ESMA Public Statement on derivatives on fractions of shares


On 28 March 2023, the European Securities and Markets Authority (ESMA) published a Public Statement on derivatives on fractions of shares. Fractional share trading has risen in popularity in the UK and European markets in recent years, enabling retail investors to get direct exposure to tech companies and other issuers whose shares may be relatively expensive and which have traditionally been more frequently accessed indirectly through mutual funds. This exposure can be achieved through a trust-based or “co-ownership” model, under which multiple clients each have a beneficial claim over a given fraction of a pool of shares held in an omnibus client account. Alternatively, the exposure can be provided through a derivative, under which each client is entitled to a payment flow, which is designed to imitate ownership of a given fraction of an underlying share. The governing law and jurisdiction in which an investment is manufactured and marketed is likely to have a bearing on how it is structured.

The Statement is focused on the application of the MiFID II investor protection framework to derivative structures in the European Union. Critically, ESMA considers that derivatives on fractions of shares should not be marketed as “fractional shares”, given the investor is investing in a derivative instrument, as opposed to actually acquiring a fraction of the underlying share. ESMA also reminds firms that all direct and indirect costs and charges must be disclosed, including any structuring costs, and that for product governance and appropriateness purposes, derivatives should be treated as complex financial instruments. ESMA also notes that derivatives on fractions of shares may be subject to the requirements of the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation (including the requirement to provide a Key Information Document). ESMA does not comment in any detail on co-ownership structures, but notes that other structures also raise “some investor protection concerns and […] some of the clarifications given in [the Statement] may also be relevant for such structures”.

In the UK, in our experience the majority of fractional share offerings are structured as trust-based structures, rather than through the use of derivatives. The FCA has so far not made any public statements on fractional share offerings and has allowed the market to develop within the existing investor protection framework, which includes robust client asset controls, which equally apply to fractional share trust-based structures. Similarly, HMRC has not publicly clarified its position on the eligibility of fractions of shares for inclusion in an Individual Savings Account. However, firms offering, or considering offering, fractional shares may wish to consider the key messages in ESMA’s Statement and any read-across to the UK market. In addition, as part of ongoing Consumer Duty implementation, UK firms will be considering what enhancements may be necessary to existing policies and procedures, including in relation to fractional shares. We have advised many of the market leaders on establishing their fractional share offerings and would be happy to discuss the Statement in more detail.