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Risks in markets under ESMA’s remit remained high, particularly in securities markets, where high asset valuations and search-for-yield prevail.
Credit risk continues to be elevated, with deteriorating corporate debt quality and the growing share of BBB-rated debt as main concerns.
Looking ahead, a weakening economic outlook, further uncertainty over global trade negotiations, as well as uncertainty around the Brexit timeline remain key risk drivers.
Risks from a disorderly UK exit from the EU have reduced significantly with the recent progress on a withdrawal agreement and the renewed extension of the exit deadline to 31 January 2020. A no-deal risk, nevertheless, continues to exist, and ESMA has in the past taken important steps to reassure markets and limit operational uncertainties, for example with the recognition decisions for the UK CSD and UK CCPs. Despite the continuing uncertainty surrounding the Brexit outcome, trading conditions in European financial markets have been orderly throughout as shown by the number of circuit breakers that has been stable over the period. The transition from the existing Inter-bank offer-rates (IBORs) to the new risk-free rates raises risks associated with the replacement of the reference rate or the introduction of fallback rates in existing financial products and derivative contracts for both banks and counterparties. The first publication of €STR on 2 October was not followed by any discontinuity in interbank or IRS derivative volumes. While ESMA will keep monitoring developments with respect to €STR and other benchmarks, the transition to the new risk-free rates has gradually started without major disruption.
Brexit remains a source of concern for operational risk until full clarity about terms and timeline of a Brexit deal and longer term relationship with the UK is achieved. As such, the need for contingency planning and assurance of business continuity both for financial institutions and supervisors remains. Regarding cyber risks, concerns are expected to intensify in the medium to long term, especially with respect to business continuity and the integrity of proprietary data as financial data breaches are increasingly frequent in comparison to breaches in other sectors.