I recently reported on a rule review by the Commodity Futures Trading Commission’s Division of Market Oversight of the CBOE Futures Exchange, LLC. (Click here to access the article, “CFTC’s Division of Market Oversight Highlights Compliance Department Resources Concern in CBOE Futures Rule Enforcement Review" in the July 10, 2016 edition of Bridging the Week.) One recommendation made by staff that is receiving more and more attention was that the CBOE Futures Regulation Department “should recommend and the Exchange should promptly take appropriate disciplinary action when it makes a finding that a violation of a substantive trading rule occurred.” This may sound innocuous (it did to me on first reading); however, the recommendation was made in response to the issuance of warning letters by CFE to certain trading permit holders in response to their alleged placement of fictitious orders and trades. According to CFTC staff, “[w]hile a warning letter may be appropriate for certain violations of recordkeeping or audit trail rules, the Division believes that issuing a warning letter for a substantive trading violation is never appropriate.” However, this statement appears contrary to the plain language of CFTC Rule 38.711 (click here to access) that does not limit the types of violations for which warning letters may be issued. All this provision does is limit to one time the number of occasions an exchange may issue a warning letter for any type of rule violation during a rolling one-year period. If, based on its own assessment of facts and circumstances, an exchange believes that the appropriate disciplinary action in response to a rule violation is to issue a warning letter, the CFTC should defer to the exchange’s discretion absent extraordinary circumstances.