The E.U. and U.S. Quarrel Over Hedge Funds

The E.U. and U.S. Quarrel Over Hedge Funds
By JAMES KANTER
Copyright by The New York Times
Published: March 11, 2010
http://www.nytimes.com/2010/03/12/business/global/12hedge.html?hpw


BRUSSELS — The European Union on Thursday rebutted criticism by the United States of its plans to tighten the rules on hedge funds, even as Britain sought to water down the regulation to safeguard its own financial sector.

The trans-Atlantic dispute broke out after the U.S. Treasury secretary, Timothy F. Geithner, complained to Europe’s financial markets chief, Michel Barnier, about the proposed crackdown.

Amadeu Altafaj, a spokesman for Mr. Barnier, immediately struck back, saying that the E.U. decision to regulate the funds was in line with previously agreed-upon policies by the world’s biggest countries to enhance oversight of financial markets in the wake of the worst financial crisis in a generation.

Mr. Altafaj did not give details of the content of the letter from Mr. Geithner, but he sought to defend the European Union against criticism that it was closing its markets to help encourage E.U.-based funds.

The “new hedge fund rules do not discriminate against foreign players and are not protectionist,” he said.

Most European governments are eager to act decisively against what they regard as an opaque industry run by secretive investors.

Some European politicians also suspect hedge funds of contributing to severe difficulties in Greece by staking money on whether the country will need to be bailed out to pay its debts.

E.U. finance ministers are scheduled to meet Tuesday in Brussels to vote on the draft proposals on hedge funds. Diplomats said ministers from most countries, with the exception of Britain, were likely to vote in favor of the new rules. The legislation still would need the approval of the European Parliament to become law, a process that could take a few more months.

The British are worried that the rules could lessen the appeal of London as a base for the hedge fund industry; about 70 percent of the hedge funds in the European Union are based in London. A main British concern is that hedge funds with money held in accounts outside the European Union would be treated differently from hedge funds with money inside the 27-country trade bloc.

Foreign funds — and foreign funds that employ managers in London — would not be able to benefit from so-called E.U. passport provisions, which allow financial services providers to treat the trade bloc as a single market. That could make it more difficult for foreign funds to sell their services to wealthy investors in Europe.

Another concern of Britain is that fund managers might move outside of the European Union to concentrate on raising money in other parts of the world.

The rules would require funds to inform regulators about their trades and debts to ensure that they were not posing a risk to the financial system. Funds also would have to disclose their overall trading strategies and their risk management systems, and explain how they value and store assets. They could also be obliged to hold a minimum level of capital to cover potential losses.

Also on Thursday, President Nicolas Sarkozy of France, Prime Minister Jean-Claude Juncker of Luxembourg, Chancellor Angela Merkel of Germany and Prime Minister George A. Papandreou of Greece jointly called on the European Union to look into ways of limiting the speculative use of credit default swaps.

In a letter to the European Commission that was published on the Web site of the French president, the leaders suggested there should be mandatory reporting of trades and more careful oversight.

In a thinly veiled reference to the financial difficulties faced by Greece, the leaders also called on the European Commission to begin “a thorough enquiry on the role and the impact of speculative behavior” on credit default swaps and bonds issued by European states.