Introduction

Good morning, I am honored to welcome you to the first Market Risk Advisory Committee (MRAC) meeting of 2024. At this meeting, the MRAC will introduce formal recommendations, reports, and presentations with insightful guidance to improve the integrity and stability of our markets. These include an unprecedented analysis of the state of intermediated clearing markets and the significant reduction in the number of FCMs providing trade execution services over two decades. The Market Structure Subcommittee will also examine the U.S. Treasury cash-futures basis trade and risk management implications. The Future of Finance Subcommittee’s AI and Risk Management workstream will share it’s working plan, outlining initial observations and potential suggestions for navigating the complex landscape of AI integration in financial markets.

Today, we continue the long tradition of this Committee’s engagement with the Commission, its valuable insight into the concerns that shape the stability and integrity of global derivatives markets, and its collaboration toward developing ways that the industry and the Commission can prepare for and mitigate the most critical risks facing our markets today. The work of this Committee influences industry standards and best practices and provides thought leadership on many of the most important issues that will impact citizens and businesses in every corner of the world by shaping the direction of the development of markets.

CCP Risk and Governance

The Central Counterparty Risk and Governance Subcommittee, co-chaired by Alessandro Cocco, Vice President in the Financial Markets Group at the Federal Reserve Bank of Chicago, on detail as Senior Policy Advisor at the Department of Treasury and Alicia Crighton, Chair of the Futures Industry Association Board of Directors will share a presentation, a report, and recommendations on behalf of the Recovery & Resolution workstream. The recommendations reflect the collective work of the Subcommittee, whose members include diverse stakeholders, including representatives from derivatives clearing organizations (“DCOs”), clearing members, end-users, public interest advocates and academics.

As the report notes:

CCPs are fundamental market structures in derivatives markets and gained further prominence following the post-2008 financial crisis reforms. The G20 nations committed to have all standardized OTC derivatives, where appropriate, cleared through CCPs by 2012.[1] In 2010, the Dodd-Frank Act reformed the legislative framework for U.S. CCPs.[2] Title VII of the Dodd-Frank Act sets core principles for DCOs.[3] Lawmakers addressed CCP resilience by requiring CCPs to have adequate financial, operational, and managerial resources to discharge their responsibilities and to have in place appropriate risk management tools and procedures. The Dodd-Frank Act also created a novel type of regulated entity, a systemically important DCO. Title VIII of the Dodd-Frank Act, in fact, gave the Financial Stability Oversight Council (“FSOC”) the authority to designate as systemically important those clearing entities (e.g., DCOs) that “are or are likely to become, systemically important”.[4] Systemically important DCOs (“SIDCOs”) are subject to enhanced prudential and risk management standards and procedures.[5] In addition, Title VIII introduced an enhanced supervisory regime for SIDCOs that imposed on the CFTC the obligation to conduct annual examinations of these firms.[6]

In addition to the domestic reforms adopted under the Dodd-Frank Act, since 2010, international standard-setting bodies have been very active in adopting principles, guidance, and standards to support and inform national policymakers in the regulation of CCPs. The Committee on Payments and Market Infrastructures (“CPMI”), the Committee on Payment and Settlement Systems (“CPSS”) and the International Organization of Securities Commissions (“IOSCO”) (together, “CPMI-IOSCO” and “CPSS-IOSCO”, respectively), and the Financial Stability Board (the “FSB”) have published extensive reports on CCP resilience, recovery, and resolution. In 2012, CPSS-IOSCO published the Principles for Financial Market Infrastructures (“PFMI”),[7] a set of 24 principles that should apply to financial market infrastructures, including CCPs, with the ultimate goal of enhancing their safety and efficiency.

Many of the PFMIs address the resilience of CCPs and their capacity to manage financial risk. The PFMI approach to CCP resilience builds on four aspects, developed in an ad hoc additional guidance report:[8] (1) governance arrangements of CCPs;[9] (2) comprehensive risk management frameworks;[10] (3) financial resources allocated to loss absorption;[11] and (4) stress testing for both credit and liquidity exposures.[12] CPMI-IOSCO acknowledges that it is vital for CCPs to have sufficient resilience to withstand clearing member failures and other stress events—and this is even more critical in the current market landscape, characterized by the mandatory central clearing of certain standardized OTC derivatives. To complement the resilience guidelines, CPMI-IOSCO also published a report on the recovery of CCPs.[13] The recommendations on recovery focus on CCPs’ adoption of transparent and effective recovery plans, where the interests of all affected stakeholders are considered, and that contain different recovery tools appropriate to meet different recovery objectives.

