Securities Regulation Daily CFTC’s Fintech Forward conference explores an unwritten future
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Friday, October 25, 2019

CFTC’s Fintech Forward conference explores an unwritten future

By Brad Rosen, J.D.

CFTC Chairman Heath Tarbert took the opportunity to underscore the agency’s commitment to fintech and technological innovation while making significant announcements furthering these objectives.

For the second year running, innovators, regulators, market participants, and members of the public came together at the CFTC’s Fintech Forward 2019: Exploring the Unwritten Future conference to consider the latest fintech developments and the impact of these emerging technologies on markets and customers. This year’s conference featured speakers on artificial intelligence in the 21st century marketplace with a robust discussion on the challenges and potential pitfalls confronting regulators. Other topics explored included digitization and custody, cybersecurity, big data and cloud computing, and global perspectives on fintech issues. The entirety of the 2019 Fintech event can be viewed here.

Notable announcements. In his opening remarks, CFTC Chairman Heath Tarbert took the opportunity to make two significant announcements demonstrating the agency’s commitment to innovation—first, LabCFTC will become an independent operating office of the CFTC reporting directly to the chairman; second, the CFTC has joined the Global Financial Innovation Network (GFIN), a coalition of financial authorities, central banks, and international organizations that aim to provide more efficient ways for firms to interact with regulators as they seek to develop, execute, and distribute new technologies.

In his comments, Tarbert also recognized the inherent tension between seeking innovation while at the same time strengthening the derivatives markets. In his view, the best way to balance these two objectives is through a principles-based approach to regulation. He explained, "Principles-based regulation essentially means we set the destination but leave it to our registrants to find the best path to get there. This approach allows flexibility for our markets to take advantage of new technology and other advances. Yet it still retains fundamental regulatory mandates so everyone knows what is expected of them." He added, "From blockchain to digital assets to cybersecurity, the CFTC has an important role to play in shaping the unwritten future."

The elevation of LabCFTC. LabCFTC was established within the Office of General Counsel in 2017 under then-Chairman J. Christopher Giancarlo, and its first director was Daniel Gorfine. LabCFTC was designed to be the agency’s focal point to engage with fintech innovators and promote responsible innovation, and it will continue to play that role.

Melissa Netram, who came to the CFTC from Silicon Valley-based Intuit where she served as a policy and regulatory affairs executive, was recently appointed as LabCFTC’s new director. Netram stated, "LabCFTC is at the forefront of exploring and examining the value of innovation in our financial markets and making our agency accessible to fintech innovators."

Netram was also at the center of LabCFTC’s release of its primer on Artificial Intelligence in Financial Markets at the conference. Netram noted, "AI’s power to analyze vast pools of data to detect patterns and generate insights presents great opportunities to enhance the integrity of our derivatives markets." She added, "This primer provides an overview of how AI is applied in financial markets and further illustrates the CFTC’s commitment to AI and innovation."

Industry experts offer words of wisdom to the regulators. In the day’s first panel, AI in the 21st Century Marketplace: Exploring the Role of AI and Related Fintech in CFTC Markets, some of the industry’s top experts shared the benefits of their experience and insights regarding opportunities, challenges, as well as potential disasters, associated with the use of AI in regulated markets. Some of those observations follow:

Gary DeWaal, Special Counsel, Chair, Financial Markets and Regulatory, Katten Muchin Rosenman LLP, observed how AI has effectively been used by traders and brokers to facilitate best execution by breaking up big orders into smaller ones, scanning for trading ideas, and the emergence of robo-advisors to determine what’s appropriate for individual investors. DeWaal also noted how important it was to let the industry know what the rules are, and what is expected. He mentioned a current enforcement action pending against a computer programmer where someone used that computer program wrongfully. "Liability can’t sneak up on people. That’s unfair and it violates fundamental fairness" DeWaal stated. He also cautioned the worst way to educate the industry on new requirements is via enforcement actions.

Sam Playle, Data Scientist at Kaizen Reporting, noted the role AI and expert systems can play in connection with regulatory reporting, an area that is often plagued with errors. He also observed that AI is also very useful in the realms of insider trading or other forms of market abuse. He noted AI can determine what normal trading is and then when there are anomalous transactions. Playle, however, warned that algorithms can develop biases and impact consumers. He cited using AI to determine creditworthiness as one such potential use case where AI might lead undesired results.

Aaron Klein, Fellow in Economic Studies and Policy Director at the Center on Regulation and Markets at Brookings, said we should not fear the future and that the world AI brings us should be measured against what we have now, not absolute perfection. Klein brought up the example of autonomous vehicles and airplanes which essentially fly themselves. He observed things are much safer now as a result of AI, and we should not be worried if we don’t always understand what a model is doing.

Adam Zarazinski, Chief Executive Officer of Inca Digital Securities, shared his essentially optimistic view about the opportunities presented with AI. He observed there are a wealth of open data sets out there for the taking if you have the tools to correlate the data. He pointed to conversations on Reddit that might suggest an upcoming fork in a cryptocurrency, or what a community of farmers might be saying about crop yields. In the area of law enforcement, he noted that the DOJ currently looks at data on the dark web. In his view, these tools can lead to paradigm shifts in many areas.

As Bianca Gomez, the panel’s moderator and LabCFTC counsel, noted, a brave new world is upon us.

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