ESMA provides guidance for supervision of Copy Trading
Pan European financial regulatory oversight body European Securities and Markets Authority (ESMA) has published a supervisory briefing on firms offering copy trading services, in accordance with its objective of fostering investor protection and actively promoting supervisory convergence across the EU.
What is Copy Trading?
Copy trading refers to a service that involves trading of a client’s assets based on the trades of another trader (hence adding a social element), whom ESMA refers to as the ‘copied trader’ (also identified as the ‘signal provider’). The trading usually is automated in this case, but it could also involve (partially) manual trading of the client’s assets.
ESMA Copy Trading Guideline Details
The ESMA briefing (see link to the full briefing below) includes guidance on the qualification of copy trading services as an investment service, and sets out supervisory expectations with regard to MiFID II requirements on:
- Information requirements (including on marketing communications and costs and charges),
- Product governance,
- Suitability and appropriateness assessment,
- Remuneration and inducement, and
- Qualifications of traders whose trades are being copied.
The supervisory briefing sets out the supervisory expectations of both ESMA and National Competent Authorities (NCAs), and also includes indicative questions that supervisors could ask themselves, or firms, when assessing firms’ approaches to the application of the relevant MiFID II rules.
More than 10 years ago, in June 2012, ESMA published a Q&A in relation to the legal qualification of the automatic execution of trade signals. This current supervisory briefing takes into account this Q&A and sets out supervisory expectations with regard to its application as well as to the compliance with respective MiFID II requirements applicable to firms that provide copy trading services. The supervisory briefing sets out the supervisory expectations of both ESMA and National Competent Authorities (NCAs) in order to ensure effective and consistent application of the requirements, and hence to foster convergence in supervisory outcomes. The briefing also includes indicative questions that supervisors could ask themselves, or firms, when assessing firms’ approaches to the application of the relevant MiFID II rules.
In terms of next steps, ESMA and NCAs said that they will continue monitoring the development on this topic and may therefore undertake other steps in the future to assure that copy trading is provided in a manner that is consistent with the applicable MiFID II requirements and that investment services continue being provided in the best interest of the client.
The full ESMA briefing on copy trading can be seen here (pdf).