The European Securities and Markets Authority (ESMA), which is responsible for regulating and overseeing financial markets in the European Union, has published a supervisory briefing focused on firms offering copy trading services. The briefing’s primary goal is to increase investor protection and promote harmonization of supervision across the EU, which aligns with ESMA’s mission.
Copy trading businesses provide a mechanism for investors to automatically replicate the trading strategies of experienced traders. Given the increasing adoption of such services, ESMA aims to ensure that companies adhere to the regulatory requirements of the Markets in Financial Instruments Directive II (MiFID II).
ESMA’s 25-page document provides direction on the classifications of copy trading and outlines the regulator’s expectations for supervision across several domains, including information requirements, product governance, suitability and appropriateness evaluations, remuneration and incentives, and the qualifications of the traders, others copy from.
The supervisory briefing states that regulated firms should be transparent and accurate in their marketing communication, disclosing all costs and charges related to their copy trading services. Offered products must prioritize the clients’ best interests, and firms should ensure that traders whose trades are replicated have the requisite qualifications and expertise.
ESMA and National Competent Authorities’ (NCAs) will continue to monitor the copy trading industry’s progress and may implement further measures in the future to ensure that copy trading complies with the applicable MiFID II requirements and that investment services consistently prioritize clients’ best interests.
The ESMA-prepared supervisory brief takes into account the Q&A published in June 2012 regarding the legal classification of the automatic execution of trade signals.
ESMA and NCAs have indicated that they will continue to monitor developments on this matter and may take additional measures in the future to ensure that copy trading is provided in a manner consistent with the relevant MiFID II regulations and that investment services continue to be provided in the clients’ best interest.
Earlier this week, ESMA issued a statement expressing worries about safeguarding investors’ interests in relation to fractional shares.
