EU hedge fund rules stalled, UK digs in heels

Date: Wednesday, March 17, 2010
Author: Reuters

European Union plans to crack down on hedge funds hung in the balance on Tuesday when talks stalled after Britain dug in its heels to head off new rules that could damage its financial centre.

The draft law had been intended to curb pay and borrowing at hedge funds and usher in an era of transparency for a secretive industry that many politicians said exacerbated borrowing difficulties in Greece by betting on its debt. [ID:nLDE62F0D9]

But the finance ministers were unable at talks to resolve a dispute between Britain -- which wants lighter regulation of an industry important for London's financial centre -- and Germany and France, which want a heavier clampdown.

"We want to convince everyone and we believe we can convince everyone," said Spanish Economy Minister Elena Salgado, announcing the failure of negotiations that she chaired.

The draft rules would require hedge funds, private equity groups and others to register and disclose trading information to supervisors.

Germany voiced disappointment, saying it had been ready to agree to a draft law, while France's Michel Barnier, the EU's financial markets chief, signalled concern about further delays in introducing stricter rules.

"Hedge funds and private equity are very important players," Barnier said, adding that hedge funds accounted for up to half of daily transactions in some financial markets. "There are potential systemic risks which are undeniable."

British finance minister Alistair Darling emerged upbeat from negotiations and warned against rules that would put Europe and "its only global financial centre, London ... at a competitive disadvantage".

"It's a good outcome for the UK," said an official at the British Treasury. "We had to hang tough."

London is home to 80 percent of the EU's hedge fund industry and the sector's lobby group AIMA said it was important not to risk botching the new rules by rushing them.

London's refusal to sign up to the draft rules casts uncertainty over their future. British elections expected in May could put the Eurosceptic Conservatives in power.

This could further compound difficulties in reaching a deal. Although other European countries could overrule Britain and vote through the legislation, they would be reluctant to do so because of the diplomatic fallout.

TRANSATLANTIC RIFT

The proposed rules, which need the backing of the European Parliament to become law, have already driven a rift between Washington and Brussels.

U.S. Treasury Secretary Timothy Geithner has complained to Barnier that the controls could discriminate against U.S. firms.

Washington, mulling lighter regulation for the sector, is worried new EU rules would make it harder for a New York hedge fund, for example, to find investors in Europe or do business there.

On Tuesday, Barnier hit back against the criticism. "I don't take instructions from Paris or London and neither from Washington," he told journalists.

But he signalled willingness to license foreign funds with a base in London, for example, to do business across Europe. The absence of such a licence is Washington's primary objection to the rules. "This passport would be demanding," he said. "It would really have to be deserved."

The tug-of-war between Brussels and Washington will put pressure on leaders of the Group of 20 major economies who are trying to keep momentum in a regulatory crackdown on banking.

European diplomats and ministers will gather again for talks in the coming months to resolve the stalemate, a time-consuming distraction for the EU's planned shake-up of financial services.

The overhaul includes measures ranging from a squeeze on bankers' pay to demanding higher reserves of capital for unexpected losses.