Proxy hedging is the use a non-equivalent commodity derivative to hedge a specific risk arising from commercial activity where an identical commodity derivative is not available or where a more closely correlated commodity derivative does not have sufficient liquidity (see ESMA's Opinion (Annex), Amended draft Regulatory Technical Standards on the methodology for the calculation and the application of position limits for commodity derivatives traded on trading venues and economically equivalent OTC contracts, 2 May 2016, ESMA/2016/668, Recital 8).
See also:
Hedging activity under MiFID II
Hedging after 3 January 2017 - not for everybody