On January 25, 2024, the Commodity Futures Trading Commission (CFTC) issued a request for comment (RFC) on the current and potential uses and risks of artificial intelligence (AI) in the derivatives markets. The RFC follows President Biden’s October 2023 Executive Order on the Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence (Executive Order), which encourages agencies, such as the CFTC, to “consider using their full range of authorities to protect American consumers from fraud, discrimination and threats to privacy and to address other risks that may arise from the use of AI…”

The RFC seeks to clarify the definition of AI and focuses on whether the Executive Order definition is appropriate for CFTC-regulated entities and markets. Additionally, the inquiry includes questions on the distinction between AI and other automated trading strategies currently used by the industry. The RFC also raises important questions about AI use in various applications, including trading, risk management, compliance, cybersecurity, recordkeeping, data processing and analytics, and customer interactions, among others. The RFC closes with questions on AI risk, which are broken down into topics including data quality, market manipulation and fraud, customer protection, privacy and confidentially, and bias, among others.

It appears domestic and international efforts to harness the power of AI while managing related risks are top of mind for the CFTC, specifically for Commissioner Kristin Johnson. Along with the CFTC’s RFC press release, Commissioner Johnson released her own statement supporting the RFC and the Commission’s proactive efforts to fully understand the risks and rewards of AI adoption. Commissioner Johnson’s statement highlights recent proposals, reports, and laws (see graphic below) from global policymakers and applauds the CFTC staff for their efforts to be an active participant in the policy-making discussion. Her statement’s conclusion notes that the RFC will inform her sponsored Market Risk Advisory Committee’s (MRAC) approach to AI in 2024 and that the “MRAC anticipates offering formal recommendations to the Commission on a number of [AI-related] topics…”

In additional to the anticipated MRAC AI-related recommendations, the CFTC has indicated that staff will consider all responses to the RFC while analyzing possible future actions, such as new or amended guidance, interpretations, policy statements, or regulations. Comments to the CFTC will be accepted until April 24, 2024. Click here for the public comment forum and here to read submitted comments.

Separately, the CFTC issued a Customer Advisory warning titled AI Won’t Turn Trading Bots into Money Machines to highlight scams and fraudulent claims that AI-assisted technology, such as crypto-asset arbitrage algorithms, can generate high or guaranteed returns. The Commission warns that these exaggerated false promises are often distributed through social media channels and “influencers”, people who purport to have an expert level of knowledge or social influence in their field. Prior to investing with platforms promoting AI algorithms and trading bots, the Commission encourages novice and advanced investors alike to (i) research the background of the company or trader; (ii) research the history of the trading website (e.g. the age of the domain); (iii) get a second opinion from a financial advisor, trusted friend, or family member; and (iv) understand the risks and costs associated with the underlying assets.

Put Patomak’s Expertise to Work

As the regulatory landscape surrounding AI in derivatives trading rapidly evolves, Patomak stands ready to be your trusted advisor. Our deep expertise in both the derivatives markets and AI applications enables us to help you navigate complexities, mitigate risks, and harness the full potential of this transformative technology. Whether you’re seeking to submit a comment letter, define your AI goals, ensure compliance, or stay ahead of the curve, Patomak’s suite of services can provide the support you need to succeed. If you would like to learn more about how Patomak can partner with you, please reach out to Sudhir Jain, Managing Director, at sjain@patomak.com.