CFTC Staff Issues Advisory on AI Use in Derivatives Markets
Commentary by Chuck Hollis
In an advisory addressing the integration of AI within CFTC-regulated markets, the staff of the CFTC's Division of Clearing and Risk, Division of Data, Division of Market Oversight and Market Participants Division (collectively, the "Staff"), emphasized that CFTC-regulated entities leveraging AI technology must ensure compliance with applicable CFTC statutory and regulatory requirements. The Staff also provided a non-exhaustive list of requirements under the Commodity Exchange Act and CFTC regulations that may be implicated by the use of AI in derivatives markets and by CFTC-regulated entities.
The advisory noted, among other things, that (i) AI products are increasingly being designed and utilized by CFTC-regulated entities and can implicate all stages of the lifecycle of a derivatives trade, including trade matching, market surveillance and settlement; (ii) the Staff is "closely tracking" the development of AI and its potential use cases by CFTC-regulated entities; and (iii) the rapid evolution of AI technology necessitates ongoing evaluation of current regulatory frameworks and the potential need for future CFTC regulation and/or guidance.
The advisory states that the Staff "expects that CFTC-regulated entities will assess the risks of using AI and update policies, procedures, controls, and systems, as appropriate." Furthermore, the advisory reiterates that CFTC-regulated entities remain responsible for regulatory compliance with respect to utilization of AI products and services, regardless of whether such products and services are developed in-house or procured from third-party providers. The advisory also reaffirms that DCMs, SEFs, SDRs and DCOs must provide advance notice to the Staff of any material changes to automated systems in connection with AI that could impact the reliability, security, or capacity of such systems.
In a related statement, CFTC Chair Rostin Behnam described the advisory's role as a "measured first step" to address AI's growing integration in derivatives markets and "ensure ongoing compliance with the Commodity Exchange Act and the CFTC's regulations." He reiterated the CFTC's commitment to a "technology-neutral approach." Mr. Behnam also highlighted the agency's internal advancements, including the hiring of a Chief Artificial Intelligence Officer to implement an AI strategy.
In a statement by CFTC Commissioner Kristin N. Johnson, she emphasized the importance of the staff advisory and offered several proposals aimed at "develop[ing] a robust regulatory framework" that can "remain applicable to AI and other emerging technologies." Such proposals include, among other things: (i) the creation of an AI Fraud Task Force and the adoption of a formal policy of heightened penalties for bad actors using AI for fraud; and (ii) the establishment of an interagency task force among market and prudential regulators.
Commentary
Regulatory agencies, including the CFTC in this Staff Advisory, continue to remind those companies under their purview that the use and deployment of AI solutions does not change a company's responsibility for regulatory compliance. These companies need to be implementing policies and governance processes to ensure that their deployment and use of AI in their organization is risk mitigated and enables them to meet their compliance obligations. Absent these policies and processes, companies face compliance risk in their organizations.