The Ontario Securities Commission ("OSC") and Ernst & Young LLP recently published Artificial Intelligence in Capital Markets: Exploring Use Cases in Ontario (the "Report"), which examines current artificial intelligence ("AI") use cases, value drivers and challenges. Due to the potentially disruptive nature of AI systems, regulators are considering how oversight, regulation or guidance might facilitate the innovation and adoption of AI in Canada while at the same time protecting investors and maintaining the integrity of the capital markets.

Background

Market participants continue to embrace the use of AI to streamline complex tasks, optimize processes and uncover trends. While AI systems may help organizations complete projects more efficiently and cost-effectively, they must remain aware of and manage AI-related risks.

The OSC Innovation Office supports the OSC in its approach to market regulation and response to emerging trends, new technologies and novel business models. Given the transformative potential of AI, the OSC conducted research to better understand and promote awareness of current and future applications of AI in capital markets.

Key Findings

Overall, market participants are implementing AI solutions in a phased approach, prioritizing low-risk applications. Higher-risk applications are more limited and currently used as benchmarks or with human supervision.

The Report highlights the following themes:

  • market participants are currently using AI to enhance their existing products and services rather than creating new ones;
  • AI is at an intermediate stage of adoption in Ontario's capital markets;
  • key value drivers of AI adoption in capital markets include: (i) enhanced capacity to extract information and insights from large volumes of structured and unstructured data; (ii) greater automation of manual processes that involve handling and managing data; (iii) more precise predictive analytics; (iv) better liquidity forecasting and hedging; and (v) increased end-user satisfaction through more personalized service;
  • the most mature use of AI in capital markets is focused on: (i) improving the efficiency and accuracy of operational processes; (ii) trade surveillance and detection of market manipulation; and (iii) supporting advisory and customer service;
  • the use of AI in asset allocation and risk management is less mature in Canada;
  • scale is important for the development of AI models: larger firms appear to be developing in-house solutions and using AI more than smaller firms due to the significant investment required;
  • AI development primarily occurs in-house in Ontario;
  • while market participants continue to employ and explore a range of AI techniques, natural language processing is the most used; and
  • major challenges remain for AI adoption, including data constraints, attracting and retaining skilled labour and concerns relating to privacy, bias, fairness, explainability and interpretability.

AI Governance

Many organizations that implement AI solutions continue to rely on existing governance and compliance frameworks and personnel. The Report suggests that firms should consider adopting a robust, AI-specific governance framework as risks associated with AI systems are distinct and require measures beyond traditional approaches. Such risks include issues related to risk measurement and tracking, reliance on third-party models, use of open-source material and lack of transparency. Individuals who possess AI expertise and domain knowledge should help establish and oversee the governance program, as they are better equipped to understand these unique risks.

What's Next?

The OSC indicates that continuing to identify and understand the use of AI, its risks and potential in Ontario's capital markets is a key priority. While OSC Staff view the Report as an important first step, further collaboration between market participants, innovators, federal and provincial governments, securities regulators and financial services regulators is needed to develop consistent regulation and support responsible AI innovation and adoption. International collaboration through forums such as the International Organization of Securities Commissions is also required to develop comparable global standards.

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