The International Organization of Securities Commissions (IOSCO) is consulting on its recommendations relating to pre-hedging practices. Pre-hedging is used by dealers to manage risks associated with anticipated wholesale principal orders in relation to primary market offerings and secondary market transactions.
This can occur across various markets, including securities and derivatives, on trading venues and over the counter (OTC) markets. It encompasses a range of asset classes such as equities, fixed income, currencies and commodities.
The report offers a definition of pre-hedging and proposes a set of recommendations to guide regulators in determining acceptable pre-hedging practices and managing the associated conduct risks effectively.
There can be benefits from the use of pre-hedging for dealers and clients to price and execute certain transactions. However, various market participants, standard setters and national and supra-national authorities have raised potential concerns about pre-hedging practices.
Jean-Paul Servais, chair of IOSCO and chair of the Belgium Financial Services & Markets Authority (FSMA), said in a statement: “Last year, IOSCO’s Board approved a mandate to assess vulnerabilities in pre-hedging practices. This consultation report reflects our commitment to understanding existing regulatory frameworks and identifying gaps in international standards.”
Existing industry codes and standards relating to pre-hedging mostly target OTC markets and/or only specific asset classes, or do not cover the range of potential issues related to pre-hedging.
James Andronis, chair of IOSCO’s Committee on Regulation of Market Intermediaries (C3), said in a statement: “In preparing this consultation report, we have taken the time to carefully consider our members’ existing regulatory approaches and existing industry codes. We believe the proposed Recommendations will assist to promote greater consistency and good conduct in pre-hedging in the interest of market integrity and market participants.”
In addition, there’s consideration on whether the proposed recommendations need to be adapted to specific circumstances, e.g. in relation to potential differences of pre-hedging practices and internal non-electronic transactions and in the context of electronic trading, including competitive requests for quotes (RFQs).