European FMs agree to rein in hedge funds, PEs

The finance ministers of the European Union reached an agreement to introduce more stringent control over hedge funds and private equity firms as part of a major effort to regulate financial markets.

Overriding objections from Britain, the finance ministers of the 27-bloc yesterday agreed that all hedge funds must get registered in EU member-nations to operate in the continent. They should also make their activities more transparent by keeping open their investment strategies and the risks involved in such investments.

"We have reached a broad agreement on the general direction" of tightening the regulations on hedge funds and private equity firms, Spanish finance minister Elena Salgado said at the conclusion of a two-day meeting of the finance ministers in Brussels.

Salgado chaired the meeting in her capacity as the current president of the EU council of ministers.

The agreement will come into force only after the European Parliament in Strasbourg endorses it. The EU parliament yesterday passed a resolution calling for more stringent regulations on hedge funds and private equity firms.

Meanwhile, yesterday Germany went a step further by banning short-selling, in its effort to contain the fallout of the Eurozone crisis on the capital markets in general and the euro in particular. However, instead of it helping markets, the move further unsettled the global markets today. While the European bourses shed more than 1.5 per cent in their opening trade, Asia stocks were battered.

Under the present time-plan of the finance ministers, the EU parliament could debate the proposals by the finance ministers and pass a legislation in July after consulting the EU member-nations.

The finance ministers indicated that the crackdown on the hedge funds is the first step towards a comprehensive regulation of financial markets.

They are also working on plans to introduce a financial transaction levy to involve financial institutions in paying for the costs of future financial crisis.

Highly speculative business practices of the hedge funds have been cited as one of the main causes for the outbreak of the global financial crisis in 2008 and more recently they were criticised for aggravating the debt crisis in the Eurozone by speculating on the single currency-- the euro.

 

Hedge funds are the riskiest form of investment funds and they have at their disposal all tricks of financial markets.

They are increasingly earning money by speculating on positive as well as negative developments in the markets.

Therefore, many governments view them as a risk to the stability of the world's financial system, and demand that they should be put under tougher control.

It is estimated that hedge funds have assets worth more than $1.5 trillion world wide.
     
It can be noted that the British government had, for months, blocked an agreement on regulating hedge funds, because it feared that such a move would diminish London's importance as a major financial centre.
    
Around 80 per cent of hedge funds and PE firms operating worldwide are based in London, and there are fears that a clamp down on their operations in Europe might force them to move to Singapore, considered to be another haven for hedge funds.
    
German finance minister, Wolfgang Schaeuble, said it is quite important that the EU could finally reach an agreement on tougher regulations for hedge funds, after years of wrangling over whether and how to regulate them.
    
"A gap in regulating the financial markets will be closed," he said.
    
An agreement so far was prevented by the massive lobbying by hedge funds and PE firms, Schaeuble said in a German television interview.

Those hedge funds, or private equity firms, which want to invest in Europe, must comply with the EU rules.

If they shift their operations to Singapore or other locations, "then they should not complain if something goes wrong," he said.
    
Britain's new finance minister, George Osborne, had urged his EU colleagues to allow hedge funds from countries to obtain an EU licence instead of getting registered in every member-nation.
    
The European Commission also made a similar proposal.

But the majority of the EU members were against a central EU licensing for hedge funds from abroad, and insisted that a decision should be left to the national authorities.
    
However, Britain's EU partners agreed that London's concerns will be taken into account in the upcoming negotiations with the European Parliament on curbing the hedge funds.