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

A regulator observes that many asset managers and banks rely on the same small group of providers for foundation models and cloud computing used in trading and risk analytics. Which systemic risk is most directly raised by this concentration?

The key risk is operational and third-party dependence. When many firms use the same few model and cloud providers, one outage, flaw or cyberattack can hit them all simultaneously, creating a common point of failure. Shared models also tend to increase correlated behavior rather than diversify it.

  1. AOperational dependence on a few third-party providers, so that an outage or flaw could affect many institutions at onceCorrect
  2. BReduced transparency because each firm builds its own proprietary model from scratch
  3. CLower correlation of trading strategies across firms due to model diversity
  4. DElimination of model risk because providers validate models centrally

Explanation

Concentration in a few AI model and cloud providers creates common points of failure and third-party dependency, so a single disruption or error can spread across many firms. The third option is wrong because shared models tend to raise, not lower, correlation of behavior.

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