On February 1, the European Securities and Markets Authority (ESMA) published a Risk Analysis Report on trends, risks and vulnerabilities relating to artificial intelligence (AI) in the EU securities markets.

The Report provides an overview of AI use cases such as natural language processing in the identification and assessment of environmental, social and governance (ESG) disclosures or AI for compliance tools to detect data anomalies, generate automated reporting and legal documents. Other use cases include AI applications in trading (pre-trade analysis and investment decision algorithms, in trade execution, and in post-trade processing and credit rating agencies (sourcing and processing of large quantities of data).

Interestingly, the Report noted that while interest in using AI is growing, the application of and disclosure of its use remains limited. Furthermore, there is consensus that providing “explainable” tools - those that can be understood by clients - is a critical success factor to business.

A number of potential risks are highlighted:

• Explainability

• Concentration, interconnectedness and systemic risk

• Algorithmic bias

• Operational risk

• Data quality and model risk

• Ethical concerns

• Reliability issues