Industry Bodies Respond on IOSCO Pre-Hedging Consultation

Three industry associations have published their responses to IOSCO’s consultation on pre-hedging in markets, and it is notable that even within these, there remain differences of opinion as to the merits of the practice.

In its response, ACI – the Financial Markets Association highlights how pre-hedging “is an important tool for financial markets and can be beneficial to clients, dealers and market integrity when conducted ethically, with appropriate full disclosure, for risk management purposes, and in a manner that is not meant to disadvantage the client”.

Meanwhile, ISDA and FIA, in a joint response, observe, “We agree that compliance with all applicable rules and regulations is essential for appropriate pre-hedging activity.”

The associations’ response also highlights one of the big challenges facing IOSCO in its efforts to clarify good practice around pre-hedging, however, where they note,  “Within applicable rules and regulations, our members have a variety of views on pre-hedging – many view it as essential for risk management and market liquidity while others have objections to it.”

The two bodies agree with ACI that appropriate disclosure and transparency are key for clients to understand liquidity providers’ approach to pre-hedging – they also stress how these principles are enshrined in existing industry codes of conduct and that transactions should be structured accordingly.

ISDA and FIA also highlight in their response, the importance of not cutting across these industry codes, most notably, the FX Global Code, the Precious Metal Code and the FSMB Standard for Large Trades. “Market participants have policies, procedures and institutional frameworks in place to comply with these global codes and, in many cases, such compliance is monitored by local supervisors,” the two bodies conclude.