The European Securities and Markets Authority (ESMA), the EU’s securities markets regulator, today published a Call for Evidence on pre-hedging. The aim is to promote discussion among stakeholders and gather further evidence on the practice of pre-hedging that could help ESMA to develop appropriate guidance.

In the course of its MAR Review, ESMA had made market participants aware that some national competent authorities (NCAs) had received suspicious transactions and order reports (STOR) on pre-hedging behaviour, a practice that is not defined in EU law. Mixed views were expressed on the usefulness of pre-hedging and the risks associated with this practice.

ESMA had described that, on the one hand, pre-hedging involves a risk management aspect, as it takes place when a dealer acting as principal undertakes a trade in anticipation of a client order in order to manage the risk associated with a possible trade stemming from that order. On the other hand, pre-hedging may fall within the scope of insider trading if a broker were to use the information received from the client to make trades for his own account, including potentially trades against the client.

Several market participants asked ESMA to issue guidance on what should be considered as MAR-compliant in terms of pre-hedging and what behaviour might constitute front-running. Guidance was also requested on procedural aspects of pre-hedging, such as the documentation required, transparency regarding pre-hedging arrangements by brokers to their clients, and internal policies of market makers.

In the final report (FR) on the MAR Review, ESMA acknowledged that there are fundamentally different views on pre-hedging. As a follow-up to the MAR Review, ESMA is therefore undertaking an analysis of that practice in the market.

The purpose of this call for evidence (CFE) is to promote discussion among stakeholders in order to gather further evidence on the practice of pre-hedging that could help ESMA to develop appropriate guidance.

Stakeholders – investment firms, credit institutions, proprietary traders, market makers, asset management companies and any other market participants including trade associations and industry bodies, institutional and retail investors, consultants, and academics – are invited to submit their responses by 30 September 2022.