Liquidity risk remains high – ESMA

Risks to liquidity are high due to the uncertainty surrounding the macroeconomic environment, according to ESMA’s first quarter risk assessment.

The European Securities and Markets Authority’s (ESMA) first quarter risk assessment rated liquidity risk at high levels amid sustained investor uncertainty.

The assessment explained liquidity pressures were high as, “low performance, high volatility and uncertainty on global financial and economic developments increased liquidity concerns.”

ESMA expects liquidity risk to stay high because “the potential of risk reassessment and portfolio rebalancing may increase pressures on market liquidity.”

The assessment added: “High liquidity in sovereign bonds was reflected in low levels of collateral scarcity. In the corporate bond segment, however, bid-ask spreads increased by 8% over 1Q16.”

Systematic stress was at an elevated level due to the uncertainty surrounding a possible ‘Brexit’, “also reflecting the materialisation of key macro-financial risks at the global level,” ESMA said.

Fund return volatility was linked to mispricing of risks, deteriorating liquidity and potential amplification of market distortions.

Insufficient technology management and cyber-attacks were listed as risk drivers to infrastructure and services, as well as market abuse.

ESMA’s risk assessment remains relatively unchanged from the fourth quarter report last year, although the risks are “deemed to prevail in the forthcoming quarter.”