US warns EU of financial reform clash


The US is growing increasingly worried by the EU's financial reform agenda, as US officials descend on the European institutions in Brussels to warn policymakers against divergent rules on hedge funds and derivatives.

US officials have been floating around the EU's corridors of power to make sure that both sides have the same ideas on how to regulate financial services, especially hedge funds and derivatives.

Danger of protectionist transatlantic quarrels

A high-ranking US official told EURACTIV that the EU needs "a common regulatory floor on hedge funds" or there is a danger that one side will accuse the other of cultivating protectionist policies.

"If US and EU rules differ for different funds depending on their location, then protectionism could become a cover for weaker rules," the US official close to the reform process told EURACTIV.

Yesterday the US unveiled a Senate bill which would clamp down on big banks and make hedge funds with more than $100 million in assets register with the Securities and Exchange Commission.

The US official warned that the so-called Dodd Bill, named after Senator Christopher Dodd, was not a fait accompli and was still subject to months of debate between the US House of Representatives and the Obama administration.

Last week, the US Treasury said it was worried by draft EU rules on hedge funds and private equity – the Alternative Investment Fund Managers Directive (AIFMD).

US Treasury Secretary Timothy Geithner warned the EU in a letter that the draft AIFMD would "discriminate against US funds and deny them the access to the EU market that they currently have".

The Treasury letter was referring to parts of the AIFMD which would restrict the access of non-EU fund managers to EU investors unless they can prove that they have equivalent safeguards to EU funds.

The EU and the US could move together on hedge funds if both sides were to concede some elements of their policies, the US official told EURACTIV.

"We will stop being discriminatory. Now you have to get tough," should be the EU's message to the US, the official added.

"The best thing for effective regulation would be for the EU to drop limited access on passports and rules on depositaries and then to talk to the US about getting tough on disclosure rules and leverage limits," he explained.

A 'comprehensive' derivatives rulebook

"Regulatory reform must be comprehensive and international," warned a second official in talks with the European Parliament yesterday.

Gary Gensler, chairman of the Commodities Futures Trading Commission (CFTC), a US governmental agency, told MEPs that EU and US moves to clamp down on derivatives should target the same instruments at the same time.

"A comprehensive regulatory framework governing over-the-counter derivatives should apply to all dealers and all derivatives, including interest rate swaps, currency swaps, foreign exchange swaps, commodity swaps, equity swaps, credit default swaps and any new product that might be developed in the future," Gensler warned.

Gensler and other officials have also been in talks with EU Internal Market Commissioner Michel Barnier and his cabinet on rerouting the reform agenda to suit both parties' interests. 

US disenchantment with the direction of EU financial reform came to light last week when the US treasury secretary sent a letter to EU Internal Market Commissioner Michel Barnier warning of a transatlantic rift if draft rules on hedge funds and private equity - the Alternative Investment Fund Managers Directive (AIFMD) - were to win EU approval (EURACTIV 12/03/10)

Finance ministers' talks on EU rules for more market transparency of hedge funds and private equity in the bloc collapsed after it became clear that the UK's position on the draft law was irreconcilable with other member states, most notably France (EURACTIV 16/03/10).

Meanwhile, the European Commission is also currently drafting a proposal to regulate the derivatives market, which could include a ban on naked Credit Default Swaps (CDS).

The EU began investigating the derivatives sector after the Lehman collapse in 2008, and began drafting rules on hedge funds and private equity in April 2009 (EURACTIV 30/04/09). 

Naked CDS, which involve one entity taking out an insurance policy on assets it does not own, have been blamed for high yields in sovereign debt, most notably in Greece, whose excessive deficits are the highest in the EU.

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