ESMA does not find evidence to ban pre-hedging but warns on risks

ESMA has released a Final Report on pre-hedging based on the feedback received to the 2022 Call for Evidence (eventid=16744).
Pre-hedging is a voluntary market practice where liquidity providers hedge their inventory risk in anticipation of potential incoming transactions. ESMA acknowledges that pre-hedging can give rise to conflicts of interest or abusive behaviors, but it does not find sufficient evidence to ban this practice at this stage. Instead, ESMA suggests that the risks associated with pre-hedging should be considered when issuing any future guidance.
ESMA commits to providing guidance on pre-hedging in the Final Report on the MAR review (eventid=8046). It will also promote and contribute to the development of global regulatory principles applicable to pre-hedging, which could serve as a basis for future ESMA guidance.
Some stakeholders support pre-hedging, stating that it enables better quotes for clients, reduces volatility, and helps manage market risks. On the other hand, others argue against pre-hedging, highlighting concerns about possible market abuse and exploitation of conflicts of interest.
The report also discusses whether RFQ can be considered inside information under MAR. There are differing views on whether RFQs should be classified as inside information, and ESMA concludes that a case-by-case assessment is necessary.