ii. Reviewing Sample Front-End Audit Trail Data and Paper Order Tickets

Investigators review the TPH’s written supervisory procedures to determine if they are 

sufficient to maintain accurate and complete audit trail records in accordance with Exchange 

rules and Commission regulations. To verify that the TPH is maintaining the data in accordance 

with its procedures, investigators review a sample of the TPH’s paper order tickets, if any such 

order tickets were created during the review period, to ensure they are accurate and complete, 

and were created and maintained pursuant to Exchange rules. For all orders placed 

electronically, investigators review a subset of trades executed on sample trade dates over the 

 47 BASIC, which stands for Background Affiliation Status Information Center, contains CFTC registration and NFA 

membership information, as well as all regulatory and non-regulatory actions taken by NFA, the CFTC and the U.S. 

futures exchanges.

48 WebCRD contains the registration information on registered broker-dealers and the qualification, employment, 

and disclosure history of individuals registered with FINRA. 
32

last five years to ensure that audit trail data is in a standard format, that the record includes all 

orders placed but rejected for any reason, and that each order contains the required fields.49 

iii. Reviewing the Accuracy of Order Entry Data Points

To verify the accuracy of order entry data points, CFE’s investigators utilize two 

automated tools to compare the audit trail data provided by the TPH against the Exchange’s 

records – CBOE’s Market Replay and CFE Order History. Investigators utilize the Market 

Replay system to locate all trades or orders placed by a TPH and identify all trade details 

including: origin codes, executing firm, trade time, price, quantity, and order number. 

Investigators can search based on numerous data fields including: trade date and time, TPH, 

clearing firms, and CFE login. CFE’s Order History application permits the following fields to 

be searched on from the Exchange’s records: executing firm, CFE login, OEO ID, sub account, 

order ID, and trade times. The search results can be exported into a spreadsheet to allow for 

easier filtering and sorting of the data. This tool provides a broader range of search criteria than 

that which exists in Market Replay by allowing investigators to search a range of dates as 

opposed to a single trade date. Data from the Order History application is available on a T+1 

basis, while Market Replay provides near-real time view of the data.

iv. Monitoring for Post-Execution Changes to CTI Codes and Account 

numbers; Monitoring Error Account Activity

Investigators monitor the usage of the CTI code,

50 account numbers and error accounts to 

detect any patterns suggesting possible misuse, errors, or violations of Exchange rules. To 

monitor and detect improper use of CTI codes, investigators review two months of complete 

 49 As discussed in Section VI(A)(1), the following fields are required for all orders entered into CBOE Command: 

the product, executing firm, buy sell code, quantity, price, the time in force, account name, open close code, CBOE 

account type, and expiration date. For options, all orders must also include the strike price, whether the option is a 

put or call, and the expiration month. As of April 30, 2012, the Exchange began requiring TPHs to submit an OEO 

ID with every order or quote submitted. 50 As discussed above, the CTI code is populated in the Exchange’s audit trail through the CBOE account type. 
33

audit trail data, including fill information, to ensure that the TPH is using the appropriate CBOE 

account type (which, in turn, should translate to the appropriate CTI code) and that it is being 

used consistently during the review period. Investigators can review any post-execution changes 

made to the CBOE account type using the CFE Allocations tool, which pulls data tables from 

OCC for sample trade dates and identifies any adjustments that were made to the origin where 

trades were cleared. Investigators also trace a sample of trades from the TPH’s records through 

the Exchange’s records, and then to the account statement to determine whether any postclearing changes were made to the CBOE account type. To monitor and detect improper use of 

account numbers, investigators request account statements for sample trade dates to verify that

the account numbers belong to the TPH as indicated. Investigators can also use the CFE 

Allocations application to identify instances where a post-execution change was made to the 

account number. Finally, investigators identify which of the TPH’s accounts are error accounts 

and review trading activity in such accounts for the review period. Investigators also verify that 

the TPH has written supervisory procedures for error account activity.

v. Reviewing Adjustments and Transfer Activity

Investigators obtain and review all adjustments and transfers made by the TPH during a 

selected two-month period. While adjustments or transfers do not, in and of themselves, indicate 

a potential violation of Exchange rules, investigators may question any adjustments or transfers 

that appear excessive or unusual, and request documents, such as account statements, to verify 

any explanation provided by the TPH. Utilizing the CFE Adjustments application, investigators 

can identify any long or short quantity changes made at OCC and search for all adjustments that 

occurred on a single trade date or date range in a given year, or for all adjustments by a particular 

clearing firm. The CFE Transfers application allows investigators to identify instances where 
34

positions have been transferred between clearing firms as well as internally between same 

beneficial owners. Investigators can search for all transfers that occurred on a single trade date 

or date range in a given year, or for all transfers by a particular clearing firm. 

