CFTC Commissioner Lays Out Agenda for Regulating AI in Financial Markets

The Commodity Futures Trading Commission (CFTC) is undertaking a multi-faceted effort to develop guidance and rules around artificial intelligence (AI) integration in the markets it oversees, according to an extensive statement today from Commissioner Kristin N. Johnson.

Johnson framed the statement, delivered at a Technology Advisory Committee meeting, as marking the CFTC's fourth major initiative to assess AI's role after previously issuing an AI request for public comment, making policy proposals, working through advisory committees, and appointing the agency's first Chief AI Officer. The statement outlines a multi-pronged approach including establishing a principles-based regulatory framework, levying harsh penalties for intentional AI misuse, creating an interagency AI task force, and potentially mandating transparency around firms' AI adoption.

"With each of these steps, the Commission reinforces its commitment to ensure the integrity and stability of our markets," Johnson stated. She said the work demonstrates U.S. leadership as regulators globally grapple with both the potential benefits and challenges of increasingly advanced AI applications.

Cracking Down on AI Misuse

A central pillar is advocating "heightened penalties" against deliberately weaponizing AI for fraud, market manipulation or evading rules. Johnson drew a parallel to enhancing sentences for firearm crimes, stating "Like a firearm, AI can also enhance the danger of a crime."

She warned that "bad actors who would use AI as a weapon to disrupt our markets must be sufficiently deterred" through calibrating penalties severe enough that "AI-enabled misconduct is not worth the risk." The rationale is generative AI's ability to "turbocharge" schemes like synthetic identity fraud in ways that could "accelerate" and cause widespread harm.

"It is essential that we get the penalties right," Johnson stated bluntly, putting compliance teams on notice of potential strict liability if the tough stance advances.

On the regulatory front, Johnson advocated a principles-based approach to assess if existing requirements around areas like risk management are sufficient for addressing AI risks. She argued this would retain flexibility and avoid being overly prescriptive.

"I believe the Commission's approach should be principles-based, retaining adaptability and remaining technology neutral," she stated.

Interagency Coordination

Recognizing many firms span multiple regulators, Johnson proposed the CFTC lead creation of an interagency AI task force with the SEC, Federal Reserve, OCC, CFPB and others. The task force would coordinate identifying risks, share information, and provide recommendations. She cited precedents like past CFTC-SEC joint Dodd-Frank Act legislation after the 2008 financial crisis when roundtables proved "invaluable" for regulating previously unsupervised markets.

"Such coordination has proved critical to the success of our regulatory efforts in the past, and it is only more critical now, as we face the unprecedented opportunities and challenges that AI brings," Johnson stated.

The CFTC is also working with its Market Risk Advisory Committee on potentially integrating a survey to solicit more transparency from registered entities around their AI usage.

Tackling AI's Transformative Effect on Finance

Throughout the statement, Johnson framed AI as holding "promising new innovations" for areas like trading, risk management and compliance, but also creating significant potential risks requiring "appropriate safeguards." She said the initiatives aim to address how "conversations among global regulators, market participants, customers, and investors have reached a fever pitch" around AI's potential to "fundamentally reshape" financial markets.

Johnson emphasized the vital role of the CFTC's advisory committees like the Technology Advisory Committee (TAC) in understanding AI's impacts and said she is "hopeful" their recommendations can help "enhance the regulatory toolkit." But she acknowledged "much work remains" in the comprehensive effort, signaling the CFTC's AI regulation plan remains at an early stage as the emerging technology's market integration rapidly accelerates.

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