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European diplomats prepare for hedge fund talks

Date: Wednesday, May 5, 2010
Author: Reuters

European parliamentarians and diplomats are preparing for another round of talks this week to end the wrangling over rules to control the hedge fund industry.

Failure to break the deadlock on a law for hedge funds, which has seen Britain largely isolated in Europe by its defense of the industry, could delay a planned shake-up of financial services spanning bonus limits to curbs on risk-taking.

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

But Britain wants lighter regulation as the industry important for London's financial center, while Germany and France are seeking a heavier clampdown.

Negotiations in the parliament, which has an equal say alongside European countries in approving the law, have been protracted but are due to conclude this week.

European ambassadors will meet on Thursday in a bid to tee up agreement.

Some British parliamentarians had hoped to derail a regime that would require hedge funds and private equity groups to register and disclose closely guarded trading information -- the traditional advantage of hedge funds in the open market.

The proposed law has also driven a rift between Brussels and Washington.

U.S. Treasury Secretary Timothy Geithner has complained that the controls could discriminate against American firms because the regulations would not give a passport or license to operate in Europe to foreign firms.

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

Jean-Paul Gauzes, the French lawmaker who is in charge of broking a deal in the European parliament, has proposed giving foreign funds a license to do business across the European Union's 27 countries if they comply with the new law.

The EU's financial services chief, Michel Barnier, also has signaled a willingness to license foreign funds with a base in London, for example, to do business across the continent.

Diplomats, though, say the former foreign minister lacks the backing of French President Nicolas Sarkozy on this.

The ongoing row has turned the spotlight on the EU's often long-winded process of introducing laws. Many experts believe it bodes ill for reaching agreement on other more controversial laws, such as establishing powerful new watchdogs for Europe.

The tug-of-war between Brussels and Washington will also hold up leaders of the Group of 20 most prosperous countries who are trying to keep momentum in a regulatory crackdown on banking.