Proposed Amendments To Enhance Accountability And Transparency In AI-Driven Securities Markets
Artificial Intelligence (AI) is revolutionizing industries worldwide, and the financial sector is no exception. In the securities market, AI-driven tools are being widely adopted by Market Infrastructure Institutions, Registered Intermediaries, and other regulated entities. While these tools offer unparalleled opportunities for innovation and operational efficiency, they also raise concerns about investor protection.
Recognizing these challenges, the Securities and Exchange Board of India (SEBI) has proposed regulatory amendments outlined in a consultation paper dated November 13, 2024.[1] This report, open for public comment, aims to address key issues surrounding the responsible use of AI in the securities market while fostering innovation and safeguarding investor interests.
Table of Contents
Background
AI involves machines simulating human intelligence processes, such as learning, reasoning, and self-correction. A subset of AI, Machine Learning (ML), enables systems to learn and improve from data without explicit programming. ML uses statistical methods to uncover patterns within large datasets, offering significant applications in the securities market.
SEBI’s Current Regulatory Landscape
SEBI has acknowledged the growing influence of AI and ML in the securities market, issuing circulars to monitor their use among market participants. These circulars primarily emphasize reporting and transparency but do not comprehensively address broader concerns such as accountability, governance, and investor protection in the context of AI usage.
The Rise of AI in the Securities Market
AI has the potential to redefine the securities market by automating routine operations like trade execution and portfolio rebalancing, improving efficiency, and enabling data-driven insights that surpass human analytical capabilities. It also enhances risk management by monitoring market conditions in real-time and providing tailored investment products aligned with individual investor preferences.
However, these benefits come with risks. Algorithmic bias, stemming from skewed training data, can lead to inequitable outcomes. The opaque nature of many AI models raises concerns about interpretability and accountability. Cybersecurity vulnerabilities pose additional threats, including data breaches and operational disruptions. Ethical issues, such as job displacement and misuse of AI, further underscore the need for stringent regulatory oversight.
Proposed Amendments
To address the growing use of AI in the securities market, SEBI proposes amendments to its regulations. These amendments aim to strengthen investor protection and ensure responsible AI usage. Proposed regulations include:
SEBI (Intermediaries) Regulations, 2008
SEBI may introduce a new Chapter IIIB, “Usage of Artificial Intelligence Tools,” to specifically regulate the use of AI by intermediaries. This could involve mandating intermediaries to establish robust AI governance frameworks, requiring disclosure of AI usage and its impact on investment decisions, and imposing liability for AI-related errors or misrepresentations.
SEBI (Depositories and Participants) Regulations, 2018
A new Chapter VIIA, “Usage of Artificial Intelligence Tools,” could be added to regulate the use of AI by depositories and participants. This could involve ensuring data privacy and security in AI-driven processes, implementing effective risk management practices for AI systems, and disclosing the use of AI in depository services.
SEBI (Stock Exchanges and Clearing Corporations) Regulations, 2018
A new Chapter VIA, “Usage of Artificial Intelligence Tools,” could be introduced to regulate the use of AI by stock exchanges and clearing corporations. This could involve mandating the development of robust AI governance frameworks, ensuring the reliability and accuracy of AI-driven systems, and implementing measures to mitigate systemic risks arising from AI usage.
Conclusion
SEBI’s proposed amendments to regulate AI in the securities market signify a forward-looking approach to balancing innovation with investor protection. By addressing key challenges such as algorithmic bias, accountability, transparency, and cybersecurity risks, these measures aim to ensure the responsible use of AI while fostering trust and resilience in the financial ecosystem. Through robust governance frameworks and stakeholder engagement, SEBI seeks to create a regulatory environment that not only safeguards investor interests but also supports sustainable growth and innovation in the securities market.
[1] https://www.sebi.gov.in/reports-and-statistics/reports/nov-2024/proposed-amendments-with-respect-to-assigning-responsibility-for-the-use-of-artificial-intelligence-tools-by-market-infrastructure-institutions-registered-intermediaries-and-other-persons-regulated-b-_88470.html
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