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EU moves toward new hedge fund rules

Date: Tuesday, December 2, 2008
Author: Aoife White, Washington Post

BRUSSELS, Belgium -- The European Union will this week take the first step toward new rules governing high-risk hedge funds, the EU's financial services chief said Monday.

EU Commissioner Charlie McCreevy, long opposed to regulating the funds, is bowing to calls from the G-20 group of the world's leading industrialized and emerging economies and many European politicians for more oversight for hedge funds that invest large sums and often operate in near secrecy.

He said the European Commission would consult European financial firms and others, sparking a debate that might see regulators eventually come up new rules.

He said he wanted to focus on the risks hedge funds might pose to the financial system if current rules were left in place. EU regulators also have to define hedge funds and consider how they should deal with hedge funds based in jurisdictions with little supervision, he said.

"Who should oversee hedge funds? Securities regulators? Central banks? Both?" he asked in a speech to the European Parliament's economy committee. "How can we ensure that too much transparency does not kill hedge funds and that we do not throw the baby out with the bathwater?"

Until recently, McCreevy has been adamant that there is no need for the EU to further regulate hedge funds _ despite a European Parliament demand for rules and loud protests from German politicians for curbs what they see as the aggressive edge of capitalism.

Activist hedge fund shareholders shook up Germany's staid corporate culture by forcing out the head of the country's stock exchange in 2005.

McCreevy said he did not see the same need for private equity funds to be more tightly regulated but accepted that there were worries over corporate governance, transparency and reporting.

He also indicated that he did not want a ban on short-selling _ borrowing a stock to sell it with the intention of buying it back at a cheaper price and making a profit before returning it to the owner.

Most European nations have recently banned the practice temporarily for some shares to stop speculators adding to market volatility.

McCreevy said he believed short-selling may be a positive element that alerts the market about companies making taking on too much debt or making poor investment choices or management decisions.

The European Commission is in charge of drafting new EU-wide rules for financial services that must be agreed by EU governments and the European Parliament.