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September 19, 2018

The ESMA Chair Steven Maijoor delivered a keynote speech on new financial technologies within and beyond capital markets, at the AFME/Euromoney Global Innovation Institute conference in Paris. The speech focused on technological change in capital markets, financial innovation, and the challenges and opportunities that new technologies present to regulators.

One way in which technology may affect capital markets and investors is in the form of artificial-intelligence-powered investment and trade-execution strategies. Portfolio managers—especially systematic or "quant" funds— are using artificial intelligence and machine learning tools to detect subtle patterns in data to help predict price movements. Their aim is to generate alpha and, to do so, they comb through vast datasets from sources as diverse as satellite images and Twitter feeds. At present the amount of money in artificial-intelligence-based strategies is limited, thus any impact on financial stability is limited too. However, as artificial intelligence tools become more widely used, supervisors will want to keep monitoring this area. ESMA contributed to an FSB report, published last November, which noted the scope for new forms of interconnectedness resulting from the use of artificial intelligence in financial services.

He added that one of the goals of a regulator is to ensure the integrity of markets. Algorithms can be used to help identify where people may be "cheating," such as acting on insider information or other bad conduct. This is an illustration of supervisory technology, or suptech. Regulators have, for example, been exploring how best to put in place data analytics and pattern recognition systems to study trading behavior to detect market abuse. While the industry is still at an early stage in applying tools such as artificial-intelligence-powered surveillance of market conduct, significant potential exists in this area. The flipside of the suptech coin is regtech: the use of new technology by financial market participants to meet their regulatory obligations such as reporting and risk management.

Automation of regulatory and compliance functions by financial market participants can increase efficiency and reduce the scope for human error. Regtech is, for example, extensively used to meet the reporting obligations for investment firms under MIFID 2, allowing for more automation in data reporting. Common reporting standards, such as LEI, ISIN, and ISO20022 underpin the successful application of regtech. In conclusion, he emphasized that "regulators face a balancing act." They work to understand and respond to the risks that new technologies and entrants may introduce while not wanting to stifle innovation by restricting the use of certain technologies. When making this assessment, he believes it is important to consider that "common capital markets phenomena like a derivative, a mutual fund, and even a stock exchange once came to life as a financial innovation." 

Related Link: Speech

Keywords: Europe, EU, Suptech, Regtech, Artificial Intelligence, ESMA

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