CFTC Advisory Committee Considers Reports on Risk Management, Cyber and AI

At its final meeting of the year, the CFTC Market Risk Advisory Committee ("MRAC") considered a number of "critical issues at the center of market integrity and market infrastructure," including reports and recommendations on "central counterparty risk and governance, market structure, climate-related risk, and innovative and emerging technologies affecting the derivatives and related financial markets."

MRAC Sponsor Commissioner Kristin Johnson and Commissioner Christy Goldsmith Romero framed the discussions in separate remarks. On: 

• US Treasury Market Resilience, Commissioner Romero emphasized the role of central clearing in reducing systemic risk and enhancing market resilience. emphasized the benefits of central clearing as advocated by the US Treasury, which has called for an expansion of such systems to strengthen market stability. Commissioner Johnson highlighted a presentation by Treasury on The Treasury Cash-Futures Basis Trade and Effective Risk Management Practices touting the role that the "cash-futures basis trade," plays in price discovery and liquidity. She emphasized that basis trade helps lower government funding costs and optimizes portfolio risk allocation. Ms. Johnson acknowledged concerns about the growing role of leveraged funds in these trades and the potential for market stress, particularly in times of high volatility. 
• Cyber Resilience and Third-Party Risks. Ms. Romero and Ms. Johnson highlighted the CFTC's efforts to bolster cyber resilience within the market, focusing on the need for collaboration between market participants and public-private partnerships. They both highlighted the work of the Technology and Operations Workstream of the CCP Risk Subcommittee and its Recommendations on DCO System Safeguards Standards for Third Party Service Providers to strengthen the regulatory framework for cybersecurity.
• Artificial Intelligence in Financial Markets. Ms. Johnson warned that advancements in AI, particularly in generative models, amplify existing cybersecurity risks. She referenced the US Department of the Treasury's report on AI-specific cybersecurity risks in financial services, which highlighted the vulnerabilities of AI systems to data poisoning, leakage and integrity attacks. Ms. Johnson urged the CFTC to develop a regulatory framework, including creating an AI Fraud Task Force and enhancing enforcement measures.