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CFTC Issues Advisory Guidance For Anticipated Growth In Use Of Artificial Intelligence By Regulated Entities
12/17/2024On December 5, 2024, the Divisions of Clearing and Risk, Data, Market Oversight, and Market Participants of the Commodity Futures Trading Commission (“CFTC”) issued an advisory on the use of artificial intelligence (“AI”) in CFTC-regulated markets by registered entities and registrants (“Guidance”). The Guidance anticipates areas wherein CFTC-regulated entities may deploy AI to perform regulated activities and fulfill regulatory requirements. It then reminds the audience of the statutory and regulatory requirements that may be implicated as a result.
The Guidance follows a CFTC Request for Public Comment (“RFPC”) issued on January 25, 2024. The RFPC recognized the potential benefits related to AI use in the financial services industry, such as minimizing errors, reducing transaction times, removing unnecessary manual transactions, augmenting compliance, and trading, as well as potential risks, such as inappropriate trading behavior, market disruptions, deceptive or misleading communication, unintended biases, and operational resiliency.
The Guidance is directed to three categories of CFTC regulated entities/registrants: (i) Designated Contract Markets, Swap Execution Facilities, and Swap Data Repositories (“Organizers”), (ii) Derivatives Clearing Organizations (“Clearers”), and (iii) Future Commission Merchants, Swap Dealers, Commodity Pool Operators, Commodity Trading Advisors, Introducing Banks, and Retail Foreign Exchange Dealers (“Intermediaries”).
For the Organizers, the CFTC highlights three areas that could be affected by increased AI use, including order processing and trade matching, market surveillance, and system safeguards. The Guidance predicts that AI’s capabilities could be utilized to anticipate trades before they happen, and therefore would require close observation in the form of market surveillance. AI can also be used by the Organizers to positively monitor compliance by detecting abusive trade practices, investigating possible rule violations, and monitoring the market in real-time.
For the Clearers, the CFTC highlights the anticipated use of AI to support the settlement process, including facilitation of netting or offset of positions as the AI works to validate data, mine data anomalies prior to settlement, or identify failed trades. The Guidance further notes the potential for AI to support the detection and/or response to cyber intrusions, in addition to identifying cyber vulnerabilities and hardening defenses.
For the Intermediaries, the CFTC features three categories that could be impacted by AI, including risk management and assessment, compliance and recordkeeping, and customer protection. AI may be utilized, for example, in the calculation and collection of initial and variation margins for uncleared swaps. AI may also be used to “support the accuracy and timeliness of financial information and risk disclosures that are provided to the Commission, National Futures Association, and the registrant’s customers.”
However AI may be deployed, “CFTC-regulated entities must maintain compliance with applicable requirements whether they choose to deploy AI or any other technology, either directly or by a third-party service provider.”
