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
Previous ArticleSam Woods of BoE on Importance of Horizon-Scanning to Identify Risks
The Australian Prudential Regulation Authority (APRA) found that Heritage Bank Limited had incorrectly reported capital because of weaknesses in operational risk and compliance frameworks, although the bank did not breach minimum prudential capital ratios at any point and remains well-capitalized.
The Office of the Superintendent of Financial Institutions (OSFI) released the annual report for 2020-2021.
The Australian Prudential Regulation Authority (APRA) published, along with a summary of its response to the consultation feedback, an information paper that summarizes the finalized capital framework that is in line with the internationally agreed Basel III requirements for banks.
The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) issued a consultative report focusing on access to central counterparty (CCP) clearing and client-position portability.
The Australian Prudential Regulation Authority (APRA) released the final Prudential Practice Guide on management of climate change financial risks (CPG 229) for banks, insurers, and superannuation trustees.
The European Banking Authority (EBA) Single Rulebook Question and Answer (Q&A) tool updates for this month include answers to 10 questions.
The European Commission, or EC, finalized the Implementing Regulation 2021/2017 with respect to the benchmark portfolios, reporting templates, and reporting instructions for the supervisory benchmarking of internal approaches for calculating own funds requirements.
The European Commission (EC) has adopted a package of measures related to the Capital Markets Union.
The European Council adopted its position on two proposals that are part of the digital finance package adopted by the European Commission in September 2020, with one of the proposals involving the regulation on markets in crypto-assets (MiCA) and the other involving the Digital Operational Resilience Act (DORA).
The Prudential Regulation Authority (PRA) is proposing, via the consultation paper CP21/21, to apply group provisions in the Operational Resilience Part of the PRA Rulebook (relevant for the Capital Requirements Regulation or CRR firms) to holding companies.