EU mulls lighter rules for hedge funds

Sweden, holder of the European Union presidency, wants to ditch a proposed borrowing limit for hedge funds in a move that will please Britain but anger France and others seeking tougher control of the secretive industry. Skip related content

Although hedge funds did not play a central role in the global financial crisis, many politicians have long been suspicious of their activity, prompting the European Commission, or EU executive, to draft rules to keep close tabs on them.

But Sweden, concerned that EU draft rules, as they stand, could drive hedge funds into exile, has proposed a radical compromise, according to a document obtained by Reuters.

It is trying to broker a deal with European countries to drop a central part of the proposed EU rules -- a cap on borrowing for hedge funds, which are best known for making reverse bets on company stocks rising or falling.

The Swedes propose abandoning the proposed cap on the amount of money hedge funds can borrow.

Instead they want an industry watchdog to monitor hedge funds and decide when to clamp down on their activity by imposing borrowing limits.

"When it is deemed necessary, the authorities ... may impose limits to the level of leverage," officials write in the document.

"The leverage cap is being taken out," said one diplomat close to the negotiations. "That was too blunt. It is still possible for the supervisors to impose a cap but on a case by case basis."

"This is not watering down the rules. In fact it is tightening them up. The Commission had made a proposal with no bite -- this one has bite," the diplomat said.

But others were sceptical. "We are disappointed," said a second diplomat. "We can't do less for hedge funds that what we are doing for banks, insurance or financial markets."

Diplomats, who met last Friday to discuss the proposed compromise, plan to gather again in the coming weeks to continue what is set to be a difficult negotiation.