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IOSCO issues guidance to help regulate the risks associated with AI and ML usage

The Board of the International Organization of Securities Commissions (IOSCO) has published guidance to help its members regulate and supervise the use of artificial intelligence (AI) and machine learning (ML) by market intermediaries and asset managers, following a consultation report published in June.

IOSCO says that use of AI and ML may benefit market intermediaries, asset managers and investors by increasing the efficiency of existing processes, reducing the cost of investment services and freeing up resources for other activities. However, it may also create or amplify risks, potentially undermining financial market efficiency and harming consumers and other market participants.

Market intermediaries and asset managers’ use of AI and ML is growing, as their understanding of the technology evolves. The IOSCO report describes how market intermediaries and asset managers currently use AI and ML to reduce costs and increase efficiency. It notes that the rise in the use of electronic trading platforms and the increasing availability of data have led firms to progressively use AI and ML in their trading and advisory activities, and risk management and compliance functions. Consequently, regulators are focusing on the use and control of AI and ML in financial markets to mitigate the potential risks and prevent consumer harm.

The IOSCO guidance highlights measures that seek to ensure that market intermediaries and asset managers have:

  • Appropriate governance, controls and oversight frameworks over the development, testing, use and performance monitoring of AI and ML;
  • Staff with adequate knowledge, skills and experience to implement, oversee, and challenge the outcomes of the AI and ML;
  • Robust, consistent and clearly defined development and testing processes to enable firms to identify potential issues prior to full deployment of AI and ML; and
  • Appropriate transparency and disclosures to their investors, regulators and other relevant stakeholders.

In addition to the guidance, the report includes two annexes that describe how regulators are addressing the challenges created by AI and ML and the guidance issued by supranational bodies in this area.

Read the guidance (PDF).

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