EU diplomats mull compromise in hedge funds deadlock

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European diplomats worked yesterday (13 October) to break a deadlock in talks aimed at tightening controls on hedge funds in the EU, with officials saying they were considering delaying or granting opt-out clauses on the most controversial parts of the law.

EU diplomats met for a last-ditch attempt to reach agreement on hedge fund controls, but Britain and France remained at loggerheads, putting their finance ministers on course for a clash when they meet next week.

Central to the row is whether or not to grant a licence to foreign funds that want to work across the European Union's 27 countries. French economy chief Christine Lagarde had opposed this on the grounds that controls on foreign firms would be lax.

Diplomats are hoping a compromise can be reached soon to avoid delaying the symbolically important clampdown on private equity and hedge funds.

Yesterday, Commissioner Michel Barnier, in charge of brokering a deal on the law, signalled that there could be a delay or "transitional period" to a licensing scheme that would allow foreign hedge funds to work across Europe.

Hedge funds currently must apply to national authorities in each country to sell investment products there.

Lawmakers want to replace this scheme with a single permit to operate in all 27 EU states, but some proposals presented by diplomats at the meeting in Brussels may be more divisive.

Under one alternative plan, a country could block any fund holding a European licence from operating in its territory by not signing up to the agreement granting them the permit.

"Britain believes this would be an opt out," said one diplomat. "It allows the member states to pick and choose."

The hedge funds blueprint has provoked a row between Paris and Washington, which is worried that French moves could block US funds from doing business in Europe. US Treasury Secretary Timothy Geithner wrote to Lagarde last week warning her against curbing foreign hedge funds.

Despite being one of the EU's more modest financial reforms, Brussels' attempts to change the rules for hedge funds, chiefly by putting them under the watch of a new pan-European supervisor, has taken on what one expert called a totemic significance.

It has put French President Nicolas Sarkozy at loggerheads with Britain, which has defended hedge funds, an industry London sees as important for its status as Europe's financial capital but which a German politician dismissed as "swarms of locusts". 

With the European Parliament planning to vote through its version of the hedge-fund law in November, further delays could trigger a long procedure to reconcile the positions of European countries and elected lawmakers in Brussels.

"If there is no agreement now, it is going to last for another two years," said one diplomat.

(EURACTIV with Reuters.)

In April 2009, 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 (EURACTIV 30/04/09). 

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 exempting 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.

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