Executive Summary
- What’s new: On 10 September 2026, ESMA published its second “Trends, Risks and Vulnerabilities” report of 2026. The report looks back at the first half of the year and assesses the risk levels across markets and financial infrastructure. Market, contagion and operational risk are each scored at the highest level. The report also analyses, among others, two emerging markets: prediction markets and the tokenisation of equities.
- Why it matters: The report indicates that ESMA sees existing rules as sufficient to regulate new markets. New legislation is not being proposed in relation to prediction markets and tokenised equities. Unanswered questions relate to interpretation and application, not creation.
- What to do next: Firms offering these products, and institutions providing services to those that do, should consider the report as a signal of ESMA’s future strategy. Although the report is not an official interpretative document, it offers insight into ESMA’s thinking and can be used to develop business strategy against an uncertain regulatory landscape.
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The European Securities and Markets Authority (ESMA) has published its second “Trends, Risks and Vulnerabilities” report of 2026 (the Report), covering the period from 31 December 2025 to 30 June 2026. The Report looks at risk drivers, which are key factors influencing potential risks within ESMA’s remit.
In the Report, ESMA considers market, contagion and operational risk to be the categories with the highest risk level, mainly due to geopolitical tensions and macroeconomic uncertainties. This is followed by credit risk (high) and environmental risk (medium).
In terms of market segments, the Report flags that securities markets — in particular, prediction markets — and cryptoassets remain at very high risk due to elevated valuation levels and the risk of a sharp correction, while infrastructures and services face increased risk because of developments in frontier artificial intelligence (AI).
Overall, the Report characterises the risk outlook as one in which uncertainty has become “the norm.” It also contains nine in-depth analyses; this article addresses two of them, together with the findings that bear on them.
Background
The Report, published on 10 September 2026, is ESMA’s biannual assessment of risk across its remit. This edition surveys:
- The market environment
- Securities markets and cryptoassets
- Asset management
- Consumers
- Infrastructures and services
- Market-based finance
- Sustainable finance
- Financial innovation
It includes nine in-depth analyses of:
- Real estate funds suspending redemption
- Retail transactions in derivatives
- UCITS (Undertakings for Collective Investment in Transferable Securities) market fragmentation
- Frontier AI and systemic cyber risks
- Private finance in the European Union
- Large technology IPOs in the US
- The EU Emissions Trading System
- Prediction markets (discussed below)
- The tokenisation of equities (discussed below)
Our discussion below is specific to prediction markets and the tokenisation of equities, as products in both these markets are already reaching EU investors without a clear EU regulatory framework.
Prediction Markets
The Risk
The Report describes prediction markets as platforms on which participants trade contracts linked to the outcome of future events, typically paying out according to whether a specified event occurs. These are referred to as “event contracts.”
This market has grown quickly: By the fourth quarter of 2025, quarterly trading volumes across the two largest platforms in the world had reached US$20.8 billion, with growth continuing into 2026. Although the major operators are all based outside the EU and marketing and sale of these products in the EU generally requires an authorisation that the largest platforms do not hold, the Report notes that platform-level geographic restrictions do not prevent EU users from accessing these services through a virtual private network (VPN).
The Report states that just over 10 million retail investors, representing 18% of all active retail investors, bought or sold derivatives or structured products between 2022 and 2025, almost all of which are classified as “complex” under the Markets in Financial Instruments Regulation (MiFIR) regime. These retail participants are increasingly trading such products on digital platforms that are convenient and accessible. Some embed social media feeds directly.
In relation to prediction markets, ESMA sees their gamified structure, emotional dynamics and social media-driven promotion as potentially exposing inexperienced retail investors to significant risks of financial loss, addictive behaviour and exploitation by more sophisticated traders.
The Report also highlights that manipulation and insider trading risks are amplified in prediction markets. This is especially the case on distributed ledger technology (DLT)-based platforms with limited identity verification, where pseudonymous participation and multiple accounts hinder detection of insider trading, wash trading and coordinated manipulation.
As prediction markets become increasingly integrated with cryptoassets, decentralised finance (DeFi) infrastructure, AI tools and social media ecosystems, there are fewer identifiable intermediaries and less accountability and oversight.
