Ecofin To Rule Against Hedge Fund Regulation

by Ulrika Lomas, for LawAndTax-News.com, Brussels

08 May 2007

It sounds as if the Anglo-Saxons have won the day in the battle against imposing a regulatory strait-jacket on hedge funds, at least on European turf; far from agreeing a new regulatory structure, today's Ecofin meeting is set to laud the contribution of the hedgies to financial stability.

The EU's monthly finance ministers' meeting will hear ritual calls for vigilance from France, Germany and the Netherlands, but ministers are expected to affirm that the current approach towards regulating and monitoring hedge funds has worked well and has even enhanced resilience to systemic shocks.

Germany in particular has been pushing for greater controls over hedge funds ever since the Deutsche Boerse affair in 2005, which saw investors remove Chief Executive Werner Seifert and Chairman Rolf Breuer, leading the SPD's Franz Muentefering to compare the funds to locusts.

The Ecofin meeting will agree a 'common position' to be put to the G7 later in the month, and it is likely to endorse the principle of indirect supervision, which has strong support from Charlie McCreevy, EU internal market commissioner. He has ruled out new regulation. Draft wording for the common position lays responsibility for supervision of hedge funds squarely on the private sector.

G7 finance ministers effectively kicked proposals for more hedge fund regulation into touch during the joint IMF/World Bank meetings last month in Washington. 'G7 Deputies agreed to keep the matter under further consideration,' said the G7 communique, about as close to a put-down as you get in officialese.

The Washington meeting was co-chaired by the G7 presidency, State Secretary Thomas Mirow and Under Secretary of the Treasury, Tim Adams. After hearing a presentation by Under Secretary of the Treasury, Robert Steel, on the "Principles and Guidelines Regarding Private Pools of Capital" of the President's Working Group on Financial Markets, a progress report was given by the chairman of the Financial Stability Forum, Mario Draghi, on the update of the institution's 2000 report on Highly Leveraged Institutions. In addition, the chairman of the "Counterparty Risk Management Policy Group II", E. Gerald Corrigan, briefed participants on the implementation of the group's 2005 report's findings. The discussion with private sector participants focused on best practices on risk management, current hedge fund and private equity regulations and disclosure issues, including a discussion of best practices.

In Berlin, at last month's Ecofin meeting, EU Finance Ministers and central bank governors discussed the "systemic risks" posed by hedge funds and other highly leveraged financial institutions, reviewing recommendations from the Financial Stability Forum that the risk management practices of financial institutions entering into contracts with hedge funds should be strengthened.

The FSF would like to compel hedge fund managers to provide sufficiently detailed and frequent information to allow investors and the banking institutions to assess strategies and risks. But Charlie McCreevy, who was present in Berlin, is on record as opposing such a move, and in the intervening month the EU's position seems to have moved noticeably closer to the pro-market British position.

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