CFTC AI Day: Responsible AI Governance in Financial Services

May 15th '24

The rise of AI, especially generative AI, has got everyone in the financial services industry both excited and a bit nervous. On one hand, AI could completely revolutionize the way we do things, making processes more efficient and opening new opportunities. Financial services firms are increasingly exploring various use cases for AI, leveraging its capabilities to transform traditional practices and drive innovation across multiple domains. From risk assessment and fraud detection to trading and investment decisions, personalized financial services, automating back-office operations, and enhancing customer experience, AI is reshaping the landscape of finance in profound ways.


On the other hand, we must recognize the potential risks involved.


“Whether we’re discussing AI or any other innovation, new technologies often present opportunities for better functioning in more efficient markets. But unfortunately, they can also present opportunities for fraud as well as risks for customers, regulated entities, and the economy at large.”

Summer K. Mersinger, Commissioner, CFTC


To tackle this crucial issue, the CFTC’s Technology Advisory Committee (TAC) recently held an “AI Day” to discuss how AI impacts financial markets. They brought together experts from different fields to share their thoughts, discuss the challenges, and make recommendations for governing AI responsibly in the financial sector.


Data quality, accountability and trust

The CFTC AI Day highlighted the importance of data quality and management in responsible AI development. Kirsten Wegner, CEO of Modern Markets Initiative, hit the nail on the head when she said, “Data is liquid gold.” This statement underscores the critical role of high-quality, unbiased data in building trustworthy AI solutions. The report emphasized the need for rigorous data governance practices and called for a federal data privacy framework to address inconsistencies in state laws.


Moreover, discussions stressed the necessity of accountability as AI becomes more integrated into financial services. We need precise mechanisms to hold entities accountable for their AI systems’ actions and decisions and prevent potential exploitation by bad actors. Collaboration between the private sector and its regulators and strong internal governance frameworks are crucial to fostering accountability and maintaining trust in AI-driven financial services.


Governance pillars

One of the primary outcomes was adopting a subcommittee report, Responsible Artificial Intelligence in Financial Markets: Opportunities, Risks and Recommendations. This report lays the groundwork for understanding AI’s potential benefits and risks in finance and provides guidance for setting up effective governance frameworks. The report emphasizes the importance of defining and sticking to the principles of responsible AI, which include fairness, robustness, transparency, explainability, and privacy.


The discussion identified five key types of AI governance:


  • Technical oversight: Monitoring technical aspects like data quality, model training, and system deployment.
  • Corporate policies and regulations: Ensuring everyone follows internal and external regulations to ensure compliance and accountability across the board.
  • Risk identification and mitigation: Developing strategies to identify and mitigate technical and socio-technical risks, including using comprehensive risk management frameworks tailored to the financial sector’s needs.
  • Government regulation and intervention: Understanding the government plays a role in shaping AI through guidelines and interventions, contributing to a structured regulatory environment that promotes responsible AI development.
  • Guidance on technology types: Recognizing that not all AI technologies are created equal and that we need tailored governance strategies based on their differences, like artificial intelligence and autonomous decision-making tools.


Don’t forget about human oversight

Human oversight is essential when developing and deploying AI in financial services. It acts as a crucial safeguard against potential pitfalls and ethical concerns inherent in AI systems. By integrating human judgment with technological advancements, we can ensure that AI-driven innovations align with ethical standards, regulatory requirements, and societal values, fostering confidence and integrity within the industry.


Regulators need to work together

Discussions at the CFTC AI Day emphasized the importance of regulators collaborating and coordinating their efforts. Harmonizing AI policies across agencies like the SEC and Treasury can improve consistency in AI governance across the entire financial services industry.


As AI becomes increasingly essential, other regulators like the SEC and FINRA will likely start exploring similar initiatives. Following the NIST risk management framework suggested during the CFTC AI Day could serve as a guiding model. The SEC has already aligned with NIST in the past regarding cybersecurity frameworks, so there’s a precedent for this kind of cooperation across regulatory domains. This collaborative approach will streamline AI governance and promote responsible AI development and deployment in finance.


Financial services firms must watch and adapt to the AI movement

The CFTC AI Day and the subcommittee report represent significant progress in moving towards responsible AI governance in finance. As we move forward, it’s essential that we stay engaged, keep researching, and work together to fine-tune and implement effective AI governance strategies. Building internal expertise within regulatory agencies is crucial for understanding and overseeing the use of AI in financial markets. Sunayna Tuteja, from the Federal Reserve Board, hit the mark when she said, “I think it’s incumbent on all of us to flex that curiosity and make sure that we’re leveling up as individuals and on behalf of our institutions.” By upholding principles of transparency, accountability, and ethical AI development, the financial sector can harness AI’s potential to drive positive change while safeguarding the financial system’s integrity. Stay vigilant and adapt to regulatory changes to ensure AI’s responsible integration into financial services.


FEATURED BLOG: Managing AI to Ensure Compliance with Data Privacy Laws


Source: Smarsh. Author: Tiffany Magri Regulatory Advisor at Smarsh


About the author: 

As a Regulatory Advisor at Smarsh, Tiffany monitors, evaluates and consults on the financial services regulatory landscape. Tiffany has more than 10 years of experience facilitating compliance with laws and regulations, policies, and risk management. Prior to joining Smarsh, Tiffany was a Senior Associate at Benefit Street Partners and a Compliance Analyst at Broadstone and Manning & Napier Advisors.


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