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29th Mar 2024

EU reaches deal in long-running hedge fund battle

  • Critics point to the high level of risk of some hedge fund activities (Photo: badcat777)

The UK, home to most of the world's hedge funds, has won out in a long-running battle with France over European supervision of the controversial and lightly-regulated multi-trillion-dollar sector.

EU finance ministers agreed on Tuesday (19 October) to regulate the sector, under the eye of the European Securities and Markets Authority - the new Paris-based market watchdog tasked with preventing future financial crises on the scale of 2008.

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Hedge funds, blamed by some for exacerbating the scale of the crisis, are essentially unregulated and opaque investment vehicles. The funds engage in riskier bets than more tightly regulated funds, due to their scale of leverage, short-selling and appetite for risk.

Under the new regime, the EMSA will manage a 'passport' system for hedge fund managers from outside the EU, giving them access to investors from all 27 member states so long as they are registered in one country.

Paris had wanted the EMSA to be able to issue licences to force funds to register with financial regulators in each different EU member state, but the UK, home to 80 percent of the world's hedge funds, balked at the idea, saying that such a rule would send funds scurrying to other jurisdictions.

The UK prevailed in the end, with France isolated amongst the member states, and registration under one regime will be sufficient to win a passport for the rest of the bloc.

The new rules, will force the funds to increase the amount of information they have to provide to regulators, including which products they are investing in. Managers' bonuses and the use of debt will also be restricted.

The passport system has also been delayed, being introduced gradually in the coming years, with licensing for non-EU funds phased in by 2015.

"We have reached an agreement with unanimity," said Belgian Finance Minister Didier Reynders. His country holds the EU's six-month rotating presidency and has finally brokered a deal acceptable to both sides.

"We have had innumerable compromises," he continued. "We have now got a final text fully supported by all."

The French finance minister, Christine Lagarde put on a brave face: "It is indeed a compromise and we probably could've come up with something better."

She added that at least the deal delivered "genuine supervision and regulation of actors who were to-date not at all controlled."

EU internal market commissioner Michel Barnier for his part said that the deal represented "the first time the hedge fund sector was subject to European regulations."

The deal now passes for approval by the European Parliament.

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