Risk Analysis & Economics - Markets Infrastructure Investors

Risk Monitoring

Risk assessment focuses on important market risks that could harm ESMA’s objectives of investor protection, orderly markets and financial stability.  

ESMA monitors and assesses developments in the area of its competence and, where necessary, informs the European Parliament, the Council, the Commission, the other European Supervisory Authorities and the ESRB on a regular and, as necessary, on an ad hoc basis. ESMA continuously strengthens its capabilities to identify and assess risks to investors, orderly markets and financial stability in the EU.

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 inflation drove expectations of higher rates, equity price falls halted the recovery that had started in 2020, and invasion-sensitive commodity values surged, particularly energy, impacting natural gas derivatives and highlighting liquidity risks for exposed counterparties.

Asset management: Direct impacts of the invasion were limited but the deteriorating macroeconomic conditions amplified vulnerabilities and interest rate risk has grown with expectations of higher inflation. Exiting the low-rate environment presents a medium-term challenge for the sector.

Consumers: Sentiment worsened in response to growing uncertainty and geopolitical risks. The growing volatility and inflation could negatively impact many consumers, with effects potentially exacerbated by behavioural biases. Household savings fell from the record highs of the pandemic lockdowns.

Sustainable finance: The invasion presented a new major challenge to EU climate objectives as several member states turned to coal to compensate for lower Russian fossil fuel imports. Although EU ESG bond issuance fell and EU ESG equity funds experiencing net outflows for the first time in two years, funds with an ESG impact objective were largely spared and the pricing of long-term green bonds proved resilient.

Financial innovation: Crypto-asset markets fell over 60% in value in 1H22 from an all-time-high, amid rising inflation and a deteriorating outlook. The sharp sell-off, the Terra stablecoin collapse in May, and the pause in consumer withdrawals by crypto lender Celsius, added to investor mistrust and confirmed the speculative nature of many business models in this sector.


Further information:

Solveig Kleiveland

Acting Team Leader

✆ +33 (0)1 58 36 43 27

@ Email: press@esma.europa.eu

The European Securities and Markets Authority (ESMA), the EU’s securities markets regulator, today publishes an article  on the development of key retail risk indicators (RRIs) for the EU single market. The proposed RRIs highlight risks around:

  • inexperienced investors;
  • use of digital tools by younger investors; and
  • spikes in overall trading during periods of market stress.

This development of RRIs is based on the new mandate ESMA recently received in this regard. ESMA is building on existing consumer analysis and indicators from the Trends, Risks and Vulnerabilities Reports to propose a conceptual framework that:

  • defines key terms;
  • considers how to measure risks practically; and
  • identifies sources of risk to consumers.

Within this framework, RRIs should aim to reflect market developments, especially the rise of online- or mobile-based retail trading.

Next steps

ESMA will continue to refine and develop RRIs to enhance its risk monitoring in this area. The article sets out several possible extensions to the analysis, including broadening the coverage in terms of the products and markets covered, and enhancing the evidence base on investor characteristics.   

The European Securities and Markets Authority (ESMA), the EU securities markets regulator, today updates its risk assessment to account for the impacts on financial markets of Russia’s invasion of Ukraine and the deteriorating economic environment.

The risk to ESMA’s overall remit remains at the highest level, with political event risk, surging inflation and jumps in market volatility negatively impacting the outlook.

Risk assessment June 2022

Following the invasion and the resulting sanctions, funds and investors with exposures to Russian assets have faced substantial valuation issues. There has been significant asset repricing, with riskier assets falling in value (particularly equities, corporate bonds and emerging market debt).

Prices of commodities and related derivatives have jumped sharply and are adding to pre-existing inflation pressures. This has led to increasing market expectations of higher interest rates and growing likelihood of far-reaching rebalancing of portfolios as investors adjust to the new environment. Finally, cyber risk is very high currently and remains a key concern for financial markets, as attacks targeting infrastructures and firms could be very disruptive.

ESMA also observes that crypto assets have experienced sharp falls in value, showing the importance of the recently published ESAs joint warning on crypto assets reminding consumers of the highly volatile and speculative nature of many crypto markets.  The collapse of Terra illustrates the acuteness of confidence effects in crypto-asset markets and the risks attached to so-called stablecoins in the absence of a sufficiently robust business models and financial engineering.