EU/UK financial trading risks need close monitoring

Significance Hedge funds are systemically important participants in financial markets and their preference for leverage amplifies their impact, especially when interest rate changes prompt them to sell. US regulators late last year sought to manage the risk by forcing centralised treasury clearing. ESMA has identified potential problems in real-estate funds and parts of the pensions market. Impacts Monetary authorities will be careful when loosening monetary policy because of the risk of triggering a financial market sell-off. If markets become more volatile or uncertainties rise, risky strategies and fund structures would amplify sell-offs. Pension funds using liability-driven investment strategies have been under stricter UK requirements since 2022, but risks remain high.