Tue. Oct 4th, 2022

1 September 2022

The European Securities and Markets Authority (ESMA), the EU’s securities markets regulator, today publishes the second Trends, Risks and Vulnerabilities (TRV) Report of 2022. The Russian war on Ukraine against a backdrop of already-increasing inflation has profoundly impacted the risk environment of EU financial markets, with overall risks to ESMA’s remit remaining at its highest level.

In the first half of 2022 financial markets saw faltering recoveries, increasing volatility and likelihood of market corrections. Separately, crypto-markets saw large falls in value and the collapse of an algorithmic stablecoin, highlighting again the very high-risk nature of the sector.

Verena Ross, Chair, said:

“The current high inflation environment is having impacts across the financial markets. Consumers are faced with fast rising cost of living and negative real returns on many of their investments. Consumers also need to watch out as they might be targeted by aggressive marketing promoting high-risk products that may not be suitable for them.

The Russian invasion of Ukraine continues to significantly affect commodity markets, leading to rapid price increases and elevated volatility. These present liquidity risks for exposed counterparties and show the continued importance of close monitoring to ensure orderly markets, a core objective for ESMA.”

Risk summary and outlook…

The overall risk to ESMA’s remit remains at its highest level. Contagion and operational risks are now considered very high, like liquidity and market risks. Credit risk stays high but is expected to rise. Risks remain very high in securities markets and for asset management. Risks to infrastructures and to consumers both remain high, though now with a worsening outlook, while environmental risks remain elevated. Looking ahead, the confluence of risk sources continues to provide a highly fragile market environment, and investors should be prepared for further market corrections.

Main findings

Market environment: The Russian aggression drove a commodities-supply shock which added to pre-existing pandemic-related inflation pressures. Monetary policy tightening also gathered pace globally, with markets adjusting to the end of the low interest rates period.

Securities markets: Market volatility, bond yields and spreads jumped as inf…