The European Securities and Markets Authority (ESMA) has issued a statement to clarify to institutional investors risks from a newly emerging asset class known as contingent convertible instruments (CoCo).
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 other standards to improve the quality and quantity of bank capital, reflect a considerate response to the former regulatory capital framework. However, it is unclear whether investors fully consider the risks of CoCos and correctly factor those risks into their valuation.
ESMA believes that 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 knowledgeable institutional investors.