Stress in EU securities markets has decreased, but key markets and investors continue to face substantive risks, according to the European Securities and Markets Authority (ESMA).
ESMA has published its first report on Trends, Risks and Vulnerabilities 2014, and its Risk Dashboard for 4Q 2013.
The report looks at the performance of EU securities markets, assessing both trends and risks to develop a comprehensive picture of systemic and macro-prudential risks in the EU that can serve both national and EU bodies in their risk assessments.
EU securities markets and investment conditions in the union improved in the second half of 2013, based on better macro-economic prospects, which also contributed to reduced systemic risk in that period, found ESMA.
But overall risks remained at high levels for EU securities markets as reflected by the rapid propagation of uncertainty from emerging markets countries to EU markets in early 2014.
Steven Maijoor, chair of ESMA, commented: “Stress in EU securities markets has decreased, but key markets and investors continue to face substantive risks.”
“As we remain vigilant about monitoring these vulnerabilities, global re-pricing risks as well as a better understanding conduct and operational risks will be a particular concern going forward.”
The securities markets performed positively in the second half of 2013, with volatility decreasing. But “sensitivities prevailed during the reporting period”, found ESMA, “especially surrounding the global economic outlook and potential fragilities” in emerging markets.
Following a substantial decline in Q2 2013, fund flows returned to positive levels at the end of the year. Fixed-income funds experienced outflows, according to ESMA, whereas equity funds replicated the positive development of stock markets. “Overall, mutual funds were hit harder than alternative funds”, it said.
Areas that may present future vulnerabilities include high-frequency-trading.
Based on a sample of 100 stocks traded in nine EU countries, ESMA found that high-frequency-trading activity accounted for around 22 percent of the value traded and for 60 percent of orders and is concentrated on multilateral trading facilities.
“Overall, [high-frequency-trading] seems to be positively related to volumes traded, fragmentation, prices and tick sizes and negatively related to volatility.”
Structural vulnerabilities due to low interest rates may also, found ESMA.
“[The low interest rate environment] encourages investors to favour particular asset market segments such as fixed income products. [Risks include] revaluation, liquidity and additional counterparty risks once the low interest rate environment comes to an end.”
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