What you need to know
- ASIC released Consultation Paper 389, which sets out a proposed regulatory guide on pre-hedging practices by market participants. This draft guidance follows the release of IOSCO's final report on pre-hedging of November 2025, and reflects recent case law in Australia on pre-hedging conduct issues.
- The draft guide sets out four principles that must be satisfied before pre-hedging is undertaken. Market participants should only pre-hedge if they: (a) do so for a risk management purpose associated with anticipated client transactions; (b) intend to benefit the client; (c) act efficiently, honestly and fairly; and (d) seek to minimise market impact and maintain market integrity.
- Before undertaking pre-hedging, market participants must implement adequate arrangements to manage conduct risks.
What you need to do
- Consider the draft guidance and respond to the consultation by 27 June 2026.
- Review existing pre-hedging policies and procedures against the principles and expectations set out in the draft guidance, particularly with regard to disclosure and consent mechanisms.
Background
On 15 June 2026, ASIC published Consultation Paper 389 (CP 389), setting out a draft regulatory guide on pre-hedging practices by market participants. The draft guide, once finalised, will supersede ASIC's open letter to CEOs of market participants dated 1 February 2024. The guidance proposed is largely consistent with the expectations communicated in the open letter, and aligns with IOSCO's final report on pre-hedging of November 2025.
Definition of Pre-Hedging
To constitute pre-hedging, ASIC considers that all of the following elements must be met:
- The market participant is dealing on its own account in a principal capacity;
- Trades are executed in the same or related instruments after the receipt of information about one or more anticipated client transactions and before the client has agreed on the terms of the transactions and/or irrevocably accepted the executable quotes;
- Trades are executed to manage the risk related to the anticipated client transactions; and
- Trades are executed with the intention of benefiting the client.
ASIC clearly states that activity which does not fall within the above definition is not considered to be pre-hedging and creates a heightened risk of constituting market abuse, including insider trading or market manipulation.
Principles for the Use of Pre-Hedging
The draft guide sets out four principles that must be satisfied before pre-hedging is undertaken. Market participants should only pre-hedge if they:
- do so for a risk management purpose associated with anticipated client transactions;
- intend to benefit the client;
- act efficiently, honestly and fairly; and
- seek to minimise market impact and maintain market integrity.
Risk management purpose
Before pre-hedging, participants should carefully consider whether it is necessary to manage the risks involved, having regard to:
- whether the anticipated client transaction is expected to proceed;
- whether the size and nature of the pre-hedging is reasonable relative to the anticipated transaction, taking into account prevailing market conditions; and
- the available liquidity or trading volume in the relevant or correlated instruments relative to the size of the anticipated transaction.
Intention to benefit the client
Market participants should undertake pre-hedging with the intention of benefiting the client. The draft guide acknowledges that while a market participant may expect to earn a profit or derive other benefits from pre-hedging, it should only do so with a clear intention to also benefit the client.
Act fairly and honestly
When undertaking pre-hedging, market participants should act fairly and honestly in all their dealings with the client. Acting with honesty and transparency promotes trust and confidence in wholesale markets and fair treatment of clients. Participants must ensure communications and conduct are not misleading or deceptive, and that pre-hedging conduct is not unconscionable.
The draft guide notes that although there are no prescribed steps to satisfy these obligations, market participants should consider matters including compliance with client instructions, the client's position of vulnerability, the adequacy of pre-hedging policies and training, the sufficiency of client consent, and whether adequate mechanisms exist to review trading.
Minimise market impact and maintain market integrity
Market participants should seek to minimise market impact and maintain market integrity when pre-hedging. The draft guide recommends that before pre-hedging, participants should consider:
- agreeing on a pre-hedging strategy with the client;
- how the time frame will affect the market and pricing;
- the likely influence on market pricing, volatility and liquidity;
- relevant industry guidance;
- how to communicate with the client in a timely manner; and
- whether to nominate a different time for the pricing call or withhold some hedging activity to avoid placing undue pressure on the reference price.
Principles for Managing Conduct Risks
Before undertaking pre-hedging, market participants must implement adequate arrangements to manage conduct risks and comply with their obligations under the Corporations Act and ASIC Act. The draft guidance calls out the following considerations.
Policies, procedures and controls
Policies, procedures and controls for pre-hedging should address how the participant will identify, assess and manage pre-hedging conduct risks such as:
- the mapping of identified risks to internal controls;
- information barriers (including physical and electronic segregation) to manage conflicts of interest;
- monitoring and surveillance of trading activities and communications;
- escalation protocols;
- client complaint processes;
- governance and supervisory oversight arrangements; and
- training on pre-hedging policy and procedure requirements.
