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Report on Trends Risks Vulnerabilities No. 2, 2014

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Report on Trends Risks Vulnerabilities No. 2, 2014 Trends Risks Vulnerabilities No. 2, 2014 3 September 2014|ESMA/2014/884 ESMA Report on Trends, Risks and Vulnerabilities No. 2, 2014 2 ESMA Report on Trends, Risks and Vulnerabilities, No. 2, 2014 Contributors: Sophie Ahlswede, Jakub Brettl, Anne Chone, Claudia Guagliano, Jean-Baptiste Haquin, Frank Hespeler, Steffen Kern (editor), Giuseppe Loiacono, Julien Mazzacurati, Peter McGoldrick, Yanis El Omari, Tania De Renzis, Christian Weistroffer, Christian Winkler Support: Mirza Durakovic, Massimo Ferrari, Claire Meyer, Roko Pedisic © European Securities and Markets Authority, Paris, 2014. All rights reserved. Brief excerpts may be reproduced or translated provided the source is cited adequately. The reporting period of this Report is 01 January 2014 to 30 June 2014, unless indicated otherwise. The reporting quarter of the Risk Dashboard in the Risk Section is 4Q13. Legal reference of this Report: Regulation (EU) No 1095/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/77/EC, Article 32 “Assessment of market developments”, 1. “The Authority shall monitor and assess market developments in the area of its competence and, where necessary, inform the European Supervisory Authority (European Banking Authority), and the European Supervisory Authority (European Insurance and Occupational Pensions Authority), the ESRB and the European Parliament, the Council and the Commission about the relevant micro-prudential trends, potential risks and vulnerabilities. The Authority shall include in its assessments an economic analysis of the markets in which financial market participants operate, and an assessment of the impact of potential market developments on such financial market participants.” The charts and analyses in this report are, fully or in parts, based on data not proprietary to ESMA, including from commercial data providers and public authorities. ESMA uses these data in good faith and does not take responsibility for their accuracy or completeness. ESMA is committed to constantly improving its data sources and reserves the right to alter data sources at any time. The shaded area in all charts indicates the reporting period of this report. European Securities and Markets Authority (ESMA) Economics and Financial Stability Unit 103, Rue de Grenelle FR–75007 Paris [email protected] ESMA Report on Trends, Risks and Vulnerabilities No. 2, 2014 3 Contents Executive summary ______________________________________ 5 Trends _______________________________________________ 7 Securities markets __________________________________________________ 8 Market overview ________________________________________________________ 8 Equity markets _________________________________________________________ 9 Sovereign bond markets __________________________________________________ 11 Corporate bond markets __________________________________________________ 13 Securitisation and covered bonds ____________________________________________ 14 Credit quality _________________________________________________________ 15 Securities finance and collateral _____________________________________________ 16 Short selling __________________________________________________________ 18 Structured retail products _________________________________________________ 19 Money markets ________________________________________________________ 19 Commodity markets ____________________________________________________ 20 Derivatives markets _____________________________________________________ 20 Shadow banking _______________________________________________________ 21 Investors ________________________________________________________ 23 Funds industry ________________________________________________________ 23 Money market funds ____________________________________________________ 25 Alternative funds _______________________________________________________ 26 Exchange-traded funds ___________________________________________________ 27 Retail investor trends ____________________________________________________ 28 Market infrastructures ______________________________________________ 32 Trading venues ________________________________________________________ 32 Central counterparties ___________________________________________________ 32 Central securities depositories ______________________________________________ 33 Credit rating agencies ____________________________________________________ 34 Financial benchmarks ___________________________________________________ 35 Risks ________________________________________________ 37 ESMA Risk Dashboard _______________________________________________ 38 