Pre-hedging refers to the practice where dealers, acting as principals, engage in trading activities to manage their own risk in anticipation of a potential client transaction, such as following a request for quote (RFQ), but before the client has irrevocably committed to the deal. This can occur in various asset classes, including fixed income, FX, and derivatives, and aims to mitigate inventory risks that might arise if the trade is executed, potentially leading to tighter pricing and better execution for clients in illiquid markets. However, it raises significant policy concerns, as improper use could resemble front-running, adversely impact market prices, or disadvantage clients through unintended information leakage or conflicts of interest.

From the buy-side perspective, as represented by EFAMA, pre-hedging should adhere to strict high-level principles: it must serve a genuine risk management purpose with a legitimate expectation of the transaction (typically limited to bilateral OTC deals, excluding competitive RFQs); be proportionate without over-hedging; prioritize client benefit by minimizing market impact and ensuring no profit at the client's expense; and incorporate robust transparency through disclosures and client consent mechanisms, allowing clients to opt out on a trade-by-trade basis.

This issue has drawn attention from regulators at multiple levels, including the European Securities and Markets Authority (ESMA) through its 2022 Call for Evidence and the International Organization of Securities Commissions (IOSCO) via its 2024 consultation, where EFAMA has actively contributed to foster balanced, client-protective frameworks.