Compliance and supervisory arrangements
Market participants should have appropriate compliance and supervisory arrangements that support the implementation of pre-hedging policies into business practices and employee behaviours, including by having regard to the general licence obligations. Adequate arrangements may include appropriate review, monitoring, escalation and reporting processes.
Transparent, clear and effective disclosure
Market participants should provide transparent, clear and effective disclosure of their pre-hedging practices to clients. The draft guide notes that even sophisticated wholesale clients may be situationally vulnerable when they rely upon a market participant's judgement. Disclosures may include the circumstances in which the participant will engage in pre-hedging, the process for modifying or revoking consent, the possibility of potential market impact, and the influence pre-hedging may have on the quote provided to the client.
Informed prior consent
Market participants should seek informed prior consent from the client to pre-hedge at the outset of the relationship and give the client a clear process to modify or revoke that consent at any time with reasonable notice. Where the participant stands to profit directly from price movements caused by its own trading, prior informed consent becomes a critical safeguard. If the participant is acting as a duration manager, extra steps may be expected to ensure clients understand how pre-hedging will be conducted and how it may affect pricing and execution.
Confidential information and conflicts of interest
Market participants should appropriately manage access to, and prohibit misuse of, confidential client information, and adequately manage conflicts of interest arising from pre-hedging. The draft guide suggests that participants should consider establishing, monitoring and regularly reviewing appropriate physical and electronic information controls.
Adequate records
Market participants should maintain adequate records to facilitate supervisory oversight, monitoring and surveillance. Participants should keep accurate records of client discussions, disclosures, internal approvals and risk management rationales, as well as records of monitoring, reporting, compliance and breach notifications. Records should also cover internal pre-hedging plans and strategy (including any changes or deviations), limits, operation of compliance and supervisory controls, escalation decisions and approvals.
Observed "better practices"
Beyond the IOSCO-aligned guidance, ASIC has identified three observed better practices and is seeking feedback on whether to include them in the final regulatory guide:
- Post-trade reviews of pre-hedging for large, complex transactions – ASIC considers that this practice enhances compliance and supervisory oversight of higher-risk transactions and responds to issues identified in the Westpac case, where the court found that inadequate trading review mechanisms contributed to a contravention.
- Explicit and informed trade-by-trade client consent – ASIC considers that express consent on a transaction-by-transaction basis may be appropriate where practical and where pre-hedging poses greater risks to execution quality or pricing, such as in relatively low-liquidity markets. ASIC acknowledges that this may be impractical in high-frequency markets and that implied consent may be sufficient where upfront disclosure is robust, but for larger, complex transactions negotiated over time, explicit and informed trade-by-trade consent may be more appropriate.
- Internal controls to identify pre-hedging – ASIC considers that controls which distinguish pre-hedging from other trading activities, including inventory management, would be an effective way to support front-office supervision of trading behaviours and compliance monitoring.
Differences to current guidance
When the ASIC open letter on pre-hedging was issued in February 2024, there were some concerns around whether the expectations as set out were practical. The draft guidance addresses some of those concerns, notably:
|
Open Letter |
Draft regulatory guide |
|---|---|
|
Obtain explicit and informed client consent prior to each transaction, where practical. |
Seek informed prior consent to pre-hedge from the client at the outset of the relationship and give the client a clear process to modify or revoke that consent. |
|
Policies and procedures should be informed by achieving the "best overall outcome" for clients by pre-hedging. |
Emphasis has shifted to whether pre-hedging is conducted with the intention to benefit the client. |
|
Expectation that the market participant would conduct post-trade reviews for quality of execution. |
Identified as a "better practice" item subject to further consultation on if it should be expressly provided for in the regulatory guide. |
The draft guidance is also largely consistent with IOSCO's final report, which is to be expected given that ASIC was generally considered a "first mover" in the world on this issue, and significantly contributed to the formation of the guidance at the IOSCO level.
Next steps
The consultation is open until 27 July 2026, and ASIC anticipates releasing the finalised regulatory guide in Q4 2026. We recommend that affected market participants begin to review their existing arrangements against the draft guidance and identify any issues in practically implementing relevant requirements to meet ASIC's expectations.
Authors: Corey McHattan, Partner; Nicky Thiyavutikan, Senior Associate
