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Ambitious EU hedge fund regulation collapses over ‘passport’ disagreement

Friday, June 25, 2010
Opalesque Industry Update – The dream of portraying Europe as a model for ambitious hedge fund rules suffered a major blow Thursday over serious disagreements about the controversial “passport” rule, while Europe’s trans-Atlantic rival, the U.S. is close to signing off on a key financial reform bill within weeks, various media reports said.

As expected, the UK, which is the heart of alternative investment in Europe, is at the center of the debate, particularly over the required strict reporting and custody requirements on hedge and private equity funds, including leverage and borrowing limits

The UK is asking for exceptions to the so-called “passport” rule which was approved by the European Parliament in May and which requires foreign hedge funds and private equity funds to pass certain requirements before they will be allowed to operate across Europe, reported

The UK is also asking the European Parliament to give foreign funds that fail a second chance and allow them to apply for a license to operate in individual countries.

With the collapse of Thursday’s negotiations, French lawmaker Jean-Paul Gauzes said he had moved the voting on the AIFM Directive to September, signaling that the 27 member-countries EU bloc will not pass the measure on July 6 as earlier scheduled.

Gauzes said, "The Spanish Presidency (of the European Union) informed me it would not be possible to reach a deal before the end of June. I have yesterday taken the decision to delay the vote until the second parliamentary session in September.”

Collapse, a boost to UK
It is very easy to understand where Britain is coming from when opposing over-regulation of hedge fund and private equity firms.

The latest statistics released by the UK’s Financial Services Authority (FSA) showed that Britain is home to 80% of Europe’s hedge-fund management industry and 60% of private equity funds. It is also the center for non-EU funds that want to enter the European market. Unfortunately for the UK, it does not have enough muscle among EU ministers to stop the law from being approved.

But it has the backing of the U.S. In March this year, U.S. Treasury Secretary Timothy Geithner wrote a letter to EU Financial Services Commissioner Michel Barnier, to express his concern that the draft AIFM Directive would discriminate against U.S. funds.

Both the U.S. and UK financial regulators criticized the pending EU hedge funds rules which they described as going beyond international standards and making it difficult for U.S. investment funds to access the bloc's market.

Early cracks in negotiations
Signs of cracks in the negotiations were first seen early this month when discussions between the EU Parliament and the European Council turned sour over the passport rules. The Council has expressed opposition to the scheme and instead suggested to issue some form of certification, which would take in financial services in third countries.

During a third meeting last week, the European Parliament, the European Commission and the European Council failed to reach an agreement and the meeting was mired by wrangling, insiders said Financial News. Some people who attended predicted that Thursday’s meeting would not result in an agreement.

AIMA thinks AIFM Directive ‘impractical and unworkable’
The Alternative Investment Management Association (AIMA), the global organization representing hedge funds, last month said that while it supports efforts of the EU to formulate hedge funds and private equity firms rules under the AIFM Directive, it believes that many of the provisions under the proposal are “impractical and unworkable.”

"In particular, it seems that the process of negotiation in ECON was so highly-politicised that it took little note of the legal and practical feasibility of the compromise amendments put forward,” AIMA said in its statement issued last month.

The industry body also warned that a flawed AIFM Directive could have an impact far wider that on just hedge funds and private equity firms.

Andrew Baker, CEO of AIMA, was quoted as saying: “Of course the hedge fund and private equity industries would be impacted by a flawed Directive, but the consequences would be much wider. We have already heard how the Directive would hit small firms across Europe and make it more difficult for new businesses to be created, and how development banks investing in emerging markets would be affected. Real estate and infrastructure investment in Europe would also be impacted because funds in this sector would also be covered by the Directive. We’re talking about schools, hospitals, shopping centres, things that affect ordinary EU citizens.
- Komfie Manalo

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