vi. Reviewing Compliance with OEO ID Requirements

With the availability of the OEO ID in the Exchange’s audit trail, the exam program has 

been expanded to include a review of TPHs’ compliance with the OEO ID requirements. As part 

of this review, investigators evaluate the TPH’s procedures for issuing OEO IDs to ensure that 

they are unique at the clearing firm level and that the TPH can readily identify the natural person 

or ATS for which the OEO IDs are assigned. Investigators verify this information with the 

Exchange’s records to ensure that the TPH is promptly notifying the Exchange of any changes to 

such information. To identify potential misuse of OEO IDs, Exchange staff identifies instances 

where an OEO ID is trading for several accounts or an OEO ID is trading for more than one 

session. To facilitate this review, staff utilizes the same surveillance tool used to conduct the 

Multiple User/Single Account review.

3. Services Provided by NFA Related to the Audit Trail

While NFA does not directly perform any services relating to the Exchange’s audit trail 

enforcement program, an alert generated as part of its trade practice surveillance program is used 

by the Exchange to identify instances where multiple CTI codes are utilized by a single account 

on a given trade date. When the alert is generated, NFA contacts the TPH and requests specific 

information regarding the account in an effort to determine whether the appropriate CTI code 

was used. The Exchange staff is copied on all such communications. If the alert was triggered 

for any reason other than account set-up issues or trader input error, the matter is referred to the 

Exchange. As of December 1, 2012, NFA began logging all of the alerts generated on the basis 
35

of multiple CTI code usage into a monthly report for the Exchange. Accordingly, the Exchange 

utilizes referrals made by NFA on the basis of this alert as a source for conducting audit trail 

investigations. 

Exchange staff meets with NFA staff on a monthly basis to discuss that status of open 

investigations, any market maker incentive programs, and matters relating to surveillance 

conducted on behalf of the Exchange. This meeting also provides an opportunity to identify any 

potential audit trail issues that NFA uncovers in the course of its trade practice surveillance

program, or potential trade practice issues that could result from the Exchange’s audit trail 

enforcement program. In addition to these formal meetings, Exchange and NFA staffs maintain 

regular contact to discuss issues as they arise. 

4. Disposition of Audit Trail Investigations and Examinations 

Once an audit trail investigation or exam is completed, investigators document their 

findings in a case report. The case report is brought before of all CFER staff members for 

review at a Department meeting for management’s approval. The Exchange refers to this 

meeting as a “draft meeting.” If the decision is made to “file the matter without action”51 due to 

no apparent violations of CFE rules or Commission regulations, then the matter will be closed

administratively at this meeting. If a determination is made to issue a Letter of Caution,52 or to 

recommend that the BCC issue a Statement of Charges, the matter proceeds to a “Pre-BCC” 

meeting where it is presented to senior staff of the Regulatory Services Division. The Pre-BCC 

meeting provides staff an opportunity to hone its presentation of a matter in preparation for the 

BCC meeting; CFER staff does not explicitly seek approval of its recommendation with respect 

 51 The Exchange uses the term “filed without action” to describe a matter that has been closed upon review and 

approval of CFE management.

52 The Exchange issues a Letter of Caution where a party violates a technical rule for the first time and it appears a 

letter is sufficient to prevent a recurrence. The letter serves as notice that another similar violation may result in a 

Statement of Charges.
36

to the disposition of a matter. All matters for which Exchange staff recommended a Letter of 

Caution or Statement of Charges will then advance to the BCC for review. 

On January 23, 2013, the Exchange implemented a summary fine schedule for certain 

audit trail and recordkeeping violations, including: failure to include an OEO ID with an order or 

quote submitted to CBOE Command; improper use of OEO IDs; failure to comply with issuance, 

recordkeeping and reporting requirements related to OEO IDs; failure to identify correct account 

type in order; and failure to maintain front-end audit trail information. The schedule permits a 

Letter of Caution for the first offense for each of these violations, while subsequent violations 

within a rolling 12-month period will result in progressively larger fines, and ultimately, referral 

to the BCC for disciplinary action.53 The fines established under this schedule range from 

$2,500 to $10,000. 

