IOSCO publishes Final Report on Pre-Hedging

On 3 November 2025, the International Organization of Securities Commissions (“IOSCO”) published its Final Report on Pre-Hedging, seeking to facilitate greater consistency and clarity around the practice and promote a level playing field for market participants across jurisdictions, asset classes and execution types. In this article, we discuss IOSCO’s final proposals, highlighting how they have evolved over the course of the consultation process, including the subtle changes in emphasis, and where they align with existing codes.

Pre-hedging is the well-established practice by which dealers in certain markets look to hedge their exposure to anticipated client orders for a number of reasons, including to enable the dealer to take on the risk of the client order once confirmed, and to offer a competitive price. Pre-hedging is already addressed in existing codes, standards and good practices, in particular, the FX Global Code, the Global Precious Metals Code and the Standard for the execution of Large Trades in FICC markets (collectively, “the Codes”). There are different and often strongly held views in the market on the practice, including its impact on the prices that other market participants may receive as a result, as well as whether further guidance is necessary.

The report sets out IOSCO’s proposed definition of pre-hedging to encourage consistent interpretation among its member jurisdictions, together with recommendations relating to pre-hedging practices and the management of associated conduct risks. It will be up to IOSCO member organisations (including the European Commission, the European Securities and Markets Authority (“ESMA”) and the United Kingdom Financial Conduct Authority (“FCA”)) to decide whether and how to adopt the definition and recommendations in their respective jurisdictions.   

This long awaited report follows on from IOSCO’s (delayed) November 2024 consultation on pre-hedging, which we discussed in an earlier article, including the history of the various ESMA initiatives on pre-hedging.

Definition of pre-hedging (shown in mark-up)

Drawing on extensive stakeholder feedback and engagement, IOSCO has more closely aligned its definition of pre-hedging with existing definitions used in the existing Codes.

IOSCO’s final definition includes a number of elements (with deletions and additions as from the consulted on text struck through or italicised, as applicable):

“Pre-hedging is trading undertaken by a dealer, in compliance with applicable laws and rules, including those governing frontrunning, trading on material non-public information/insider dealing, and/or manipulative trading: where:

1. the dealer is dealing on its own account in a principal capacity; and
2. the trades are executed in the same or related instruments after the receipt of information about one or more an anticipated client transactions and before the client (or an intermediary on the client’s behalf) has agreed on the terms of the transaction(s) and/or irrevocably accepted the executable quote(s); and
3. the trades are executed to manage risk related to the anticipated client transaction(s); and
4. the trades are executed with the intention of benefiting the client [with “client” in this context including a counterparty and does not give rise to any agency relationship or fiduciary duty].”

This marks a slight shift from IOSCO’s originally proposed definition, as follows:

• the final definition explicitly requires that such pre-hedging trades be executed with the intention of benefiting the client;
• the reference to pre-hedging being carried out in compliance with applicable laws and rules etc. has been removed, given there is no consistent approach to the regulation of pre-hedging, with some jurisdictions not maintaining specific rules or guidance on the practice; and
• IOSCO has made it explicit that in order for trading to qualify as pre-hedging, trades should be executed in the same or related instruments to the anticipated client transaction, and may relate to more than one anticipated client transaction.

Recommendations (shown in mark-up)

IOSCO has made the following recommendations for the use of pre-hedging (with deletions and additions as from the consulted on text struck through or italicised, as applicable):

• Recommendation A1 – Dealers should undertake pre-hedging only for a genuine risk management purpose associated with one or more anticipated client transactions. Factors dealers may consider include but are not limited to: (i) having a legitimate expectation of a client transaction; (ii) the size and nature of the anticipated transaction; and (iii) available liquidity.
• Recommendation A2 – Dealers should (i) act fairly and honestly to clients and (ii) undertake pre-hedging only with the intention of benefiting the client. Note that the deletion here is not consequential, as the obligation to act fairly and honestly has been preserved as a standalone recommendation (see below). IOSCO notes that client benefit goes beyond dealing price and includes factors such as execution speed, expected market impact, trade size and liquidity, other contractual provisions and fair treatment. This will need to be balanced against other responsibilities when pre-hedging, including providing liquidity to counterparties and broader risk management.
• Recommendation A3 – Dealers should act fairly and honestly with clients when pre-hedging. The reference to “honesty” goes beyond the position in the Codes, though IOSCO reports that consultation respondents were in agreement with the inclusion of this reference. IOSCO notes that the conduct of dealers may be subject to jurisdictional laws and regulations that require the dealer to act fairly and honestly.
• Recommendation A4 – Dealers should (i) seek to minimise market impact and (ii) should maintain market integrity when pre-hedging. While existing codes and standards already reflect this expectation, IOSCO highlights the fact that dealers should also consider whether unwinding pre-hedges where an anticipated client transaction does not occur could harm market integrity.

