CFTC’s AI Feedback for Compliance and Market Dynamics

The United States Commodity Futures Trading Commission (CFTC) is seeking information on how regulated entities are utilizing artificial intelligence (AI) in their compliance efforts and other areas. The agency has issued a comment request to gain a better understanding of the current and potential applications and risks of AI in derivatives markets. The feedback received will have an impact on future CFTC guidance, interpretations, policy statements, or regulations. The CFTC is interested in input on a wide range of AI applications, including trading, risk management, compliance, cybersecurity, recordkeeping, data processing, analytics, and customer interactions.

In terms of compliance, the CFTC is particularly interested in how AI can affect functions such as surveillance, Anti-Money Laundering (AML), and regulatory reporting. CFTC Chair Rostin Behnam believes that the request for comment will help the agency identify the highest priorities and return-on-investment projects with AI use cases, allowing them to optimize their data-driven approach to policy, surveillance, and enforcement. The CFTC has stated that this comment request aligns with the Biden Administration’s directives for the safe and trustworthy development of AI. Interested parties have until April 24, 2024, to submit their comments.

Commissioner Kristin N. Johnson emphasizes that the comment request is part of an ongoing conversation within the CFTC involving various divisions. It is crucial for the agency to understand how market participants are adopting AI in the derivatives markets. The definition of AI is one area of interest, with the RFC asking respondents to provide insights on how broad or narrow the definition should be and how to distinguish AI from other automated trading strategies.

In September 2023, CFTC Commissioner Christy Goldsmith Romero suggested updating protection measures in response to technological advancements to safeguard American investors. To strengthen investor protections and regulations, Romero appointed technology experts in fintech, responsible artificial intelligence, cryptocurrency, blockchain, and cybersecurity to the CFTC’s Technology Advisory Committee (TAC).

The CFTC is warning investors against relying on AI trading bots to deliver massive cryptocurrency profits. The agency has identified certain individuals who promise impressive yields using bots, trade signal algorithms, crypto-asset arbitrage algorithms, and other AI-assisted technologies as fraudsters. It is important for investors to exercise caution and conduct thorough due diligence when considering such technologies.

The CFTC’s comment request on AI applications in compliance and derivatives markets is a step towards understanding the potential benefits and risks associated with AI usage. The agency recognizes the need to keep up with technological advancements to better protect investors and ensure fair and efficient markets.