Mumbai: Market Watchdog Securities and Exchange Commission (SEBI) has released a consultation paper proposing a five-point regulatory framework for the responsible use of artificial intelligence (AI) and machine learning (ML) in the securities market. The guidelines specify procedures and control systems to ensure responsible use, transparency, equity, data security, and risk management, and aim to balance innovation and investor protection.
The proposed guidelines cover several important parameters, including governance, investor protection, disclosure, testing frameworks, equity and bias, and measures of data privacy and cybersecurity. AI and ML tools are widely used in stock exchanges, brokers and mutual funds for a variety of purposes, including surveillance, social media analytics, order execution, KYC processing, and customer support.
In the new draft, SEBI proposes that market participants disclose the use of AI and ML tools in operations such as algorithmic trading, asset management, portfolio management, and advisory services. Disclosures should include information on risk, limitations, accuracy results, fees and data quality, says the draft paper.
The draft states that market participants using AI and ML should designate senior management with technical expertise to oversee the performance and control of these tools. They also need to maintain validation, documentation, and interpretability of these models. Additionally, accuracy and audit results should be shared regularly with SEBI.
