EU parliament and governments agree on new hedge fund regulation

Oct 26, 2010, 14:45 GMT

Brussels - Representatives of the European Parliament and European Union governments agreed Tuesday on a new set of rules for managers of hedge funds and private equity firms, paving the way for final approval of the regulation.

As part of its drive to place financial markets on a tighter leash, the EU is seeking to impose greater transparency on so-called alternative investment funds, which some see as having contributed to the 2008 financial crash with destabilising moves on the markets.

'This directive is to enforce transparency, responsibility and surveillance ... and aims to ensure that there is no repeat of the financial crisis or any further massive payment from public funds to clean up the direct and indirect consequences,' EU market regulation commissioner Michel Barnier said in a statement.

With Tuesday's agreement, the EU assembly broadly endorsed the compromise that had already been approved last week by EU finance ministers in Luxembourg.

Previous 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' that will let foreign hedge funds operate across the bloc with a single licence.

Under the final set-up, managers of non-EU funds will be able to obtain passports only in return for signing up to international standards against money laundering and tax evasion.

The European Securities and Markets Agency (ESMA), a new Paris- based EU watchdog due to start work next year, is to set standards for the issuance of the permits, which will be handled by national regulators.

On France's insistence, ESMA also won the power to order national regulators to ban hedge fund activities in case they pose a risk to financial stability.

Parliament, on its part, insisted on curbing 'asset stripping' - the practice used by private equity firms to dismantle companies after taking them over in order to make a quick profit, in disregard of their long-term prospects.

EU lawmakers are expected to formally vote on the reforms on November 11, paving the way for the EU regulation to enter into force on January 1.

Its provisions, however, will only be introduced gradually: EU states will have two years to incorporate them into their national legislations, while EU passports will not completely replace old national authorization procedures until 2018.