UK holds talks to try to fend off EU plan for tighter regulation of hedge fund industry

Written by Ray Clancy

Friday, 12 March 2010 09:18

Britain will try to secure a compromise deal over the tighter regulatory controls of hedge funds at a meeting in London today between Prime Minister Gordon Brown and French President Nicolas Sarkozy.

The UK home to most of Europe’s hedge funds has become increasingly isolated in fighting for lighter regulation of the sector amid fears that a draft European Union directive could impose new barriers to business and damage the hedge fund and private equity industries based in London.

Alistair Darling, UK Chancellor of the Exchequer, has argued that hedge funds authorised by regulators to operate in one EU country should be allowed to operate under a ‘passport’ in all other countries.

The financial sector in London believes that French cultural opposition to hedge funds lies behind the drive to clamp down on the operation of alternative investment funds and concerns increased yesterday when Sarkozy and German Chancellor Angela Merkel called for a clampdown on the type of speculative trading that exacerbated Greece’s debt crisis and undermined the euro in recent weeks.

In a letter Sarkozy, Merkel and the leaders of Luxembourg and Greece asked European Commission President Jose Manuel Barroso to launch an inquiry into the role of credit default swaps in the trading of government bonds in European countries.

They called for mandatory reporting of all derivatives trading in Europe and said the EU should consider banning speculative trading in credit default swaps. They also proposed new curbs on market abuses and improved safety in private derivative trading.

Credit default swaps are a form of insurance for buyers to protect them against the risk that a seller or borrower would default on a security such as a government bond. Greece argues that traders of the swaps who bet against Greece’s debt are raising its borrowing costs, making default more likely. It claims trading of swaps, which is unregulated, is racking up big profits for Wall Street banks and hedge funds at Greece’s expense. Prime Minister George Papandreou likened the practice to buying insurance on a neighbour’s house and then burning it down to collect.

The US is also critical of the EU plans, claiming they are protectionist and will discriminate against foreign players. Treasury Secretary Tim Geithner has complained to EU financial markets chief Michel Barnier about the proposed rules to curb hedge fund borrowing and pay.

Geithner’s complaint widens further a rift between Washington and Brussels, with Washington saying Greece is the author of its own misfortune. The two sides also disagree over how to deal with large banks that pose a risk to the wider economy.