At the international level, the FSB has been quite active as well. In 2017, the FSB published guidelines for CCP resolution and resolution planning.[14] In March 2022, in the aftermath of the Covid-19 pandemic, the FSB, together with the CPMI and IOSCO, commenced new work to assess CCP financial resources in the context of recovery and resolution.[15] The FSB acknowledged the increased systemic importance of CCPs in markets that embraced central clearing and evaluated the operation of recovery mechanisms. However, the FSB concluded by admitting the necessity of additional input from stakeholders on the sufficiency of the existing toolkit for CCP resolution, in particular on non-default loss scenarios. The FSB further noted the need for potential alternative financial resources and tools for CCP resolution, along with an analysis of the costs and benefits (including effectiveness and impact on incentives) of such alternatives. In September 2023, the FSB launched a public consultation on financial resources and tools for CCPs.[16] The consultation, that ended in November 2023, proposed a regulatory toolbox approach as a global standard for CCPs resolution. “In this approach, home resolution authorities for systemically important CCPs should have access to a set of resolution-specific resources and tools to meet the objectives for financial resources to support resolution, in addition to the use of recovery[17]

The FSB is working on finalizing its report, taking into account comments received during the consultation period. As discussed above, since 2008, domestic lawmakers and international standard-setting bodies have established regulations and standards that have substantially enhanced the resilience of CCPs. Such resilience has been demonstrated by the successful performance of CCPs during extreme stress events, including a historic global pandemic. Attention has more recently turned toward CCP recovery and wind-down as international standard standard-setting bodies issue various forms of guidance.

Since 2013, SIDCOs and Subpart C DCOs have been subject to the requirement to develop and submit recovery and resolution plans. In July 2016, the staff of the CFTC’s Division of Clearing and Risk (“DCR”) issued an advisory letter (“guidance”) regarding the content of a SIDCO’s and Subpart C DCO’s recovery and orderly wind-down plans. In response to CFTC regulations and such guidance, SIDCOs and Subpart C DCOs spent considerable time, in collaboration with DCR, analyzing scenarios that could prevent a DCO from being able to meet its obligations and to provide its critical operations and services; developing and implementing recovery tools, wind-down scenarios and options; analyzing interconnections and interdependencies; evaluating agreements to be maintained during recovery and wind-down; reviewing financial resources, governance arrangements, and notification policies; establishing a framework for regular policy updates; and conducting testing. This analysis resulted in significant revisions to DCO policies and practices to address recovery and wind-down.

SIDCOs and Subpart C DCOs have spent considerable time responding to guidance and have taken material steps to reduce systemic risk within the financial system. The Commission is now proposing to codify some of that guidance in the proposed rule. The Commission believes that most, if not all, of the proposals are already incorporated into the plans submitted by SIDCOs and Subpart C DCOs. But the proposed requirements will be new for other DCOs. Informal guidance and rules do not have the same weight, as guidance is non-binding, nor is guidance subject to public consultation. Moreover, the rule applies to all DCOs whereas the guidance applies to SIDCOs and Subpart C DCOs.

Pursuant to Title VII and VIII of the Dodd-Frank Act, and taking into account the international standards set by CPMI-IOSCO and the FSB, the CFTC adopted a proposed rule for DCOs recovery and orderly wind-down plans. The CFTC is “proposing, among other things: (1) for SIDCOs and Subpart C DCOs, that they should incorporate certain subjects and analyses in their viable plans for recovery and orderly wind-down; and (2) for all other DCOs, that they should maintain viable plans for orderly wind-down that incorporate substantially similar subjects and analyses as the proposed requirements for SIDCOs and Subpart C DCOs.”[18]

The report includes a number of important recommendations, which, if adopted by MRAC, can be used by the Commission to inform the development of the final rule on DCO resilience, recovery, and orderly wind-down. The recommendations include:

