The Board of the International Organisation of Securities Commissions (IOSCO) has recently published its latest report on the rise of AI in capital markets. The significant work that has gone into this report (the 2025 Report) represents a globally shared understanding of the challenges that the use of AI in financial products and services presents to investors, to the markets, and to financial stability.
The purpose of IOSCO's work
The purpose of the 2025 Report, which has been based on contributions from IOSCO members and from industry experts beyond IOSCO's membership (including self-regulatory organisations, affiliate members, trade associations and attendees at IOSCO roundtables held around the world), is to inform regulatory thinking even further and to assist those charged with mitigating the risks presented by AI, by generating more feedback from other stakeholders, including 'financial market participants, AI developers, academics, researchers, public policy experts, and other interested parties'.
The next phase of IOSCO's work in this fast-moving area will be to consider whether additional 'tools, recommendations, or considerations' are needed to address the 'issues, risks and challenges posed by the use of AI in financial products and services'.
Background
This 2025 Report is not the only work of IOSCO relative to the use of AI in the financial sector. IOSCO has published many reports, including a significant report in 2021 (the 2021 Report), which looked into the 'use of AI by market intermediaries and asset managers', highlighting the 'transformative nature of AI....relating to investment strategies, operational efficiency, and the development of new financial products' and identifying key challenges around:
Since 2021, however, there have been significant advancements in AI technologies, and in industry practice and in regulation. There have been 'innovations and developments in theory, hardware, software, algorithmic efficiency, compute power, data, and end-user applications'. The 2025 Report is therefore intended to bring the combined thinking up to date, taking into account the many technological advancements that have been made since 2021, and to look forward at the future of AI's role in the financial markets. It cites recent developments such as the emergence of large language models and the release of ChatGPT, and the ability of these technologies to enable convincing human-like interactions, as critical in driving more financial institutions to seek to leverage them to drive operational efficiencies and to create market opportunities.
Don't get left behind
Looking to the future, the 2025 Report notes that it is likely that, driven by 'demand, investment, and competition', some financial institutions will consider that 'not adopting AI technologies or failing to do so quickly enough', could in itself create risks and challenges.
Risk v opportunity
The 2025 Report also represents a revised assessment of the risks and of the opportunities that could arise through the use of AI technology in the financial markets, looking at the latest reported current and proposed real-use examples, and considering whether the existing regulatory frameworks are able to do enough to protect market integrity and investor protection, or whether more needs to be done to address both the known and the unknown or emergent risks.
Definition of AI
IOSCO does not seek to define AI but instead refers to widely drawn 'common understanding of the types of technologies referred to' and for this it refers to the OECD's definition of an AI system as:
'a machine-based system that, for explicit or implicit objectives, infers, from the input it receives, how to generate outputs such as predictions, content, recommendations, or decisions that can influence physical or virtual environments. Different AI systems vary in their levels of autonomy and adaptiveness after deployment'.
This definition (or understanding) will include a diverse range of technologies that can analyse data (either from specifically curated data sets or from vast amounts of data drawn from a variety of sources), identify patterns, make predictions, extract insights, and generate other outputs (such as text, images and audio). It will include machine learning models, systems that are designed to perform specific tasks, deep learning models, GenAI systems, foundation models, general purpose AI systems and further models and advancements of models that will no doubt evolve in the future.
Application of AI to financial products and services
IOSCO discovered that the benefits and risks analysis of using AI in financial services is dependent on a number of factors including:
Use cases
The use of AI in capital markets is not a new thing. The 2021 Report recorded AI being used in:
In the period intervening between the two reports, AI technologies have evolved and advanced, giving rise to 'new possibilities' and to an expanded range of potential uses. Through its work, IOSCO has gathered information that indicates that 'firms are investing in AI technologies and that these technologies are being explored, piloted, and adopted in various activities in capital markets'. IOSCO currently categorises current AI application (meaning that firms are using or considering using AI technologies) by firms into three broad areas:
The overall position, based on the variety of market participants and the different jurisdictions involved in the gathering of IOSCO's information, is well summarised in this quote:
'the uses of AI that were reported by IOSCO Member/SRO Survey respondents to be most observed across market participants, including broker-dealers, asset managers, and exchanges, were: * Anti-Money Laundering and Counter Terrorist Financing (AML and CFT) (50%) * Internal Productivity Support (50%) * Market Analysis and Trading Insights (40%)'
Drilling down into this information in more granular detail, the 2025 Report identifies the details of many uses to which AI is being put in capital markets across the globe, including:
Advantages
While it seems that much of the work in AI deployment across the capital markets is currently happening at the experimental and exploratory phases of development, there is already evidence emerging of the advantages that AI can bring. The 2025 Report includes reference to these examples:
Novel applications of AI
Through its research, IOSCO identified a range of novel applications that remain in the exploratory phases, in the evolving and expanding phase of applications in testing but not yet deployed, these include:
Risks, issues and challenges
Expanding upon the most cited risks that are noted above, IOSCO's research identifies the following key risk areas for the financial markets:
The Future
The 2025 Report notes that there are currently many unknowns and that in this place of unknowns there are 'knowledge gaps' within which there is not very much in the way of regulatory publications, and within which the regulators are still evolving their own understandings of how AI technologies work and the capabilities that they have. There is therefore an acknowledged risk that 'data and knowledge gaps remain and may widen as technological advances may outpace regulatory assessment'. Given the possibility of limited regulatory (i.e. including both regulator and regulated firm) understanding of complex AI technologies, the 2025 Report notes a number of additional challenges for the financial system, including:
Governance
IOSCO's research has identified that firms are evolving their approaches to the 'development, deployment, and maintenance of AI systems' and reports evidence of diverse approaches including:
IOSCO's important work in this area is far from over. In terms of conclusions from the 2025 Report (on which IOSCO remains open for input from 'the public, including financial market participants, AI developers, academics, researchers, public policy experts, and other interested parties' until mid-April), the following are significant take-away points for the financial services sector: