Key points
- ASIC has published a letter to market intermediary CEOs setting out its guidance regarding pre-hedging practices in Australia.
- ASIC is concerned with how differences in market intermediaries' approach to pre-hedging can disrupt fair competition and the effective functioning of markets.
- Market intermediaries should always carefully consider their obligations under Australian law and applicable international codes and standards when undertaking pre-hedging.
Pre-hedging practices in Australia
Pre-hedging is a practice that occurs in financial markets and can help the effective functioning of markets by facilitating trades that could otherwise significantly impact market pricing.
ASIC acknowledges that pre-hedging has a role in markets, including in the management of market intermediaries' risk associated with anticipated client orders and may assist in liquidity provision and execution for clients. However, it can also create significant conflicts of interest between a client and the market intermediary which actively trades in possession of confidential information about the client's anticipated order or trade.
Market intermediaries need to manage confidential client information very carefully and have robust, closely monitored and frequently tested arrangements for ensuring conflicts of interest are appropriately managed and in compliance with the Corporations Act 2001.
ASIC has also observed a wide range of pre-hedging practices in the Australian market, with some falling significantly short of its expectations. Differences in pre-hedging practices can disrupt fair competition and the effective functioning of markets.
Raising and harmonising minimum standards of conduct is a key focus of ASIC and an increasing focus among international regulators and standard setters, including the International Organization of Securities Commissions (IOSCO), the European Securities and Markets Authority (ESMA), the Financial Markets Standards Board (FMSB), and the FX Global Code.
If pre-hedging is not carried out in an appropriate manner it can be unfair, unconscionable and result in poor client outcomes. This may adversely impact investor confidence and undermine market integrity.
ASIC encourages market intermediaries to carefully consider the guidance set out in the letter below.