5. Findings and Recommendations Regarding the Exchange’s Audit Trail 

Enforcement Program

The Exchange has implemented an audit trail enforcement program that includes routine 

surveillance and annual exams to monitor TPHs’ compliance with audit trail and recordkeeping 

requirements. The Division found that the Exchange’s audit trail enforcement program

adequately implements the following components: (1) monitoring for potential recordkeeping 

and audit trail violations; (2) reviewing paper order tickets for orders that cannot be entered 

immediately upon receipt; (3) reviewing sample front-end audit trail data; (4) monitoring for 

post-execution changes to trade information, including account numbers and CTI codes; (5) 

monitoring error account activity; (6) reviewing the accuracy of order entry data points; and (7) 

auditing, examining, and enforcing the proper assignment and usage of login IDs. In addition, 

the Division believes that the fines established under the summary fine schedule, which range 

 53 Nonetheless, CFE Rule 714(d) permits the Exchange to proceed under its formal disciplinary rules “whenever it 

determines that any violation is intentional, egregious or otherwise not minor in nature.” 
37

from $2,500 to $10,000, are adequate to deter recidivist activity. Based on the foregoing, the 

Division has no recommendations in this area.

C. Audit Trail Examinations and Audit Trail Investigations Process

The Exchange tracks all audit trail investigations and exams using the Integrated Case 

Tracking System (“ICT”). The Exchange provided the Division logs that were generated from 

the ICT system listing all audit trail exams and investigations during the second target period. 

ICT logs list two types of “general investigations” pertaining to the audit trail enforcement 

program. One type of general investigation captures each surveillance activity conducted by the 

Exchange pursuant to its routine audit trail surveillance. Therefore, the routine surveillance 

activities conducted by the Exchange, such as the OEO review, are logged as a general 

investigation and are not attributed to any particular TPH. If, however, the routine surveillance 

reveals a potential violation that requires further investigation, then a separate general 

investigation listing the TPH under review will be opened. The second type of general 

investigation captures audit trail investigations pertaining to potential violative conduct identified 

by NFA referrals or routine audit trail surveillance. Finally, the examinations log lists all audit 

trail examinations. 

Both logs include the date that the matter was opened and the date that it was closed in 

the ICT system. The date that a matter is opened varies depending on the matter type. 

According to the Exchange, audit trail exams are generally opened in the system the month that 

the exam was assigned to an investigator, prior to commencing the exam. Audit trail 

investigations pertaining to routine audit trail surveillance that are not attributed to any particular 

TPH (the first type of “general investigation” discussed above) are opened at the time the 

surveillance is assigned to an investigator, which is generally within the first two weeks of 
38

following month for which the review covered. Finally, audit trail investigations that arise from

NFA referrals or the results of routine audit trail surveillance are opened once Exchange staff 

determines that further investigation is warranted. For each matter, the close date represents the 

date on the entire regulatory process has been completed, including CFER’s examination or 

investigatory work and the BCC’s disciplinary action, if applicable, and the matter has been 

closed in the ICT system. 

The logs also include the “last draft date” which is the date on which CFER management 

reviewed the case report during a draft meeting (which consists of all CFER regulation staff) and 

either approved the matter for closure or recommended a Letter of Caution or a Statement of 

Charges. Exchange staff explained to the Division that the date of the last draft meeting 

represents the date on which Exchange staff has substantively completed its examination and 

investigatory work, and that the recommendation regarding the disposition of the matter is final. 

Generally, any substantive changes made to the case report after this time would require that the 

matter be remanded to a subsequent draft meeting before proceeding to the Pre-BCC for 

review.54 However, non-substantive changes to the case report that do not affect Exchange 

staff’s recommendation regarding the disposition can be made without remanding the matter to a 

subsequent draft meeting.

One exception to this process is a matter for which Exchange staff recommends a 

Statement of Charges. The Exchange employs a “Wells” process for such matters. Prior to 

submitting an investigative report to the BCC for which staff finds a reasonable basis exists for 

finding a violation of Exchange rules, Exchange staff must notify the subject of the report and 

 54 As discussed in section VI(B)(4), the Pre-BCC is a meeting of all of the departments within the Regulatory 

Services Division to review the cases that will be presented at the next BCC meeting. The Pre-BCC meeting 

provides staff an opportunity to hone its presentation of a matter in preparation for the BCC meeting; CFER staff 

does not explicitly seek approval of its recommendation with respect to the disposition of a matter. 
39

allow the subject to submit a written statement to the BCC explaining why no disciplinary action 

should be taken.55 As a practical matter, since this “Wells letter” is issued to the subject of the 

report ahead of the BCC meeting, Exchange staff may obtain additional investigative evidence 

that must be included in the case report before it is presented to the BCC. Therefore, the last 

draft date for these matters is not an accurate indication of when investigatory work was 

completed. 