First, implementation of supervisory stress tests:

• Commission staff should adopt and implement supervisory stress testing of credit and liquidity risks for all DCOs.
• Commission staff should adopt and implement operational and other non-default risk stress testing, leveraging industry exercises covering these risks, where appropriate.
• Commission staff should include reverse stress tests in their supervisory stress tests.
• The results of the supervisory stress tests should be made available to the public, in a level of detail determined to be appropriate by Commission staff, within a reasonable time after the stress tests have been concluded.
• Subcommittee members representing end users, FCMs and academia believe these stress test should be required to take place at least annually. Subcommittee members representing DCOs do not believe that the frequency of reverse stress tests should be annual but rather that the frequency of reverse stress tests should be determined by Commission staff.

Second, regarding recovery scenarios and analysis:

• In the final rule, the text of CFTC Regulation 39.39(c)(2) should be amended to require that DCOs conduct scenario analysis that includes extreme but plausible scenarios that could trigger recovery or wind down.
• The final rule should require that SIDCOs include in their plans an assessment of (1) the financial resources and tools available in the event of recovery and wind-down, and (2) how they would address the scenarios identified that could trigger recovery and wind-down.

Third, regarding non-default losses:

• The Commission should retain the proposal to require a DCO that is neither a SIDCO nor a Subpart C DCO to maintain and submit to the Commission viable plans for orderly wind-down necessitated by default losses as well as NDLs.
• The Commission should retain the proposed definition of NDL as applied to all DCOs.

Fourth, regarding the provision of data for resolution planning:

• Subcommittee members believe that the Commission and FDIC should develop an inter-agency task force to discuss the sharing of information for resolution planning purposes. However, Subcommittee members representing DCOs believe that coordination already occurs between the FDIC and CFTC with respect to SIDCOs, that an interagency task force is not necessary, and that coordination can and will continue to occur through existing channels.

And, finally, regarding challenges to porting of customer positions and collateral during resolution:

• The Commission should develop an inter-agency task force, which should include the National Futures Association (NFA) to discuss and address impediments to the porting of customer position and collateral in the context of a DCO resolution and clearing member default.

Throughout the years, I have maintained an unwavering commitment to researching and proposing regulatory solutions for AI in financial markets, driven by a steadfast dedication to ensure integrity and stability in this rapidly evolving landscape. Five years ago, I began to convene and participate in convenings of AI developers, adopters, academics, government and industry researchers, regulators, and public interest organizations.

In 2020, a co-author and I received invitations to publish two books, one of which examines the ethical implications of AI across diverse sectors of our society. In two recent speeches, a speech last month before the New York Bar Association and a speech at Japanese Fintech Week in Tokyo, Japan, I have advocated for the CFTC to begin to identify best practices for integrating AI in our markets. Last week while in South Africa, I offered remarks at the South African Reserve Bank’s Fintech Summit about the regulation of novel financial products as well as the rapid development and deployment of generative AI and its impact on financial markets.

While the use of AI in financial markets may hold the potential for substantial benefits, such use may also introduce unprecedented risks concerning market integrity, customer protection, governance, data privacy, bias, and cyber threats.[19] The derivatives market provides many potential applications for AI. Accordingly, given the Commission’s mandate to promote responsible innovation while safeguarding market integrity, effective risk management is essential to address these concerns.

In January of this year, the Commission issued a request for comment (RFC) to “to assess the benefits associated with the use of AI in CFTC-regulated markets, to inform staff’s supervisory oversight and to evaluate the need for any future guidance and rulemakings.”[20] The RFC solicits responses to 20 questions that cover a wide range of topics, including the definition of AI, general and specific use-cases, market manipulation, and consumer protection.

