Outlawing pre-hedging could have global impact

In its current form, the T-Charter is a set of 10 principles designed primarily to protect clients from “poor or questionable practices” in the UK transition management industry.

The draft was sent out to interested parties last month for further discussion after being drawn up by a select seven-member sub-committee.

Pre-hedging – effectively dealing ahead in a stock before the benchmark price is set – has been one of the key issues of contention. However, the charter’s attempt at clearing the waters appears to have failed to appease the masses.

“As far as we can tell, there will be no investment bank able to sign this,” said Ross McLellan, managing director at State Street Global Markets.

“At some level, a portion of that firm pre-hedges and I think there will be questions raised over what the T-Charter means by [stating that] a firm cannot pre-hedge orders.

“A global investment bank has business models where it’s an accepted practice to pre-hedge orders. I’m sure they are not going to sign a document that says they can’t do this anymore because of their UK transition management business.”

A source working for a global investment bank, who asked not to be named, shared a similar concern: “The banning of pre-hedging will be particularly relevant to investment banks where they are committing capital to a transition.”

It is as yet unclear when the T-Charter will be officially implemented, but many firms will want to involve their compliance teams before signing up.

“I would have thought it was prudent the various providers run this by all the parties within their firm before signing up for it,” said Sam Lundqvist, portfolio manager, UK, Russell Investment Group. “Whether that will cause delays or further issues I cannot say.”

Daniel Flatt

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