The Division is concerned that the open and closed dates maintained by the Exchange do 

not accurately reflect the actual time Exchange staff spent conducting examination or 

investigatory work on a matter. The open date does not appear to reflect the date that staff began 

working on the matter given that the Division found many instances in which investigators sent

advisory letters initiating the exam prior to opening the exam in the ICT system. Furthermore, 

the Division notes that while the last draft meeting provides a general timeframe for when a 

matter was completed by CFER staff, this does not necessarily represent the date on which the 

report was approved as final since the possibility exists that subsequent changes could occur. 

The Exchange cannot identify a discrete “pens down” date on which all examination and 

investigatory work conducted by staff was completed, including any changes made to the case

report, regardless of whether such changes affected the disposition of a matter. The Division 

believes that these logs should contain dates that accurately identify the beginning and end of 

each stage of a matter so that the timeliness of an investigation may be more easily ascertained

by Exchange staff. Accordingly, the Division recommends the following:

• All logs maintained by CFE contain accurate and meaningful dates, including 

the date that staff began its work and the date that staff completed all 

examination and investigatory work related to a matter. 

 55 CFE Rule 702(e). 
40

D. Audit Trail Examinations and Audit Trail Investigations Completed During the Second 

Target Period

1. Number and Sources of Investigations and Examinations Completed During the 

Second Target Period

For purposes of this report, the Division used the date opened and last draft date listed in 

the logs provided by the Exchange to determine when an audit trail investigation or examination 

was initiated as well as completed by CFER staff. Accordingly, the Exchange opened 85 TPH 

audit trail examinations during the second target period, 25 of which were also completed during 

the second target period. Twenty of these 25 exams were filed without action, while five

resulted in Letters of Caution issued to five separate TPHs. During the second target period, 

Exchange staff did not recommend a Statement of Charges for any audit trail exams. 

During the second target period, the Exchange opened 12 audit trail investigations, five

of which were also completed during that same time. Of the five completed investigations, three

pertained to the Exchange’s Multiple User/Single Account review for the months of July, 

August, and September 2011, and two arose from NFA referrals. Four of the completed audit 

trail investigations were filed without action; the Exchange issued a Statement of Charges for 

one audit trail investigation, which arose from a NFA referral for improper CTI code usage. 56 

The Exchange’s Multiple User/Single Account review conducted during the second target period 

did not identify any unusual or violative activity that resulted in disciplinary action.57 All seven 

of the investigations that remained open after the second target period pertained to the 

Exchange’s routine audit trail surveillance. 

2. Timeliness of Investigations and Examinations 

 56 See infra section VI(D)(3)(i) for a discussion of ICT # 99474. 57 As CFE gains experience administering its audit trail enforcement program, the Division encourages the 

Exchange to evaluate the frequency with which actual and potential audit trail violations are being identified through 

routine surveillance reviews and calibrate the audit trail surveillance program accordingly to ensure its effectiveness.
41

To determine when an audit trail investigation or exam was initiated and completed by 

CFER staff, the Division used the date opened and last draft date58 listed in the logs provided by 

the Exchange. Division staff examined the case files for the 25 TPH audit trail exams completed

during the second target period to determine whether they were completed within a reasonable 

amount of time. The Division found that 13 of these 25 exams were completed within 90 days, 

while the remaining 12 exams took between 91 and 279 days to complete. Of the these 12 

exams, six took between 91 and 180 days to complete, five took between 181 and 270 days to 

complete, and one took 279 days to complete. The shortest and longest amount of time to 

complete an audit trail exam for which the TPH under review was actively trading59 was 90 days 

and 279 days, respectively. Of the 60 audit trail exams that remained open at the end of the 

second target period, eighteen had been open for less than 90 days, 23 had been open between 90 

and 180 days, ten had been open between 181 and 270 days, and nine had been open over 270 

days. 

