Frankfurt After the Russian attack on Ukraine, the EU financial market supervisory authority Esma expects violent fluctuations on the stock exchanges for some time to come. “This is not only due to the war in Ukraine, but also to the high inflation rates and possible interest rate increases,” said Esma boss Verena Ross in an interview with the Handelsblatt. “In view of this mix-up, investors must prepare for turbulent times.”
Esma is currently watching financial companies and funds that focus on Russia, Ukraine or the commodity markets particularly closely. “For products that are closely related to the Russian or Ukrainian market, there are currently not only liquidity problems, but also valuation problems,” said Ross, who has been at the helm of Esma since November. “Overall, the risks in the markets remain high.”
Ms. Ross, what are the effects of the war in Ukraine and the EU sanctions against Russia on the EU financial markets?
The Russian invasion of Ukraine not only came as a shock to all of us personally, but also to the markets. It has led to major corrections on the stock markets. The medium to long-term effects will only gradually become clear. The sanctions have been improved several times. There is still a great deal of uncertainty among many market participants as to how they should be implemented in detail. We bundle these questions and then try to get clarification from the EU Commission in a timely manner.
Where do you see the greatest dangers in the market?
There were particularly large price fluctuations on the raw materials markets, for example for nickel. In the case of some derivative contracts in the energy sector, investors had to add collateral as part of so-called margin calls. We closely monitor whether market participants are experiencing difficulties as a result and whether these may also have an impact on other investors or banks. Overall, the risks in the markets remain high.
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Do you expect individual financial firms to be unable to meet their obligations and go bankrupt because of the turbulence?
We keep a close eye on companies and funds that focus on Russia, Ukraine or the commodity markets. For products that are closely related to the Russian or Ukrainian market, there are currently not only liquidity problems, but also valuation problems. In the current situation, it is not easy to present an appropriate valuation of certain funds.
Are there more shock waves looming on the financial markets if the Russian state becomes insolvent and Russian companies no longer service their bonds?
The markets have already priced in a lot. But it is impossible to predict what the impact of a Russian sovereign default would be. There is great uncertainty on the financial markets, and volatility is likely to remain high for some time. This is not only due to the war in Ukraine, but also to the high inflation rates and possible interest rate increases. Investors have to be prepared for turbulent times in view of this mixture.
Esma warned consumers of significant market corrections as early as mid-February, and then last week against investing in cryptocurrencies. Will you now give warning words every week?
No. We are not a financial company that makes predictions for the markets. When we see major risks, we issue warnings. However, we only use this tool selectively, otherwise it wears out. One reason for the recent warnings is to ensure that new investors in particular are aware of the risks they are currently taking in the financial markets, especially when investing in cryptos.
Are you concerned that young private investors in particular will burn their fingers if they have been increasingly active on the stock exchange through neo-brokers such as Trade Republic and Scalable?
The fact that digitization paves the way for more investors to enter the financial market is fundamentally a positive thing. However, new low-cost offers sometimes tempt private investors to engage in quick and speculative trading. Many new investors are encouraged to trade by influencers on social networks and are not always aware of the risks they are taking. This is a complex that worries us.
What are you going to do about it?
When it comes to consumer and investor protection, I see a need for action for the entire financial system, which Esma cannot solve on its own. Regulations already oblige financial firms to act in the best interests of their customers. But compliance with these rules must be monitored more intensively. We will also submit proposals to the EU Commission on how digitization can be used to inform investors in a more coherent, comparable and less complicated way.
Does that also apply to the topic of greenwashing?
Absolutely. The information available to investors on sustainability is not yet good enough. Fighting greenwashing is a shared priority for us and national regulators over the next two years. We want the regulations for this to be implemented uniformly in the different national markets.
At the end of 2021, the EU Commission presented proposals for rules on the subject of environment, social issues and corporate governance (ESG). In view of the threat posed by Russia, there are now calls for investment in armaments to also be classified as sustainable within the framework of a “social” taxonomy.
I am convinced that the taxonomy will continue to evolve. So far, the focus has primarily been on the environmental aspect. Social issues and corporate governance will play a greater role in the future. Ultimately, however, politics must decide whether investments in certain industries should be classified as sustainable in this context.
Politicians have also been working on a legislative package called Mica for two years, which is intended to regulate crypto assets. Does it bother you that regulation is so far behind market developments in this area?
The financial market is fast-paced. It is always difficult for legislators and regulators to keep up with this pace. At the moment we have a fragmented market with an uneven framework: some member states already have crypto legislation in place, while others do not. Mica is important to create a common ground.
When do you expect decisions on this?
Negotiations are in full swing in the European Parliament and Council. I am confident that we will have clarity in the next few months. We then have to implement the uniform legal framework promptly in all member states.
Mica is about crypto assets, not the decentralized financial system (Defi). After the decision on mica, is there a need for another legislative initiative to also find regulations for defibrillators?
I do think that we should advance the regulations further. The market has finally evolved since Mica was launched. As long as there are no laws at EU level, we will try to coordinate with the national supervisory authorities how to deal with decentralized financial systems in the EU.
The Economic and Monetary Affairs Committee of the European Parliament recently decided that energy-intensive cryptocurrencies are still allowed. Is that understandable given the energy crisis?
My deputy, Erik Thedéen, has been critical of the energy consumption of cryptocurrencies – and we will keep an eye on the sustainability aspect. However, Esma’s focus on this topic is how crypto assets are treated in the financial market and what this means for the end investor.
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