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The International Organisation of Securities Commissions (IOSCO) has issued its final report on pre-hedging setting out its understanding of pre-hedging and associated risks, together with a definition to promote a consistent interpretation across jurisdictions and presenting high-level recommendations intended to guide regulators and market participants. IOSCO explains that the recommendations are intended to be flexible, based on the specific market circumstances and legal framework in each jurisdiction and are to complement existing rules. It will be up to individual jurisdictions to decide whether and how to apply the definition and IOSCO guidance, as the IOSCO report is not legally binding.
The final report seeks to align IOSCO’s guidance more closely with existing codes and standards which will be familiar to firms engaged in pre-hedging. The report also acknowledges more prominently the benefits of pre-hedging and its role in a wide range of nuanced scenarios. Notably, IOSCO has decided not to include detailed and potentially prescriptive commentary on acceptable pre-hedging practices in its final report (having explored detailed consultation questions on topics such upper limits for pre-hedging amounts, prescribed content for upfront disclosures, or the need to share financial benefits from pre-hedging with clients).
However, IOSCO’s recommendations (particularly those on how to manage conduct risks from pre-hedging) provide a useful touch point for dealers to revisit their systems and potentially strengthen these, given that any supervision or enforcement in this space will look at practices and processes with the benefit of hindsight.
Diverse market views
Pre-hedging is used by liquidity providers in different asset classes - trading on-venue or OTC - to manage the risk of anticipated orders. Following discussions in recent years about the benefits and potential concerns around pre-hedging practices, IOSCO consulted on its report in November 2024 (read our earlier blog post and client note for further detail). Whilst the responses showed a commonality of understanding of pre-hedging issues they also demonstrate a range of divergent opinions from different market segments on certain key issues, most notably regarding the circumstances where pre-hedging may be appropriate, what should be disclosed to clients about pre-hedging, when and how informed client consent should be obtained, record keeping requirements and competitive ‘requests for quotes’ (RFQ) scenarios.
Definition of “pre-hedging”
IOSCO has amended its definition of pre-hedging to align it more closely with existing industry codes and standards (such as the FX Global Code, the Global Precious Metals Code and the Financial Markets Standards Board Standard on Large Trades) by including references to reflect that pre-hedging should be undertaken to manage the risk related to one or more anticipated client transactions ‘with the intention to benefit the client’.
The reference to “compliance with applicable laws and rules, including those governing frontrunning, trading on material non-public information/insider dealing, and/or manipulative trading” has been removed from the definition as this is already implied and hence redundant.
A table comparing IOSCO’s definition with existing codes and standards is provided in the report as follows:
| IOSCO definition | FX Global Code | Global Precious Metals Code | FMSB Standard Large Trades |
| Pre-hedging is trading undertaken by a dealer where: | Principle 11: Pre Hedging is the management of the risk | 5.6.1: Pre-Hedging is the management of the risk
| Core Principle 7: Pre-hedging is the management of the risk |
| • the dealer is dealing on its own account in a principal capacity; and | Principle 11: When a Market Participant is acting as an Agent, the Market Participant should not Pre-Hedge. | PTE Principle 6 – A Market Participant should only Pre-Hedge Client orders when acting as a principal | Core Principle 7: (i) the pre hedging is undertaken at the dealer’s own risk; |
| • the trades are executed in the same or related instruments after the receipt of information about one or more anticipated client transactions and before the client has agreed on the terms of the transaction(s) and/or irrevocably accepted the executable quote(s); and | |||
| • the trades are executed to manage the risk related to the anticipated client transaction(s); and | Principle 11: (…) the management of the risk associated with one or more anticipated Client orders | 5.6.1: (…) the management of the risk associated with one or more anticipated Client orders | Core Principle 7: (…) the management of the risk associated with one or more anticipated Client orders |
| • the trades are executed with the intention of benefitting the client. | Principle 11: (…) designed to benefit the Client | 5.6.1: (…) designed to benefit the Client | Core Principle 7: (iv) it is designed to benefit the client |
IOSCO recommendations
IOSCO’s recommendations are intended to guide pre-hedging practices across all asset classes, execution types and transaction sizes. They are significantly less prescriptive than they might have been, particularly given the specific questions IOSCO was asking in its consultation, some of which were not reflected in the final report, such as whether pre-hedging should be acceptable in respect of orders in liquid instruments, and whether pre-hedging is genuinely needed for small trades in liquid markets. This less prescriptive approach will be welcome news to market participants that undertake pre-hedging. But, as ever, regulators will judge practices and intentions with the benefit of hindsight.
