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ESMA: Tendências, Riscos e Vulnerabilidades nos Mercados financeiros da União Europeia

Leitura recomendada: Relatório da ESMA sobre Tendências, Riscos e Vulnerabilidades nos Mercados financeiros da União Europeia, Nº2, 2013.
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EU securities markets in 1H13

Trends
Securities markets: Conditions in securities markets improved moderately in 1H13, while issuance was subdued. EU equity prices declined slightly, but liquidity on sovereign bond markets improved and volatility stabilised, while overnight interbank EUR market activity increased. The second quarter was marked by a general increase in borrowing costs for sovereigns and a spike in commodity market volatility, especially for precious metals. Issuance of corporate bonds, covered bonds and securitised products was subdued across sectors, with spreads low. Rating downgrades for the corporate sector rose, highlighting lingering strains in the non-financial sector.
Investors: In 1H13, the EU fund industry benefited from positive trends in financial markets, although fund inflows were highly volatile. Bond and equity funds drove the sector’s growth, but initial capital flows partly reversed in 2Q13 for both types. MMF assets and shares continued to decline. Alternative funds increased their share base. Leverage was moderate and stable for most fund types but fell for real estate funds and increased for hedge funds. While retail investors continued to enjoy above-long-term-average portfolio returns, general investor sentiment deteriorated.
Market infrastructures: Activity on EU trading venues increased in early 2013 as general market conditions picked up. Central clearing of interest rate swaps continued to gain ground. With regard to financial benchmarks, the number of banks in the Euribor panel dropped by 23% from December 2012. Credit rating agencies’ accuracy improved slightly on average in the course of 2012 but deteriorated for ratings on structured finance instruments.

Risks
Systemic stress: The level of systemic risk in EU securities markets remained stable throughout 1Q13, decreased slightly in early 2Q13 and rose substantially towards the end of the quarter. Sources of market uncertainty, e.g. funding risk, the low interest rate environment and obstacles to orderly market functioning, continued to impact on EU financial stability, aggravated by higher market volatility in emerging economies and commodity markets and a weakening global economic outlook. Clustering remained a vulnerability, with a group of countries and market segments still experiencing trends significantly different to those in the majority of EU markets. The consequences of the recent restructuring of one national banking sector underlined this tendency, even if they were locally limited. Liquidity, credit and contagion risks and their future outlook remained unchanged, while uncertainties over the low-interest-rate environment aggravated market risks, which can be expected to continue rising going forward.
Liquidity risk: Liquidity risk remained constant in the last two quarters and is still highly dispersed across market segments and regions. Some countries saw liquidity deteriorate in sovereign bonds and equities.
Market risk: After improvements in securities market conditions in 1Q13 and early 2Q13, in June 2013 market risk intensified. The search for yield associated with reduced investor risk aversion and evidenced by stronger inflows into riskier bond market segments, subsided into volatile market expectations for the slope of the yield curve, temporarily destabilising the bullish trend in securities markets. As concerns linger, the outlook for market riskmay be expected to further deteriorate in the months ahead.
Contagion risk: Contagion risks have remained unchanged on late 2012. In 1Q13, the market segments most exposed to contagion risks, i.e. sovereign bonds, exhibited increasing clustering. Early 2Q13 saw a temporary trend reversal, but geographical and sectoral clustering persisted throughout a broad set of asset classes including equities, CDS and private bond markets. Markets reacted moderately to the restructuring of one national banking sector in early 2013, in spite of limited direct cross-border exposures.
Credit risk: In 1H13, credit risks did not increase further. Growth in issuance was initially strong, mainly in asset classes with higher risk and longer maturities, but subsided in 2Q13. In 2H12 average credit ratings continued to fall, while a general decrease in their volatility, corporates excluded, evidences a shift of credit risk to this sector. Debt maturities at issuance continued to shorten throughout 1H13, particularly in the bond market segments for distressed sovereigns. The concentration of outstanding bank debt at shorter maturities persisted. Despite the recent successful refinancing operations by debt issuers and narrowing spreads, substantial credit risks remain.

Vulnerabilities
Short Selling Regulation: This article analyses the impact of the entry into force of the EU’s Short Selling Regulation along three dimensions: reports of short positions to NCAs, implementation of temporary short selling bans, and bans on uncovered sovereign CDS. It shows that investment funds account for most of the short positions reported on EU equities, with the top ten holders accounting for around 30% of all reported positions. Looking at temporary short selling restrictions, they appear to have had limited impact on markets, both in terms of liquidity and volatility. Finally, there was no evidence of a significant deterioration in liquidity in the sovereign CDS market.
Network structure of CDS exposures on European reference entities: We analyse the potential for contagion risk stemming from the CDS market, describing the main characteristics and developments of the market over the past four years, and then establish rankings of the most interconnected market participants by means of network centrality indicators. The potential “super-spreaders” of financial contagion identified consist mostly of banks. Net CDS exposures at some banks are particularly large relative to their total common equity. The structural features revealed suggest that the network of CDS exposures would, in most cases, be resilient to failure. However, should more than one major player be affected together, the network might possibly lose its connectedness and hence its ability to function.
EU UCITS industry: In this article we provide an overview of the EU UCITS industry. UCITS represent by far the bulk of the EU fund industry, with an estimated market share above 70% in terms of assets under management. The industry is very diverse since the UCITS label encompasses a wide range of fund types, including bond, equity, money market, mixed assets and exchange traded funds, and even some alternative funds. Since 1985 the UCITS Directive has proved a sound framework for investors and delivered financial stability. Funds in particular demonstrated their resilience during the recent crisis and have recovered, both in terms of assets under management and profitability. In this regard, rules on the eligibility of assets and investor protection have helped to contain risks and sustain investors’ confidence. However, on-going financial market development, in terms of risks, financial innovation and interconnectedness, constantly exposes the UCITS industry to new vulnerabilities.
Bail-in securities and contingent capital securities: Recently, a class of hybrid securities with features that combine fixed income and equity securities has emerged. Driven by both regulatory and market pressures, they have been created to meet financial institutions’ emergency capital funding needs. Securities that fall under regulatory oversight and are guided by statutory powers are commonly called bail-in securities. Securities that have contractual agreements tied to the issue and issuer are typically termed contingent capital securities. While the trigger points are set at different levels for the two types of securities, both provide the issuer with a capital cushion and serve to mitigate the need to rely on public funding. The exact supply and demand forces for these securities are not yet known, as the regulatory legislation driving their development has not been finalised.

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