Liquidity risk _____________________________________________________ 40 Market risk ________________________________________________________ 41 Contagion risk ____________________________________________________ 42 Credit risk _______________________________________________________ 43 Vulnerabilities _________________________________________ 44 Trading venue developments, operational risk and new challenges _______________ 45 The systemic relevance of securities financing markets in the EU ________________ 54 Performance and risks of Exchange-Traded Funds ____________________________ 61 Crowdfunding – Opportunities and challenges ahead _________________________ 70 ESMA Report on Trends, Risks and Vulnerabilities No. 2, 2014 4 List of abbreviations ABS Asset-Backed Securities AF Alternative Funds AuM Assets under Management AVG Average BF Bond fund BPS Basis points CAP Cumulative Accuracy Profile CCP Central Counterparty CDO Collateralised Debt Obligation CDS Credit Default Swap CEREP ESMA Central Rating Repository CRA Credit Rating Agency CSD Central Securities Depository DTCC Depository Trust & Clearing Corporation EA Euro Area EBA European Banking Authority ECB European Central Bank EF Equity fund EFAMA European Fund and Asset Management Association EIOPA European Insurance and Occupational Pensions Authority EM Emerging market EMIR European Market Infrastructure Regulation EOB Electronic Order Book EONIA Euro Overnight Index Average ESMA European Securities and Markets Authority ETF Exchange Traded Fund EU European Union FMI Financial market intermediary FRA Forward Rate Agreement HFT High Frequency Trading HY High Yield ICSD International Central Securities Depository IMF International Monetary Fund IPO Initial Public Offering IRS Interest Rate Swap LTRO Long-Term Refinancing Operation MA Moving Average MBS Mortgage-Backed Securities MMF Money Market Funds MS EU Member State MTN Medium-Term Note NAV Net Asset Value NCA National Competent Authority OIS Overnight Index Swap OMT Outright Monetary Transactions OTC Over-the-Counter RMBS Residential Mortgage-Backed Securities SCDS Sovereign Credit Default Swap SF Structured Finance UCITS Undertaking for Collective Investment in Transferable Securities VaR Value at Risk YTD Year-to-Date Countries abbreviated according to ISO standards Currencies abbreviated according to ISO standards ESMA Report on Trends, Risks and Vulnerabilities No. 2, 2014 5 Executive summary Trends Securities markets: In 1H14, EU markets reported significant gains amid low volatility and notwithstanding a challenging economic and political environment. This underscored the prevailing sanguine market sentiment in a low interest rate environment, within which a hunt for yield spread across asset and risk classes, continuing to raise valuation concerns and raising the risks of future raised volatility and its effects. Having fallen in 2013, issuance in key market segments picked up again in 1H14. This was driven by corporate bond markets, while a 2Q14 rebound in securitisation halted its hitherto persistent decline. Risk appetite remained strong as yields continued to compress and solid high-yield bond issuance was readily absorbed by markets. Against a background of deleveraging, the importance of capital market financing continued to grow relative to loan-based financing through 2013, with net new issuance of EUR 820bn in 2013 and EUR 317bn in 2014. Higher investment from institutional investors, amounting to EUR 600bn in 2013, met new capital market issuance. Foreign portfolio inflows remained positive, both for that period and into 1H14. Investors: The fund industry continued to expand, with AuM growing by about 6.7% or EUR o.5tn in 1H14 and capital inflows that concentrated into bond funds. Investment fund returns were relatively low in the same period, though trending upward, with positive valuation effects an important driver. With allocations focused on bonds, high-yield and corporate bonds were in demand in 1Q14. Overall, the industry exhibits behaviour consistent with hunt-for-yield. In a context of booming primary bond markets, a shrinking pool of market makers could potentially limit the functionality of secondary bond markets. Market infrastructures: Activity in trading venues increased strongly before easing off as from May. Volumes of securities settled by CSDs were broadly flat before tailing off somewhat end-1H14, with the incidence of elevated settlement fails tailing off towards the end of the reporting period. The proportion of interest rate derivatives cleared via CCPs fell slightly, although this decline was less than that reported in the gross notional value of contracts in general. Equities bucked that trend, however, while at the end of May settlement fails
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