SEBI recently published a consultation paper which proposes guidelines for the supervision and governance of artificial intelligence (AI) and machine learning (ML) applications and tools used by market participants. These guidelines aim to specify procedures and control systems to ensure responsible usage. 

The proposed guidelines cover several key parameters, including governance, investor protection, disclosure, testing frameworks, fairness and bias, and data privacy and cybersecurity measures. Currently, AI and ML are widely used by stock exchanges, brokers, and mutual funds for various purposes such as surveillance, social media analytics, order execution, KYC processing, and customer support. SEBI has also proposed that market participants disclose their use of AI and ML tools in operations like algorithmic trading, asset management, portfolio management, and advisory services. Disclosures should include information on risks, limitations, accuracy results, fees, and data quality.

Market participants using AI and ML will need to designate senior management with technical expertise to oversee the performance and control of these tools. They also must maintain validation, documentation, and interpretability of the models. Additionally, they will be required to share accuracy results and audit findings with SEBI on a periodic basis. As per SEBI, market participants should think beyond traditional testing methods and ensure continuous monitoring of AI/ML models as they adjust and transform. In terms of cybersecurity and data privacy, SEBI has highlighted risks such as the use of generative AI to create fake financial statements, deepfake content, and misleading news articles. To mitigate these risks, it has recommended human oversight of AI systems, monitoring of suspicious activities, and the implementation of circuit breakers to manage AI-driven market volatility.
 

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