This Week’s Musings: Regulatory Heat on AI, the Future of Models, and the Rise of Digital Agents
AI continues to transform trading and investment, with models evolving beyond fundamentals and momentum to target economic moats. See more in Sigma’s This Week in FX.
But as AI’s capabilities advance, so too does regulatory scrutiny. This week’s newsletter is all about recent forums at both the U.S. SEC and ESMA in Europe underscoring a growing urgency: understanding AI is one thing — controlling outcomes and protecting investors is another.
1. ESMA’s AI Wake-Up Call to Asset Managers
At its first AI-focused webinar, ESMA drew a clear line: embrace AI innovation, but don’t bypass accountability. For asset managers, data integrity, transparency, and clear communication are now baseline expectations—not optional extras.
Back in May 2024, ESMA released guidance aligning AI use with MiFID II, reinforcing standards on governance, fair treatment, and fiduciary duty.
Read the guidance
Key risks highlighted:
- Algorithmic bias
- Poor data quality
- Black-box opacity
- Overreliance on automation
2. SEC: AI Fraud Is Scaling Fast—So Must Defences
At its March 27 roundtable, the SEC spotlighted a rising threat: AI-driven fraud. Generative and agentic AI are supercharging scams—deepfakes, voice clones, and hyper-targeted attacks are now exploiting breached data at scale.
But not all harm is malicious. “Model-chasing-models” and hallucinated outputs pose new risks to everyday investors.
Proposed responses included:
- Smarter authentication
- Rigorous due diligence on AI tools
- Industry-wide information sharing (e.g. Project Fortress by the U.S. Treasury)
3. SEC to Industry: Let’s Talk—Not Talk Past Each Other
Acting Chair Mark Uyeda urged regulators to stay tech-neutral, encourage smart innovation, and collaborate to balance progress with investor protection.
Commissioner Crenshaw revisited the SEC’s 2023 Predictive Data Analytics proposal, which many deemed overly broad. She called for a reset—urging shared definitions, clear use cases, and open dialogue on AI governance.
Commissioner Peirce raised five essential questions:
- Which areas of finance will AI most transform in the next five years?
- What kind of guidance do firms need?
- How do we avoid outdated or overly narrow rules?
- How can regulators maintain tech neutrality?
- How do we avoid overreacting to edge cases?
Coming Soon: Highlights from the Rob Hegarty panel on “The Benefits, Costs, and Uses of AI in the Financial Industry,” featuring:
- Michael Kelly (JP Morgan Chase)
- Gregg Berman (Market Analytics)
- Doug Hamilton (Nasdaq)
- Hilary Allen (American University)
- Daniel Pateiro (BlackRock)
4. CFTC’s Quiet Bombshell: AI Still Answers to the Law
In December 2024, the CFTC issued a stark reminder: AI in trading must comply with the Commodity Exchange Act. No exceptions. Compliance must be built into every model.
CFTC Staff Advisory No. 24-17 (Dec 2024)
As AI becomes more autonomous, accountability frameworks must scale with it.
5. Governance 2.0: From Checklists to Real-Time Control
Governance is evolving. Quality Management Systems (QMS) and Risk Management Systems (RMS) are no longer static checklists—they’re dynamic, real-time control layers that monitor and respond to AI behaviour.
RMS now connects directly to model lifecycles, helping firms adapt oversight as the technology evolves.
6. The Agent Economy: AI’s New Operating System
The age of AI agents—autonomous digital workers combining LLMs with tools, APIs, and memory – is only ramping up. These agents can perform complex tasks, learn from outcomes, and interact across systems. While Web2 frameworks dominate enterprise workflows today, Web3 agent frameworks are rising fast—offering modular, decentralized alternatives for executing tasks, managing data, and reducing transaction costs. Expect a major shift as enterprise structures unbundle and specialized agents become the new standard in productivity.
As always, your feedback is always welcome — let me know what you thought of this weeks’ content and what topics would you like to see covered next?
Many thanks
Rebecca
