IOSCO finalises guidance on pre-hedging

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. 

Read our briefing note for further detail on the guidance.