FIA EPTA supports the recommendations IOSCO has made in its consultation report on pre-hedging. The association agrees that a genuine risk management rationale is a key factor in determining whether pre-hedging is acceptable. FIA EPTA also agrees with the factors dealers should consider when determining whether there is a genuine risk management purpose.
The question of whether a dealer legitimately expects a client transaction is fundamental to determining whether there is a genuine risk management purpose. In a competitive RFQ market, FIA EPTA believes it is either impossible or highly unlikely for a dealer to be sufficiently certain that they will win the trade. Therefore, the presumption in such markets should be that such a genuine risk management rationale is not present.
FIA EPTA recommends that IOSCO makes clear in its guidance that pre-hedging is not acceptable where a dealer lacks a genuine risk management rationale, regardless of whether the other factors are satisfied.
In addition, trade-by-trade disclosure and consent from a counterparty are fundamental to whether pre-hedging is considered acceptable. In the event that a dealer has a legitimate risk management rationale for undertaking pre-hedging in a competitive RFQ scenario, FIA EPTA believes it is of fundamental importance that a dealer provides disclosure on a trade-by-trade basis to the counterparty, who must consent to pre-hedging being undertaken by the dealer.
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