Finally, the Report identifies risks relating to contract resolution: Prediction markets rely heavily on clearly defined event outcomes, and investors face risks if there are ambiguities in event definitions or event determination processes. Where these disputes are resolved by discretionary or opaque resolution mechanisms, especially in decentralised settings, the Report notes that investors may be adversely affected.
Regulatory Approach
Under EU law, event contracts traded on prediction markets may be classified as one of the following:
- Financial instruments under the Markets in Financial Instruments Directive II (MiFID II). If so, they would qualify as derivatives falling within national product intervention measures. These measures prohibit the marketing, distribution and/or sale of binary options to retail investors.
- Cryptoassets under MiCA, if they are DLT-based and do not qualify as financial instruments above.
- Gambling products under national laws.
This regulatory spectrum gives rise to varying consequences. As financial instruments, prediction market operators could seek an “EU passport,” a mechanism that allows a firm authorised in one EU country — the home member state — to provide services across the EU without needing separate authorisation from every member state in which it wishes to offer services.
However, as stated above, authorisation by member state regulators only opens up the professional market. Marketing and sale of prediction markets to retail investors would be prohibited.
Further, as financial instruments, event contracts would be subject to the EU’s Market Abuse Regulation. This may go some way to alleviating ESMA’s concerns about insider trading and market abuse.
On the other hand, if prediction markets are treated as gambling products under national law, firms will have to seek regulatory approval jurisdiction by jurisdiction. For instance, while Malta is actively exploring a statutory framework for prediction markets, France, Hungary, the Netherlands, Portugal and Romania have already moved to prohibit it.
While an instrument cannot be regulated by both MiFID II and MiCA, whether a product falls under MiFID II or national gambling laws is currently dependent on the decisions of national regulators. Provided that the EU does not take an overall position, member states may determine which regime should apply. This means that even if ESMA considers an event contract to be a financial instrument, a national regulator may consider its gambling regime to apply, which would result in its classification in that member state as a gambling product rather than a financial instrument.
Implications
Three points are worth highlighting.
First, the Report does not expressly take a position on the classification of the current prediction market players. Ultimately, this will depend on the detailed characteristics of each product. As we previously observed in our client alert “Fit for Purpose? European Commission Launches Review of MiCA,” DLT-based prediction markets facilitated through smart contracts are among the most prominent borderline cases in the EU framework.
The European Commission’s MiCA review consultation closed for responses on 30 September 2026, and its report is due by 30 June 2027. This is therefore a space to watch for firms and their institutional suppliers.
Second, the content of the contract also affects its classification. The Report points out that only event contracts whose event question relates to an underlying listed in Section C(4) to (10) of Annex I to MiFID II qualify as financial instruments. A contract referencing an equity index or interest rate is therefore likely to qualify, but a contract referencing, for instance, an election result or sports game is not.
In theory, then, a single platform could offer products under different regulations. In this respect, the EU and the UK have taken the same approach: The UK financial regulator has said that prediction markets on “financial or certain climatic events” fall under its remit, while political outcomes and sports would fall under the Gambling Commission.
Firms should consider how all of these variables interact. Only contracts whose event question relates to an underlying in C(4) to (10) of Annex 1 to MiFID II can qualify as financial instruments. If they do not, the technology that firms use to build their platform may affect whether MiCA or national gambling law applies instead. The intended audience then determines whether the resulting restrictions matter, since the national binary options prohibition bites on retail offerings but not institutional ones.
A change to any of the three affects whether a firm’s product falls within a particular regime, and whether an EU passport is available. However, firms considering relying on MiCA regulation to offer their product to retail investors should note that the MiCA regulations empower authorities to impose a ban on retail marketing and distribution of cryptoassets very similar to the ban on retail marketing of derivatives.1
Third, this analysis is also relevant to EU-facing intermediaries of such platforms: banks, custodian or payment providers. These regulated institutions cannot discharge know-your-customer (KYC) obligations by relying on their counterparty’s own controls. As highlighted above, the risks posed by anonymous trading and limited ID verification, coupled with what the Report describes as reactive rather than proactive compliance monitoring, exposes regulated institutions interacting with prediction markets platforms to significantly greater compliance risk.
A clear regulatory understanding is therefore key to strategic planning and expansion in this industry.
