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EU curbs trillion-dollar hedge fund industry

EU curbs trillion-dollar hedge fund industry

Barnier - Reynders - Photo EU Council

(LUXEMBOURG) - European governments sealed a landmark deal Tuesday to bring the trillion-dollar hedge fund industry under EU control, after Britain and France settled a two-year-old conflict.

"We have unanimity," said Belgian Finance Minister Didier Reynders, chairing the talks between his EU counterparts in Luxembourg. "It was very important to complete this before the G20 meetings" upcoming in South Korea.

EU Financial Services Commissioner Michel Barnier said it was "the first time" the sector would be "subject to European regulations."

He also stressed that "robust and clear new rules to reinforce transparency" would avoid "discrimination."

That was a direct response to US Treasury Secretary Timothy Geithner's fears of protectionist overtones in a French-led bid to have the industry -- 80 percent of which is located in the City of London -- regulated by an incoming European Securities and Markets Authority that takes up work in Paris as of January 2011.

British Financial Services Secretary Mark Hoban said it was a "significant advance from the situation in May, when member states were on the verge of voting through an agreement that would have closed the EU market to funds from third countries."

The deal, which will ultimately see funds obtain a "passport" to market their products across the single European market, home to half a billion people, now goes to a vote in the European parliament next month.

Britain has fought for months to ensure that funds based in Commonwealth outposts in the Caribbean, for example, but managed in the City, be able to sell to all of Europe on the strength of British regulations alone.

France wanted the industry -- blamed for exacerbating the financial crisis due to high-stakes gambles that backfired -- to be brought under the EU's emerging financial services supervisory framework sooner.

But French Finance Minister Christine Lagarde settled for "genuine supervision and regulation of actors who were to date not at all controlled."

She cited incoming rights to police funds and address complaints to national supervisors, with "emergency" powers where "systemic risk" is feared for the European economy.

Under the agreement, a series of different phases will see rules change depending on funds' origins.

Once the planned change is implemented, at the start of 2013, funds will need to comply to strictly defined new guidelines, an expert involved in the negotiations explained.

Between 2013 and 2015, a London-based fund would be able to sell across Europe, although "third-country" funds -- such as American or Cayman Islands-based products -- would not.

The expert denied that this amounted to "discrimination," saying the rules would be "exactly as is now" and that Europe was "not closing any door" to overseas funds.

Between 2015 and 2018 a "dual regime" will apply, when London authorisation on the new EU terms would automatically secure the EU-wide passport, but London authorisation on British-only terms would not.

Finally, even that possibility would vanish in 2018, when only funds that meet EMSA requirements will be allowed to operate, and everywhere in the EU.

Reynders said the deal allows the EU to pressure international partners to match its regulations, while offering "protection for investments" for consumers, in line with broader financial services curbs gradually agreed since the global financial crisis broke two years ago.

The European parliament first demanded curbs in September 2008, immediately after the collapse of Lehman Brothers investment bank in the United States.

France did not want the passport to be issued by Britain, for fear of encouraging funds domiciled in tax havens, while Britain feared capital flight to Switzerland and other more favourable destinations if the long arm of EU law proved too restrictive.

Hedge funds: Council sets out its position with a view to concluding negotiations with the Parliament - 19/10/2010

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