IOSCO publishes final report on AI for market intermediaries and asset managers

Written by Zhuan Faraj

On 7 September 2021, the International Organization of Securities Commissions (“IOSCO”) published a Final Report on the use of artificial intelligence (“AI”) and machine learning (“ML”) by market intermediaries and asset managers.

The report details how firms are using AI and ML techniques, identifies the risks and harms posed by the use of AI and ML, and sets out firms’ response to the potential risks arising from the use of AI and ML.

It also provides guidance to assist IOSCO members in supervising market intermediaries and asset managers that utilise AI and ML, comprising six measures that reflect expected standards of conduct by market intermediaries and asset managers using AI and ML.

The guidance states that Regulators should consider requiring firms to:

• Have designated senior management responsible for the oversight of the development, testing, deployment, monitoring and controls of AI and ML. This includes a documented internal governance framework and an appropriately senior individual with the relevant skills and knowledge designated to sign off on initial deployment and substantial updates of the technology.
• Adequately test and monitor the algorithms to validate the results of an AI and ML technique on a continuous basis. The testing should be conducted in an environment that is segregated from the live environment prior to deployment to ensure that AI and ML behave as expected in stressed and unstressed market conditions and operate in a way that complies with regulatory obligations.
• Have the adequate skills, expertise and experience to develop, test, deploy, monitor, and oversee the controls over the AI and ML that the firm utilises. Compliance and risk management functions should be able to understand and challenge the algorithms and conduct due diligence on any third party providers.
• Understand their reliance and manage their relationship with third-party providers, including monitoring their performance and conducting oversight. There should be a clear service level agreement and contract in place clarifying the scope of the outsourced functions and the responsibility of the service provider, containing clear performance indicators, and clearly determining rights and remedies for poor performance.
• Disclose meaningful information to customers and clients around their use of AI and ML that impact client outcomes. The report also suggests that Regulators consider what type of information they may require from firms using AI and ML to ensure appropriate oversight.
• Have appropriate controls in place to ensure that the data on which the AI and ML performance is dependent is of sufficient quality to prevent biases and sufficiently broad for a well-founded application of AI and ML.

For further information a copy of the report can be found here.