Tokenisation of Equities
The Risk
Tokenisation of equities is another area of in-depth analysis in the Report. ESMA’s concern with it can be situated against its wider concern surrounding risks that EU investors face from overexposure to US equities. The Report notes that retail clients, especially younger investors, have accumulated significant exposure to US-based stocks, and that investments in AI and technology firms have continued to drive US equity valuations higher, raising concerns over the impact of any disorderly correction on EU retail investors.
The growth of tokenised equities accentuates these concerns. Outstanding tokenised equity value grew from approximately €0.3 billion at the end of 2024 to around €1.9 billion by end of June 2026, a 6.5-fold increase over 18 months, concentrated in a limited number of large US-listed technology firms.
The Report explains that such tokenised equities have developed predominantly through wrapped structures. This means that the tokens represent a claim on, or economic exposure to, underlying shares held by a trusted party. Transfers of such tokens do not convey legal title.
While acknowledging the benefits of tokenisation (in particular, settlement risk), the Report notes that in practice, such benefits are only partially realised. First, many tokenised equities operate within hybrid settlement models, where token transfer occurs on-chain but cash settlement remains off-chain. This limits the extent to which settlement risk is reduced.
Second, where multiple nonfungible representations of the same equity coexist across platforms, the Report warns of the risk of liquidity fragmenting across venues, affecting market manipulation.
Regulatory Approach
As with prediction markets, ESMA sees tokenised equities through the lens of existing instruments. The Report notes that the EU has taken a proactive approach to addressing barriers to wider adoption while ensuring risks are addressed, through:
- The DLT pilot regime regulation.
- Support for regulated on-chain cash solutions such as the European Central Bank’s Pontes and Appia projects.
- The development of common standards.
Since the release of the Report, Pontes has become operational. This gives the participants the option to settle transactions in tokenised securities using central bank money. Settlement of central bank money takes place on TARGET, the Eurosystem’s existing settlement infrastructure. However, firms seeking to engage with Pontes have to go through TARGET Services, which requires a bank relationship if the firm itself is not part of TARGET. However, Pontes is still limited to conventional trading hours.
Appia is the EU’s initiative to shape a European tokenised financial ecosystem. The focus is broader and more holistic than Pontes but equally focused on DLT networks, with European governance and common standards.
Implications
Of the three regulatory responses listed by the Report, two points are worth noting.
First, the launch of Pontes (and Appia more broadly) shows how the EU has chosen to approach on-chain settlement. The EU has decided to focus on solving this absence via central bank systems as an alternative to reliance on stablecoins. It describes Pontes as seeking to make private assets mutually convertible — enabling tokenised deposits to move between banks, or stablecoins to be settled in fiat currency, directly on DLT. Alongside MiCA, which regulates privately issued tokens, Pontes is intended to enable the trading of these tokens in a safe currency.
However, the EU’s longer-term tokenisation strategy remains unsettled. Applications to join the Appia working group closed in June 2026, and the Appia contact group is expected to begin its work shortly. Firms may want to watch out for published meeting summaries on the ECB’s website to track the developments in this space.
Second, the Report does not elaborate on its reference to the “development of common standards,” but this likely refers to the transition to T+1, a structural transformation currently underway in the EU to shorten the securities settlement cycle from two business days to one. Whereas the current move to T+1 settlement for equities reduces settlement risk, the atomic settlement linked to tokenisation removes it almost entirely, as delivery and payment occur as a single simultaneous transaction.
Although the Report does not expressly connect the two areas, firms complying with the mandatory October 2027 deadline for T+1 should also consider taking note of developments in the tokenisation space given ESMA’s focus on the development of common standards as a response to what it sees as risks presented by the tokenisation of equities.
Final Thoughts
The Report offers a condensed survey of topical areas that ESMA is concerned with and is indicative of where its 2027 priorities may lie, especially as prediction markets and tokenised equities are just two of the areas that the Report comments on. Firms should consider continuing to monitor output from the regulator on these developing areas of law as markets continue to move swiftly.
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1 MiCA Article 105 gives competent authorities materially the same product intervention power as Article 42 MiFIR, which gave national regulators the power to implement national rules on binary options under the MiFID regime.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.