AI: European Securities and Markets Authority (ESMA) Releases Trends, Risks, Vulnerabilities (TRV) Report of 2023

The role of AI in EU securities markets is becoming more significant.

A widespread use of artificial intelligence (AI) comes with “risks,” according to an update from European Securities and Markets Authority (ESMA). In particular, increased uptake may “lead to the concentration of systems and models among a few ‘big players’.”

These circumstances “warrant further attention and monitoring to continue ensuring that AI developments and the related potential risks are well understood and taken into account.”

Key findings:

  • asset management: increasing number of managers leverage AI ininvestment strategies, risk management and compliance
  • trading: traders, brokers and financial institutions use AI to optimise
    trade execution and post-trade processes
  • elsewhere: some credit rating agencies, proxy advisory firms and
  • other financial market participants also use AI tools, mostly to enhance information sourcing and data analysis

The European Securities and Markets Authority (ESMA) also published the first Trends, Risks and Vulnerabilities (TRV) Report of 2023. Overall, risks in ESMA’s remit “remain high, and investors should be prepared for further market corrections.”

Verena Ross, ESMA Chair, said:

“Financial markets remained remarkably stable in 2H22, despite the general volatile environment. Although economic sentiment has become more positive in early 2023, there is no room for complacency. ESMA is keeping the overall risk assessment across its remit at the highest level. The confluence of high risks across the ESMA remit and fragile market liquidity may test the resilience of the financial system against possible future shocks.”

As noted in the update:

“The second half of 2022 was dominated by the slowdown of economic activity,
high inflation, global tightening of financial conditions, the geopolitical
environment and the materialisation of peripheral risks linked to leverage and
liquidity, together with growing concerns over business practices in the crypto
space. These remain the defining drivers of risk in EU financial markets at the
current juncture.”

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