EU pulls hedge fund curbs, amid British opposition

(BRUSSELS) - Plans for European finance ministers to vote through new laws curbing highly speculative investment fund managers were ditched at the last minute on Tuesday amid opposition from Britain, officials said.

Diplomats last week said the issue would be put to a vote, and that Britain was isolated.

But vigorously expressed opposition from London, in the run-up to a closely-fought general election there, appears to have killed a continental appetite to use a majority to ram through changes.

British Chancellor Alistair Darling told reporters that London was unable to sign up to new regulatory burdens that effectively prevented London-managed funds from "crossing the channel" and accessing the entire European Union marketplace.

He argued that if no "passport" were offered to non-EU funds, whether they were represented in and regulated by London or not, it "seems to me to be encouraging people to go offshore."

As there was "never going to be a deal at any price," he said it was "important that Europe gets this right" and avoids "unintended consequences" or "discriminatory" overtones.

"I hope it will be possible between now and the end of June to adopt this directive," said Spanish Finance Minister Elena Salgado, who as chair took the decision to cancel the vote.

Swedish Finance Minister Anders Borg suggested that terms of the discussion had shifted towards ensuring Europe was not applying "protectionist" measures via the back door.

US Treasury chief Timothy Geithner complained last week that the draft directive might damage US hedge funds, private equity groups and banks by curbing their ability to do business with Europe.

European Commissioner for financial services, Michel Barnier, is to travel to the United States in the coming weeks to discuss access to the EU single market for fund managers based in Europe but whose money is held outside the EU, in the Cayman Islands or other tax havens.

Speaking at the European parliament in Brussels, the head of the US Commodity Futures Trading Commission, Gary Gensler, said "regulatory reform must be comprehensive and international."

He said the law should cover 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."

"This is a dark ocean, this marketplace, and we really need to bring transparency to it," he underlined.

However, he questioned how a ban on credit default swaps -- blamed by Athens for a deterioration in its prospects of tackling its debt crisis -- could be designed.

"I'm not sure how you would actually put that in place," he added.

With "very real risk" still in the system, he said agreements on sharing information on these markets was required across Europe, the United States and Asian regulators.

Opponents say the law changes would hasten the flight of top funds from London, where between 70 percent and 80 percent of Europe's high-end financial services sector are found, to Switzerland or elsewhere outside the EU.

EU finance ministers had been called to agree on a "general approach" following heated talks between ambassadors on Thursday, but could decide to send the long-running issue back to national negotiators.

Main results of the Economic and Financial Affairs Council 16 March 2010