24th Jan 2021

EU defends hedge fund plans after US criticism

  • The US has criticised the EU plans as being potentially protectionist (Photo: Downing Street)

The European Union has defended its draft hedge fund legislation, following criticism from the US that the rules could discriminate against foreign hedge funds, private equity groups and banks.

At a regular news conference in Brussels on Thursday (11 March), European Commission economy spokesperson Amadeu Altafaj said the bloc was entitled to come up with its own plans, and that the proposals were in accordance with G20 commitments.

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"The EU decision to act on hedge funds is in line with a G20 decision to reinforce transparency," he said. "The new hedge fund rules do not discriminate against foreign players and are not protectionist."

In a letter to EU internal market and financial services commissioner Michel Barnier on Wednesday, US treasury secretary Tim Geithner warned that the EU plans could cause a transatlantic rift by discriminating against US groups.

He pointed in particular to so-called "third country" elements of the draft directive, measures designed to force non-EU funds to comply with the new rules if they wish to seek investors inside the EU.

Member state diplomats were meeting in Brussels on Thursday to agree on amendments to the draft legislation, put forward by the European Commission last April. EU finance ministers are then expected to finalise the member state position at a meeting next Tuesday, with agreement from the European Parliament then needed before full ratification can take place.

Credit default swaps

The move to finalise a European position on hedge funds comes as a number of EU governments ramp up pressure for commission action on credit default swaps (CDSs).

In a joint letter to commission President Jose Manuel Barroso and Spanish Prime Minister Jose Luis Rodriguez Zapatero, dated 10 March, the leaders of four EU states called for an immediate enquiry into the role and impact of speculation linked to the insurance-type swaps.

"We must prevent speculative actions from causing so much uncertainty on the market that prices no longer provide accurate information and state financing reaches a fundamentally unjustifiable high level," said the letter.

Unheard of a decade ago, a CDS is a contract between two parties, under which the buyer pays for protection against bond default. 'Naked' CDS trading, where the bank or hedge fund does not own the underlying bond, has attracted particular criticism from politicians who blame the process for exacerbating the Greek debt crisis.

Large-scale purchases of CDSs can lead to increasing market doubts over the security of the underlying bond, they argue, pushing up bond yields and the cost of government borrowing.

The letter is signed by French President Nicolas Sarkozy, Luxembourg's Prime Minister Jean-Claude Juncker, German Chancellor Angela Merkel and Greek Prime Minister George Papandreou.

Further Greek bail-out details?

Mr Papandreou has just returned from a European tour and subsequent visit to the US, with EU finance ministers expected to endorse the fresh austerity measures announced by his government last week.

In return for the measures, Greece is pushing for greater details of a EU financial support plan to be made public, an action that would reassure investors and bring down Athen's borrowing costs, say Greek officials.

A Greek source suggested to EUobserver on Thursday that euro area finance ministers are gearing up to make a fresh announcement regarding a potential Greek aid plan on Monday, going beyond a statement of 'solidarity' given by EU leaders at an informal summit in Brussels on 11 February.

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