EU Forges Ahead With New Hedge Fund Rules, Despite Objections From Britain, US, Canada

Treasury Secretary Geithner claims the EU law, formed to regulate alternative investment vehicles, would negatively impact US fund managers and banks.

(March 15, 2010) – The European Union is moving closer to more stringent rules that would require greater disclosure among hedge funds, despite US worries, articulated by Treasury Secretary Tim Geithner.

His concern reflects fear among American as well as British and Canadian investors that the EU’s reforms are equivalent to protectionism, discriminating against banks, hedge funds and private equity funds.

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In a March 1 letter, Geithner accused Brussels of advancing on protectionist rules to regulate the hedge fund and private equity industries. However, top European Union officials maintain that the 27-nation bloc’s proposed rules were in line with the Group of 20’s decision to encourage transparency in the financial system.

Geithner’s letter addressed to Michel Barnier, Europe’s financial markets chief, stated: “We are concerned with various proposals that would discriminate against U.S. firms and deny them access to EU markets that they currently have,” according to the Wall Street Journal. The EU’s proposed law would exclude American funds from marketing to European investors under the rules that mandate all funds sold in Europe have stringent oversight, Geithner expressed.

Early next week, EU finance ministers are scheduled to vote on the draft proposals on hedge funds. Most countries are expected to vote in favor of the new rules, but the European Parliament would still need to approve the legislation, which could take a few additional months, in order for the proposals to become law. If passed, the proposals would require large fund managers doing business in Europe to hold a minimum level of capital to hedge against losses, register with local market regulators, and prove they don’t pose a threat to the financial system by regularly sending their supervisors updates about their trades and risk exposure, according to Canadian Business. Additionally, the proposals stipulate that fund managers would be forced to disclose their overall trading strategy, their risk management system and explain how they value and store assets.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

“This should be the goal: that a firm cannot trade for its own account in securities it is selling to its customers. That’s roughly what Volcker is trying to say. You have brokers and you have dealers. You don’t have broker-dealers. Even in my day it was shocking the extent to which my job as salesman was to get bond traders or derivatives traders out of their shitty positions and use the customers as the dumb money. It’s a perversion of how capital markets are supposed to work. If you just do what I said, the end result is a far less profitable financial system – one that no longer has the status it has now, one where the best students from MIT and Harvard aren’t flocking there. It’s not a sign of a healthy society when the smartest people want to be in a middleman role.”

To catch the entirety of Michael Lewis’ Interrogation, out in ai5000 Magazine in early April, click here.

aiCIO Editorial Staff