Introduction

Securities and Exchange Board of India (SEBI) issued a consultation paper to seek feedback on its proposed amendments to its regulations focusing on the responsibilities of Market Infrastructure Institutions, Registered Intermediaries and other entities in relation to their use of Artificial Intelligence and Machine Learning (Consultation Paper). This Consultation Paper solicits comments and inputs from the public on the proposed amendments to the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018, the Securities and Exchange Board of India (Depositories and Participants) Regulations, 2018 and the Securities and Exchange Board of India (Intermediaries) Regulations, 2008, with respect  to  assigning responsibility   for the use  of artificial   intelligence   tools  by   Market Infrastructure  Institutions, Registered Intermediaries and  other  persons regulated by SEBI.

 

Reporting requirements for use of AI

In response to the growing use of Artificial Intelligence and Machine Learning tools, SEBI previously mandated that Stockbrokers, Depository Participants, Market Infrastructure Institutions (MIIs) such as Stock Exchanges, Depositories, and Clearing Corporations, as well as Mutual Funds, Asset Management Companies, Trustee Companies, and Boards of Trustees of Mutual Funds, report their AI and ML applications and systems. It included within its ambit any set of applications / software / programs / executable / systems (computer systems), offered to investors—both individuals and institutions—by market intermediaries or institutions. These tools are used to facilitate investing and trading, disseminate investment strategies and advice, or conduct compliance operations and activities, where AI / ML is portrayed as a part of the public product offering or under usage for compliance or management purposes).

 

Rise of AI

With the rise of AI and ML systems in financial markets, stakeholders can now make more informed decisions, significantly impacting market analysis, stock selection, investment strategies, and portfolio building. However, this advancement necessitates robust investor protection measures. It is crucial to assign responsibility to MIIs, intermediaries, and other entities regulated by SEBI that utilize AI/ML in their business operations and client services. This responsibility ensures that these entities approach the deployment of AI/ML tools with the seriousness it demands, while also safeguarding investor interests. Additionally, transparency in AI/ML operations is crucial to maintain trust, and entities must address privacy and confidentiality risks by implementing robust data protection measures to safeguard sensitive information. This risk is heightened due to the vast amount of data that AI systems process, coupled with their innate ability to learn from data and apply it in different scenarios.

 

Proposed amendment

To this end, it is proposed that all SEBI-regulated entities using AI/ML tools and techniques in securities markets and investor services, regardless of the scale and scenario of adoption, must comply with all applicable laws. They must also be solely accountable for the consequences of such use, including ensuring the privacy, security, and integrity of investor and stakeholder data, especially data maintained in a fiduciary capacity. These entities will be held responsible for any outcomes resulting from the use of AI/ML tools. SEBI may take necessary actions in case of any violations, reinforcing the importance of investor protection in the era of AI and ML.

 

Conclusion

The integration of AI in trading and market operations, including compliance mechanisms, offers numerous benefits such as increased efficiency, enhanced accuracy in decision-making, improved risk management, and the ability to cater to a diverse range of investors. Additionally, AI facilitates timely reporting, thereby streamlining business processes for both intermediaries and investors.

Consequently, the proposed amendments are seen as a positive development for investors, promoting ease of doing business. Ensuring investor protection is crucial and assigning responsibility to Market Infrastructure Institutions, intermediaries, and other regulated entities is a significant step. The Draft Amendments stress the importance of compliance with existing laws, liability for AI and ML use, and the protection of investor and stakeholder data. SEBI’s uniform regulatory approach prioritizes transparency and welfare in the use of these technologies.

 

However, these changes are likely to face resistance from service providers, as they impose absolute responsibility regardless of the extent to which these AI tools are adopted. Regulated entities would be required to be cautious when developing or procuring AI/ML technologies and ensure human oversight in decision-making processes. This could be perceived as an undue burden, potentially leading to significant pushbacks from the industry.

Authors & Contributors

Partner(s):

Ramya Suresh

 

 

Associate:

Amitabh Abhijit