On January 04, SEBI through a circular mandated quarterly reporting by stock brokers and depository participants who use applications and systems based on artificial intelligence (AI) and machine learning (ML) technologies with effect from quarter ended March 2019 to stock exchanges and depositories. The concerned stock exchanges and depositories are thereafter required to share the said information with SEBI.
The objective of this reporting regime is to inter alia i) collate information on AI and ML technologies used in the financial markets, ii) confirm whether the AI and ML technologies used by the market participants will be compliance with SEBI’s cyber security framework and iii) to ascertain the safeguards that have been implemented to prevent data breach and system failures with respect to AI and ML technology based applications and systems. Further, on January 31, SEBI through another Circular expanded the scope of AI and ML technologies to include those technologies that are related to compliance activities and Fin-tech and Reg-tech activities of market infrastructure institutions such as stock exchanges, clearing corporations and depositories.
With the passing of time, more and more financial intermediaries are adopting the use of AI and MI based applications and systems to provide inter alia investment advice and trading services to their clients. However, as information on the functioning of such applications and systems are currently opaque, it is the need of the hour for SEBI to acquire a deeper understanding of the latest technologies in the field of AI and ML. The possibility of system crashes and investors being misled through the use of such application and systems have not been studied/analysed sufficiently by SEBI. The aforesaid circulars will now allow SEBI to collect the necessary information required to frame appropriate policies and laws in the future, to regulate the use of AI and ML technologies by market participants to protect the interest of the investors. Currently, the information sought by SEBI under the aforementioned circulars also does not impinge upon the intellectual property rights of concerned market participants. Further, for the development of the securities market, SEBI in the future may also explore the possibility of mandating other market participants, including investment advisors to comply with the aforesaid circulars.