Sebi on Friday proposed guiding principles for responsible use of Artificial intelligence (AI) and machine learning (ML) applications in the securities markets to safeguard investors and market integrity.

The regulator has proposed that a “regulatory lite” framework may be adopted for use of AI/ML in the securities market for any purpose other than for business operations that may directly impact their customers.

AI/ML is being used by market participants mainly for advisory and support services, risk management, client identification and monitoring, surveillance, pattern recognition, internal compliance purposes and cyber security.

“While AI/ML has the potential to improve productivity, efficiency and outcome, it is also important to manage these systems responsibly as their use creates or amplifies certain risks which could have an impact on the efficiency of the financial markets and may result in adverse impact on investors,” Sebi said.

Accordingly, Sebi proposed high-level principles to provide guidance to the market participants for having reasonable procedures and control systems in place for supervision and governance of use of AI/ML applications.

The guiding principles were suggested by a working group after studying the existing AI/ML guidelines in India as well as globally.

As a part of the proposal, the working group suggested that market participants using AI/ML models should have an internal team with adequate skills and experience to monitor the performance, efficacy and security of the algorithms deployed throughout their lifecycle, as well as maintain auditability and explain interpretability of such models.

Furthermore, the team should establish procedures for exception and error handling related to AI/ML-based systems. It should also establish fallback plans in the event an AI-based application fails due to technical issues or an unexpected disruption.