Regulators Needn’t Be Spooked: The WFE Says Curtailing AI In Financial Markets Might Mean Greater Risks For Investors

The World Federation of Exchanges, the global industry body for exchanges and clearing houses (The WFE), has today published a paper on the opportunities and challenges surrounding Artificial Intelligence (AI).  

AI does not necessarily mean more regulation is needed because principles-based rules should ensure firms are held accountable regardless of the technology applied. Regulation must first use existing tools to achieve a balance between ensuring robust oversight and fostering innovation to not only protect public interest and safety, but also encourage the growth and beneficial application of AI technologies.

With policymakers around the world opening consultations and discussions on the use of AI this year, The WFE suggests 3 foundational principles:

Principles-based regulation: that is inherently flexible and adaptable to evolving technologies. AI-driven systems should be held to the same regulatory standards as existing tools, with a focus on outcomes and accountability rather than the specific technology. This would ensure that AI applications enhance efficiency and innovation without compromising the foundational goals of financial regulation.

A risk-based framework: where requirements are proportional to the level of risk associated with AI applications. 

Alignment of regulatory standards: there must be alignment at both local and international levels. This helps to facilitate a safe system that is easier to comply with. 

While the technological innovations and associated concerns about managing generative AI are significant, exchanges are carefully scrutinising tools and establishing controls to govern AI use as trusted third parties providing secure and regulated platforms for trading securities. 

WFE exchange and clearing house members, which together see over $124tr in trading pass through them annually (at end-2023), are uniquely positioned to leverage AI’s potential due to the critical role they play in ensuring transparency, enabling efficient trading and facilitating investment to the real economy. Exchanges are leaders in deploying technology to improve market integrity and efficiency and AI already has a role in their operations: detecting fraud, undertaking market surveillance, facilitating trade execution and optimising settlement, for example.

Nandini Sukumar, Chief Executive Officer of the WFE, said, “As an industry, we are committed to shaping an AI regulatory framework that fosters innovation while safeguarding market integrity and investor protection. Regulators need to curb their natural reaction to regulate here. A principles-based, risk-sensitive regulatory approach that encourages innovation, without stifling progress, should be the goal of all regulators and governments. Modernisation must be encouraged to enhance market dynamics and provide better services and protections to consumers.” 

Richard Metcalfe, Head of Regulatory Affairs at the WFE, commented, “A failure to strike the right balance in the regulation puts more than growth at risk. Exchanges and CCPs are at the heart of the financial ecosystem and are trusted to uphold market integrity. More advanced machine learning models and generative AI has opened new avenues for enhancing operational efficiency, improving market surveillance, and managing risk. Policymakers must take care that regulatory changes don’t leave investors more exposed to risk, with overly broad regulation stifling the use of AI in safeguarding markets.”

The full paper can be read here.