18 May 2010

Hedge fund rules 'agreed by EU ministers'

EU finance ministers have reached "general agreement" on tighter restrictions for hedge funds and private equity firms, Spain has said.

They will now negotiate with the European Parliament to draft legislation for the industry.

With 80% of European hedge funds based in London, UK Chancellor George Osborne set out UK objections to some of the proposed new rules.

Ministers agreed talks on the final deal would take account of UK concerns.

A UK Treasury spokesman said this was a "very good result in the circumstances, the best outcome we could have expected".

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There is a widespread view on the continent that hedge funds somehow caused the credit crunch and financial crisis of 2008.

Robert Peston

BBC business editor
Robert Peston on hedge funds

Spain's Finance Minister, Elena Salgado, said there was "general agreement" about tighter restrictions for the sector.

Some European governments, notably France and Germany, have long suggested that hedge funds pose a risk to the stability of the world's financial system and so need more regulation.

Hedge funds use sophisticated, complex investment strategies to make returns, and often make money when markets are falling


The European Commission wants new rules to overcome what it sees as gaps and inconsistencies in existing national regulatory frameworks.

The finance ministers have proposed rules that do not give hedge funds the automatic right to trade across the 27-nation bloc.

However, the UK argues that in exchange for accepting rules on closer scrutiny, fund managers should be given extra benefits - such as more freedom to function across EU borders.

HEDGE FUNDSContinue reading the main story

They control around $1.5 trillion in assets globally, with about $300bn managed from within the EU - mainly in London

Offer their investment capabilities primarily to very wealthy individuals or to professional investors such as insurance companies and pension funds

Market experts reckon hedge funds account for as much as 50% of all trades on the London Stock Exchange

Some governments therefore fear they could pose a risk to the stability of the world's financial system

There are also plans to make it much tougher for non-EU hedge funds to sell their products across the single market.

Andrew Baker, chief executive of the Alternative Investment Managers Association, said the plans were "very disappointing" and would "effectively ban EU investors from investing outside Europe".

"This will have negative social consequences across the EU because it will be European institutional investors like pension funds who will be affected," he said.

The US government has also objected to the plans to restrict trade, labelling them protectionist.

Other aspects of the regulation are likely to include:
•Legislation for private equity investors - in particular the way they treat other shareholders and employees when they buy a big stake in a company

•Stricter reporting and registration rules, and guidelines to limit pay

•Creating a European financial supervisor to keep checks on the amount of borrowing hedge funds can take on.

There are also proposals for new guidelines on short selling, including requiring managers to regularly disclose information on important short positions to national authorities.

Short selling is a technique that sees investors borrow an asset, such as shares, currencies or oil contracts, from another investor and then sell that asset in the relevant market hoping the price will fall.

The aim is to buy back the asset at a lower price and return it to its owner, pocketing the difference.

On Monday, a key committee of Euro MPs backed a directive that may lead to greater supervision of the hedge fund industry.

Finance ministers must now negotiate with the European parliament over the legislation. Talks will begin on 31 May before a final vote in July.

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