ESMA published its second report of the year on the trends, risks, and vulnerabilities in EU. This issue of the biannual report covers the period from January 01, 2018 to June 30, 2018. The report reveals that the securities markets, infrastructures, and investors in EU face new risks in the form of high volatility. In the report, ESMA also reiterated its concerns about cyber risk and Brexit risks for business operations.
The report examines the performance of securities markets, assessing both trends and risks to develop a comprehensive picture of systemic and macro-prudential risks in EU, to assist both national and EU bodies in their risk assessments. It finds that the overall risk levels for the securities markets in EU remained stable but at high levels for most risk categories. Moreover, investor risks persist across a range of products. Under the Markets in Financial Instruments Regulation, or MiFIR, product intervention powers, ESMA restricted the provision of contracts for differences and prohibited the provision of binary options to retail investors. The new measures started to apply from August 01, 2018 and July 02, 2018, respectively.
The report reveals that the financial markets in EU can be expected to become increasingly sensitive to mounting economic and political uncertainty from diverse sources, such as weakening economic fundamentals, transatlantic trade relations, emerging market capital flows, and Brexit negotiations. Assessing business exposures and ensuring adequate hedging against these risks will be a key concern for market participants in the coming months. The report identifies the following key risks in EU securities markets:
- Market risk remains at a very high level accompanied by very high risk in securities markets and elevated risk for investors, infrastructures, and services. The outcome of the Brexit negotiations remains the most important political risk for the EU, at this stage.
- Credit and liquidity risks remain high, with a deterioration in outstanding corporate debt ratings and deterioration in measures of corporate and sovereign bond liquidity
- Operational risk continues to be elevated with negative outlook, as cyber threats and Brexit-related risks to business operations remain major concerns.
Keywords: Europe, EU, Securities, TRV Report, Cyber Risk, Brexit, Market Risk, ESMA
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