On December 5, 2024, the U.S. Commodities Futures Trading Commission (CFTC) released a staff advisory outlining the implications and considerations surrounding the use of artificial intelligence (AI) by market participants within CFTC-regulated markets. The advisory serves as a reminder to registered entities about their obligation to maintain compliance with relevant regulations as they navigate the rapidly evolving landscape of AI technology.
The guidance addresses specific applications of AI for various market participants, including Designated Contract Markets (DCMs), Swap Execution Facilities (SEFs), Swap Data Repositories (SDRs), and Derivatives Clearing Organizations (DCOs). Notably, the advisory identifies key areas where AI is expected to play a significant role. For DCMs, SEFs, and SDRs, the three primary applications include order processing and trade matching, market surveillance, and system safeguards. The CFTC emphasised that while AI-based solutions can enhance efficiency in order processing, compliance with Core Principle 9 remains essential. Furthermore, these entities are reminded to use AI effectively to detect abusive trading activities, adhering to Core Principles related to market integrity and customer protection.
The advisory also cautions that DCMs and SEFs that opt for AI integration must ensure their systems comply with existing regulatory Core Principles, specifically Core Principles 2, 4, and 12 for DCMs and Core Principles 2, 3, and 4 for SEFs. The possibility of either developing in-house AI solutions or employing third-party software is acknowledged, with emphasis on the necessity for adherence to Core Principle 20 for DCMs and Core Principle 14 for SEFs.
For DCOs, the use of AI must be aligned with all regulatory requirements as dictated by the Commodities Exchange Act and applicable CFTC regulations. The advisory outlines that DCOs are likely to leverage AI to bolster cybersecurity, improve monitoring, enhance member communications, and streamline settlement processes. DCOs are reminded of their overarching accountability for compliance, particularly when integrating third-party systems or software, as noted in Regulation 39.18(d)(2).
Additionally, the advisory discusses implications for Future Commission Merchants, Swap Dealers, Commodity Pool Operators, Commodity Trading Advisors, Introducing Brokers, Retail Foreign Exchange Dealers, and Associated Persons. Each registrant is presented with a non-exhaustive overview of obligations concerning AI utilisation, which includes risk assessment, compliance, recordkeeping, and customer protection. The CFTC anticipates AI may facilitate the calculation of margin for uncleared swaps, yet reaffirms the necessity for registrants to validate the performance and risk management capabilities of AI systems.
As the financial services sector increasingly embraces AI solutions, the CFTC is poised to intensify its scrutiny of these technologies through the lens of registration applications, examinations, and investigations. It is imperative for registrants eyeing AI integration to develop and implement rigorous compliance frameworks that address CFTC regulations.
By establishing robust systems and controls, registered entities can better navigate the challenges presented by the introduction of AI technologies into their operations, while simultaneously committing to transparency and regulation adherence. They are also reminded to provide timely notifications to the CFTC should the adoption of AI lead to substantial modifications to their existing systems and controls. The CFTC's vigilance in this evolving area underscores the need for a careful and compliant approach to the integration of AI in market activities.
Source: Noah Wire Services