Three weeks ago, the Future of Finance Subcommittee held a public meeting on March 15, 2024, which focused on the use of artificial intelligence (“AI”) in CFTC-regulated markets. This meeting supports work initiated at the MRAC meetings over nearly two years. The MRAC meetings have long served as an effective venue for exchanging diverse viewpoints on critical issues facing futures and derivatives markets. Dating back to the first MRAC meeting of 2022, the panel recognized the transformative innovation in the market of digital assets, where broad collaboration and information sharing were deemed to be essential for financial institutions to mitigate significant risks associated with digital assets.[21]

In 2017, the Financial Stability Board (FSB) issued a report on market developments related to AI and the financial stability implications. The Financial Stability Oversight Council (FSOC) and the Financial Industry Regulatory Authority (FINRA) have published recommendations that offer guidelines for governing AI. More recently, the International Organization of Securities Commissions issued a report following a consultation on the use of AI by market intermediaries. These efforts include a number of common threads, suggesting that, while many questions remain, there are important areas of consensus regarding the right approach to AI in financial markets. A few of these commonalities include:

• A focus on the governance of AI models. FSOC “recommends monitoring the rapid developments in AI, including generative AI, to ensure that oversight structures keep up with or stay ahead of emerging risks to the financial system while facilitating efficiency and innovation.”[22] Similarly, IOSCO has recommended that“[r]egulators should consider requiring firms to have designated senior management responsible for the oversight of the development, testing, deployment, monitoring and controls of AI and [machine learning]. This includes a documented internal governance framework, with clear lines of accountability.”[23]
  
  CFTC regulations, for example, introduce important governance obligations for registered market participants. Designated Clearing Organizations must establish a Risk Management Committee “comprised of clearing members and customers of clearing members on matters that could materially affect the risk profile of the DCO” and Risk Management Working Groups composed of market participants.[24] Enhanced risk management oversight and governance best practices will play an important role in managing the development and implementation of AI.
• Promoting the explainability of AI models. Many AI models are “black-box” models, meaning that it may be difficult, and in some cases impossible, to explain their decision-making processes. Accordingly, FSOC, IOSCO, the FSB, and FINRA have all emphasized the importance of addressing the explainability challenge.[25] As FINRA put it, [i]ncorporating explainability as a key consideration in the model risk management process for AI-based applications.”[26]
• The need for data controls. Data quality, security and privacy are central concerns for regulators as market participants adopt AI models. FSOC recent report notes, “data controls like data quality, suitability, security, privacy, and timeliness are vital to sound AI use.”[27] Similarly, FINRA calls for “data governance efforts” including: “data review for potential bias,” “data source verification,” “data integration,” “data security,” and “data quality benchmarks and metrics.”[28]
• Implementing measures to address bias. In 2019, I testified before Congress and voiced my concerns that AI models trained on incomplete or inaccurate data may engender biased results. Consistent with these concerns voiced by civil rights advocates, the White House AI Bill of Rights emphasizes the need to ensure fairness and guard against bias. In its report, FSOC notes that “specific requirements to prevent discrimination or bias that apply to tools, models, or processes used in consumer compliance also apply to AI. This is an important consideration because without proper design, testing, and controls, AI can lead to disparate outcomes, which may cause direct consumer harm and/or raise consumer compliance risks.”[29]
• Testing and monitoring output. Protecting against bias, promoting explainability, and implementing governance strategies are only possible where models are properly tested and monitored. FSOC, IOSCO, the FSB, and FINRA have each emphasized the importance of testing. FSOC notes the responsibility of financial institutions to “monitor the quality and applicability of AI’s output” the ability of regulators to “help to ensure that they do so.”[30] Similarly, the FSB recognizes the importance of “[a]ssessing AI and machine learning applications for risks, including adherence to any relevant protocols regarding data privacy, conduct risks, and cybersecurity.”[31] Existing approaches to issues like cybersecurity offer some guidance.

Last year, in a statement regarding a proposed cyber resilience rulemaking, I noted the importance of comprehensive regulation in this area, including regulations that capture mission-critical third-party service providers.[32] Model testing and oversight, which concerns cybersecurity, and much more, must similarly be comprehensive in the parties and the issues that it captures.

I have advocated interventions for the Commission to foster responsible use of AI in financial markets. First, I have encouraged greater visibility and transparency regarding our registrants’ use of AI by expanding our annual systems examination questionnaire to incorporate questions that directly inquire about the adoption of AI and related risks. Additionally, I have proposed for the development of a principles-based framework. In consultation with members of this working group of the Market Risk Advisory Committee, I look forward to exploring a principles-based regulatory framework that underscores intelligibility, risk management, compliance, oversight, market responsibility, notice, and explainability.

