The level of risk facing market participants is “high”, according to the European Markets and Securities Authority (Esma), with a warning investors should be prepared for further market corrections.
The comments come in the regulator’s first ‘Trends, Risks and Vulnerabilities (TVR) report‘ for 2023.
Much of the risks facing investors in 2023 – high inflation, economic slowdowns, global tightening of financial conditions – are issues from the second half of the previous year.
These remain the “defining drivers of risk in EU financial markets”, according to Esma.
As a result, Europe’s asset management sector has seen its AUM record its sharpest decline since the global financial crisis.
“Maturity mismatches in Commercial Real Estate Funds persist, and the impact of the UK Gilt market turmoil on leveraged Liability-Driven Investment Funds in 2H22 confirmed existing concerns over fund liquidity risk management and excessive leverage, as well as contagion risks given strong systemic interconnections,” added the report.
Elsewhere, Esma highlighted emerging trends on the continent.
Central clearing volumes have continued to grow, with margins collected by EU central counterparties for interest rate and commodity derivatives rising.
Some migration from ETD to OTC energy derivatives was also observed.
Net-zero pledges have also come under greater scrutiny.
Although the ESG space has continued to grow in Europe, with more investors relying on SFDR labels to guide their product choices, the energy crisis has cast doubt over decarbonisation objectives.
“Financial markets remained remarkably stable in 2H22, despite the general volatile environment. Although economic sentiment has become more positive in early 2023, there is no room for complacency,” said Verena Ross, Esma chair.
“The confluence of high risks across the Esma remit and fragile market liquidity may test the resilience of the financial system against possible future shocks.”
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