Mar 26, 2024 Artificial Intelligence or (“AI”) has been a hot topic of discussion for the last several years. It should come as no surprise that financial regulators are beginning to take an interest in the subject. As AI infiltrates everyday life, it is also becoming more frequently relied upon within the brokerage and trading community. Institutional finance has always been a leading player in the advancement of technology if it can drive higher brokerage and trading profits. For example, high frequency traders greatly moved the needle with respect to computer processing power and innovation. Algorithmic traders helped to usher in unrivaled predictive analytics models, some of which now underpin major sports books in Las Vegas. Even the advancement of trading platforms themselves have revolutionized how the investing public can access financial markets and grow wealth. If one thing is certain, whenever there is a change in technological advancement adjustments to regulations soon follow. How then are the Commodity Futures Trading Commission (“CFTC”) and National Futures Association (“NFA”) to respond to AI? NFA Staff Inquiring About AI Turnkey is one of the leading consulting firms for CFTC and NFA related matters in the country. Our scale affords us the opportunity to regularly interact with NFA on behalf of our customers. Through these interactions we are able to glean valuable insight into how industry rules and regulations may be changing. Starting during the fall of 2023 Turnkey’s team began noticing NFA asking about the use of artificial intelligence during routine examinations. At first these inquiries were relatively agnostic; questions such as “Does the firm utilize artificial intelligence?” began appearing on NFA’s initial questionnaire. After this the questions advanced to include inquiries about whether or not AI involved deep learning or generative AI in any capacity. NFA’s inquiries have slowly but surely evolved to become a full-blown questionnaire committed to this area. Recently, through our industry relationships, Turnkey was able to source what NFA is looking for. What is NFA asking? The following questions are being evaluated and considered by NFA during routine regulatory audits as of Q1 2024. At this time, Turnkey is not aware of any regulation that specifically or directly addresses the use of artificial intelligence at Futures Commission Merchants (“FCMs”), Introducing Brokers (“IB”), Commodity Pool Operators (“CPO”), or Commodity Trading Advisors (“CTA”). Turnkey is also not aware of any interpretive notices or guidance on the subject which exist. What we can confirm however is that the following are some actual questions examiners are being required to ask member firms during examinations. What are specific areas where AI involving deep learning or generative AI being utilized by the firm? Provide details on when the Firm began using the AI. Is the AI developed in-house or by a third-party? If a third-party identify the third party and how they are utilized? Describe any challenges the firm has faced using AI developed by a third party and how the firm is managing these risks. Does the firm or do the firms employees utilize ChatGPT? If so, provide details on the extent of its use and all identified risks of its use. Does the firm maintain a list of approved and unapproved third-party AI or large language model vendors for use by employees? Does the firm utilize AI to forecast or make any predictive modeling calculations? If so describe. NFA has also asked several questions about how the firm governs and supervises the use of AI and request information on any potential conflicts of interest in this area. NFA expects firms to also analyze and provide information on how the AI applications were trained or “learned” their functionalities. A description of any and all models to develop the AI is being requested. NFA expects firms to monitor outputs of the AI for accuracy, they want an analysis of bias tendencies, model degradation, and “data drift” to be considered. They also want to know the qualifications of staff supervising the AI and evaluating these features and have asked for resumes or other resume information. They ask questions about model extraction, data poisoning, and AI explainability and expect answers. Lastly, they are asking about AI’s role in certain compliance functions such as the firms AML and fraud detection processes, monitoring of trading activity, risk management capabilities, customer service (chatbots/avatars), trading strategy development or use, and within promotional materials. Turnkey’s Opinion Turnkey has been in business since 2007 and has witnessed the evolution of many industry trends and regulations. Our team has a significant amount of experience working with regulatory examiners and evaluating how they approach new regulatory obligations. It is Turnkey’s view that NFA is preparing to implement a new rule or interpretive notice governing the use of AI at member firms. In Turnkey’s experience any time NFA begins asking questions such as those noted above, they are gathering facts. When this occurs it usually suggests NFA or the CFTC have observed abuse within the markets they regulate in the specific area being inquired about. In other instances, it may be that regulators are being forward looking and have identified potential shortcomings that will need to be addressed. Whatever the case, Turnkey is highly confident that new regulations governing the use of AI are coming. When or what these regulations might look like remains anyone’s guess. Turnkey is advising clients to consider (at a minimum) the above questions prior to implementing any AI technologies. If you have questions or concerns with any of the information included within this article Turnkey has answers! Our firm is aware of more questions related to AI that NFA has been asking which were not discussed in this article. Turnkey also has insight into the latest audit trends and techniques being put forth by NFA, CME Group, and the CFTC. If your firm is registered with the CFTC, is an NFA member, or belongs to a commodity exchange contact us today to learn more about how we may be able to assist your firm.