US and EU in a battle over hedge funds

Steve Dinneen
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THE bitter war of words between the US and Europe over hedge fund regulation reached new heights yesterday.

The EU reacted furiously to criticism of its plans to clamp down on hedge funds. US treasury secretary Tim Geithner had complained tough new rules passed down from Brussels could alienate US hedge funds trading in Europe. But the EU said the changes simply meet commitments already discussed with Washington.

The dispute could play into the hands of the UK, which has been campaigning for lighter rules for hedge funds, unfairly cast as whipping boys after the financial crisis.

France and Germany, both campaigning for tougher legislation, had appeared to gain the upper hand but now UK Prime Minister Gordon Brown and French president Nicolas Sarkozy will thrash out a compromise in London today.

The dispute was sparked by a letter written by Geithner to EU financial markets chief Michel Barnier, in which he criticised proposed rules to curb hedge fund borrowing and pay. The EU plans to closely scrutinise foreign hedge funds operating within Europe, as well as imposing stricter regulatory standards for their European operations.

Washington fears this could place New York hedge funds based in London at an unfair disadvantage. The major sticking point relates to proposed law changes restricting hedge funds, private equity firms and banks from accessing funds based outside the 27 countries in the EU bloc.

A spokesman for Barnier denied the legislation would put foreign funds at a disadvantage. He said: “The EU decision to act on hedge funds is in line with a G20 decision to reinforce transparency. The new hedge fund rules do not discriminate against foreign players.”

The news comes as four EU states called for an inquiry into the role of speculation linked to Credit default swaps trading in EU government bonds.