European regulator backtracks on pre-hedging ban but warns of risks

ESMA decision

The European Securities and Markets Authority (ESMA) has concluded there is no case to ban pre-hedging “at this stage”, but has flagged its risks and called for a common approach to its regulation.

Pre-hedging, which ESMA described as "a voluntary market practice which might give rise to conflicts of interest or abusive behaviours", takes place when liquidity providers aim to hedge their inventory risk in an anticipatory manner.   As an example, a liquidity provider expecting an order from a client may want to hedge the expected future risk arising from filling that order. To that goal, the liquidity provider undertakes one or several transactions to hedge the order before it is received. Industry welcomes Mansion House short selling and investment research reforms ESMA's vie...