New EU Hedge Fund, Private Equity And Derivative Proposals

Author:Mr Peter Stapleton
Profession:Dillon Eustace
 
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A New EU Framework for Hedge Funds, Private Equity and

Derivatives?

On 18 December, 2008 the European Commission issued a formal

consultation document on hedge funds. The consultation

document1 sets out a series of targeted questions to be

considered by all EU citizens and organisations but contributions

are particularly sought from investors, the hedge fund industry,

other financial institutions, public authorities and listed

companies. It follows the policy announcements made to the

EMAC2 on 1 December, 2008 by Charlie McCreevy,

Commissioner for the Internal Market and Services, on wider

segments of the alternative investment market including private

equity and derivatives.

Pursuant to this policy, the European Commission is examining,

in line with relevant authorities in many other global markets,

whether a new architecture for financial markets is required

following the current economic crisis. It follows the wider

statements from leaders of the G20 on 15 November, 2008 that

"all financial markets, products and participants should

be regulated or subject to oversight, as appropriate to their

circumstances".

As the EU has only recently completed the implementation of a

large-scale financial services reform pursuant to its Financial

Services Action Plan3, it is hoped that further

regulation will be not be overly restrictive, but rather will build

on the existing regulation of EU market participants and help

stimulate recovery by introducing targeted measures to restore

market confidence. In this regard, it is positive to note that

Commissioner McCreevy has categorised himself as a market liberal

and has historically been sympathetic to the alternative investment

community.

Indeed a previous analysis by the European Commission of the

risks presented by hedge funds to the European financial and

economic system suggested that all significant risks were

adequately addressed by a combination of EU legislative measures,

Member State national regulation and self regulatory codes.

However, the markets have now changed, the Commissioner has

acknowledged that he recognises the value of good and appropriate

regulation and, perhaps above all, the political will from many EU

Member States is moving towards imposing some form of harmonised

prudential supervision and further control on the alternative

investment sector. In this regard, the hedge fund consultations

follow recent EU proposals in the areas of banking capital

adequacy, regulation of credit rating agencies, accounting reforms

for EU financial institutions and amendments to the deposit

guarantee scheme directive raising the minimum level of deposit

guarantees throughout the EU.

Hedge Funds

While the benefits hedge funds bring to the financial markets

have been recognised, one of the main concerns expressed in the

consultation is with regard to the impact highlyleveraged funds may

have the stability of the financial system; and also to a perceived

lack of transparency of hedge funds vis-à-vis regulators and

other financial market actors. These concerns have been further

elaborated under five main headings:

Applicable Scope – The Commission proposes to

specifically identify the...

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