On the 2 April 2020, the European Securities and Markets Authority (ESMA) updated its risk assessment to account for the impact of COVID-19.
In the risk assessment, ESMA highlights that the COVID-19 pandemic has led to massive equity corrections, driven by sharp deterioration in the outlook for consumers, businesses and the economic environment. Furthermore, corporate bonds, government bonds and investment funds are also showing signs of stress.
ESMA highlights that market infrastructures continue to function in an orderly manner notwithstanding a massive increase in trades, circuit breakers and derivatives margins.
Looking forward, ESMA predicts intermittent market rebounds, even though a prolonged period of risk to institutional and retail investors and further market corrections remain. With regards to operation risks, ESMA sees a negative outlook, given the reliance on remote-working arrangements, even though reports suggest that business continuity plans are functioning well.
ESMA highlights that further risks will materialise depending on two drives: i) the economic impact of the pandemic; and ii) the occurrence of any additional external factors contributing to the already fragile global environment. Macroeconomic forecasts predict a global recession for 2020, with Europe being particularly affected.
Since mid-February, global equity markets have seen major price corrections with falls comparable to the Global Financial Crisis. The EuroStoxx has recorded record volatility with a -38% drop).
- Corporate Bonds:
Markets have been showing signs of severe stress with liquidity deteriorating way below long-term averages.
- Sovereign Bonds:
EA markets have shown sharp increases in spreads to yearly highs, with such spreads decreasing after ECB interventions in mid-March.
Infrastructures and Services
- Trading Venues
Trading volumes have increased 3X the average value. Circuit breakers were also used extensively, with ESMA reacting by supporting transparency and lowering the reporting threshold of net short positions. ESMA notes that several Member States have imposed short or long-terms short selling bans.
- Central Clearing
Market movements showed extreme levels of volatility. Initial margin model parameters had to be revised in order to respond to the higher volatility.
Fund performance decreased across asset classes in line with market valuations. Bond UCITS, ETFS and MMFs were faced with massive outflows, with MMFs facing a decline of Euro 120bn in NAV decline. Fund managers have started using liquidity management tools to counter the present situation.
We shall be monitoring the situation closely and will issue further updates as things develop.
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