The International Organization of Securities Commissions (IOSCO) published a final report on pre-hedging that sets a proposed definition of the practice and guidance-style recommendations for IOSCO members considering new rules or adjustments to existing regimes. The report is intended to support more consistent interpretation of pre-hedging across jurisdictions and to improve clarity for dealers and other wholesale market participants, while noting that IOSCO reports are not legally binding and are ancillary to each jurisdiction’s market abuse framework. For IOSCO’s purposes, pre-hedging is trading by a dealer acting as principal, executed in the same or related instruments after receiving information about one or more anticipated client transactions but before the client has agreed terms and or irrevocably accepted an executable quote, undertaken for risk management and with the intention of benefiting the client. The recommendations for dealers cover both use of pre-hedging and conduct risk controls, including limiting activity to risk management purposes, acting with intent to benefit the client, treating clients fairly and honestly, and seeking to minimize market impact while maintaining market integrity. Governance expectations include documented policies and controls, clear upfront disclosures of pre-hedging practices, seeking prior client consent at the outset of the relationship with a process to modify or revoke consent, supervisory and compliance arrangements including trade and communications monitoring, controls to protect confidential client information and manage conflicts of interest, and recordkeeping sufficient to support oversight, monitoring, and surveillance. IOSCO member jurisdictions decide whether and how to apply the definition and recommendations, and the report notes that some industry standard-setting bodies indicated they may review aspects of their standards following publication.

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