IOSCO Report Provides Guidance that Can Help Dealers Avoid Insider Trading Scrutiny

Background 

Pre-hedging or prepositioning is a technique employed by dealers to manage risk associated with anticipated market-moving transactions. While pre-hedging can have benefits such as price discovery and reducing market impact, the practice of trading ahead of a large client order runs the risk of being perceived as misappropriation of client information about an upcoming trade in violation of prohibitions against insider trading.

Both FINRA and the NFA have rules that prohibit "frontrunning," with FINRA Rule 5720(a) defining the practice as causing "to be executed an order to buy or sell a security or a related financial instrument when such member or person associated with a member causing such order to be executed has material, non-public market information concerning an imminent block transaction in that security, a related financial instrument or a security underlying the related financial instrument prior to the time information concerning the block transaction has been made publicly available or has otherwise become stale or obsolete."

In the United States, prosecutors, regulators, and self-regulatory organizations ("SROs") have initiated enforcement actions against dealers who trade ahead of client orders on the theory that the trading activity constitutes "frontrunning." In May 2024, for example, Lawrence Billimek, a trader at TIAA-CREF, was sentenced to 70 months' imprisonment following a guilty plea to one count of securities fraud in which he admitted to misappropriating confidential information by trading ahead of market-moving securities trades. Prior to his guilty plea, Billimek resolved parallel charges with the Securities Exchange Commission ("SEC").

Both the Justice Department and the Commodity Futures Trading Commission ("CFTC") have advanced enforcement actions alleging frontrunning in the commodity derivatives markets. Although his conviction was ultimately overturned as a result of a collateral attack on the jury instructions, Mark Johnson, the former head of HSBC's foreign exchange desk, was indicted on charges of wire fraud related to an alleged scheme to frontrun a client's anticipated $2 billion foreign exchange trade arising from an international M&A transaction. The indictment alleged that Johnson tipped other HSBC traders about the impending trade and that, in the days and hours leading up to execution, those traders put on positions in the applicable currency pair that stood to benefit from the anticipated market movement. One of the central questions of the trial was whether those trades constituted legitimate pre-hedging calculated to facilitate the client's transaction or illegal misappropriation of the client's confidences. 

Pre-Hedging Report 

IOSCO is an international consortium of regulators comprised of more than 134 national securities and derivatives commissions and SROs, including the SEC, CFTC, Financial Conduct Authority, BaFin, Autorité des Marché Financiers, FINRA, and the NFA.

In late 2024, IOSCO released a consultation report on pre-hedging. In November 2025, IOSCO issued its "Final Report on Pre-Hedging" following feedback on that consultation and several months of engagement with regulators and dealers, as well as analysis of guidance promulgated by standard-setting bodies such as the FX Global Code, Global Precious Metals Code, and the Financial Markets Standards Board's Standards for Large Trades. Although the report does not technically bind its members, its recommendations generally reflect the views of its members given the extensive stakeholder engagement in which IOSCO staff engaged in preparing its contents. The report makes several practical suggestions, which, if implemented, would reduce dealers' risk to accusations of insider trading through frontrunning.

First, IOSCO recommends that, "Dealers should seek to minimize market impact and should maintain market integrity when pre-hedging" and "undertake pre-hedging only with the intention of benefitting the client." This recommendation is consistent with the FX Global Code and the Global Precious Metals Code, which recommend against pre-positioning that "disrupt[s] the market." Pre-execution trading calculated to impact the markets is likely to be viewed by regulators and prosecutors as manipulative and can expose dealers to civil claims by clients against whom the markets moved before execution.

Second, IOSCO recommends that, "Dealers should provide clear disclosure to clients of the dealer's pre-hedging activities" and also provide a process for the client to revoke consent for pre-hedging. Advising the client that the dealer intends to trade on its own account in the same or related instruments as the client before execution of the client's order will reduce the chances of misunderstanding and go a long way toward rebutting the inference that a dealer deceptively misappropriated the client's confidential information. Such pre-trade disclosures provide the dealer with an opportunity to educate the client on how pre-execution trading can serve the client's interests.

Third, IOSCO recommends that, "Dealers should maintain adequate records, including for pre-hedging, to facilitate supervisory oversight, monitoring, and surveillance." Dealers should memorialize their pre-hedging strategy and be prepared to show their blotters should the client ask after execution. Likewise, dealers should anticipate that regulators and government enforcers may ask for data reflecting all trading in the same or related instruments in the lead-up to execution of the client's order and be prepared to explain how this trading inured to the client's benefit. To the extent that other clients ask the dealer to transact in the same or similar instruments shortly before the large trade in question, the dealer should document these requests carefully.

Fourth, IOSCO recommends that, "Dealers [should] appropriately manage access to, and prohibit misuse of, confidential client information and adequately manage any conflict of interest that may arise in relation to pre-hedging." It is a best practice for dealers to erect information "walls" to restrict access to information regarding anticipated large client orders to those traders charged with executing that client order. Traders who are unaware of the client's impending large trade are insulated from accusations of misappropriation if they transact in the same or related instruments during the relevant time period.