European securities regulators have issued a report which finds that systemic risks have eased, but remain elevated.
The European Securities and Markets Authority (ESMA) published its first report on trends, risks and vulnerabilities in European Union (EU) securities markets Thursday. The report examines the performance, and risks, of securities markets in 2012, in order to develop a comprehensive picture of systemic and macro-prudential risks.
The report finds that EU securities markets and investment conditions in the region improved in 2012, especially in the second half of the year; and, that systemic risk in EU securities markets decreased in the fourth quarter. However, it also notes that risk indicators remain at high levels, due to “the ongoing sovereign debt and banking crisis, the realignment of risk assessments by investors, funding risk, potential long-term implications of low interest rates and obstacles to orderly market functioning.”
“ESMA’s risk analysis points to important first signs of easing in EU financial markets, but risks remain high and regulators, market participants and investors should remain vigilant about risks in the financial markets,” said Steven Maijoor, ESMA chair. “This report provides a guide for securities regulators on those areas requiring regulatory focus in order to build on recent improvements in financial markets and to foster financial stability in the EU.”
The report notes that asset managers benefited from easing markets, with total net asset values up to €8 trillion, compared to €7.4 trillion in 2011. The main beneficiaries of these improvements were bond, hedge, real estate and exchange-traded funds. Overall however, fund inflows remained volatile, it notes.
And, it reports that trading significantly decreased in 2012. Yet, the use of central counterparties (CCPs) increased, with 60% of worldwide interest rate swaps now centrally cleared, and 10% of credit default swaps.
The report also cites collateral concerns as a potential vulnerability. It notes that the collapse of unsecured markets and regulatory reforms have led to an increasing reliance on collateral as a means of mitigating counterparty risk. And, it says that additional demand for collateral will exceed the additional supply of collateral in 2013-2014.
Additionally, financial intermediation provided by hedge funds and prime brokers “may be vulnerable to any negative impacts on the price of assets pledged as collateral, which may lead to scarcer collateral, reducing liquidity and ultimately hamper repo financing,” it says.
In addition to the report, the ESMA also began publishing a quarterly “risk dashboard”, which assesses some of the ongoing risks. It notes that liquidity risk remains significant in the sovereign bond market. Additionally, contagion risk remains high in countries with high sovereign yields, it says.