Markets – EU takes lighter touch approach to hedge fund regulation

In a meeting on the 8th May, the European Union finance ministers ignored pressure from some member states and decided against specific regulation of hedge funds. Instead they will promote a voluntary code of conduct and a self-regulatory approach for the industry.

The regulation of hedge funds has become a matter of much debate in Europe, particularly in the current German presidency of the EU, with many member states (France, Germany and Belgium) and political groupings calling for formal regulation (see Chase Cooper News, 12th April). However, EU finance ministers have resisted these pressures and have called for a voluntary commitment from the hedge-fund to improve industry's transparency and adopt a voluntary code of conduct. This lighter touch of regulation would include a "close supervisory monitoring of credit institutions' exposure to hedge funds and progress in upgrading their internal risk management systems".

According to EU media portal, EuroActiv, member states underlined the importance of the "significant" contributions that hedge funds make to the efficiency of the financial system, but at the same time recognised the "potential systemic and operational risks" that they represent and called on creditors and investors to remain vigilant.

Internal Market Commissioner Charlie McCreevy said: "I would be very supportive of the [hedge fund] industry adopting a voluntary code of conduct", adding, "At this stage, I do not see the need for a Community initiative in this area. The case for this has not yet been proven."

German Finance Minister Peer Steinbrück said: "We all agree that a regulatory approach is the wrong one, so we are taking on the indirect approach, which everyone says is the right one." But he went on to say, "The amount of money being administered by hedge funds is increasing exponentially. It is not just experts, but also issuing bank governors are wondering about what might happen if there was a downturn, what happens if there is a change of interest rate, what about leverage effects? These are not just daydreams, they are real issues. The real experts on financial markets ask these questions and hedge-fund managers are beginning to raise them too."

G8 finance ministers will discuss hedge-fund transparency at their next meeting in Potsdam on 18th and 19th May.