IOSCO has also made the following recommendations on the arrangements that dealers should have in place to manage conduct risk that arises from pre-hedging (with deletions and additions as from the consulted on text struck through or italicised, as applicable):

• Recommendation B1 – The dealer Dealers should document and implement appropriate policies, procedures and controls for pre-hedging. A firm’s policies and procedures may already address market abuse and supervisory oversight for pre-hedging, as well as potential pre-hedging conduct risks arising from dealers’ business activities. Those related to pre-hedging could include identifying, assessing and managing conduct risks and mapping them to internal controls, establishing information barriers, monitoring and surveilling trading and communications, handling client complaints, ensuring governance and oversight, and training staff on the firm’s pre‑hedging requirements.
• Recommendation B2 – The dealer Dealers should provide clear disclosure to clients of the dealer’s pre-hedging practices. Communication should be tailored to the relevant trading environment, market and asset classes, and in advance of undertaking any transactions that may be pre-hedged. Disclosures may cover that pre‑hedging can occur, how clients can modify or revoke consent, the potential market impact, and the possible effects on quotes. IOSCO recognised that trade-by-trade disclosure may not be possible (e.g. in relation to electronic/automated trading), but recommends that dealers should consider when trade‑by‑trade disclosure is feasible and appropriate and how promptly to respond to post‑trade disclosure requests.
• Recommendation B3 – The dealer Dealers should (i) seek to receive obtain 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. This is an important area where the recommendations go beyond the Codes, which do not directly mention obtaining consent. IOSCO has toned down the recommendation here, recognising that prior consent may not be feasible (e.g. client-dealer relationships initiated prior to the publication of IOSCO’s final report). IOSCO advises dealers to consider informing clients about their use of pre-hedging and consent revocation/modification when practicable and through periodic disclosure updates.
• Recommendation B4 – Dealers 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. IOSCO has recognised that these arrangements do not need to be stand alone and may be incorporated into firms’ existing compliance arrangements. Drawing on Principle 11 to the FX Global Code, arrangements could include reviewing pre‑hedging activity and managing conflicts of interest; raising awareness and providing training on pre‑hedging policies; and implementing oversight capable of detecting whether pre‑hedging is undertaken for legitimate risk‑management purposes and is designed to benefit the client.
• Recommendation B5 – Dealers 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. For example, information barriers prevent inappropriate sharing of, or unauthorised access to, confidential client information arising from client enquiries and/or resulting pre-hedging activity. In addition, dealers should maintain policies and procedures setting out internal processes to manage conflicts of interest across their businesses, including those related to pre-hedging, and to prevent the misuse of confidential client information.
• Recommendation B6 – The dealer Dealers should maintain adequate records of pre-hedging, including for pre-hedging, to facilitate supervisory oversight, monitoring, and surveillance. Similarly, as above, IOSCO has recognised that dealers may not need to create stand alone record keeping practices if their current record keeping practices sufficiently support this.

Commentary and next steps

As discussed in our earlier article on this topic, ESMA had previously noted that global regulatory principles, if established, could contribute to the development of any future ESMA guidance. It remains to be seen whether ESMA will continue with its previous initiative in this respect, which had been contentious in some respects. The IOSCO Final Report has been helpful in airing various views in the market and seeking to align its definition and recommendations with the existing Codes in many respects.

While the FCA has not yet indicated that it will produce specific guidance on pre-hedging, firms should continue to monitor FCA publications or statements for anything that may follow the report. The FCA has contributed to and been involved in IOSCO’s work in this area and so it might be expected to adopt a similar approach, were it deemed necessary to publish further guidance.

Firms may wish to actively review and update policies, procedures, and controls for pre-hedging to in light of the IOSCO guidance, including, for example, in relation to client disclosures and consents.

If you have any questions about the changes and how these are likely to impact your firm, please get in touch with the key contacts listed or your usual contacts at CMS, who would be happy to discuss these considerations in more detail.