Introduction
On December 5, 2024 [1] [2] [3] [5] [7], the US Commodity Futures Trading Commission (CFTC) issued an advisory on the use of artificial intelligence (AI) by entities regulated under the Commodity Exchange Act (CEA). This advisory highlights the potential impact of AI on the derivatives trade lifecycle and underscores the necessity for compliance with existing CFTC regulations. It aims to guide the development of policies and procedures to manage AI-related risks without introducing new rules.
Description
On December 5, 2024 [1] [2] [3] [5] [7], the staff of the US Commodity Futures Trading Commission (CFTC) published an advisory addressing the use of artificial intelligence (AI) by entities regulated under the Commodity Exchange Act (CEA). This advisory underscores that AI could impact nearly all aspects of the derivatives trade lifecycle and emphasizes that market participants must comply with their existing obligations under CFTC regulations. It clarifies the agency’s expectations without introducing new rules [2], aiming to assist in the development of policies and procedures to manage the risks associated with AI use [3]. The advisory is informed by feedback from a Request for Comment (RFC) issued in January 2024 [2], which sought input on the uses and risks of AI following an Executive Order from President Biden on the safe development and use of AI [2].
While the advisory does not serve as a comprehensive compliance checklist, it highlights the necessity for CFTC-regulated entities—including designated contract markets (DCMs), swap execution facilities (SEFs) [8], and swap data repositories (SDRs)—to assess AI-related risks and update their policies, procedures [3] [4] [5] [6] [7] [8], controls [3] [5] [7], and systems accordingly [2] [7]. Regardless of whether AI is deployed directly or through third-party providers [3] [5], entities are required to conduct risk assessments and document their AI use cases while adhering to established standards for the development and operation of AI systems.
Key AI use cases identified in the advisory include:
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Order Processing and Trade Matching: AI applications can enhance efficiency in these functions, ensuring competitive and efficient markets while maintaining compliance with existing regulations.
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Market Surveillance: AI’s analytical capabilities improve the detection of abusive trading practices and anomalies in trade execution patterns, necessitating that DCMs and SEFs maintain adequate compliance resources for effective oversight.
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System Safeguards: Entities must conduct risk analysis and maintain robust control systems for risk management, adhering to best practices in AI system development and operation [4] [5], and notifying the CFTC of significant changes that could affect system reliability or security [4].
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Derivatives Clearing Organizations (DCOs): AI can assist in communication and compliance assessments among clearing members, as well as in cyber intrusion detection [4] [5]. DCOs are required to promptly notify the CFTC of material changes to automated systems that could impact reliability or security.
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Customer Protection: AI supports customer protection activities, ensuring the accuracy and timeliness of financial information and risk disclosures [3], while also enhancing compliance and recordkeeping efforts.
CFTC Chairman Rostin Behnam described the advisory as a “measured first step,” reflecting the agency’s technology-neutral approach and the importance of monitoring AI-related risks [7]. Commissioner Kristin N [3] [5] [6] [8]. Johnson has advocated for increased supervision and enforcement regarding AI technologies [3] [5], including the establishment of an AI Fraud Task Force within the Division of Enforcement to enhance oversight [6]. She emphasizes the need for formal policies imposing stricter penalties on those who misuse AI, particularly against vulnerable investors [6], and supports the creation of an interagency task force to facilitate open dialogue on AI use in the market [6] [8].
As the financial services industry increasingly adopts AI [7], the CFTC recognizes the pressing need for updated regulatory guidance, indicating a balanced approach to the regulation and oversight of AI technology while ensuring that AI use does not exempt entities from their regulatory obligations. The CFTC will continue to assess the benefits and risks associated with AI in derivatives markets, reflecting a broader trend of evolving regulatory frameworks addressing the integration of AI in financial markets [1]. Additionally, regulators in the US [2], EU [2], and UK are focusing on AI in financial markets [2], with ongoing considerations about how enforcement rules will adapt to AI-driven trading [2].
Conclusion
The CFTC’s advisory on AI use in derivatives markets marks a significant step in addressing the integration of AI technologies within the financial sector. By emphasizing compliance with existing regulations and encouraging the development of risk management policies, the advisory seeks to balance innovation with oversight. As AI continues to evolve, the CFTC and other global regulators are poised to adapt their frameworks to ensure that AI-driven advancements do not compromise market integrity or investor protection.
References
[1] https://www.lexology.com/library/detail.aspx?g=3644accf-c579-498b-bbc7-1fb65906f8b2
[2] https://www.lexology.com/library/detail.aspx?g=88dd163c-cd26-4349-8c06-a4560b5ce53e
[3] https://www.lexology.com/library/detail.aspx?g=ee88047a-31d5-43f7-95de-cb4bebd94a86
[4] https://www.jdsupra.com/legalnews/cftc-staff-issues-advisory-on-the-use-1982417/
[5] https://www.mofo.com/resources/insights/241211-cftc-staff-issues-advisory-on-the-use-of-artificial-intelligence
[6] https://www.klgates.com/CFTC-Staff-Takes-a-Measured-First-Step-in-Artificial-Intelligence-12-20-2024
[7] https://www.jdsupra.com/legalnews/cftc-issues-staff-advisory-on-the-use-4262863/
[8] https://natlawreview.com/article/cftc-staff-takes-measured-first-step-artificial-intelligence
