Volatility threat to markets identified by Esma

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The latest Trends, Risks, and Vulnerabilities (TRV) report from the European Securities and Markets Authority (Esma) as identified volatility spikes as a key threat to markets in Europe, alongside cyber risk and uncertainties linked to Brexit.

The conclusion is based on a review of risks during the first half of 2018. The TRV report notes that “overall risk levels for the EU’s securities markets remained stable but at high levels for most risk categories.”

“Equity and bond volatility spikes in February and May reflected the growing sensitivities. Esma also sees a deterioration in outstanding corporate debt ratings, and in corporate and sovereign bond liquidity.”

Esma added that the main political risk to the EU currently is Brexit, given the uncertainty around negotiations.

Market, credit and liquidity risk remain high.

Operational risk is described as “elevated with negative outlook”, again with a link to Brexit, but also cyber threats.

Looking ahead, Esma iterates that it sees a number of factors contributing to ongoing high levels of risk to markets.

“Going forward, EU financial markets 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, Brexit negotiations, and others. Assessing business exposures and ensuring adequate hedging against these risks will be a key concern for market participants in the coming months.”

Esma has also noted that “investor risk persists across a range of products.”

As the relevant Authority, Esma has restricted access to contracts for difference and banned provision of binary options to retail investors.

The full TRV report is available here: https://www.esma.europa.eu/sites/default/files/library/esma_50-165-632_report_on_trends_risks_and_vulnerabilities_no.2_2018.pdf