Derivatives market players must invest in talent, foster collaboration and prioritise ethics, if the industry is to suitably capitalise on the use of generative artificial intelligence (genAI).
The recommendations come from a new white paper – GenAI in the Derivatives Market: a Future Perspective – published by the International Swaps and Derivatives Association (ISDA) professional development programme, ISDA Future Leaders in Derivatives (IFLD).
ISDA CEO Scott O’Malia said: “The rapid development of artificial intelligence has generated considerable attention, both within financial markets and across society more broadly. As the technology advances, there is a significant opportunity for genAI to support more efficient, data-driven decision making in the derivatives market, but we need to approach this carefully, making sure the implications and risks of the technology are properly addressed.”
The 38 individuals that make up IFLD, who represent buy- and sell-side institutions, law firms and service providers, identified a number of potential use cases for genAI in the derivatives market, including document creation, market insight and risk profiling. The paper also considered regulatory issues in key jurisdictions and addressed the challenges and risks associated with the use of genAI.
In terms of use cases, the paper recommended genAI could be used to summarise complex derivatives agreements and suggest clauses based on deal terms and firms’ existing precedent agreements, as well as extract unstructured data from derivatives documentation to provide summaries of derivatives transactions required for operations and front-office processes. GenAI can also synthesise various jurisdictional regulations making it easier to comply with standards and provide checks against trades and trade documentation.
The second use case identified is with respect to genAI’s use in app development to propose new code changes. Third, genAI can be used to analyse data to provide market insights. The fourth use case is to improve operational efficiencies, such as to summarise margin and collateral requirements and assist in selecting the least costly collateral or create synthetic data that can be used for model testing. Finally, genAI can be used to assist in the development of derivatives markets in emerging markets, by aiding firms in summarising local regulations and market conditions.
These use cases also come with potential challenges, namely data breaches, regulatory issues, and propagating bias’, as well as overall system failures, which could lead to erroneous trades and the erosion of trust.
To mitigate these risks, the paper recommends a number of best practices, including the formulation of governance frameworks, looping in human overseers, comprehensive cybersecurity policies, and robust risk mitigation policies.
Reacting to the report, Matt Smith, CEO of SteelEye, said: “We know from our Annual Compliance Health Check report that nearly two thirds of financial institutions have invested in some form of AI for compliance. AI should be a tool to enhance human capabilities, allowing them to process vast amounts of information more efficiently. Those advocating for an all-encompassing reliance on AI to solve financial crime issues must consider the human factor. The need for detailed traceability is only something AI can support with, but it’s the compliance officers who are still solving the problems.”
According to Shai Popat, head of product and commercial Strategy at SIX: “As a company that has promoted financial literacy over many years, we also believe there are gains to be made from language models. These models have the power to level the playing field and make complex financial concepts more accessible. No longer confined to the realm of experts, critical information can now be readily understood and utilised by a wider group of people withing a financial institution, regardless of their background.”
Participants from the IFLD will present the paper’s findings and recommendations during a panel discussion at ISDA’s 38th Annual General Meeting, which is taking place in Tokyo this week. Nominations for a fourth group of IFLD participants will open later this year.
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