The World Federation of Exchanges (WFE) has raised concerns about the potential risks of over-regulating Artificial Intelligence (AI) in financial markets. As AI continues to transform the landscape of global finance, the WFE urges policymakers to adopt a more balanced and flexible regulatory approach that encourages innovation while safeguarding market integrity and protecting investors.
The WFE, which represents global exchanges and clearing houses, highlighted that AI's integration into financial markets does not automatically necessitate an entirely new regulatory framework. Instead, it suggests that regulators should focus on utilizing existing principles-based rules, which are inherently flexible and adaptable to new technologies. According to the WFE, these principles should be designed to ensure accountability, irrespective of the technology being used, while achieving the dual goals of robust oversight and fostering innovation.
One of the core messages of the WFE’s position is that regulation should prioritize the outcomes and accountability of AI-driven systems rather than trying to regulate the specific technology itself. This principles-based approach allows for flexibility, ensuring that AI applications can enhance market efficiency and innovation, without compromising the foundational goals of financial regulation, such as transparency, fairness, and investor protection.
In its paper, the WFE also lays out three foundational principles that it believes should guide AI regulation:
- Principles-based Regulation: The WFE advocates for a regulatory framework that is inherently flexible and can evolve with emerging technologies. AI applications in financial markets should be subject to the same regulatory standards as existing tools and systems, with a focus on achieving desired outcomes (such as transparency, fairness, and accountability) rather than focusing on the specific technology in use. By doing so, regulators can ensure that AI-driven systems work within the established framework for market integrity while also encouraging the growth of innovative applications.
- A Risk-based Framework: The WFE calls for a risk-based regulatory approach that aligns requirements with the level of risk posed by AI applications. This ensures that regulatory burdens are proportional to the potential risks involved, avoiding the imposition of overly restrictive rules on lower-risk AI applications, while ensuring that more significant risks are adequately addressed. By tailoring regulations to the risk profile of each AI application, regulators can strike a balance between oversight and innovation.
- Alignment of Regulatory Standards: In an increasingly globalised financial ecosystem, the WFE stresses the importance of aligning regulatory standards at both local and international levels. Such alignment would make it easier for businesses to comply with regulations, reduce regulatory arbitrage, and facilitate a safer and more efficient financial system. The WFE also emphasises the need for international cooperation in creating consistent AI regulations that help promote global market stability and protect investors.
While AI brings undeniable technological benefits to financial markets, there are also significant concerns, particularly around the use of generative AI, which requires careful management. However, exchanges, as trusted third parties providing secure and regulated platforms for securities trading, are already taking steps to scrutinise and govern AI use. They have implemented controls to ensure that AI is used responsibly and that market integrity is maintained.
Exchanges and clearing houses are uniquely positioned to leverage AI's potential, given the critical role they play in ensuring market transparency, enabling efficient trading, and facilitating investment into the real economy. WFE members, which handle over $124 trillion in annual trading (as of the end of 2023), are already deploying AI technologies to improve market operations. AI is already used in a variety of ways, such as detecting fraud, conducting market surveillance, optimising trade execution, and streamlining settlement processes. These applications demonstrate the significant positive impact that AI can have on financial markets, improving both efficiency and security.
Nandini Sukumar, Chief Executive Officer of the WFE, urged regulators to avoid the knee-jerk reaction of imposing strict regulations on AI. "A principles-based, risk-sensitive regulatory approach that encourages innovation, without stifling progress, should be the goal of all regulators and governments," Sukumar said. She also emphasised that the modernisation of financial markets should be encouraged to improve market dynamics and provide better services and protections to consumers.
While it is crucial to safeguard market stability and investor protection, it is equally important to avoid over-regulation that could stifle innovation. The WFE’s call for a principles-based, risk-sensitive approach that aligns with both market needs and the evolving nature of AI technologies offers a framework that can help regulators navigate the complexities of AI in finance, ensuring that it continues to drive growth and efficiency in the global economy.
