On 5 December 2024, the Commodity Futures Trading Commission (CFTC) issued a staff advisory focused on the utilisation of artificial intelligence (AI) by entities regulated under its jurisdiction. This advisory follows a notable period of engagement with market participants, marked by a Request for Comments issued by the CFTC staff regarding AI in regulated markets, which attracted 26 responses that informed the subsequent guidance.
The advisory does not impose any new compliance requirements for derivatives market participants employing AI solutions. Instead, it reinforces the CFTC's "technology neutral" stance, reminding registered entities to continue adhering to existing compliance obligations, irrespective of the technology used, whether developed in-house or through third-party services.
CFTC Chairman Rostin Behnam stated that this initiative represents a foundational step towards engaging further with market participants on AI technology. He noted that further developments could be anticipated as AI evolves and as derivatives market participants continue to explore innovative applications of this technology.
Under the advisory, the CFTC staff outlined expectations for risk assessment related to AI usage. CFTC-regulated entities are expected to critically evaluate the risks associated with their AI implementations and update their policies, procedures, and controls accordingly, in alignment with the applicable Commodity Exchange Act (CEA) and CFTC regulatory standards. While the emphasis was placed on registered entities, the advisory suggested that all market participants should consider conducting risk assessments in light of AI technology adoption.
Various practical AI applications were discussed in the advisory, reflecting its growing presence in the derivatives market. For instance, designated contract markets (DCMs) are encouraged to employ AI for order processing and trade matching, leveraging analytical capabilities to enhance efficiency while maintaining the integrity of market operations. The advisory further highlighted the potential of AI in market surveillance, noting its utility in identifying rule violations and market misconduct. However, the CFTC staff cautioned that AI should not be seen as a replacement for robust compliance frameworks.
In the realm of safeguards, DCMs and other market participants are reminded to maintain appropriate controls across several operational areas, including risk management and information security. Moreover, the advisory stressed the importance of compliance with notification requirements when introducing significant alterations to automated systems, including any advanced AI functionalities that may affect system reliability or security.
Commissioner Kristin N. Johnson, a prominent advocate for enhanced oversight of AI, commented concurrently with the advisory's release. She articulated her vision for establishing an AI Fraud Task Force within the CFTC’s Division of Enforcement and called for strengthened penalties against individuals misusing AI for fraudulent activities, particularly those targeting vulnerable investors through advanced deceptive techniques such as deepfakes. Additionally, Commissioner Johnson emphasised the need for interagency collaboration focused on AI to foster open discussions regarding market participants' adoption of AI technologies.
As the adoption of AI within the financial sector continues to grow, the CFTC’s advisory signals an ongoing commitment to overseeing the associated risks while navigating the implications for compliance and market practices. The staff's advisory acts as a precursor to potential future rules or guidance as the market adapts to the rapidly evolving landscape of artificial intelligence. Market participants are encouraged to meticulously document their AI use cases and related risk assessments to align with the existing compliance framework set forth by the CFTC, ensuring that they remain vigilant in their obligations as AI applications become increasingly prominent in the industry.
Source: Noah Wire Services