France cedes to US in row over hedge fund control

Date: Tuesday, October 12, 2010
Author: Jamie Dunkley, Telegraph

France has given a clear indication that it is ready to make concessions to the US Government in their long-running dispute over controlling hedge funds.

Christine Lagarde, the French finance minister, has written to US Treasury Secretary Timothy Geithner about revising European proposals which would see strict controls placed on the hedge funds across the 27-member block in the wake of the financial crisis.

In the letter, she rebuffed US criticisms that French demands for the new EU rules were protectionist and penalised foreign funds operating in Europe. However, in a change of policy Ms Lagarde said foreign funds would now be allowed to qualify for a pan-European licence if the scheme was phased in and if the new permits were issued by a new EU regulator.

The development represents a change of policy for Paris. Ms Lagarde had previously argued that issuing a EU licence to foreign funds would be a mistake because controls on those operators were unlikely to be tough enough. This led to a stern response from Mr Geithner last week, warning her against placing restrictions on foreign hedge funds.

Under the proposals, the new European watchdog would have the power to demand information about how the funds invest and borrow money. It could also intervene by restricting trading, including a ban on short-selling.

The law would also impose a loose pay code on hedge fund managers, requiring them to stagger earnings over a number of years to reduce the incentive for managers to take big risks for one-off windfalls.

Governments and lawmakers across Europe remain divided over the issue, with many favouring the existing system, which requires foreign funds to apply for permission to sell to investors on a country-by-country basis.

It remains unclear whether Britain would accept this system, which would give an EU watchdog more power to police the bloc's hedge funds, weakening the importance of London, which is Europe's hedge fund capital.

France has been sensitive to Mr Geithner's criticism so close to its presidency of the Group of 20 countries. Diplomats and lawmakers now hope to broker a deal on regulating hedge funds in time for a planned vote in the European Parliament, which is due to give its seal of approval on the law this month.