On March 11, the European Securities and Markets Authority (ESMA) published its Report No. 1, 2015, on trends, risks and vulnerabilities in the European Union securities markets, covering the time period from July to December 2014. The Report concludes that the EU securities market remains tense, characterized by high asset valuations. Although asset prices were generally stable over the period, strong price movements occurred in foreign exchange rates and commodity prices. Corporate funding in the capital markets, however, increased overall during the time period. The Report cited the following factors as contributing to the continued tense EU securities markets: (1) the low-interest rate environment;( 2) public debt policies in the EU member states; (3) high volatility in both exchange rates and the commodity markets; and (4) political and geopolitical risks.

The Report identifies three areas of potential future vulnerabilities for the EU securities markets: (1) fund investments in loans; (2) increased investments in alternative indices; and( 3) monitoring systemic risk in the hedge fund industry. Fund investments in loan assets raises concern due to perceived increased exposure to credit and liquidity risk. Investments in alternative indices is viewed as having limited transparency regarding the underlying indices’ constituents, weights, methodology and simulated past performance as well as increasing exposure to sector volatility. Systemic risk in the hedge fund industry remains an issue for ESMA and the Report discusses new indicators for its monitoring by comparing individual hedge fund performance rates against those of the entire industry.

A copy of the Report can be found here.