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

A regulator is considering how to supervise AI use in capital markets when many firms rely on the same few foundation-model providers. Which concern most directly motivates supervisory attention to this arrangement?

The main concern is concentration: if many firms depend on a few model providers, errors, similar signals or outages can hit them simultaneously. This creates herding, correlated behaviour and single points of failure, which makes it a systemic and third-party risk issue for supervisors.

  1. AConcentration in a few providers could create correlated errors, herding and operational single points of failure across firmsCorrect
  2. BFoundation models are always less accurate than in-house models, which lowers firm profitability
  3. CProvider concentration reduces the volume of data available to firms, which raises their capital requirements automatically
  4. DUsing common providers makes it impossible for firms to hold any capital against operational risk

Explanation

Shared dependence on a few providers can cause many firms to act on similar outputs or fail together after an outage, raising systemic and third-party risk. The other options assert unsupported or false mechanical effects.

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