The US Securities and Exchange Commission (SEC) Chairman, Gary Gensler, has issued a warning about the potential risks posed by artificial intelligence (AI) in financial markets. In a speech, Gensler expressed concerns that the growing use of AI could amplify financial fragility and encourage herding behaviour among investors. While acknowledging the transformative potential of AI in financial markets, Gensler said that its adoption could lead market participants to make similar decisions based on signals from AI models or data aggregators. Such herding behaviour, he warned, has the potential to increase market instability and create challenges for risk management within the financial system. Gensler stressed the critical need for proper regulation of AI to address potential risks and avoid exacerbating the interconnectedness of the global financial system, which could play a central role in future financial crises. The SEC chairman revealed that the agency’s staff has been directed to formulate rule proposals to address conflicts of interest arising from AI optimisation. He noted that the optimisation process often prioritises not only the interests of the customers but also the interests of the platform itself. “In finance, conflicts may arise to the extent that advisers or brokers are optimising to place their interests ahead of their investors’ interests,” Gensler said, highlighting the importance of addressing these conflicts across various investor interactions. Regarding the current model risk management guidance, Gensler acknowledged that it would require updates to account for the new wave of data analytics introduced by AI. However, he cautioned that such updates might still not be sufficient. “Model risk management tools, while lowering overall risk, primarily address firm-level, or so-called micro-prudential, risks. Many of the challenges to financial stability that AI may pose in the future, though, will require new thinking on system-wide or macro-prudential policy interventions,” he said. The SEC’s efforts to develop rule proposals aim to strike a balance between capitalising on AI’s benefits and mitigating its inherent dangers in financial markets.
— Regulation Asia (@RegulationAsia) July 19, 2023