February 28, 2019

ESMA published its report on the trends, risks, and vulnerabilities in EU. The report reveals that overall risk levels for EU financial markets remained stable but at high levels for most risk categories—particularly liquidity, market contagion, and credit risk. Securities markets experienced several episodes of short-term volatility and equity markets suffered sharp declines from October onward, erasing all the gains made in the first half of 2018.

In addition to the Brexit-related political uncertainty in EU, volatility on equity and sovereign bond markets increased in the fourth quarter of 2018, equity prices continued to decrease, repricing on corporate and sovereign bond markets continued, and regional developments led to localized sell-offs and increased short-selling activity. Market risk thus remains very high. Outlook for liquidity, contagion, and credit risks remains unchanged. Operational risk remains elevated with a negative outlook, as cyber threats and Brexit-related risks to business operations continue to be a major concern.

The report reveals that EU financial markets can be expected to become increasingly sensitive to mounting political and economic uncertainty, with concerns over a no-deal Brexit weighing on the economic and market expectations. Overall, weakening growth prospects and political and geopolitical tensions are likely to be the main drivers of volatility looking forward. ESMA, in a series of articles in the Vulnerabilities section of the report, also looks in more detail at the following key issues:

  • Regtech and Suptech. The article on this topic helps to examine how technology can help supervised entities and supervisors to perform their duties. New automated tools in areas such as fraud detection, regulatory reporting, and risk management are available for firms, while potential applications of new tools for regulators include greater surveillance capacity and improved data collection and management.
  • New stress-testing requirements for Money Market Funds (MMFs) in EU. The article on this topic provides an overview of the potential financial stability risks posed by MMFs and discusses how the MMF stress test guidelines aim to increase the resilience of the sector by addressing the identified issues, including the “first-mover advantage.” The MMF Regulation also introduces new stress-testing requirements, as part of the fund risk management and regulatory disclosure. ESMA will design common parameters and scenarios to coherently capture the risks in the sector. Stress test results will be reported to ESMA and the national competent authorities.

 

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Keywords: Europe, EU, Securities, Brexit, Regtech, Suptech, Stress-Testing, Market Risk, Credit Risk, MMFs, ESMA

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