CFTC Staff Issues Advisory on the Use of Artificial Intelligence

CFTC-Regulated Entity

 Identified AI Use Cases

 Identified Regulatory Considerations

Order Processing and Trade Matching

Derivatives Contract Markets (“DCMs”)

Swap Execution Facilities (“SEFs”)

Swap Data Repositories (“SDRs”)

AI may be utilized in the order processing and trade matching functions, particularly as it relates to the preparation of message data at the time of execution. For example, AI may be used to anticipate trades before they happen, allowing for greater efficiency in the allocation of resources.

Regardless of how DCMs deploy AI, they must continue to provide competitive, open, and efficient markets and mechanisms for executing transactions that protect the price discovery process of trading in the centralized market of the DCM.[1]

Market Surveillance

AI may be used to identify instances of abusive trading practices and to improve detection and flagging of specific trade execution patterns and trade anomalies.

DCMs and SEFs have a responsibility to maintain compliance staff and resources sufficient to conduct effective audit trail reviews, trade practice surveillance, market surveillance, and real-time market monitoring.[2]

System Safeguards

DCMs, SEFs, and SDRs should continue to maintain appropriate controls systems related to risk, analysis, and oversight.

• DCMs, SEFs, and SDRs are expected to follow generally accepted standards and best practices with respect to the development, operation, reliability, security, and capacity of an AI system.
• DCMs, SEFs, and SDRs have a responsibility to give the Staff timely advance notice of all material planned changes to automated systems that may impact the reliability, security, or adequate scalable capacity of such systems.[3]

Derivatives Clearing Organizations (“DCOs”)

System Safeguards

AI may be used to support the detection and/or response to cyber intrusions, in addition to identifying cyber vulnerabilities and hardening defenses, or as a tool to evaluate and/or update legacy and new computer code. DCOs may benefit from considering how the introduction of AI could impact, positively or negatively, the functionality, reliability, and resilience of computer systems relied upon by DCOs to accomplish the DCOs’ core functions.

DCOs must give the Staff prompt advance notice of all material planned changes to automated systems that may impact the reliability, security, or capacity of automated systems and all materials changes to the DCO’s program of risk analysis and oversight.[4]

Member Assessment and Interaction

A DCO might use AI to review its clearing members’ compliance with DCO rules and to support communication with its clearing members (e.g., through the use of chatbots).

DCOs must continue to ensure that they comply with clearing member eligibility requirements and monitor their credit exposure to their clearing members.[5]

Settlement

AI may be used to support DCO settlement, including facilitating netting or offset of positions.

DCOs must continue to ensure timely completion of settlement, exposure limitations to settlement bank risk, and the ability to permit netting or offset arrangements.[6]

Futures Commission Merchants  (“FCMs”)

Swap Dealers (“SD”)

Commodity Pool Operators (“CPO”)

Commodity Trading Advisors (“CTAs”)

Introducing Brokers (“IBs”)

Retail Foreign Exchange Dealers (“RFEDs”)

Associated Persons

Risk Assessment and Risk Management

AI may be utilized for the calculation and collection of initial and variation margin for uncleared swaps.

An SD that uses AI to assist in the collection of initial margin, for example, would still be required to confirm the adequate performance of such a system to ensure that risk is properly managed consistent with CFTC regulations.[7]

Compliance and Recordkeeping

AI may support activities that bear on customer protection, including, for example, the accuracy and timeliness of financial information and risk disclosures that are provided to customers, the CFTC, and the National Futures Association by these CFTC-regulated entities.

These CFTC-regulated entities remain responsible for ensuring that such disclosures are compliant with the applicable statutory and regulatory requirements.

For example, a CPO using generative AI to update a disclosure document or prepare periodic account statements for a commodity pool would still be subject to all the requirements of Part 4 of the CFTC regulations.[8]

Customer Protection

FCMs may use AI to account for segregated funds.

The Advisory emphasizes that a substantial portion of CFTC regulations relate to customer protection and that these CFTC-regulated entities remain responsible for ensuring compliance with these regulations. For example, FCMs will still be required to ensure compliance with requirements for holding their customers’ money, securities, and property under the Commodity Exchange Act and CFTC regulations.[9]