EU Markets Improve in 2013, But Overall Risk Is Still High, Finds ESMA

In a report from the European Securities and Markets Authority (ESMA) on risk, trends and vulnerabilities in the EU, the regulator determined that EU securities markets and investment conditions improved in the second half of 2013 based on better macro-economic prospects, which helped lessen systemic risk. However, overall risk remains high due to uncertainty from emerging markets to EU markets in early 2014.

“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,” says Steven Maijoor, ESMA chair.

Other risks remained mostly stable at the end of 2013, but not necessarily postive. For example, liquidity risk was a mixed bag, as volatility decreased but heterogeneity across regions and market segments remained, so ESMA says “liquidity risk developments should be treated with caution as liquidity support measures remain in place and shifts in yield curves could significantly alter liquidity risks.”

In terms of trading, levels on EU venues in the second half of 2013 remained in line with the first half of 2013, but ESMA is concerned with the continuity of key financial benchmarks in the EU. The report determined that high-frequency trading (HFT) accounts for around 22% of value traded and 60% of orders in the EU. While ESMA lists HFT as a potential vulnerability, the regulator says further analysis is needed to determine HFT’s risks and benefits. 

The report also found that despite a substantial decline in the second quarter of 2013, fund flows returned to positive levels at the end of the year, buoyed by equity funds, while fixed-income funds experienced outflows. Long term, the low interest rate environment could be a vulnerability, ESMA says.