The Securities and Exchange Board of India (SEBI) has taken a monumental step towards regulating Artificial Intelligence (AI) and Machine Learning (ML) in financial markets by releasing a consultation paper on November 13, 2024. This move builds on SEBI’s years-long effort, beginning in 2019, to understand and track AI's growing footprint among key market players like brokers, depositories, clearinghouses, and mutual funds.
SEBI's proposed amendments stem from two critical concerns: data integrity and the opacity of AI algorithms. Even slight inconsistencies in data can drastically affect AI-generated outputs, while “black box” AI models, which lack transparent decision-making mechanisms, raise accountability questions.
To address these challenges, SEBI’s framework outlines a clear roadmap for regulated entities (REs). Key mandates include adherence to stringent data privacy standards, ensuring transparency in AI operations, and accepting full operational liability for AI-generated outcomes. This proactive approach underscores SEBI’s intent to protect investors and uphold market integrity without stifling innovation.
However, the proposal has sparked a strong response from the Asia Securities Industry & Financial Markets Association (ASIFMA), a body representing foreign portfolio investors. ASIFMA argues that SEBI’s “one-size-fits-all” approach could unintentionally hinder technological progress. The association advocates for a shared responsibility model, distributing accountability across the AI lifecycle rather than placing it solely on financial institutions.
One of ASIFMA’s main concerns is liability. They argue that holding institutions responsible for client decisions based on AI-generated data—particularly when the data itself is accurate—places undue burden on these entities. The lobby group suggests more precise regulations that reflect the nuances of AI implementation.
ASIFMA has proposed aligning SEBI’s framework with global standards, such as the OECD’s AI definitions, and adopting a granular responsibility model. These measures, they contend, will strike a balance between innovation and accountability while avoiding regulatory overreach.
For financial institutions, SEBI’s proposals mark a watershed moment. Institutions are urged to implement rigorous oversight of AI tools, establish human-led checks, and critically evaluate third-party solutions to navigate this evolving regulatory landscape.
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