E.U. Moves Ahead with AIFM Directive Legislation
On Tuesday, E.U. finance ministers approved plans to reign in hedge funds with tough new oversight rules, overriding the objections of the UK (and, more specifically, the City of London), where some 80 percent of European hedge funds are estimated to be based. The proposed legislation aims to subject so-called “alternative investment funds” to greater scrutiny in the interest of avoiding future financial crisis like the credit crunch and the recent run on Greece’s debt, both of which many critics have claimed the hedge fund industry’s excessive risk taking has had a substantial role in instigating.
But European government officials have become increasingly suspicious of the notoriously secretive hedge fund industry. France and Germany are the notable leaders of the call for more regulation. In fact, Germany is apparently so concerned about the sneaky practices that hedge funds employ that on Tuesday night, according to Time Magazine,
Germany unilaterally banned naked short selling, where the trader sells shares without establishing that they can be borrowed in the future, despite the fact that the practice is rarely used in Germany — news that sent the euro to a four-year low against the dollar.
That move followed on the heels of the decision of European finance ministers to move ahead with the proposed AIFM legislation. It should be noted that the versions of the draft law presented to the European Parliament and the finance ministers differed in that, as the Wall Street Journal puts it, “The European Parliament’s draft even offers the carrot of a pan-EU ‘passport,’ provided funds agree to comply with the new rules and their home regulator agrees to enforce them.” The WSJ also points out that both versions are an improvement upon earlier proposed drafts– and with a final version not expected until July, there is still time and room for compromise (though whether the newly elected British Conservative-Liberal Democrat leadership has the connections or clout to do so remains to be seen).
According to Time Magazine:
The draft law aims to put “alternative investment funds” — hedge funds and private equity — under closer scrutiny by a new pan-European watchdog, which will be armed with the power to cap their borrowing from 2012. It will oblige fund managers to register with national authorities and reveal to both regulators and investors closely guarded information about their investments and borrowings.
The law also contains plans to make it much more difficult for non-E.U. hedge funds to sell their products across the single market, by forcing them to register in each individual member state.
Naturally, this last bit has “raised the hackles” of the Obama Administration, Geithner most notably. E.U. officials, however, insist that the move is not protectionist in nature (as Geithner has asserted) and is in accordance with the pledges made by G-20 leaders last year in London to set up the oversight, registration and reporting of hedge funds. And apparently the crackdown on hedge funds is only the beginning of a larger financial services overhaul planned by E.U. Internal Markets Commissioner Michel Barnier in the interest of avoiding another global financial crisis.
According to Time Magazine,
Other reforms in the pipeline include a crackdown on the derivatives market, new legislation on credit rating agencies, limits on banker pay, and new watchdogs being set up to police banks, insurers and markets.
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