ESMA: Market Conditions Improve, but Systemic Risks Persist

The European Securities and Markets Authority (ESMA) has published its Trends, Risks, Vulnerabilities (TRV) Report and a Risk Dashboard for the second quarter of 2013.

The TRV examines the performance of securities markets in the first half of 2013, assessing both trends and risks in order to develop a comprehensive picture of systemic and macro-prudential risks in the European Union (EU), to assist both national and EU bodies in their risk assessments. ESMA’s TRV contributes to promoting financial stability and enhancing consumer protection by regularly looking into cross-border and cross-sector trends, risks and vulnerabilities, both at the wholesale and retail level.

The TRV finds that EU securities markets and investment conditions in the EU improved for a second quarter in a row since Q412, although systemic risk persisted at medium to high levels. Among other risk factors, uncertainty remained high due to concerns over funding sources, low interest rates and recent market fluctuations, resulting in increased market risk, while liquidity, credit and contagion risk continue to be significant.

“While the easing of stress in financial markets is a positive sign, systemic risks in the EU remain high and uncertainty in the international market environment has risen. Valuations in securities markets, volatility in fund flows, and continuity issues around financial benchmarks remain a matter of concern,” said Steven Maijoor, ESMA chair. “Faced with these issues regulators and market participants should remain vigilant.

“ESMA’s work on identifying those risks facing Europe’s securities markets is an important component in the European System of Financial Supervision’s (ESFS) efforts to foster recovery in its markets and promote financial stability.”

Key trends

The TRV identifies the following key trends for H113 in EU securities markets:

  • Securities markets: Market conditions improved moderately while issuance was subdued with equity prices declining and inter-bank lending increasing. The second quarter saw an increase in sovereign borrowing costs, and corporate bonds; covered bonds and securitised products were subdued.
  • Collective investments: Asset managers benefited from improved market conditions, mainly driven by bond, equity or alternative funds whereas money market fund assets decreased. Overall, leverage remained moderate but capital inflows were volatile reflecting a decline in investor sentiment.
  • Market infrastructures: Trading on EU venues increased in early 2013. Central clearing of interest rate swaps continued to grow. Potential continuity issues around financial benchmarks give rise to concerns.

Key risks identified in the report, and published separately in the Risk Dashboard, include:

  • Liquidity risk: Even though policy action helped to reduce liquidity risks in main market segments, others rose, leaving the overall liquidity risk at high levels.
  • Credit risk: Securities markets in the EU saw a reduction in issuance volumes, mainly in asset classes with higher risk and longer maturities. Despite recent debt refinancing, overall credit risk remains high.
  • Market risk: Equity and bond markets risks increased driven by rising concerns over the valuation of assets.
  • Contagion risk: The risk of contagion between market segments remained unchanged, while the level of credit default swap exposures declined.

In addition, the TRV presents in-depth analyses on four specific topics:

  • First evidence on the impact of the short-selling regulation on securities markets.
  • Contagion risks and the network structure of EU credit default swap (CDS) exposures.
  • Overview of the EU Undertakings for Collective Investment in Transferable Securities (UCITS) industry.
  • Overview of bail-in and contingent capital securities.


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