G7 Won't Regulate Hedgies; EU May Be Tougher

by Jeremy Hetherington-Gore, Tax-News.com, London

24 April 2007

After the G7 finance ministers effectively kicked proposals for more hedge fund regulation into touch 10 days ago in Washington, Germany was hoping for a more sympathetic hearing from EU finance ministers meeting in Berlin last weekend.

'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.

The Fed seems to be a mite more interested: during the week, Jim Embersit, Deputy Associate Director for the Market and Liquidity Risks Section for the Fed's Division of Banking Supervision, told a panel discussion at New York University that hedge funds, their lenders, and investors have considerable work to do to adopt consistent standards for managing risk. "This is an area that is crying out for leadership in the investor community," he said.

In Berlin, 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. Echoing Embersit, the FSF says that investors should demand more information on risks.

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 the EU's internal market commissioner, Charlie McCreevy, who was present in Berlin, is on record as opposing such a move. And the post-meeting communique merely said that Ecofin would 'revisit' the subject at its next meeting in May.

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