The Peer-to-Peer Answer to the Pre-Hedging Dilemma - Townsend Smith, CFO.

December 5, 2023

FX HedgePool believes that the principles of the FX Global Code, to which we are enthusiastic adherents, are critical components of a properly functioning market. Where concepts of professionalism, fairness, and honesty are involved, there cannot be – or should not be – any debate around the Global Code’s principles. Pre-hedging, however, is a more nuanced area of the Global Code, attracting more controversy.

Pre-hedging, or to use the more derogatory term, frontrunning, is a feature of “over the counter” markets as old as markets themselves, where information asymmetry is more a rule than an exception. With FX hedging, the situation may be more pronounced. Swaps, the preferred instruments for buy-side hedgers, roll with an unmistakable rhythm from one maturing contract to the next. Banks, therefore, often know when buy-side trades are coming and quite naturally position their books accordingly, with a corresponding impact on the market. In context, this is not necessarily a damaging aspect for the buy-side. Market-making banks provide a critical service to hedgers and the rest of the economy, and it is entirely appropriate and necessary for them to manage their market risks. If this means they use information to their advantage, then so be it; without doing so, higher spreads would be the inevitable result.

Pre-hedging, however, presents a dilemma because it can have an artificial impact on the market. When a bank prices a large swap transaction, the spread may be low depending on how competitive the bank is, but it is a spread over the bank’s view of the market, where the bank’s market action influences the market itself. The effect is that spreads around the middle of the market may tend to be narrower, but the middle of the market itself may be distorted.

FX HedgePool agrees with the FX Global Code, which tells us that if pre-hedging is not conducted by a non-principal participant in the trade and is done fairly, it is an acceptable, albeit potentially suspicious, aspect of the market. It is now, however, not the only way. FX HedgePool offers an alternative with our innovative peer-to-peer platform that provides fair, middle-of-the-market pricing without the possibility of artificial market impact from pre-hedging.

Peer-to-peer is a new paradigm of executing FX that structurally assures basic principles set out in the FX Global Code and makes pre-hedging irrelevant. In an FX HedgePool peer-to-peer transaction, the execution between two buy-side members of our community occurs anonymously with no information leakage at a middle-of-the-market benchmark accepted by the community. Banks clear the trades as credit providers but do so as “riskless principals,” so have no book to pre-position.

This has several advantages for individual participants and the marketplace. On the buy-side, members of the FX HedgePool community receive a fair execution with a transparent fee on a middle-of-the-market benchmark where there is no winner or loser to the trade. The benchmark rate is often the same for buy-side currency hedgers as their hedge targets, meaning they do not experience hedge performance slippage. Furthermore, buy-side members rest easy with the operational efficiency of FX HedgePool’s modern technology platform instead of having to trade their positions actively. Banks participating in the program receive a steady, fixed revenue stream for clearing credit without incurring market risk. The overall marketplace benefits because for every peer-to-peer transaction, there is less external influence on the fundamentals of supply and demand for currencies; i.e., there is less pre-hedging.

FX HedgePool is passionate about innovation in this market and firmly believes that peer-to-peer can be an important additional tool for buy-side managers to access liquidity for their currency hedging. Our model and approach to business are highly aligned with principles enumerated in the Global Code and provide a structural solution to the dilemma of pre-hedging. For FX HedgePool transactions, pre-hedging cannot occur. Furthermore, our technology creates meaningful operating efficiencies, and we offer a compelling and measurable economic value proposition.

We would be delighted to speak with you about your business and how we can help lower your transaction costs and hedge performance slippage while making your trading more efficient, more transparent, and less impactful to the market. You can reach us at

About FX HedgePool

FX HedgePool is a multi-award winning matching platform for the mid-market execution of FX swaps that is transforming the market through its breakthrough unbundling of liquidity from credit. This is unlocking vast potential for passive hedgers to provide liquidity to each other, while leveraging existing counterparty relationships for credit provision. Passive hedgers can now access a new source of safe and dependable liquidity, eliminating unnecessary friction for both the buy-side and the sell-side. Founded in 2019, FX HedgePool is on a mission to modernize institutional FX through bold innovation and leading-edge technology for the betterment of all.