France, citing fears of insufficient regulation, refused with German backing a few weeks ago to back adoption of new hedge fund rules that would give funds outside of the EU area a licence or passport to do business across all 27 EU states.
In a letter to US counterpart Timothy Geithner, French economy minister Christine Lagarde responds to recent US grievances, saying the system France supported was “neither protectionist... nor discriminatory”.
But by also referring in the letter to a potential phasing-in of EU licenses for foreign funds to work across Europe, Lagarde could have been leaving the door open to a deal addressing Washington’s chief concern about the new EU rules.
“We believe that awarding a passport to offshore funds is not satisfactory as they would not be subject to the same regulatory provisions as EU funds on many issues ranging from the governing law and competent court, the capacity to obtain enforcement or a judgement, the professional requirements and financial liability of auditors to valuation rules,” it says.
“If however a passport for offshore funds was to be adopted, France believes that such a passport should be truly European,” Lagarde says, adding it was important such funds register with and be supervised by a European body.
“This would also parallel the approach adopted under the Dodd-Frank act which requires funds advisers to be registered by the SEC (US watchdog),” Lagarde says in the letter.
It remains unclear whether Britain would accept Lagarde’s conditions for any deal, namely a new EU watchdog rather than national supervisors should police the bloc’s hedge funds.
KEY POINTS ON PROPOSED HEDGE FUND LEGISLATION
The draft law does not lay down rigid rules, such as a cap on hedge-fund borrowing or pay, but sets up a framework for watchdogs to police hedge funds and private equity firms.
Most significantly, the law would put hedge funds under the supervision of a pan-EU regulator, one of three new watchdogs setting up from January. The watchdog could demand information about how funds invest or borrow money. It could also intervene with trading curbs, such as a ban on short-selling.
Think tanks and finance experts are sceptical about whether the regulator will have sufficient clout to make powerful hedge funds adhere to the rules.
At the heart of the row about how the rules should look is a passport scheme or licence for foreign hedge funds to do business throughout Europe. Governments and lawmakers are divided over the issue, with many in favour of keeping the current system, which requires foreign funds to apply for permission to sell to investors on a country-by-country basis. The US says refusing a passport unfairly blocks foreign funds.
Under the draft being considered, EU countries want hedge funds to inform authorities of how and why they have borrowed money to invest. This could be shared with other watchdogs.
They also want to give supervisors power to limit borrowing at a hedge fund if they see a threat to the financial system. EU lawmakers are pushing for even more stringent borrowing limits.
The law would extend the range of information hedge funds are required to hand over, such as what products and on which markets they are trading as well as outlining key exposures.
For example, a fund could be told to reveal its short-selling positions, something most would be reluctant to do in case the information were to fall into the hands of rivals. The information would be shared among watchdogs around Europe as well as a new market-risks supervisor, based in Frankfurt.
The authorities would be given powers to demand documents from hedge funds, to quiz managers, and to probe telephone or data records as well as launch surprise on-site checks.
A system of guardians will monitor what is happening to investor money at a hedge fund as well as safeguarding the investments it has made.
Lawmakers hope this would prevent sham investment schemes like that run by Bernard Madoff.
The law would also impose a loose pay code on hedge-fund managers, staggering earnings over a number of years.