MVA White Collar Defense, Investigations, and Regulatory Advice Blog

Artificial Intelligence (“AI”) is everywhere you look right now. AI is a lot of things, but for most of the market it is simultaneously a buzzword for innovation and efficiency, and a bogeyman for fraud and privacy concerns. As such, AI is a technology that banking and markets regulators, like the Commodity Futures Trading Commission (“CFTC”) are watching closely. On December 5, 2024, the CFTC issued a staff advisory (the “Advisory”) regarding the use of AI in CFTC-regulated markets.

Foremost, the Advisory reminds registrants that despite the technological innovation and expected efficiencies that AI brings, registrants remain responsible for compliance with all applicable requirements under the Commodity Exchange Act (“CEA”) and CFTC regulations. As such, the CFTC expects registrants that implement AI, either directly or through third parties, to assess the risks of using AI, make updates to policies, procedures, controls, and systems and ensure that the implementation of AI has been reviewed for compliance with the CEA and CFTC regulations. CFTC registrants should also be prepared to discuss AI as CFTC Staff may incorporate AI as a topic of discussion in their routine oversight activities such as examinations.

The Advisory also discusses interesting use cases for AI among registrants such as: (i) order processing, (ii) detection of abusive trading practices, (iii) settlement, (iv) calculation or collection of initial margin and variation margin, (v) chatbots, (vi) recordkeeping, and (vii) disclosures. The Advisory discusses these use cases under different types of registrants, but generally, the CFTC’s discussion of these use cases should be considered by all registrants. The use cases closely follow those that Commissioner Johnson shared in her remarks at the April 2024 FIA L&C. While the Advisory is helpful to appreciate some of the different applications of AI by registrants, the bottom line is that despite the different potential uses of AI, registrants remain accountable for compliance with the same long-standing regulatory requirements. As such, registrants adopting AI should carefully consider all applicable CEA and CFTC regulations as they work to implement AI.   Certain registrants (e.g., DCOs, DCMs, SEFs, and SDRs) should also be cognizant of their obligation to provide advance notice of all “material planned changes to automated systems that may impact the reliability, security, or adequate scalable capacity of such systems.”

Both Chairman Behnam and Commissioner Johnson released statements concurrently with the issuance of the Advisory. Chairman Behnam’s statement champions his accomplishments to bring AI into the consciousness of the CFTC and notes the CFTC’s own use of AI to “upskill staff and leverage data to optimize the agency’s limited resources to better monitor risk, surveil for market integrity, examine for compliance, and enforce to deter unlawful trading behavior in our markets.” Commissioner Johnson’s statement repeats her call for the creation of an interagency AI Fraud Task Force to root out and hold accountable bad actors that use AI as part of their fraudulent schemes – which she notes are increasing in sophistication.

The Advisory follows the CFTC’s January 2024 Request for Comment on the Use of Artificial Intelligence and Commissioner Johnson’s related statement that raised the possibility of rulemakings regarding the integration of AI in CFTC-regulated markets. While vague, the Advisory also notes that CFTC Staff will “continue to evaluate the need for future regulation, guidance, or other Commission or Staff action.” As of the date of this article, it is unclear who will be the next Chair of the CFTC or the makeup of the Commissioners, so it is hard to predict the CFTC’s view on AI moving forward or what policies may follow. One thing is for certain though, the use of AI will continue to increase among CFTC registrants and market participants causing new and novel considerations about compliance with the CEA and CFTC regulations. Moreover, other governmental authorities, such as the Department of Justice, also continue to emphasize the need for companies to address emerging risks associated with the use of AI and other technologies. It is therefore critical for CFTC registrants to consider AI governance, risk assessment, system safeguards, and regulatory compliance when adopting new AI or other technology tools, whether internally developed or offered by third-parties.