Further, I have advocated for the Commission to consider introducing heightened penalties for those who intentionally use AI technologies to engage in fraud, market manipulation, or the evasion of our regulations. Finally, the Commission should lead in creating an inter-agency task force focused on information sharing and composed of market and prudential regulators including the CFTC, SEC, Federal Reserve System, OCC, CFPB, FDIC, FHFA, and NCUA. The task force would support the AI Safety Institute in developing guidelines, tools, benchmarks, and best practices for the use and regulation of AI in the financial services industry. It may also provide recommendations to the AI Safety Institute as well as evaluate proposals coming out of the Institute.

In consultation with members of this Subcommittee, I look forward to exploring the ways in which the Commission can ensure that oversight structures keep up with or stay ahead of emerging risks to the financial system while facilitating efficiency and innovation.

Building on our productive dialogue over the last year and a half, we will hear from Gary Kalbaugh, deputy general counsel and director at ING Financial Holdings Corp., who will outline for us the ambitious workplan that the Subcommittee has adopted for its AI workstream.

This workplan will guide the Subcommittee’s development of recommendations for this Committee on the use of AI in CFTC-regulated markets.

The Subcommittee endorses FSOC’s recommendation to monitor the “rapid developments in AI, including generative AI, to ensure that oversight structures keep up with or stay ahead of emerging risks to the financial system while facilitating efficiency and innovation.”[33]

Based on its review of the statements and materials presented at its inaugural meeting, the Subcommittee has developed a work plan. This is an initial plan only: the Subcommittee intends to further review, research and develop the plan for future presentation to the full committee and, as appropriate, the Commission:

1. Conducting a Survey on the Use of AI in CFTC-regulated Markets. The Subcommittee believes that it may be useful for the Commission to conduct a survey[34] of CFTC registrants’ use of AI in CFTC-regulated markets. The survey could be designed to inform the Subcommittee, the full committee, as well as the Commission and its staff on how different types of AI are being used, how its risk are being mitigated, and by which CFTC registered market participants.
   
   The Subcommittee would further consider the design of the survey, including: (1) whether such a survey should be incorporated into Commission and divisional staff examinations and other oversight and monitoring tools and mechanisms;[35] and (2) whether the survey would be mandatory for CFTC registered market participants. The Subcommittee will provide a recommendation on this matter and present it to the full Committee for potential presentation to the Commission.
    
2. Recommendations on New Guidance, Advisories or Rulemaking. The Subcommittee may advance a recommendation that the staff should consider new guidance, advisories or formal rulemaking, based on how CFTC market participants are using AI to conduct regulated activities and any gaps identified in existing regulations and guidance. Areas of focus may include, without limitation:
   1. Framing the Risk of AI Models. Whether CFTC registrants should be required to disclose or explain[36] key attributes and risks of those models, including those created by third parties.[37] This may include enhanced requirements for registrants that are using AI for critical requirements such as compliance, client-facing business activities, or market regulation functions.
   2. Robust Monitoring and Testing of AI Models. Whether CFTC market participants should adhere to additional requirements regarding testing and monitoring of AI models as used in CFTC-regulated activities.[38] Potential areas of testing and monitoring may include cybersecurity, data controls, bias, privacy, and output consistency.
   3. Oversight and of AI Models. Whether additional guidance is appropriate to clarify oversight and governance expectations for AI models used in CFTC-regulated activities. Such arrangements that the subcommittee may consider include a comprehensive governance framework and designated personnel focused on AI oversight, including senior management with functional understandings of AI to permit adequate supervision.[39] The subcommittee will consider the degree to which a materiality standard is appropriate, as well as concentration[40] and other risks.

With sincerest gratitude, I would like to acknowledge the hard work put in by the Subcommittee members to advance this workplan and special thanks to Gary for presenting it here today.

Market Structure

Next, we will hear presentations from members of the Market Structure Subcommittee, co-chaired by Ann Battle, Senior Counsel, Market Transitions & Head of Benchmark Reform at ISDA, and Biswarup Chatterjee, Managing Director and Head of Innovation for the Global Markets Division at Citigroup. The FCM Capacity Workstream will present a cover letter attaching a data analysis examining current state of the market for futures commission merchants (FCMs). FCMs serve as critical intermediaries in cleared markets. The workstream created and analyzed a database of publicly available financial information for FCMs, and noted industry consolidation and an increased concentration in the market for FCM services.

