ESMA maintains market risk indicator at highest level

17 March 2016

ESMA's latest risk report has found that overall market risks for European securities markets remain high with the market risk indicator remaining at very high – the highest level – with a stable outlook, while liquidity and contagion risk remain at high with a stable outlook.

The details are outlined in its Trends, Risks and Vulnerabilities Report No. 1 2016  on European Union securities markets, which covers market developments from June to December 2015.

ESMA’s market risk indicator was initially raised to very high in September 2015. This was in response to ESMA’s identification of mounting risks posed by excessive asset valuations in EU and elsewhere, a weakening growth outlook in emerging markets, and commodity market volatility.

This risk assessment has since been validated by:

• a 19% drop in EU share prices peak-to-trough, a decline in stocks of EU financials by 27%, as well as marked distortions in commodities and emerging economy markets; and
• a 50% drop in fund inflows, EUR 11bn outflows from bond funds, a 30% decline in average monthly equity fund returns, and a three-year high in fund return volatilities.

Steven Maijoor, ESMA Chair, said: “ESMA initially raised its market risk indicator to very high in 2015, in response to potential emerging risks we had identified around asset valuations, falling growth and volatility in the commodity markets. This analysis has been borne out by subsequent market developments and justifies its maintenance at very high.”

Overall, key risk sources remain the uncertainty of emerging market developments, in particular China, continued downward pressure on commodity prices, especially oil, and on commodity-export oriented emerging economies, reinforced by potential weaknesses in market functioning.

The topical vulnerabilities report features risk analyses around the following issues:

• MREL/TLAC requirements and implications for investments in bail-in instruments;
• Identifying risks and assessing benefits of financial innovation;
• The central clearing landscape in the EU; and
• Collateral scarcity premium in European repo markets and the drivers of the cost of obtaining high-quality collateral in the EU.

Full report

© ESMA