A summary of the key amendments to the recommendations is set out below together with commentary to help “facilitate…understanding” of the recommendations:
| Recommendation (indicating changes from the IOSCO consultation) | Commentary |
| A. Cumulative recommendations relating to pre-hedging | |
A1: Dealers should undertake pre-hedging only for a genuine risk management purpose associated with one or more anticipated client transactions.
| Factors to consider include a legitimate expectation of the client transaction (for which factors may include whether there are competitive quotes, or past dealing history with the particular client); the size and nature of anticipated trade; and available liquidity. |
| A2: Dealers should (i) act fairly and honestly to client, and (ii) undertake pre-hedging only with the intention to of benefiting the client. | Benefits to the client go beyond price (including speed of execution, trade size / liquidity, expected market impact). IOSCO acknowledges the need for dealers to balance other responsibilities (such as providing liquidity to other counterparties). |
A3: Dealers should act fairly and honestly with clients when pre-hedging.
| Dealers should look to existing laws and regulations (and existing codes and standards) in respect of this recommendation. |
A4: Dealers should seek to minimize market impact and should maintain market integrity when pre-hedging.
| Dealers should consider the closing out of positions taken when pre-hedging (and potential market impacts of this) if the anticipated transaction does not occur. |
| B. Recommendations for managing conduct risk from pre-hedging | |
B1: The dDealers should document and implement appropriate policies, and procedures and controls for pre-hedging.
| Existing policies may address pre-hedging conduct risks, but IOSCO lists specific aspects (such as identification / mapping of risks, information barriers, monitoring, complaints processes, governance / oversight, training). |
B2: The dDealers should provide clear disclosure to clients of the dealer’s pre-hedging practices.
| Disclosures should be in advance but do not necessarily have to be provided on a trade-by-trade basis (with IOSCO noting that dealers could consider when trade-by-trade disclosures may be appropriate). IOSCO has not prescribed disclosure content. Rather than mandating post-trade disclosures, IOSCO has suggested post-trade disclosures on client request. |
| B3: The dDealers should (i) seek to receive prior consent to pre-hedge from the client at the outset of the relationship, and (ii) give the client a clear process to modify or revoke that consent at any time with reasonable notice. | Prior consent is not always possible (but dealers should consider informing clients of pre-hedging practices when practicable and in periodic disclosure updates). There should be a process for clients to withdraw their consent to a dealer’s use of pre-hedging practices. |
| B4: The dDealers should implement have appropriate compliance and supervisory arrangements for that also cover pre-hedging, including: (i) supervisory systems and reviews and (ii) trade and communications monitoring and surveillance. | There should be compliance and supervisory arrangements related to pre-hedging activities (with IOSCO highlighting what these could include). But there is no need for standalone compliance / supervisory arrangement for pre-hedging (i.e. these could be incorporated into conflicts / market abuse arrangements). |
| B5: The dDealers should appropriately manage access to, and prohibit misuse of, confidential client information and adequately manage any conflict of interest, including those that may arise in relation to pre-hedging. Dealers should consider establishing, monitoring, and regularly reviewing appropriate physical and electronic information controls to align with changes to the dealer’s business risk profile. | IOSCO expressly acknowledges existing conflicts of interest policies / procedures here, which could be leveraged also to address risks of misuse of client information and conflicts of interest risks related to pre-hedging.
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| B6: The dDealers should maintain adequate records, including for of pre-hedging, to facilitate supervisory oversight, monitoring, and surveillance | IOSCO notes that dealers may not need to create standalone recordkeeping practices for pre-hedging, as long as recordkeeping supports oversight, monitoring and surveillance of pre-hedging actiivty. |
The above commentary is expressly not prescriptive on some issues previously highlighted in the IOSCO consultation, such as:
Implications for market participants
To what extent IOSCO’s report will inform local guidance and rules remains to be seen. In 2023, ESMA indicated that international standards might inform its future guidance in this area. Either way, the IOSCO report will be impactful, and relevant to firms that employ pre-hedging practices.
Dealers that engage in pre-hedging activity will welcome the fact that IOSCO’s final report more clearly highlights the benefits of pre-hedging, the wide range of circumstances when it may be used, and the fact that indicators of whether and when the practice is acceptable are therefore extremely nuanced. IOSCO’s decision to shy away from prescriptive factors and commentary will also be welcome.
However, as ever, regulators will be assessing pre-hedging activity with the benefit of hindsight. With that in mind, IOSCO’s report (even if not ultimately reflected through local regulators adapting their own rules or guidance) provides an opportunity for dealers engaged in pre-hedging activity to re-assess the strength of their existing systems. Key takeaways, in particular from IOSCO’s B recommendations (on managing conduct risks from pre-hedging) which firms may wish to consider include:
IOSCO’s final report published on 3 November 2025 is available here.
Our client note on ESMA’s 2022 call for evidence on pre-hedging is available here, and our client note on ESMA’s 2023 final report and feedback statement is here.
Our client note on the FMSB’s 2024 Spotlight Review on pre-hedging is available here.
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