The Division analyzed the 12 exams that took between 91 and 279 days to complete for 

mitigating factors, including the complexity of the exam, the volume of documents to be 

reviewed, whether the TPH actively traded on CFE during the review period, and whether 

unusual or violative activity was found. In four of the exams that took between 144 and 279 

days to complete, the Division found that work was steadily ongoing, and certain mitigating 

factors existed, such as voluminous documents to be reviewed and the detection of potential 

audit trail violations that required analysis. Each of these four exams resulted in a Letter of 

 58 As discussed in section VI(C), the last draft date is the date on which CFER management reviewed the case report 

during a draft meeting (which consists of all CFER regulation staff) and either approved the matter for closure or 

recommended a Letter of Caution or Statement of Charges. 

59 Fourteen of the audit trail exams conducted during the second target period involved TPHs that did not enter any 

orders, submit any quote or effect any trades on CFE during the period of time under review or the preceding five 

years. For these exams, investigators confirmed that the TPH did not receive any orders for CFE that could not be 

entered into CBOE Command and were kept in paper format. Should the TPH begin trading on CFE, an audit trail 

exam would be initiated within six months to verify the TPH’s compliance with CFE’s audit trail requirements. 
42

Caution for the TPH under review. Nonetheless, the Division is concerned that these exams took 

an average of 207 days to complete. In an additional four exams that took between 127 and 227 

days to complete, the Division noted a prolonged and unexplained period of time where it 

appeared that no examination work related to the matter was being conducted, and no mitigating 

factors existed to warrant an average of 176 days to complete these exams. 

In conversations with Division staff, the Exchange has indicated that its goal for 

completing audit trail exams is four months. At the end of the second target period, 14 of the 25

completed exams were completed in four months. To help further its goal, the Exchange has 

implemented a summary fine schedule to streamline the disposition of audit trail investigations 

and examinations that would otherwise result in disciplinary action. Additionally, the Exchange 

seeks to enhance the efficiency of its exams by automating certain data comparison tasks and 

establishing a common format for receiving audit trail data from its TPHs. Finally, the Exchange 

believes that it can leverage the experience it has gained from administering the audit trail 

examination program to gain efficiency and improve the timeliness of the examination process. 

The Division supports the Exchange’s efforts toward attaining its goal with respect to

completing audit trail exams within four months and also credits the Exchange for increasing its 

staffing levels in response to additional responsibilities undertaken by the Exchange with respect 

to the audit trail enforcement program. The Division also understands the challenge posed by the 

backlog of examinations that developed during the time that elapsed between the implementation 

of the audit trail examination program and the Department becoming fully staffed. Nonetheless, 

the Division believes that the four audit trail exams that took an average of 207 days to complete 

took longer than was warranted by the facts surrounding these exams. The Division 
43

recommends that the Exchange continue focusing on reducing the time it takes to complete audit 

trail exams. 

Division staff also reviewed the case files for the five audit trail investigations completed 

during the second target period to determine whether they were completed within a reasonable 

amount of time. Three of the five completed audit trail investigations pertained to the Multiple 

User/Single Account review for the months of July, August and September.60 Since the 

Exchange first began conducting this review in September 2011, it reviewed trading for the 

month of September as well as for historical data during the months of July and August 2011. 

For each review, Exchange staff contacted the same three TPHs to verify that the CFE logins 

identified during the review were authorized to trade; an additional two TPHs were contacted as 

part of the September review. The investigations for the July and August review were completed 

in 45 days, while the investigation for the September review took 181 days to complete. In 

reviewing the case file provided by the Exchange, including correspondence between the 

Exchange staff and TPHs and their related parties, the Division did not find any mitigating 

circumstances to justify the delay in completing the September review. 

The remaining two investigations, ICT # 98607 and 99474, which arose from NFA 

referrals for improper CTI code usage, remained open for 147 and 287 days, respectively.61

Since Exchange staff recommended the issuance of a Statement of Charges in ICT # 99474, the 

Division notes that 287 days is not an accurate indication of when investigatory work was 

completed because it does not reflect additional investigatory work resulting from the Wells 

process. Therefore, the Division looks to the date that the investigation was last presented at a

BCC meeting to determine when Exchange staff completed its investigatory work for this matter. 

 60 ICT #s 99636, 99637, 99716. 61 See infra section VI(D)(3)(i) for a discussion of ICT # 98607 and 99474.
44

Accordingly, the investigation appears to have remained open for 428 days before staff’s final 

recommendation with respect to the disposition of this matter was last presented to the BCC. 

Although the Division did not identify any particular prolonged or unexplained periods of time 

that caused the delay, it appears that the untimeliness of these investigations can be attributed, in 

part, to Exchange staff’s commingled efforts to investigate the matter as well as understand the 

structure of the underlying IT connectivity between the TPHs under investigation and the 

Exchange. The Division does not believe that the timeliness of Exchange staff’s investigatory 

work should suffer in such a manner. 

