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The Agentic Regulator: Risks for AI in Finance and a Proposed Agent-based Framework for Governance

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  • Eren Kurshan
  • Tucker Balch
  • David Byrd

Abstract

Generative and agentic artificial intelligence is entering financial markets faster than existing governance can adapt. Current model-risk frameworks assume static, well-specified algorithms and one-time validations; large language models and multi-agent trading systems violate those assumptions by learning continuously, exchanging latent signals, and exhibiting emergent behavior. Drawing on complex adaptive systems theory, we model these technologies as decentralized ensembles whose risks propagate along multiple time-scales. We then propose a modular governance architecture. The framework decomposes oversight into four layers of "regulatory blocks": (i) self-regulation modules embedded beside each model, (ii) firm-level governance blocks that aggregate local telemetry and enforce policy, (iii) regulator-hosted agents that monitor sector-wide indicators for collusive or destabilizing patterns, and (iv) independent audit blocks that supply third-party assurance. Eight design strategies enable the blocks to evolve as fast as the models they police. A case study on emergent spoofing in multi-agent trading shows how the layered controls quarantine harmful behavior in real time while preserving innovation. The architecture remains compatible with today's model-risk rules yet closes critical observability and control gaps, providing a practical path toward resilient, adaptive AI governance in financial systems.

Suggested Citation

  • Eren Kurshan & Tucker Balch & David Byrd, 2025. "The Agentic Regulator: Risks for AI in Finance and a Proposed Agent-based Framework for Governance," Papers 2512.11933, arXiv.org.
  • Handle: RePEc:arx:papers:2512.11933
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    References listed on IDEAS

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    1. Álvaro Cartea & Sebastian Jaimungal & Yixuan Wang, 2020. "Spoofing and Price Manipulation in Order-Driven Markets," Applied Mathematical Finance, Taylor & Francis Journals, vol. 27(1-2), pages 67-98, July.
    2. Taejin Park, 2024. "Enhancing Anomaly Detection in Financial Markets with an LLM-based Multi-Agent Framework," Papers 2403.19735, arXiv.org.
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