EU ministers strike breakthrough deal on hedge funds (Roundup)

Oct 19, 2010, 15:48 GMT

Luxembourg - European Union finance ministers meeting in Luxembourg reached a breakthrough agreement on regulating hedge and private equity funds, as well as their managers, officials said Tuesday.

'The big change is that at European level there was no regulation and no supervision, and now there will be one,' EU market regulation commissioner Michel Barnier said.

As part of its drive to place financial markets on a tighter leash, the EU is seeking to demand greater transparency from hedge funds, which some see as having contributed to the 2008 financial crash with destabilising moves on the markets.

Belgian Finance Minister Didier Reynders, who as a representative of the EU's rotating presidency chaired talks and brokered a compromise, said the deal represented 'real progress.'

Efforts to approve legislation had been stymied by disagreements between Britain, where most of the European hedge fund industry and foreign-owned funds operating in the EU are based - and France, which spearheaded calls for stricter controls.

The argument focused on 'EU passports' to let foreign hedge funds operate across the bloc with a single licence.

France successfully insisted that they be issued by the European Securities and Markets Agency (ESMA), a new, Paris-based EU watchdog due to start work next year.

But as part of the compromise, the new regime will take time to become operational: assuming speedy European Parliament approval, new EU legislation is expected to enter into force on January 1, 2011.

EU states would then have two years to incorporate it into their national legislation, meaning that EU passports would start being issued only from 2015.

From then on, a three-year transitional period would be set in place, where old national authorization procedures for hedge funds and their managers would co-exist with the new EU-run set up.

Officials indicated that a new clause giving ESMA the power to order national regulators to ban hedge fund activities posing a risk to financial stability was instrumental in getting France to drop its opposition.

Last week, a French official protested that the hedge fund industry should not be able to escape the powers of oversight ESMA has already been given over banks, insurance companies and credit rating agencies.

Tuesday's deal among EU states will now need to be reconciled with the EU parliament's own views. If the two sides can agree quickly on a common set of rules, formal endorsement from each is expected to follow next month.

'It would be perfect if we could have a vote in the European Parliament and an agreement in the (EU) council (of ministers) in November,' Reynders said.

The EU is keen to make progress ahead of next week's G20 meeting of finance ministers in Gyeongju, Korea, where global financial regulation will be on the agenda. The meeting will pave the way for the G20 summit in Seoul on November 11-12.

Reynders and Barnier highlighted the EU's was doing its homework, as Tuesday's agreement on hedge funds came on the back of last month's approval of an overarching EU financial sector regulation.

In Luxembourg, EU ministers also discussed legislation that would boost cooperation between national tax offices in a bid to strike against tax evaders, but failed to reach agreement.

Draft proposals are sensitive for countries such as Luxembourg and Austria, where banking secrecy traditions prevail.

Diplomats said several countries asked for a decision to be postponed until the next regular meeting of EU finance ministers on November 17, in Brussels.