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FRM Part II · FRM Exam Part II · Advances in Artificial Intelligence: Implications for Capital Markets Activities

A broker-dealer deploys a third-party generative AI tool to draft client research summaries. Compliance notes that the vendor will not disclose training data or model internals. Which governance step most directly addresses the risk that the firm cannot explain or validate outputs it relies on?

Bringing the vendor tool under the firm's model risk management framework, with inventory, validation, monitoring and documented limitations, is the best step. Accountability stays with the firm, so vendor claims, contracts or restricted access cannot substitute for independent testing of outputs.

  1. AApply the firm's model risk management framework to the tool, including inventory, validation, ongoing monitoring and documented limitationsCorrect
  2. BRely on the vendor's marketing statements about accuracy as sufficient evidence of soundness
  3. CRestrict use of the tool to senior management only, without further testing
  4. DDelegate accountability for outputs to the vendor through the contract alone

Explanation

Third-party AI remains subject to model risk governance: the firm must inventory it, validate it as far as possible, monitor performance and document limitations. Contracts and vendor claims do not transfer the firm's accountability, and limiting users does not test the model.

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