The recent spike in market risks is expected to loom over investors for a long time, says the European Securities and Markets Authority (ESMA).
The European securities regulator issued an updated risk assessment to reflect the impact of the Covid-19 outbreak on financial markets.
The report found that risk is now at its highest level throughout ESMA’s jurisdiction, and that market, liquidity and macroeconomic risk are all very high as well.
Credit and operational risk is elevated, but not as severely as market risk.
“Corporate bond, government bond markets and a number of investment funds show signs of stress,” ESMA said.
Additionally, the report said that the regulators see a “prolonged period” of risk ahead for both retail and institutional investors, even though there may be market rebounds along the way.
Positively, the report noted that market infrastructure has remained functional, “despite a massive surge in trading activity, circuit breakers and derivatives margins.”
ESMA said that operational risks are expected to remain elevated due to the increased reliance on remote working arrangements, even though the industry’s business continuity plans (BCPs) appear to be working well.
“To what extent these risks will further materialize will critically depend on two drivers,” the report said. “The economic impact of the pandemic, and any occurrence of additional external events in an already fragile global environment.”