Pre-hedging

Norges Bank Investment Management (NBIM) appreciates the opportunity to provide comments on IOSCO's consultation report on pre-hedging.

NBIM is the investment management division of the Norwegian Central Bank (Norges Bank) and is responsible for investing the Government Pension Fund Global, the Norwegian sovereign wealth fund. NBIM manages a globally diversified portfolio with assets valued more than USD 1.700 billion as of year-end 2024.

As a long-term institutional investor and significant participant in global markets, we have a strong interest in market standards and practices that affect market quality and trade execution costs. We welcome IOSCO's assessment of pre-hedging practices with the aim to facilitate better international regulatory alignment.  

Comments
The consultation aims to define permissible pre-hedging activities when pre-hedging is compliant under local laws. Existing industry standards that give guidance on pre-hedging are voluntary and does not include monitoring, supervision, or enforcement. The introduction of regulatory guidance on permissible pre-hedging activity could help to clarify boundaries between legitimate practices and market abuse.

We find IOSCO's definition of pre-hedging workable and the outline of dealers’ genuine risk management purposes comprehensive. We also agree with the emphasis that the dealer should act in the client interest when conducting pre-hedging. Pre-hedging should only be conducted with the intent to provide a better price or a more competitive quote given the clients instructions.

Potential regulation should facilitate better upfront disclosure between dealers and clients when it comes to what pre-hedging and risk management considerations the dealer can be expected to engage in following an RFQ. Dealers should be required to have clear policies and procedures on pre-hedging in place and to communicate these effectively to clients. Such transparency can be essential for maintaining market integrity and enabling informed decision-making by market participants.

Regulatory guidance should in this case take the form of high-level principles. In fixed income markets, where the request for quote is the dominant trading protocol, pre-hedging activities may take place in instruments or securities related to the requested trade. We question whether tagging of trades in a complex and dynamic setting would provide a trustworthy distinction between trades that are considered by the dealers to be pre-hedging activity, inventory management or holistic risk management. Post-trade reviews of the pre-hedging trades could be less informative than intended.

We appreciate that IOSCO's consultation document notes considerations we could make as a client. These suggestions align with our own efforts as a market participant and highlights the client’s role in evaluating dealer relationships and execution strategies.

As a long-term investor with recurring trade requirements, our relationship with dealers becomes one of repeated interaction. This allows us, to some extent, through analysis of our execution outcomes and market reaction to identify behaviours that is contrary to our interests. We can adapt our trading practises in response.

Pre-hedging regulation should be technology agnostic. If a request for quote is facilitated electronically or handled by an algorithm should not have a bearing on pre hedging principles.     

We appreciate this opportunity to share our perspective as an institutional investor on pre-hedging practices and remain at your disposal should you wish to discuss these matters further.

Yours sincerely,
Lead, Market Structure and Strategy