The European Securities and Markets Authority (ESMA), the EU’s financial markets regulator and supervisor, has issued today a Public Statement addressing investor protection concerns raised by derivatives on fractions of shares.
The statement highlights that derivatives on fractions of shares are not corporate shares, and therefore firms should not use the term fractional shares when referring to these instruments. Additionally, in line with the obligation to make clients reasonably able to understand the nature and risks of the specific type of financial instrument, firms should make clear to the investor that they are buying a derivative instrument.
The statement also reminds firms that:
All information provided to clients on these instruments shall be fair, clear, and not misleading and that firms must clearly disclosed all direct and indirect costs and charges relating to them;
As derivatives, these instruments are complex products, and this is expected to result in a narrow target market of clients; and
As derivatives are complex financial instruments, an appropriateness assessment needs to be carried out where non-advised services are provided.
