CFTC Reminds Artificial Intelligence Users To Follow Existing Rules

After a flurry of artificial intelligence (AI)-related announcements earlier this year — including the appointment of its first “Chief AI Officer” — the Commodity Futures Trading Commission (CFTC) issued a staff advisory on the use of AI in derivative markets just as 2024 is ending. The advisory, which comes from the Divisions of Clearing and Risk, Data, Market Oversight, and Market Participants, is not a comprehensive guidance document, but a reminder of existing obligations under the Commodity Exchange Act and CFTC regulations. Although CFTC notes that “AI may eventually touch upon all or nearly all aspects of the lifecycle of a derivatives trade,” its message is simply to follow existing rules, with or without AI, as other agencies have done in their respective ambits. In sum, CFTC has left guidance about the futures market to the future.

The advisory breaks down various AI uses by market participants and identifies which regulations may impact such uses. For trading organizations and swap data repositories, the advisory examines regulations impacting order processing (e.g., preparing message data during execution), market surveillance (detecting abusive practices and compliance), and system safeguarding/risk control. For example, 7 U.S.C. § 7(d)(9), which governs false reporting, may be implicated if Designated Contract Markets use AI “to anticipate trades” for resource allocation or for “reducing post-trade message latencies.”

The advisory cautions clearing organizations and intermediaries similarly: namely, that they should take care and adhere to existing regulations when using AI to implement system safeguards and evaluate compliance and when leveraging AI’s predictive capabilities to streamline operations. What the advisory does not do is provide specific guidance on the type of AI that can be used, the world of information that can be fed to a given system, or what kinds of protections need to be put in place (beyond noting that markets should “follow generally accepted [ ] and best practices” when using AI).

That CFTC’s advisory does not break new ground is unsurprising. Back in May, echoing President Biden’s executive order on AI (a part of the order that likely will survive the change in administration), CFTC’s Technology Advisory Committee recommended highlighting existing regulations impacted by AI. If CFTC adopts other Technology Advisory Committee recommendations, we can expect an AI Risk Management Framework and news about the CFTC’s collaboration with other agencies.

CFTC itself (not to mention the industry as a whole) is still figuring out the consequences of AI’s use in the market. Chairman Rostin Benham has explained that the commission is beginning “to leverage the efficiencies of AI” in its oversight and enforcement capabilities. How that will work and the pace of the rollout still remain to be seen, but with the incoming administration’s apparent emphasis on using technology to streamline government operations, we could see changes in the commission’s operations sooner rather than later.

One possible way CFTC might use AI is detailed in the advisory itself. The advisory provides examples of markets using AI “to improve the detecti[on] and flagging of specific trade execution patterns and trade anomalies.” CFTC’s use of AI could be very effective for enforcement purposes — or it could lead to false positives and/or give entities with superior knowledge of these AI systems a way to dodge prosecution. We will just have to wait to find out.

For more information on CFTC regulations and the impact of emerging technologies on financial markets, please contact the authors. For more information about other AI-related issues, please contact our interdisciplinary AI team.

© Arnold & Porter Kaye Scholer LLP 2024 All Rights Reserved. This Blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.