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

Firms trading at the unit of CBOE Holdings Inc. will be requiredto write down how they supervise their businesses, according to aSecurities and Exchange Commission (SEC) filing from theChicago-based options exchange. They must also carry out regularoffice inspections and send CBOE an annual report on regulatorypractices.

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

CBOE was fined $6 million in June by the SEC after regulatorssaid the exchange's staff interfered with their investigation ofillegal short selling at a member firm. The penalty followed anadministrative law judge's ruling that CBOE member OptionsXpressInc., a unit of Charles Schwab Corp., helped facilitate shamtransactions that violated U.S. securities laws known as RegulationSHO.

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

Options Clearing Corp. (OCC), an unrelated organization that'sanother pillar of the options industry in Chicago, was told lastyear by the SEC that its market supervision was inadequate,according to a letter obtained by Bloomberg News in October. OCCclears all trades of exchange-listed options in the U.S., abusiness that saw $1.2 trillion of volume last year.

Gail Osten, a CBOE spokeswoman, and Judith Burns of the SECdeclined to comment on the rule change.

The CBOE's new policy affects firms known as trading permitholders, CBOE's term for individuals and companies that havepermission to buy and sell at the exchange. In the filing datedyesterday, CBOE said its current rulebook doesn't specificallyrequire “the establishment and maintenance of a system ofsupervision or written procedures covering each line of business”at permit holders, which are known as TPHs.

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

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