MVA White Collar Defense, Investigations, and Regulatory Advice Blog

On November 3, 2025, IOSCO released its anticipated Pre-Hedging Final Report (“Final Report”) detailing its assessment of current pre-hedging market practices and setting out recommended guidance for International Organization of Securities Commissions’ (“IOSCO”) members. The intended purpose of the Final Report is “to facilitate greater consistency and clarity around pre-hedging, and to promote a level playing field for all participants across jurisdictions, asset classes and execution types.” IOSCO initiated its multi-step assessment process in June 2023. IOSCO is the international body that brings together markets regulators to establish standards and provide guidance to its members. Both the U.S. Securities Exchange Commission and the U.S. Commodity Futures Trading Commission are members and sit on the IOSCO board.

The Final Report is broken out into four chapters covering: (1) the existing rules and regulatory guidance, (2) stakeholder engagement undertaken by IOSCO, (3) the definition of pre-hedging and IOSCO’s recommendations, and (4) a summary of the feedback received.[1]

IOSCO’s Final Report defines pre-hedging as trading undertaken by a dealer where:

1. The dealer is dealing on its own account in a principal capacity;
2. 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);
3. The trades are executed to manage the risk related to the anticipated client transaction(s); and
4. The trades are executed with the intention of benefiting the client.

IOSCO weighs both the potential rewards of pre-hedging (e.g., price discovery, reducing market risk and market impact, assisting liquidity, and improved competition) and the potential risks (e.g., misuse of information, lack of clarity surrounding risks, costs, and benefits, and impact of price and liquidity) in making recommendations grouped into four overarching categories, which are summarized in more detail under Chapter 3 below. Those categories are:

1. The circumstances where pre-hedging may be appropriate;
2. How to provide effective disclosures and transparency about pre-hedging to clients;
3. How and when to obtain informed client consent on pre-hedging; and
4. Record keeping requirements to distinguish pre-hedging from inventory management.

Chapter 1: Existing Rules and Regulatory Guidance

The report provides that in most member jurisdictions, members rely on regulations that protect against market abuse with a “focus on insider dealing, including front running and market manipulation.” As such, many jurisdictions believe improper pre-hedging could result in violating insider trading regulations and be considered market manipulation.

When looking at existing codes and standards, IOSCO first examines the FX Global Code (“FXGC”) and notes that Principle 11 of the FXGC defines pre-hedging as “the management of risk associated with one or more anticipated client orders, undertaken only when acting as a principal and with the intent to benefit the client and facilitate execution, without disadvantaging the client or disrupting the market.”

IOSCO then looks to the Global Precious Metals Code (“GPMC”), which is based on four leading principles – ethics; governance, compliance and risk management; information management; and business conduct. These principles apply across the full trade lifecycle. The GPMC defines pre-hedging as “the management of risk associated with one or more anticipated client orders, designed to benefit the client in connection with such orders and any resulting transaction.”

IOSCO also highlights the FMSB’s “Standard for the execution of Large Trades in FICC markets” (“FMSB Standard”) in the Final Report. The FMSB Standard defines pre-hedging as “the management of risk associated with one or more anticipated client trades, undertaken only where the dealer legitimately expects to take on market risk at its own risk, in quantities reasonable relative to the anticipated transaction, with a clear aim to minimize impact and benefit (not disadvantage) the client.” The FMSB Standard also requires pre-trade disclosure to clients of potential pre-hedging activity and encourages ongoing communication regarding order size and market conditions.

Despite these industry codes and standards, IOSCO recognizes that none of these groups have a mechanism to provide monitoring, oversight, supervision or enforcement to ensure the codes and standards are followed by their participants. The codes and standards also are limited in terms of the scope of products they cover and “do not cover the whole spectrum of issues related to pre-hedging.”

Chapter 2: IOSCO Stakeholder Engagement

To prepare the Final Report, IOSCO undertook significant steps to seek stakeholder engagement, which included surveys and bilateral interactions with regulators, consultations with recommendations, analysis of existing codes and standards to assess their application and gaps, review of open-source materials and academic studies, seven industry outreach events in different regions of the world with buy-side and sell-side participants, meetings with standard setting bodies, engagement with IOSCO’s AMCC, and bilateral meetings with trade associations and firms.

IOSCO’s survey found that:

• Market participants believe pre-hedging is a long-standing and permissible risk management activity;
• Pre-hedging practices vary and are subject to many interpretations and divergent opinions;
• There is strong consensus that pre-hedging should only take place when the dealer acts as principal;
• There are various factors (e.g., notional size, market liquidity, time of day, market conditions, non-market related factors) that dealers consider when determining whether and how to pre-hedge, but there is no clear transaction or quote size;
• Suitability of pre-hedging is not dependent on the asset class, but instead the market factors for the particular transaction; and
• Stakeholders had different views on the circumstances surrounding when to pre-hedge, what disclosures to provide, when and how to get consent and how it can be withdraw, record keeping requirements, and competitive requests for quotes (“RFQs”) as discussed below.

Consultation Feedback on RFQs

Stakeholders voiced concerns about the permissibility of pre-hedging in connection with competitive RFQs without the reasonable assumption that the dealer will win the trade. The specific concern is that if multiple dealers pre-hedge an RFQ, the price and/or liquidity could be adversely affected creating worse execution for the client. Those stakeholders that supported pre-hedging in competitive RFQs argued that the practice allows smaller dealers to carry inventories, thereby promoting competition.

