The International Organization of Securities Commissions (IOSCO) has published a final report providing guidance on pre-hedging (FR/14/25). Pre-hedging is a practice used by dealers to manage the risk of anticipated primary principal market offerings and secondary market transactions, mainly in wholesale markets. While pre-hedging can offer benefits such as enabling price discovery, reducing market risk and market impact, assisting liquidity, and improving competition, IOSCO notes that certain practices pose potential risks including in relation to misuse of information, inability to understand risks, lack of transparency and adverse impact on price and liquidity. The report defines pre-hedging and reviews existing regulatory approaches and industry standards. It identifies potential issues and gaps in current industry practices and regulation and aims to promote consistent interpretation across jurisdictions. IOSCO also sets out recommendations to guide regulators in determining acceptable pre-hedging practices and managing the associated conduct risks effectively. Additionally, a dedicated chapter summarises feedback from its earlier consultation on pre-hedging.
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