ESMA Statement on Potential Risks Associated with Investing in Contingent Convertible Instruments
The European Securities and Markets Authority (ESMA) has issued a statement to clarify to institutional investors risks from a newly emerging asset class referred to by most market participants as contingent convertibles instruments (CoCos).
If they work as intended in a crisis CoCos will play an important role to inhibit risk transfer from debt holders to taxpayers. They along with standards to improve the quality and quantity of bank capital reflect a considerate response to the former regulatory capital framework. However, it is unclear as to whether investors fully consider the risks of CoCos and correctly factor those risks into their valuation.
ESMA believes there are specific risks to CoCos and that investors should take those risks into consideration prior to investing in these instruments. ESMA believes that this analysis can only take place within the skill and resource set of knowledgeble institutional investors.