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The European Securities and Markets Authority (ESMA) has published its Report on Trends, Risks and Vulnerabilities No. 2, 2014, and the Risk Dashboard for 3Q 2014. Overall, ESMA’s report finds that valuation risks in key market segments are rising and merit investor attention. In the first half of 2014, conditions in the EU’s securities markets, asset management industry and market infrastructures remained favourable. Prevailing optimistic market sentiment was at odds with sluggish underlying economic fundamentals, but in line with the ultra-low interest rate environment.
Key developments in EU securities markets, fund industry and infrastructures:
· Securities markets: EU securities markets realized significant gains amid low volatility. This underscored positive market sentiment in a low interest rate environment, which motivated investors to search for yield. Risk appetite remained strong as yields continued to compress and solid high-yield bond issuance was readily absorbed by markets. Consequently, valuation concerns rose along with the risks of future volatility and its effects.
· Asset management: the European fund industry continued to expand, partly due to capital inflows, with assets under management growing by about 6.7% or €o.5tn in 1H14. Investment fund returns were relatively low, though moving slightly upward, also driven by positive valuation effects. Allocations focused on bonds, notably high-yield and corporate bonds. Overall, investors are searching for yield. Within an active primary bond markets potentiallyfewer market makers could limit the functionality of secondary bond markets.
· Market infrastructures: activity in trading venues increased strongly before easing off from May onwards. Volumes of securities settled by CSDs were broadly flat before tailing off somewhat in late 1H14, while the volatility of settlement fails generally stabilised below levels seen in the second half of 2013. The share of interest rate derivatives cleared via CCPs fell slightly. Benchmark panels reported limited withdrawals, but even these decreased as administrators introduced reinforced governance rules.
The published reports are accompanied by a press release.
Next steps
As part of its on-going market surveillance, ESMA will update its report semi-annually, complemented by its quarterly Risk Dashboard. ESMA’s Reports on Trends, Risks and Vulnerabilities examine developments in EU securities markets while assessing trends and risks in order to establish a comprehensive picture of systemic and macro-prudential risks in the EU that can serve both national and EU bodies in their risk assessments.