Treasury workstream

The Treasury Reform workstream will provide a presentation on U.S. treasury cash-futures basis trades and risk management considerations. This presentation will be delivered by Nathaniel Wuerffel, Head of Market Structure, at Bank of New York Mellon. This presentation underscores issues raised during the December 11, 2023 MRAC meeting when the Subcommittee provided a general overview of the state of the U.S. treasury markets, including the role of the basis trade in U.S. treasury markets, risk-management practices that are intended to limit leverage, oversight and transparency, and regulatory changes impacting these markets. Today’s presentation explores the mechanics of these trades, the benefits and risks, and potential ways to manage risks associated with these trades.

PTRR and Block Trade

We will also hear brief updates from two other workstreams of the Market Structure Subcommittee. The post-trade risk reduction workstream will provide an update on its work and plans to further develop proposed recommendations in order ensure that any recommended changes preserve the systemic risk and financial market stability goals of Title VII. The block trade workstream will provide a brief update in light of industry-wide efforts to conduct a centralize data analysis to inform block trade policy.

Climate-Related Market Risk

In December of last year, the CFTC issued Proposed Guidance Regarding the Listing of Voluntary Carbon Credit Derivatives Contracts and issued a request for comment from the public on the proposed guidance. As I said at the time that it was difficult to overstate the importance of the guidance, and trumpeted how “[o]nce again, the CFTC is demonstrating leadership in the novel carbon credit markets.”[41] I remain excited about how the guidance might evolve going forward, particularly in light of the extensive public engagement that the Commission received in response.

As I also said at the time of the Guidance, however, “I find the Proposed Guidance to be necessary, but insufficient,”[42] and that I hoped that it would be the beginning of robust consideration of how the CFTC might be able to use its authority to foster and improve the market going forward. The Climate-Related Market Risk Subcommittee convened a roundtable on March 15, 2024 and expert speakers offered guidance on their understanding of the foundational issues challenging the market for carbon credits.

The roundtable focused on three main topics related to the carbon credit markets: (1) market integrity, disclosure, transparency and enforcement, (2) market design and intermediation, and (3) product design and reliability.

Regarding market integrity, Holly Pearen of the Environmental Defense Fund, who we will be hearing from again today, warned the Subcommittee that poorer quality voluntary carbon credits are overwhelmingly bought and sold in over-the-counter and less transparent carbon credit transactions. Panelists also argued that the CFTC should ensure that crediting programs properly implement social safeguards so that credits created with co-benefits for local communities do in fact go to the intended communities.

The second panel of the roundtable focused on how market design and intermediation can make carbon credit markets stronger. Panelists from diverse viewpoints as exchanges and a dairy industry association were consistent that robust and liquid markets for carbon credits and their derivative products promote greater integrity of the underlying credits through the market’s reflection of the quality of the credits in their price. The third panel focused on the design of the products themselves, including a discussion of the legal nature of carbon credits, and the importance of integrity standards that focus on results and use data to analyze the quality of the voluntary carbon credits.

Across the board, the roundtable participants were enthusiastic for the CFTC to create more robust standards. If carbon credits are going to be a force for good in the monumental task to limit anthropogenic atmospheric carbon, a firmer hand from regulators and standard-setting bodies will be critical.

Today we will hear from three different speakers regarding voluntary carbon markets. The first will be the unique perspective of Dale Lewis, joining us from Zambia, who is the CEO of Community Markets for Conservation, or COMACO. Mr. Lewis and his company do the on-the-ground work in Zambia of building the various carbon-limiting projects that are the source of voluntary carbon credits currently being traded. We will also hear from two people who spoke at the March 15 roundtable as well: Holly Pearen from the Environmental Defense Fund, and Jessica Garcia from Americans for Financial Reform Education Fund. Both Ms. Pearen and Ms. Garcia will be sharing their thoughts on the critical issues facing the voluntary carbon markets today, and discuss what they think the subcommittee should be studying going forward.

