ESMA Sees High Market Risks and Warns of Further Declines

The EU's financial markets supervisor and regulator, the European Securities and Markets Authority (ESMA), published its newest 2023 Trends, Risks and Vulnerabilities Report, still highlighting high investment risk in the international markets. ESMA warns retail investors that markets could face further downward corrections despite a positive January.

ESMA Advises Preparing for Further Downturn

According to ESMA's report, the dangers associated with contagion and operational risks are still very high. Similarly, the regulator sees a visible increase in liquidity and market risks. The prospect of credit risk continues to be a major concern and is projected to escalate due to increasing public concerns and worries about corporate debt.

In the latter half of 2022, stock prices experienced fluctuations, with the market partially bouncing back in the third quarter due to news of comparatively stable inflation and favorable corporate earnings reports. The start of the year has seen a positive rebound in equity markets, but the regulator warns that declines could return in the near future.

"Financial markets remained remarkably stable in 2H22, despite the general volatile environment. Although economic sentiment has become more positive in early 2023, there is no room for complacency. ESMA is keeping the overall risk assessment across its remit at the highest level," Verena Ross, the Chair of ESMA, commented.

"The confluence of high risks across the ESMA remit and fragile market liquidity may test the resilience of the financial system against possible future shocks," Ross added.

Cryptocurrency Effects on EU Finance Sector

In its report, ESMA highlights the crypto asset sector. As it notes, market valuations have shrunk 70% in 2022, driven by macroeconomic factors and the high-profile collapses of Terra and FTX.

"Contagion within the crypto sector has been substantial, reflected in further price drops of key crypto instruments and knock-on bankruptcies among service providers," the regulator commented.

However, the regulator does not see the negative impact of adverse conditions in global cryptocurrency on the deterioration of the financial sector's health in Europe. ESNA explains this by the low exposure of participants from the Old Continent to the crypto asset market.

Watch the recent FMLS22 panel on "Regulation Roundup: Everything You Need to Know for 2023."

New Logo, New Website and New Framework from ESMA

In early 2023, ESMA underwent a rebranding presenting a refreshed logo and a completely new website.

"The design of the new logo fully embraces the ESMA Strategy for 2023-2028 and its key twin drivers: sustainability as well as technological and data innovation," ESMA commented.

However, ESMA is setting its sights not only on a refreshed design but also on new targets in 2023. For this reason, in January, it launched a review of the promotion of financial products in various European countries. This is a similar step to that taken by the UK FCA in 2022.

ESMA wants to work with national competent authorities (NCAs) to confirm that Markets in Financial Instruments Directive ) II is correctly applied in terms of marketing financial products in the EU territories. NCAs will examine the correct form of promotion, especially in the case of more risky investments, most likely including crypto assets and contracts for difference.