On 12 July 2023, the European Securities and Markets Authority (ESMA) published a report on the call for evidence on pre-hedging.

The practice of pre-hedging is not defined in EU law. Market participants understand pre-hedging as a practice which takes place when liquidity providers aim to hedge their inventory risk in an anticipatory manner.

In its final report on the review of the Market Abuse Regulation ESMA noted that based on stakeholders’ feedback there were fundamentally diverging opinions on pre-hedging. In light of this it was deemed necessary to conduct a further analysis and a call for evidence was launched in July 2022.

In the report now published, ESMA provides an overview of the feedback received to its call for evidence and identifies elements which could be considered in future guidance.

The report concludes that, pre-hedging is a voluntary market practice which might give rise to conflicts of interest or abusive behaviours. Whilst ESMA does not find arguments to ban this practice at this stage, it also flags that these risks should be considered when issuing any future guidance.

Going forward, given the feedback received and the issues raised, ESMA believes that global regulatory principles applicable to pre-hedging could be beneficial in fostering a common regulatory approach to this practice. Furthermore, those principles could serve as a basis for the development of any future ESMA guidance.