Conclusion

Today’s meeting is an opportunity to roll up our sleeves and begin to chart a course for the development and completion of the important work that the MRAC Subcommittees have and will explore this year. I am hopeful for an open and meaningful discussion among MRAC members regarding the critical issues facing our markets.

Allow me to thank our MRAC Chair and Chair of the FIA Board, Alicia Crighton; MRAC Designated Federal Officer (DFO) Tamika Bent; and MRAC Alternate DFO Peter Janowski. I also thank each of the ADFOs who support MRAC—Rebecca Lewis Tierney and Julia Welch.

I also want to thank the CFTC logistics and administrative staff and contractors who ensured that our physical conference room and our virtual conference room were ready to go for our members and our invited speakers, including Altonio Downing, Monae Mills, Andy Brighton, Keane McBride, Venise Raphael-Constant, Margie Yates, Jean Cespedes, Pete Santos, and Ty Poole.

Thank you so much for joining us today. I look forward to a robust and informative discussion.

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[1] Group of 20 (G20), Leader’s Statement, The Pittsburgh Summit (Sep. 24-25, 2009), https://www.oecd.org/g20/summits/pittsburgh/G20-Pittsburgh-Leaders-Declaration.pdf.

[2] See Dodd-Frank Wall Street Reform and Consumer Protection (Dodd-Frank) Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010) (codified as amended in scattered sections of 7, 12, and 15 U.S.C.).

[3] See Dodd-Frank Act § 725(c); 7 U.S.C. 7a-1(c)(2).

[4] See Dodd-Frank Act § 804; 12 U.S.C. 5463.

[5] See Dodd-Frank Act § 805; 12 U.S.C. 5464.

[6] See Dodd-Frank Act § 807; 12 U.S.C. 5466.

[7] Comm. on Payment and Settlement Sys. (CPSS)—Int’l Org. of Sec. Comms. (IOSCO), Principles for Financial Market Infrastructures (April 16, 2012), https://www.bis.org/cpmi/publ/d101.htm; see also Committee on Payments and Market Infrastructures (CPMI)-IOSCO, Resilience and Recovery of Central Counterparties (CCPs): Further Guidance on the PFMI—Consultative Report(August 2016), https://www.bis.org/cpmi/publ/d149.htm; CPMI-IOSCO, Implementation monitoring of PFMI: Level 3 assessment—Report on the Financial Risk Management and Recovery Practices of 10 Derivatives CCPs (August 2016), https://www.bis.org/cpmi/publ/d148.htm.

[8] CPMI-IOSCO, Resilience of Central Counterparties (CCPs): Further Guidance on the PFMI—Final Report(July 2017), https://www.bis.org/cpmi/publ/d163.htm.

[9] Id. (specifically Principle 2).

[10] Id. (specifically Principle 3, 4, 7, 13, 14, 17).

[11] Id. (specifically Principles 5, 6).

[12] Id. (specifically

[13] CPMI-IOSCO, Recovery of financial market infrastructures (October 2014, revised July 2017) https://www.bis.org/cpmi/publ/d162.htm.

[14] Financial Stability Board (FSB), Guidance on Central Counterparty Resolution and Resolution Planning (July 2017) https://www.fsb.org/2017/07/guidance-on-central-counterparty-resolution-and-resolution-planning-2/.

[15] FSB, Central Counterparty Financial Resources for Recovery and Resolution (March 10, 2022) https://www.fsb.org/2022/03/central-counterparty-financial-resources-for-recovery-and-resolution/.

[16] FSB, Financial Resources and Tools for Central Counterparty Resolution: Consultation report (September 2023) https://www.fsb.org/2023/09/financial-resources-and-tools-for-central-cou.nterparty-resolution-consultation-report/.

[17] Id. at iii.

[18] 88 Fed. Reg. 48968 at 48969.

[19] CFTC, Request for Comment on the Use of Artificial Intelligence in CFTC-Regulated Markets (Jan. 25, 2024), CFTC Staff Releases Request for Comment on the Use of Artificial Intelligence in CFTC-Regulated Markets | CFTC.

[20] Id.

