On 21 November 2024, the International Organization of Securities Commissions (IOSCO) issued a consultation report on pre-hedging.
Definition
For the purposes of the consultation report, IOSCO proposes to define pre-hedging as “trading undertaken by a dealer, in compliance with applicable laws and rules, including those governing frontrunning, trading on material non-public information/insider dealing, and/or manipulative trading where:
- the dealer is dealing on its own account in a principal capacity;
- the trades are executed after the receipt of information about an anticipated client transaction and before the client (or an intermediary on the client’s behalf) has agreed on the terms of the transaction and/or irrevocably accepted an executable quote; and
- the trades are executed to manage the risk related to the anticipated client transaction.”
Consultation report
The consultation report assesses potential conduct and market integrity issues associated with the practice of pre-hedging. It considers IOSCO members’ existing regulatory approaches to pre-hedging and other international standards and identifies any potential issues and gaps in market standards. It also sets out proposed recommendations as guidance for regulators to consider in relation to when pre-hedging may be appropriate and the effective management of conduct risk arising from pre-hedging.
Next steps
The deadline for comments on the consultation report is 21 February 2025.
Following feedback to the consultation report, IOSCO will publish a final set of recommendations. IOSCO members should consider how they wish to apply these recommendations to dealers in their jurisdictions, taking into account their relevant legal and regulatory framework.