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

An asset manager uses a machine learning model to allocate client orders and discovers that, because of biased historical data, it systematically routes lower-priority execution to smaller retail accounts. Which ethical and regulatory principle is most directly breached?

The breach is of fair treatment of clients and the avoidance of discriminatory outcomes. A model trained on biased data that systematically gives smaller retail accounts worse execution is an algorithmic bias and conduct problem, not a capital, clearing or liquidity matter.

  1. AFair treatment of clients and avoidance of discriminatory outcomesCorrect
  2. BCapital adequacy requirements for market risk
  3. CCentral clearing obligations for standardized derivatives
  4. DLiquidity coverage ratio minimums

Explanation

Systematic disadvantage to a client group arising from biased data is an algorithmic bias problem that conflicts with fair treatment and best-execution duties. The other options are prudential or market structure rules unrelated to this conduct issue.

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