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Date Ref. Title Section Type Download Info Summary Related Documents Translated versions
20/06/2017 WP12017 ESMA working paper on collateral scarcity premia in Euro area repo markets Reference PDF
1.01 MB
22/12/2015 2015/WP/2015/2 Working Paper No.2, 2015 “Monitoring systemic risk in the hedge fund sector” Final Report PDF
872.37 KB

The working paper proposes new measures for systemic risk in the hedge fund sector. These measures are based on the ability of hedge funds to influence (be influenced by) the performance trend of the entire hedge fund sector. The proposed measures display a high ability to identify periods of financial distress, are robust to modifications in the underlying econometric model and deliver an innovation in the monitoring of systemic risks in the fund industry.

15/01/2015 ESMA/WP/2015/1 ESMA Working Paper- Real-world and risk-neutral probabilities in the regulation on the transparency of structured products Reference PDF
480.24 KB
The price of derivatives (and hence of structured products) can be calculated as the discounted value of expected future payoffs, assuming standard hypotheses on frictionless and complete markets and on the type of stochastic processes for the price of the underlying. However, the probabilities used in the pricing process do not represent “real” probabilities of future events, because they are based on the assumption that market participants are risk-neutral. This paper reviews the relevant mathematical finance literature, and clarifies that the risk-neutrality hypothesis is acceptable for pricing, but not to forecast the future value of an asset. Therefore, we argue that regulatory initiatives that mandate intermediaries to give retail investors information on the probability that, at a future date, the value of a derivative will be higher or lower than a given threshold (so-called “probability scenarios”) should explicitly reference probabilities that take into account the risk premium (so-called “real-world” probabilities). We also argue that, though probability scenarios may look appealing to foster investor protection, their practical implementation, if based on the right economic approach, raises significant regulatory and enforcement problems.
11/06/2014 ESMA/WP/1 ESMA Working Paper- Monitoring the European CDS market through networks: Implications for contagion risks Reference PDF
1005.17 KB
Based on a unique data set referencing exposures on single name credit default swaps (CDS) on European reference entities, we study the structure and the topology of the European CDS market and its evolution from 2008 to 2012, resorting to network analysis. The structural features revealed show bilateral CDS exposures describing growing scale-free networks whose highly interconnected hubs constitute both a strength and weakness for the stability of the system. The potential “super spreaders” of financial contagion, identified as the most interconnected participants, consist mostly of banks. For some of them net notional exposures may be particularly large relative to their total common equity. Our findings also point to the importance of some non-dealer/non-bank participants belonging to the shadow banking system.
11/06/2014 ESMA/WP/2 ESMA Working Paper- The systemic dimension of hedge fund illiquidity and prime brokerage Reference PDF
839.63 KB
We analyse the potentially vulnerable and systemically relevant financial intermediation chain established by hedge funds and prime brokers. Our dataset covers the 306 largest global hedge funds and their prime brokers over the period July 2001 to December 2011. The study illustrates that hedge funds and prime brokers act as complementary trading partners in normal times. However, we observe that this form of financial intermediation may be severely impaired in times of market distress. This can be explained by the hoarding of liquid securities by prime brokers who are eager to avert runs by their clients.