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The Canadian Securities Administrators Systemic Risk Committee (SRC) has released its 2025 Annual Report on Capital Markets (Report), which includes an analysis of capital market trends and vulnerabilities, as well as the CSA's mitigation efforts, confirming that risk is still very much present in the Canadian arena.
Of particular interest to registrants, the Report indicates that while AI can reshape financial systems, being used by major players for asset allocation, fraud detection and algo trading, it also brings risks. For example, concentration risk resulting from a small number of firms that control cloud infrastructure, GPU computing, and AI models. The expanded use of AI by financial institutions and other market participants also increases cyber risks, while at the same time, AI is being used to scale cyber attacks. It is specifically noted that regulators must balance supporting growth in AI while avoiding AI becoming a source of financial instability.
The Report also observes that, as the role of stablecoins and crypto assets tied to a reference value take on a more significant role in money markets, there may be a need for greater regulatory oversight through stablecoin regulatory frameworks.
Some private asset funds appeared to be under liquidity pressure in 2025, leading in part to the CSA's proposals on liquidity risk management (LRM), which BLG wrote about here. In fact, the Report noted that aligning redemption terms with portfolio liquidity would help reduce mismatches in liquidity, a core principle of the CSA's LRM proposals. As a reminder, these proposals would apply to all investment funds, including those offered on a prospectus-exempt basis. The Report closes with a note that additional information available to regulators on private asset fund-type entities would give a better view of their size, exposures, leverage, and liquidity, meaning potential future regulation may be on the horizon.
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