For all audit trail examinations and investigations arising from NFA referrals, the 

Division calculated the dates above based on the open date and draft date provided in the 

Exchange’s logs. As discussed, the draft date does not, in all cases, represent the date on which 

the case report is approved as final by CFER management since changes may occur after the 

draft meeting. Moreover, since routine surveillance matters that do not reveal any unusual or 

violative activity are not presented at the draft meeting, and therefore do not contain a draft date, 

the Division used the date closed provided in the case reports for these matters. The Division 

found that the case reports for audit trail examinations do not include the date on which the 

report was approved by CFER staff and the signature of the approving senior CFER staff. The 

Division has previously stated that the date on which an investigation report is approved as final 

by senior compliance staff is necessary to determine whether responsibility for any delays in 

processing a matter rest with the compliance staff or the BCC.62 Accordingly, the Division 

recommends the following:

• CFE should include in its case report the date on which the report was approved 

by senior CFER staff and the signature of the approving senior CFER staff. 

 62 Rule Enforcement Review of ICE Futures U.S. (December 14, 2012). 
45

• CFE should continue to focus on reducing the time it takes to complete its 

annual audit trail examinations of TPHs. 

• CFE should reduce the time it takes to complete audit trail investigations, 

including prompt review of the outputs generated by the automated systems 

used to conduct routine audit trail surveillance.

3. Adequacy of Investigations and Examinations

Division staff reviewed the case reports and case files for all five audit trail investigations 

and 25 exams completed during the second target period. The Division typically found the 

quality and documentation of the investigations and examinations work to be thorough and 

complete. Where violative activity was identified in the course of a TPH audit trail exam or 

audit trail investigation, Exchange staff expanded the time period under review to determine how 

long the activity under review persisted, and whether it affected other areas of the Exchange’s or 

NFA’s surveillance programs. The Exchange’s audit trail exams and investigations were 

thorough and well documented. Each case file included all pertinent underlying documents

related to an examination, including correspondence between Exchange staff and the TPH. The 

case files also included the final version of the case report. With the exception of one 

investigation, the Division generally found that the Exchange’s actions, and its decisions whether 

or not to pursue disciplinary action, were appropriate. Finally, the case reports for all completed 

investigations and examinations provided adequate explanations as to why Exchange staff 

recommended that the matter be filed without action or referred for further action.

i. Discussion of Completed Investigations

As discussed above, the Exchange completed five audit trail investigations during the 

second target period. Of the five completed investigations, three pertained to the Exchange’s 

Multiple User/Single Account review for the months of July, August, and September 2011, and 

two arose from NFA referrals. Four of the completed audit trail investigations were filed without 
46

action; the Exchange issued a Statement of Charges for one audit trail investigation, which arose 

from a NFA referral for improper CTI code usage.63 All five audit trail investigations are 

discussed below. 

Between September 30, 2011 and October 6, 2011, the Exchange opened three 

investigations related to the Multiple User/Single Account review for the months of July, August 

and September.64 The investigators followed the procedures outlined in Section VI(B)(1) to 

conduct this surveillance. During the three-month period reviewed, investigators identified five 

accounts for which multiple CFE logins effected transactions.65 The investigators contacted the 

TPHs to whom the CFE logins belonged and verified that the CFE logins were authorized to 

trade on behalf of the account. Accordingly, these investigations were filed without action on 

the basis that no violative activity was found. 

The two audit trail investigations dealt with a set of related circumstances involving a 

TPH (“Subject TPH”). ICT # 98607 was opened to resolve inconsistencies between how CTI 

codes were defined by the Exchange and how the CTI and origin codes were translated from the 

CBOE account type by NFA. This issue was brought to the Exchange’s and NFA’s attention 

when numerous orders placed by the Subject TPH over an extended period of time contained the 

improper CTI code. To resolve the situation, the Exchange aligned its definition of the CTI 

codes with NFA’s definitions, and codified the requirements with respect to the CTI code in a 

Regulatory Circular issued on July 21, 2011. The matter was filed without action with respect to 

the Subject TPH. 