Chapter 3: Definition & Recommendations

Chapter 3 of the Final Report provides IOSCO’s definition of pre-hedging and its practical recommendations for members.

IOSCO defines pre-hedging as trading undertaken by a dealer 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 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
3. The trades are executed to manage the risk related to the anticipated client transaction(s); and
4. The trades are executed with the intention of benefiting the client.

Each element, with the exception of #2, are consistent with the code and standards set out in the FGXC, GPMC and the FMSB Standard, as illustrated in the comparison table included in the Final Report. The industry codes and standards do not require pre-hedge trades to be executed in the same or related instruments (although in theory, a successful pre-hedge may need to be). The industry codes and standards’ silence on the recommendation that the pre-hedge transaction be executed “before the client has agreed on the terms of the transaction(s) and/or irrevocably accepted the executable quote” is reasonably based on the presumption that executing a trade to hedge a transaction after a client irrevocably accepts an executable quote would simply not be “pre-hedging”.

IOSCO sets out the following specific recommendations:

• Recommendation A1 – Dealers should undertake pre-hedging only for risk management purposes associated with one or more anticipated client transactions.
  • IOSCO notes that dealers could consider whether or not they know they are in competition with other dealers, the past dealing history of the client, the competitiveness of the executable quote, the size and nature of the anticipated transaction, and available liquidity.
• Recommendation A2 – Dealers should undertake pre-hedging only with the intention of benefiting the client.
  • IOSCO notes this recommendation goes beyond price and could include factors like speed of execution, expected market impact, trade size and liquidity, other contractual provisions, responsibility to treat the client fairly, and the need to provide liquidity to serve other counterparties and the dealer’s own risk management.
• Recommendation A3 – Dealers should act fairly and honestly with clients when pre-hedging.
  • IOSCO notes that dealers’ conduct in pre-hedging may be subject to jurisdictional laws and regulations that require the dealer to act fairly and honestly.
• Recommendation A4 – Dealers should seek to minimize market impact and should maintain market integrity when pre-hedging.
  • IOSCO notes the importance for dealers to consider whether and how to close out positions of an anticipated pre-hedging strategy where the anticipated client transaction does not occur.
• Recommendation B1 – Dealers should document and implement appropriate policies and procedures and controls for pre-hedging.
  • IOSCO recommends that a firm’s policies and procedures cover (if they do not already), market abuse and pre-hedging conduct risks that arise in a dealers’ business activities. Policies and procedures related to pre-hedging could cover: pre-hedging conduct risks and adherence to relevant standards of behavior, mapping such risks to controls, information barriers, monitoring and surveillance of trading activities and communications, client complaint processes, governance and oversight arrangements, and training on the firm’s policy and procedure requirements for pre-hedging.
• Recommendation B2 – Dealers should provide clear disclosure to clients of their pre-hedging practices.
  • IOSCO recommends that dealers communicate about their pre-hedging practices before undertaking any transactions that may be pre-hedged in a clear way that is not misleading. The communication (i.e., disclosure) should also be relevant to the trading environment, the market and asset class.
  • Pre-hedging disclosures may include: (i) that the dealer may pre-hedge in certain circumstances; (ii) the process a client can use for modifying or revoking consent; (iii) possibility of potential market impact; and (iv) and the possibility that pre-hedging may influence the quote provided to clients, such that a different quote would be provided in the absence of pre-hedging.
  • IOSCO also recommends that dealers consider when trade-by-trade disclosures may be warranted.
• Recommendation B3 – Dealers 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.
  • IOSCO recommends that dealers should consider informing clients of their use of pre-hedging and the process to revoke consent both (1) when practicable, and (2) in their periodic disclosure updates to clients.
• Recommendation B4 – Dealers should have appropriate compliance and supervisory arrangements that also cover pre-hedging, including: (i) supervisory systems and reviews and (ii) trade and communications monitoring and surveillance.
  • IOSCO notes these arrangements could include: reviewing pre-hedging activity and managing conflicts of interest, raising awareness of applicable policies and procedures, and tools that allow dealers to detect whether pre-hedging practices have been (1) conducted for risk management purposes, (2) designed to benefit the client, and (3) executed in a manner to minimize market impact.
• Recommendation B5 – Dealers should appropriately manage access to, and prohibit misuse of, confidential client information and adequately manage any conflicts 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 notes that dealers generally have policies and procedures setting out internal processes to handle conflicts of interest and protect confidential information.
• Recommendation B6 – Dealers should maintain adequate records, including for pre-hedging, to facilitate supervisory oversight, monitoring, and surveillance.
  • IOSCO notes that dealers may not need to create stand-alone recordkeeping practices if their current practices adequately facilitate supervisory oversight, monitoring, and surveillance of pre-hedging activity.

We note that Chapter 3 also provides a table of IOSCO’s recommendations as compared directly to applicable parts of the FXGC, GPMC, and the FSMB Standard.

MVA’s Swaps & Derivatives Team

The Moore & Van Allen (“MVA”) Swaps & Derivatives Team closely follows industry updates and related litigation concerning pre-hedging and has extensive experience advising clients on their policies, procedures, disclosures, and trading practices relating to pre-hedging. Each month, the MVA Swaps & Derivatives Team publishes The Desk newsletter, which provides key Swaps and Derivatives updates and the team’s insights.  If you have any questions regarding pre-hedging or the contents of this client alert, or you are interested in being added to The Desk distribution, please do not hesitate to reach out to the team listed below.

[1] This Client Alert does not summarize Chapter 4, which describes the feedback received on its initial proposals for recommendations.