Alleged Market Manipulation and the Pre-hedging of Large Trades

The authors discuss the differences between pre-hedging and alleged market manipulation.

Pre-hedging, or anticipatory hedging, is one of many risk management tools often used in principal-based OTC markets, such as commodities, foreign exchange (FX), or interest rate swap markets.

Recent developments have brought to the forefront the challenges associated with distinguishing between legitimate risk management practices and potentially manipulative conduct in the context of pre-hedging. These challenges have been highlighted by enforcement actions by the Commodity Futures Trading Commission (CFTC), among other regulators.

In this article, authors Yan Cao and Manuel Vasconcelos discuss several crucial factors that regulators typically consider. Rigorous, academically grounded empirical analyses of these factors can help distinguish between potential manipulative conduct and appropriate risk management.

This article was originally published by Westlaw Today in January 2023.