The Securities and Exchange Board of India (Sebi) has recently proposed a regulatory framework for the use of artificial intelligence (AI) and machine learning (ML) in the securities market. This move highlights the growing importance of AI in the financial sector and the need for oversight to mitigate potential risks.
The proposed framework aims to differentiate between AI/ML systems that impact clients and those used for internal business operations. Intermediaries will be liable for any violations of securities laws, even if the AI/ML system is outsourced. Additionally, Sebi has proposed extending the applicability of investor grievance mechanisms to AI/ML systems.
The use of AI in the securities market poses several risks, including market manipulation through AI-generated deepfakes and misinformation, concentration risk due to over-reliance on a few dominant AI providers, and synthetic data loops that can lead to collusive behavior and herding.
However, regulation can also have benefits. It can lead to better understanding and oversight of AI's impact on the securities market, and a regulatory sandbox framework can allow emerging players to test their products and systems, fostering growth in the industry.
Sebi's proposal aims to balance innovation with investor protection and market integrity, addressing the unique challenges posed by AI in the securities market. By establishing clear guidelines and regulations, Sebi can help ensure that AI is used in a way that benefits the market and protects investors.
