EU countries to hammer out hedge fund rules

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A majority of EU countries are ready to sign off on a precedent-setting law to regulate hedge funds, diplomatic sources told EURACTIV. The law, which had triggered a wave of resentment in the bloc's financial districts, will win EU finance ministers' approval at their next meeting on 16 March.

At a meeting yesterday, diplomats began hatching compromises to outstanding disagreements on a draft proposal to regulate alternative investment vehicles like private equity houses and hedge funds, called the Alternative Investment Fund Managers Directive (AIFMD).

Sources at the gathering say that although issues remained on the scope of the draft law, fund marketing and fund depositaries, a compromise appeared to be within reach with member states eager to seal agreement at the next meeting of EU finance ministers on the 16 March.

The UK was leading a campaign against a draft directive which its parliamentary delegates and lobbies deemed both "protectionist" and "draconian" (EURACTIV 08/02/10).

Surrounded by colleagues from their EU counterparts, British diplomats appeared ready to agree to the text on the table. albeit with a few last-ditch attempts to win exemptions here and there, said sources close to the talks.

Which funds?

Member states have long been debating whether EU rules should catch all funds or apply only to bigger ones that are "systemically relevant" to the economy.

The UK has not wavered from its position, put forward at the G20 in Pittsburgh, that EU rules should apply only to economically significant funds and that smaller funds should not be "strangled during a recession".

Though Germany, France and Italy want a catch-all rule, sources say that member states will likely allow exceptions to be written into national laws which would see AIFMs with assets below 100 million escape EU rules.

Exemptions would also apply to leveraged funds with assets below 500 million euro because they are substantially smaller than their rivals, even though they have used debt to maximise their gains.

Member states are starting to realise that a catch-all regulation would suffocate smaller funds and countries with a less developed funds sector, said sources at yesterday's talks.

Which depositaries and which market?

The question of depositaries – where funds money would be kept – had also divided member states with France, Germany and Italy again in favour of strict laws limiting this function to a select few institutions.

Yesterday, UK diplomats argued this would create monopolies – a point that seemed to resonate with other delegates.

The current draft would allow funds who use cross-border depositaries a period of four years to establish their own depositaries.

But this deadline will also be whittled down to less than four years due to pressure from French delegates, diplomatic sources said.  

"It is clear there will be a compromise on the four-year transitional period and that this, by most member states' accounts, is too long."

Finally the most contentious issue, the third country rule – stopping non-EU funds with less stringent standards marketing to EU funds – will likely also win approval.

Though fierce debate on third country rules is not out of the question, there are not enough countries against this rule to block it, say sources close to the talks.

"Countries opposed to the third country principle – the Czech Republic, the UK, Ireland, Finland and Sweden, do not have a blocking minority on this," one diplomat said.

On 29 April, the European Commission proposed a new set of rules for hedge funds and private equity firms, requiring mandatory registration and disclosure of their activities to regulators, while at the same time easing their access to European markets in the long term. 

The main regulatory component of the proposed legislation is an obligation for EU-based managers of so-called 'alternative investment funds' to register and disclose their activities, in order to improve supervision and avoid systemic risks. 

The obligations are not applied to the funds themselves, but only to their managers, who are considered responsible for key decisions. However, critics said that the exemption of funds from the proposed new regulation would leave hedge funds and private equity free to develop their investment policies, despite the fact that their risk-prone attitudes were strongly criticised during the financial crisis.

  • 10 March: Diplomats meet again to discuss AIFMD Directive before Ecofin Council. 
  • 16 March: EU finance ministers meet in Brussels for Ecofin talks focused on AIFMD.
  • July 2010: European Parliament to cast vote on AIFMD.

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