On 6 May 2021, the FICC Markets Standards Board (FMSB) issued a final standard setting out expected behaviours for the execution of large trades by participants in the wholesale fixed income, currencies and commodities (FICC) markets. The standard applies to participants in the wholesale FICC markets in Europe, subject to any applicable local regulatory restrictions, but market participants may elect to apply the standard in other jurisdictions.

The standard contains 10 core principles, which include:

  • dealers should communicate to clients that the trade may be large in the relevant market;
  • clients should communicate in a transparent manner that is clear, accurate and not misleading;
  • dealers should not disclose the details of large trades to other market participants unless necessary to give effect to the clients’ instructions; and
  • consideration of the circumstances in which pre-hedging may be undertaken and the expected behaviours of market participants when pre-hedging large trades.

The application of these core principles differs depending on whether a market participant is acting as an agent or a principal.

In respect of pre-hedging, the standard sets out that when a dealer is acting as an agent, pre-hedging is never permitted in the relevant market.

For principal transactions, the standard sets out that pre-hedging should only be undertaken where:

  • the dealer legitimately expects to take on market risk and the pre-hedging is undertaken at the dealer’s own risk;
  • the trading activity is reasonable relative to the size and nature of the anticipated transaction;
  • it aims to minimise the impact of the activity on the market; and
  • it is designed to benefit the client and not executed in a manner that is meant to disadvantage the client.