ICT # 99474 arose from a NFA referral regarding the CTI code usage by accounts that 

cleared through the Subject TPH referred to in ICT # 98607. From July 22, 2011 through 

 63 See infra for a discussion of ICT # 99474. 64 ICT #s 99636, 99637, 99716 65 Three of the five accounts identified were identified each month. 
47

October 18, 2012, NFA and the Exchange identified many instances in which the Subject TPH

submitted numerous orders with incorrect CTI codes to the Exchange on behalf of its clients, at 

least nine of whom were also CFE TPHs. To determine who was responsible for submitting 

improper CTI codes, Exchange staff considered whether the Subject TPH or its clients 

maintained control over the CBOE account type code. Upon extensive inquiry, the Exchange 

found the following: (1) for order flow coming through the Subject TPH proprietary front-end 

system, the Exchange found that Subject TPH was responsible for improper coding since it had 

control over the setup and modification of the CBOE account type; and (2) for order flow 

coming through a mechanism other than the Subject TPH’s proprietary front-end system, the 

clients were responsible for the improper coding since they maintained control over the setup and 

modification of the CBOE account type. Accordingly, Exchange staff recommended that the 

BCC issue a Statement of Charges to the Subject TPH and recommended that the investigation 

with respect to the Subject TPH’s clients be filed without action.66 Exchange staff noted in the 

case report that its basis for recommending a Statement of Charges was “[d]ue to the length of 

time taken between when CFER and NFA brought these issues to [Subject TPH’s] attention and 

the time the situation was remedied...” The BCC imposed a $30,000 fine and a censure to the 

Subject TPH. 

Exchange staff’s findings are predicated on the basis that the clients trading through the 

Subject TPH’s front-end system did not have control over the setup of the CBOE account type, 

and therefore, were not responsible for submitting incorrect CTI codes. However, the Division 

did not find any evidence in the case file to suggest that Exchange staff considered whether the 

 66 The investigation with respect to the Subject TPH’s clients was separated into a distinct audit trail investigation, 

ICT # 102291, which remained open at the end of second target period.
48

clients trading in their own capacity as CFE TPHs67 had an obligation independent of the Subject 

TPH to submit correct CTI codes in accordance with Exchange rules. In addition, while these 

clients received advisory letters notifying them of the investigation, it does not appear that 

Exchange staff engaged in a direct inquiry of these clients to determine their role in submitting 

the incorrect CTI codes. Rather, the case file appears to indicate that Exchange staff would 

query these clients regarding their CTI code usage during the annual audit trail exam process. 

Finally, Exchange staff did not address the improper CTI code usage by the clients that used a 

mechanism other than the Subject TPH’s front-end system to access CFE. Since these clients

had control over the CBOE account type, and were therefore responsible for submitting incorrect 

CTI codes, the Division believes that Exchange staff should have issued a Letter of Caution to 

these clients for submitting improper CTI codes. Accordingly, the Division recommends the 

following:

• CFE should promptly take appropriate disciplinary action when it identifies 

violations of its audit trail or recordkeeping requirements by persons subject to 

CFE’s rules. At a minimum, CFE should remind persons subject to its rules of 

their continuing compliance obligations even when services are received from 

third parties.

ii. Discussion of Completed TPH Audit Trail Examinations

As discussed, the Exchange completed 25 of the 85 audit trail examinations opened 

during the second target period. Exchange staff issued Letters of Caution to five separate TPHs 

for audit trail violations. Two TPHs received Letters of Caution for failing to maintain audit trail 

data, two for incorrect account origin code, and one for incorrect account origin code and failing 

to notify CFE of change in responsible trader. A total of 20 audit trail examinations were filed 

without action: 14 of the examinations were filed without action on the basis that the TPH under 

 67 In this situation, the clients themselves were CFE TPHs and accessed the Exchange via the Subject TPH’s frontend system. 
49

review did not enter any orders, submit any quote or effect any trades on CFE during the period 

of time under review or the preceding five years: while six of the audit trail exams were filed 

without action due to no apparent violations of Exchange or Commission rules. All five of the 

completed audit trail examinations that resulted in Letters of Caution are discussed below.

A second set of related matters, ICT # 99240 and 99242, were routine audit trail exams of 

two separate TPHs that were accessing the Exchange through the same ISV. One of the TPHs 

conducted customer trading and clearing for CFE products, while the other TPH conducted 

proprietary trading. During the review of audit trail records from sample trade dates, 

investigators found that in both instances the audit trail data sent to the Exchange was correct, 

but that the TPH was maintaining the incorrect CTI code in its own records.68 Further inquiry 

revealed that both TPHs were accessing the Exchange through the same ISV, and that the CTI 

code issue related to how the ISV was populating the audit trail record. The ISV corrected the 

issue by adding a new column to its audit trail records to retain the CBOE account type data. 

