Risky Business or the takeaways from the latest ESMA Risk Dashboard

If you hadn’t noticed, we live in risky times. At least that’s what the European regulator ESMA is saying. With equity markets experiencing increased levels of volatility, cryptocurrencies in outright turmoil, constant threats to cybersecurity, and geopolitical issues like Brexit, Italy’s budget crisis or global trade wars, the financial watchdog is rather concerned about and raises a number of red flags in its latest Risk Dashboard that is essential reading for risk managers and senior management alike.

Every quarter the European Securities and Markets Authority (ESMA) publishes its Risk Dashboard that evaluates risks in the EU’s securities markets for the previous three month with an outlook on things to come. In its Risk Dashboard series, ESMA seeks to identify and assess, at an early stage, trends, potential risks and vulnerabilities stemming from the micro-prudential level, across borders and across sectors. By doing so, particular attention is paid to any systemic risk posed by financial market participants or related to financial innovation that may impair the operation of the financial system or the real economy.

As a result, ESMA publishes these quarterly reports and keeps other European institutions like the European Parliament, the Council, the Commission, the other European Supervisory Authorities and the ESRB updated.

Yesterday, ESMA published its latest edition of the Risk Dashboardcovering the third quarter and it paints a gloomy picture. Starting with Equity Markets, the report highlights the recent market sell-off, but while most share groups have slightly recovered, market risk remains very high and because of a number of risk factors, the near future doesn’t look to bright: the low-interest environment is at risk due to the gradual increase in interest rates and the pace of the quantitative easing tapering policies, in addition to deteriorating levels of liquidity in equity markets.

Bond markets are equally affected for similar reasons as well as political threats like the controversy surrounding Italy’s budget plans and the clash with the European Commission. ESMA is even more concerned though – and not only with respect to bond markets – regarding Brexit and its potential consequences. Last week, the regulator had published a statementto address the risks of a no-deal Brexit scenario in the area of central clearing and yesterday a joint declaration of the three the European Supervisory Authorities (ESA), i.e. the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and ESMA, proposedto amend bilateral margin requirements to assist Brexit preparations for OTC derivative contracts.

Investors are alerted about the decline in return volatily, the threat to asset prices because of market events and geopolitical threats as well as the subsequent risk reassessment. At the same time, ESMA continues it warning against risky market practices like Initial Coin Offerings(ICOs) and Venture Capital.

Brexit is also likely to affect business operations, as financial institutions are still not clear about what exactly to expect after 29 March 2019. In terms of operational risks, ESMA points as well to elevated threat to cybersecurity. The report states that “with regard to cyber risks, concerns are expected to intensify in the medium to long term, especially with respect to business continuity and the integrity of proprietary data as financial data breaches are increasingly frequent in comparison to breaches in other sectors.” In a report published by the ESAs earlier this year, the authorities encouraged financial institutions to improve fragile IT systems, explore inherent risks to information security, connectivity, and outsourcing. In fact, cybersecurity is an increasingly important topic and the level and volume of sophisticated attacks grows with every year with damages from cybercrime expected to cost the world $6 trillion by 2021.

Nothing for the faint hearted, but the quarterly Risk Dashboard is essential reading for risk managers and senior management alike. The latest edition can be found on the ESMA website together with additional information.