Alternative Market Briefing

Hong Kong SFC issues comprehensive guidelines on AI language models - key implications for fund managers

Wednesday, November 13, 2024

Matthias Knab, Opalesque for New Managers:

The Securities and Futures Commission (SFC) of Hong Kong has released detailed guidelines for the use of generative AI language models (AI LMs) by licensed corporations, effective immediately. This development signals increasing regulatory scrutiny of AI adoption in financial services and establishes one of the first comprehensive regulatory frameworks for AI use in Asian financial markets. Key Points for Fund Managers 1. High-Risk Activities Defined

Investment recommendations, advice, and research are explicitly classified as "high-risk" use cases
Additional risk mitigation measures required for these activities, including mandatory human oversight
Firms must notify the SFC before implementing AI in high-risk scenarios

2. Core Compliance Requirements

Mandatory validation of AI models before deployment
Ongoing performance monitoring and review requirements
Strict cybersecurity and data protection controls
Comprehensive third-party provider due diligence

Operational Impact Analysis For hedge funds and asset managers, the immediate implications include:

Review and potential restructuring of existing AI implementations in research and trading
Need for dedica......................
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