Reporting AI/ML Tools Used by Stock Brokers — SEBI's New Disclosure Requirement

SEBI requires stock brokers to report on their use of Artificial Intelligence and Machine Learning applications and systems on a quarterly basis. The reporting obligation traces back to SEBI Circular SEBI/HO/MIRSD/DOS2/CIR/P/2019/10 dated January 4, 2019, which introduced the framework for disclosing AI and ML usage among market intermediaries. This article explains the reporting obligation, the scope of covered systems, and the submission process.

The Regulatory Basis

SEBI Circular SEBI/HO/MIRSD/DOS2/CIR/P/2019/10 dated January 4, 2019 requires all registered Stock Brokers offering or using applications or systems based on Artificial Intelligence (AI) and Machine Learning (ML) to participate in the reporting process. The reporting must be done on a quarterly basis.

Scope of Covered Systems

The following categories of applications and systems are deemed to be based on AI and ML technology:

1. Natural Language Processing (NLP)

NLP, sentiment analysis or text mining systems that gather intelligence from unstructured data. This includes voice to text, text to intelligence systems in any natural language. Eg: robo chat bots, big data intelligence gathering systems.

2. Neural Networks

Neural Networks or a modified form of it. Any systems that uses a number of nodes (physical or software simulated nodes) mimicking natural neural networks of any scale, so as to carry out learning from previous firing of the nodes. Eg: Recurrent Neural networks and Deep learning Neural Networks.

3. Machine Learning

Machine learning through supervised, unsupervised learning or a combination of both. Any application or systems that carry out knowledge representation to form a knowledge base of domain, by learning and creating its outputs with real world input data and deciding future outputs based upon the knowledge base. Eg: System based on Decision tree, random forest, K mean, Markov decision process, Gradient boosting Algorithms.

4. Statistical Heuristics

A system that uses statistical heuristics method instead of procedural algorithms or the system / application applies clustering or categorization algorithms to categorize data without a predefined set of categories.

5. Feedback Mechanism

A system that uses a feedback mechanism to improve its parameters and bases its subsequent execution steps on these parameters.

6. Knowledge Representation

A system that does knowledge representation and maintains a knowledge base.

Reporting Requirements

All registered Stock Brokers using AI / ML based application or system are required to fill in the reporting form and make submissions on quarterly basis within fifteen calendar days of the expiry of the quarter.

What to Report

The AI/ML Reporting Form requires the following information:

• Entity SEBI registration number.
• Registered entity category.
• Entity name.
• Entity PAN no.
• Application / System name.
• Date from when the Application / System was used.
• Type of area where AI or ML is used (order initiation, portfolio management, investment advice, cybersecurity, etc.).
• Name of the Tool / Technology that is categorized as AI and ML system.
• How the AI or ML project was implemented.
• Key controls and control points.
• Whether the AI / ML system is included in the system audit.
• Description of the application / system and how it uses AI / ML.
• Safeguards to prevent abnormal behavior of the AI or ML application / System.

Submission Process

• Stock brokers who are offering or using AI/ML applications or systems must submit the details in the AI/ML Reporting Form.
• Stock brokers who are not offering or using such applications or systems must also submit a NIL report by selecting the option as "No".
• The report must be submitted through the stock exchange's platform (e.g., BEFS for BSE).

Consolidation and Compilation

Stock Exchanges have to consolidate and compile a report on AI / ML applications and systems reported by registered Stock Brokers in the reporting format on a quarterly basis. The consolidated report shall be submitted to SEBI within thirty calendar days of the expiry of the quarter.

How We Help

At Anuj Desai & Associates, we help stock brokers understand the AI/ML reporting obligations, identify covered systems, and prepare and submit the required reports. If you need assistance with AI/ML reporting compliance, reach out to our regulatory compliance desk.