[21] Kristin N. Johnson, Commissioner, CFTC, Opening Statement Before the Market Risk Advisory Committee Meeting (Sept. 28, 2022), Opening Statement of Commissioner Kristin N. Johnson Before the Market Risk Advisory Committee Meeting | CFTC

[22] Financial Stability Oversight Council (FSOC), 2023 Annual Report at 93, (Dec. 14, 2023), https://home.treasury.gov/system/files/261/FSOC2023AnnualReport.pdf.

[23] IOSCO, The use of artificial intelligence and machine learning by market intermediaries and asset managers at 17 (Sept. 2021), FR06/2021 The use of artificial intelligence and machine learning by market intermediaries and asset managers (iosco.org).

[24] 88 Fed. Reg. 44675.

[25] FSOC, 2023 Annual Report supra note 22, at 92.

[26] Financial Industry Regulatory Authority (FINRA), Report on Artificial Intelligence (AI) in the Securities Industry (June 2020), https://www.finra.org/sites/default/files/2020-06/ai-report-061020.pdf.

[27] FSOC, 2023 Annual Report, supra note 22, at 92.

[28] FINRA, Report on Artificial Intelligence (AI) in the Securities Industry, supra note 26.

[29] FSOC, 2023 Annual Report, supra note 22, at 92.

[30] Id.

[31] FSB, Artificial intelligence and machine learning in financial services: Market developments and financial stability implications at 34 (Nov. 1, 2017), https://www.fsb.org/wp-content/uploads/P011117.pdf.

[32] Kristin N. Johnson, Commissioner, CFTC, Statement Regarding the CFTC’s Notice of Proposed Rulemaking on Operational Resilience Program for FCMs, SDs, and MSPs (Dec. 18, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement121823.

[33] Financial Stability Oversight Council, Annual Report 2023 at 93, available at ‌https://home.treasury.gov/‌system/files‌/261‌/‌FSOC2023AnnualReport.pdf.

[34] Committee will discuss related issues, including whether the survey will be mandatory.

[35] At the meeting, a spokesperson from the Futures Industry Association noted that its members use AI for: (1) Trading strategies; (2) Hedging/risk mitigation; and (3) Compliance tools.

[36] This could be at the time of integration or adoption of an AI model or significant amendment to one.

[37] For more on explainability, see FINRA, Artificial Intelligence (AI) in the Securities Industry (June 2020), available at https://www.finra.org/rules-guidance/key-topics/fintech/report/‌artificial-intelligence-in-the-securities-industry‌/‌key‌-challenges, suggesting that parties consider: “Incorporating explainability as a key consideration in the model risk management process for AI-based applications.” See also, Financial Stability Oversight Council, Annual Report 2023 at 92, available at https://home.treasury.gov/system/files/261/FSOC2023AnnualReport.pdf.

[38] For example, AI technologies with automated elements may require “compliance by design, i.e., technology with built in features that prevent ex ante compliance violations. For the similar “transparency by design” and “AML by design” concepts from which this is partially derived, see Sandy Pentland, Robert Mahari, and Tobin South, Transparency by Design for Large Language Models, Network Law Review (May 25, 2023), available at https://www.networklawreview.org/computational-three/, and Robert Z. Mahari, Thomas Hardjono, and Alex Pentland, AML by Design: Designing a Central Bank Digital Currency to Stifle Money Laundering, MIT Science Policy Review 57 (Aug. 29, 2022), available at https://sciencepolicyreview.org/2022/07/mitspr-191618003020/.

[39] For example, IOSCO has recommended that “[r]egulators should consider requiring firms to have designated senior management responsible for the oversight of the development, testing, deployment, monitoring and controls of AI and [machine learning]. This includes a documented internal governance framework, with clear lines of accountability.” Board of the International Organization of Securities Commissions, The Use of Artificial Intelligence and Machine Learning by Market Intermediaries and Asset Managers (Sept. 2021), available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD684.pdf.

[40] “Concentration” here is broad and could be, among others, concentration among vendors or concentrations due to model availability, hardware or software limitations, or intellectual property rights.

[41] Kristin N. Johnson, Commissioner, CFTC, Statement Regarding Commission Guidance Regarding Listing of Voluntary Carbon Credit Derivative Contracts (Dec. 4, 2023), Statement of Commissioner Kristin Johnson: Commission Guidance Regarding Listing of Voluntary Carbon Credit Derivative Contracts | CFTC.

[42] Id.