The investigator noted that the incorrect audit trail data did not impact the Exchange’s 

surveillance for trading ahead or front running since the incorrect data resided with the TPHs and 

not the Exchange. In both instances, Exchange staff recommended that a Letter of Caution be 

issued to the TPH for violating Exchange rules 403(a) and (c) for maintaining audit trail data 

which had incorrect CTI code information in the order messages and sample trade dates. 

ICT # 99241 was a routine audit trail exam of a TPH that conducted proprietary trading. 

During the review of audit trail records from sample trade dates, the investigator found that the 

 68 TPHs audit trail records contained orders with CTI 1 and the origin code “customer,” which represents 

transactions for the TPH’s own account or an account the TPH controls or has a financial interest. However, the 

TPH submitted CBOE account type “C” which translates into CTI 4 and origin code “customer,” representing nonTPH customer transactions. 
50

TPH was submitting the incorrect CBOE account type.69 Upon expanding the time period under 

review, the investigator found that the TPH had been submitting the incorrect CBOE account 

type code since it became a TPH in December 2009 due to its misunderstanding of the 

translation of the CBOE account type to CTI and origin codes. The investigator noted that 

submitting the incorrect CBOE account type did not give the TPH any apparent advantages or 

cause the TPH to avoid surveillance for trading ahead or front running since the TPH was solely 

conducting proprietary trading. The exam also revealed that the TPH changed its responsible 

trader without notifying the Exchange in the manner required by Exchange rules. Finally, the 

exam revealed one instance where audit trail records showed duplicate orders due to the manner 

in which the ISV retrieved the data. Exchange staff recommended that a Letter of Caution be 

issued to the TPH for violating Exchange rule 403(a) for failing to send account order entry 

information to the Exchange and for failing to promptly notify the Exchange of the change to the 

TPH’s responsible trader. Exchange staff recommended that the violation for Exchange rules 

403(a) and (c) for providing audit trail data which had duplicate order messages be filed without 

action “because the data was stored within the guidelines of the rules but was pulled incorrectly 

due to a third party error.”

ICT #99678 was a routine audit trail exam of a TPH that conducted proprietary trading. 

The exam revealed that the TPH had been submitting the incorrect CBOE account type code

during the sample trade dates reviewed.70 Upon expanding the time period under review, the 

investigator noted that the firm had been submitting the incorrect CBOE account type since it 

 69 TPHs audit trail records contained orders with CTI 2, which represents orders for a proprietary account of a 

clearing or non-clearing member. However, the orders sent to the Exchange were submitted with CBOE account 

type “V” which translates to CTI 1, representing transactions for the TPH’s own account or an account the TPH 

controls or has a financial interest. 

70The TPH submitted CBOE account type “M” which translates into CTI 2 origin code “market maker,” 

representing market maker transactions. However, since the TPH was a customer of a clearing firm and was trading 

proprietary funds, all orders should have been submitted with CBOE account type “O” which represents CTI 2 

origin code “customer.” 
51

became a TPH in September 2010. The investigator also noted that submitting the incorrect 

CBOE account type did not give the TPH any apparent advantages or cause the TPH to avoid 

surveillance for trading ahead or front running since the TPH was solely conducting proprietary 

trading. Exchange staff recommended that a Letter of Caution be issued to the TPH for violating 

Exchange rule 403 for sending orders with incorrect account origin code information to the 

Exchange. 

ICT # 101389 was a routine audit trail exam of a TPH that conducted proprietary trading. 

The exam revealed that during the two-month period under review, the TPH’s orders were 

marked with the incorrect CBOE account type code on multiple occasions.71 Although the TPH 

corrected this error upon discovering the error, there were subsequent instances where an

incorrect origin code was used for trades executed via its backup trading platform. The 

investigator noted that submitting the incorrect CBOE account type did not give the TPH any 

apparent financial benefit, such as excess rebates. Exchange staff recommended that a Letter of 

Caution be issued to the TPH for violating Exchange rule 403 for sending orders with incorrect 

account origin code information to the Exchange. 

The Division has no recommendations regarding completed TPH audit trail examinations 

completed during the second target period. 

 71 The TPH used CBOE account type “C” which translates to CTI 4 origin code “customer”, which represents nonTPH customer transactions. However, since the TPH was trading proprietary funds, all orders should have been 

submitted with CBOE account type “O” which represents CTI 2 origin code “customer.”