The news out of Brussels is that the EU finance ministers have called off an attempt to reach an agreement on hedge fund regulation.
Far more than in the US, in Europe hedge funds have become boogey men of the financial crisis. One reason for this is undoubtedly that continental European politicians face little political risk from attacking hedge funds. There simply aren’t enough people working in hedge funds in continental Europe to make a difference and campaign finance rules have all but locked them out from participating in the electoral process.
But any attempt to regulate hedge funds in continental Europe depends on one thing the continental Europeans cannot control or require–the cooperation of Britain. 70 per cent of alternative investment funds in Europe are located in the UK, which means any regulation not endorsed by Britain will be largely ineffective.
Britain was set to lose a clash with the continentals, led by France, over the new rules favouring tougher restrictions on off-shore hedge funds based in places like the Caymans that don’t have strict local oversight rules. US hedge funds feared that our own regulatory scheme might be loose enough that European investors would be blocked from investing in US hedge funds.
Unlike the situation on our own Capitol Hill, EU politicians appear to hate public fights over policy. So they’ve scrapped the regulation…for now.
BRUSSELS (AP) — European Union finance ministers have called off Tuesday talks on new rules to oversee hedge funds, saying they need more time to strike a deal.
Spanish government spokeswoman Cristina Gallach, whose country currently leads EU meetings, said nations need “more time to reach the maximum support possible.”
This will see efforts to bring Britain on board a compromise deal in May or June. Diplomats said earlier that Britain was “very isolated” and was heading for a clash with France, which wants to toughen rules on funds based outside the 27-nation bloc.
More than 70 per cent of alternative investment funds — which also include private equity funds — are based in Britain.
A lack of transparency and speculative trading have been blamed by officials for contributing to the financial crisis, including Greece’s debt troubles.
The new law, when completed, could block foreign funds from Europe if they don’t face tight oversight at home. This is aimed at funds based in tax havens like the Cayman Islands where supervisors might not be checking on risks they are taking on.
U.S. Treasury Secretary Timothy Geithner wrote to EU officials last week, warning them that the draft rules could also block American funds from selling to European investors.
It is unclear if the rules would actually shut U.S. funds out of Europe.
The new law would likely require managers of large funds doing business in Europe to register with local market regulators and to regularly inform supervisors about their trades and risk exposure to prove they don’t pose a threat to the financial system.
They would have to disclose their overall trading strategy, their risk management system and explain how they value and store assets — and be obliged to hold a minimum level of capital to cover potential losses.