Statement Of CFTC Commissioner Kristin N. Johnson On Future-Proofing Financial Markets: Assessing The Integration Of Artificial Intelligence In Global Derivatives Markets

Introduction

Today, the Commodity Futures Trading Commission (CFTC or Commission) issued a Staff Advisory to CFTC-Registered Entities and Registrants on the Use of Artificial Intelligence in CFTC-Regulated Markets (Staff Advisory) which reminds CFTC-regulated entities that their obligations to comply with Commission regulations are technology neutral, meaning these obligations apply broadly to market transactions and conduct without regard to the sophistication of underlying technology.

During my term as a Commissioner and in the decade prior to my appointment, I have advocated for market and prudential regulators to have clear visibility into the diverse technologies that increasingly define the infrastructure of our markets. Working in partnership with market participants, we are able to enhance our ability to accomplish our mission of ensuring market stability and market integrity. Technological innovation will indisputably characterize the future of finance. The question for our Commission and other market and prudential regulators is how best to ensure that we integrate responsible innovation that reflects our regulatory values, protects customers, and preserves investors’ capital.

Well ahead of the development of the Staff Advisory, I began working with Congress, the Commission staff, market participants and public interest advocates to advance the discussion of AI integration in our markets. Today’s Advisory marks an important step in continuing to advance that discussion.

While I strongly support the Commission’s efforts to advance inquiries regarding the integration of AI in our markets and to explore the need to introduce guardrails to mitigate the risks that AI technologies may present, I believe that there are some tangible steps that the Commission can take immediately to enhance the safety and benefits of incorporating AI in markets while minimizing the risks.

I have advocated for and repeat the call today for the creation of an AI Fraud Task Force, enhanced information gathering on the use and adoption of AI technologies by market participants, the development of an interagency task force among market and prudential regulators, and a formal policy of enhancing penalties for bad actors who use AI to lure vulnerable investors into handing over their hard-earned cash to fraudsters conjuring up deepfake investment schemes using easily and cheaply acquired or adapted generative AI technologies.

Staff Advisory

The Staff Advisory encourages the development of responsible innovation and warns markets and market participants against AI washing as well as misunderstanding the importance of ensuring compliance. No matter the complexity or novelty of technology integrated into our market infrastructure, innovation is subject to compliance with the Commodity Exchange Act (CEA) or other CFTC regulations.

As I indicated in my statement released at the time of the Commission’s Request for Comments on AI (AI RFC),

[t]he increasing integration of artificial intelligence (AI) in nearly every sector of our economy and society has spurred a global debate regarding the promise and the peril of the assemblage of technologies described as AI. Registrants and other market participants are increasingly exploring and using AI and related technologies.[1]

I commend the Commission’s staff and my fellow Commissioners for taking steps to weigh and consider challenges presented by the use of a technology that our market participants have long employed for predictive analysis and important risk mitigation strategies, among other initiatives.

Throughout my career, I have carefully considered the implications of innovative technologies, such as AI, and their effect on financial markets. The Staff Advisory is an important step in developing a pathway for the Commission and our markets to consider emerging risks associated with generative AI and other innovative approaches that must be effectively stress tested to ensure global market integrity, market stability, and the Commission’s efforts to carry out its statutory mandate. At the same time, it reminds regulated entities of their existing obligations with respect to the use of AI.

As I previously noted, applications of AI in financial markets are only increasing—government regulators, self-regulatory organizations, and market participants are all adopting AI-based technologies and looking into additional applications for the future. This makes the work of the Commission in evaluating AI and providing guidance or oversight to applicable applications even more imperative.

Path Forward

Over the course of my time as a Commissioner, I have worked to collaborate internally with my fellow Commissioners and Commission staff and across government agencies to encourage a thoughtful approach to evaluate the implications of integrating AI in our markets.[2] I have encouraged the Commission to engage in a discourse with our regulated entities to better understand how our market participants are incorporating AI into their business models and market infrastructure. In connection with these efforts, I have advocated for a few key proposals to develop a robust regulatory framework for our markets. Each of these proposals is aimed at developing a principles-based framework that can remain applicable to AI and other emerging technologies as they continue to develop over time.

Enhanced Supervision and Enforcement Resources

As our markets become more complex and reflect the incorporation of and reliance on novel technologies, the Commission must have the resources to effectively supervise more sophisticated markets. I believe that the Commission would benefit from increased resources dedicated to enabling several of the Divisions within the Commission to prepare for and meet the challenges of regulating innovative trading, clearing, and settlement technologies, among other changes to operational infrastructure that merits consideration. In addition, I would welcome an opportunity to work with our Division of Enforcement on developing an AI Fraud Task Force.

Gathering Information

I am pleased that the Staff Advisory considered the comments received in response to the Commission’s AI RFC.  I have encouraged an open dialogue among the Commission and Commission staff, domestic and foreign regulators, market participants, academics, and public interest advocates regarding the implications of integrating AI in global derivatives markets. The Staff Advisory is the latest step in what I hope will continue to be an ongoing discussion among each of these parties.

Heightened Civil Monetary Penalties to Deter Fraudulent Actors

As noted above, I encourage the Commission to consider a CFTC Task forced focused on mitigating AI enabled misconduct. AI Fraud and manipulation threaten global derivatives markets and, as bad actors continue to develop more sophisticated threats using AI,[3] regulators must be prepared to enhance surveillance, monitoring, and penalties for violations of our regulations. I have encouraged enhanced penalties for bad actors who would use the powerful and important technologies described as AI to facilitate fraud or other illegal activity. Increasing civil monetary penalties against individuals and entities who misuse AI to engage in fraud or evade CFTC regulations will stymie the proliferation of misconduct.

Increased civil penalties may serve as a deterrent to misconduct and may help to ensure that markets use AI responsibly and in compliance with existing laws. The heightened penalties may be used to emphasize a zero-tolerance approach toward fraudulent activities, market manipulation, and other violations facilitated by the use of AI.

Interagency Collaboration

Finally, I believe it is important that regulators across financial markets within the United States and globally work in collaboration to establish effective regulatory approaches. Within the community of domestic market and prudential regulators, I have encouraged the creation of an inter-agency task force focused on understanding the implications of integrating more complex AI models into regulated markets. A collaborative approach would promote efficiency and consistency in AI regulation and ensure that regulations keep pace with technological advancements and emerging challenges.

Conclusion

The Staff Advisory benefitted from the efforts of staff members and directors across the Commission, including staff and leadership from the Commission Divisions, including Division Directors for the Division of Clearing and Risk, Division of Data, Division of Market Oversight, and the Market Participants Division. The Staff Advisory released today is an important step towards strengthening the integrity, stability, and resilience of our markets.