Barnier refuses to back down in EC battle with hedge funds

Commissioner presses on with reforms and reveals new probe into CDSs
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Michel Barnier, the new European commissioner for the internal market, is on course for a bruising showdown with hedge funds and private equity firms, leading City figures are warning. Key players in both sectors said that Mr Barnier, who was in London yesterday for talks with the City and the Chancellor of the Exchequer, had signalled an unwillingness to compromise over plans to regulate hedge funds and private equity more aggressively, despite their threats to leave Britain.

Mr Barnier, who also used the visit to reveal an EU probe of short selling and the credit default swaps market, has come under pressure from the private equity and hedge fund industry to amend an EU draft directive on alternative investment fund managers (AIFM). Many funds are managed in the UK but the money is domiciled in havens such as the Cayman Islands or Jersey. The Commission is proposing that territories such as these would be required to demonstrate "equivalent" regulatory regimes, and be transparent, something that they are unlikely to agree to.

"Requiring high standards of supervision and transparency from the European industry but not from third country funds and managers active in Europe would be short-sighted," said Mr Barnier. "It would impede effective monitoring of risk in Europe and create an unlevel playing field and opportunities for regulatory arbitrage".

Simon Walker, chief executive of the British Private Equity Association, said the situation was "extraordinarily serious". He added that while Lord Myners, the City minister, had been "strong and firm" in defending British interests – 60 per cent of the private equity and 80 per cent of hedge fund activity in the EU is in London – the election meant that the issue would fade. He also pointed out that outfits as tiny as the West Cornwall Pasty Company, which is owned by private equity, would be caught by the directive's transparency rules and obliged to publish business plans.

Syed Kamall, a Conservative MEP for London and member of the parliament's financial services committee, warned that there was little time left for council agreement by the 16 March deadline.

Mr Barnier will also now investigate short selling of the euro – at a 10-month low against the dollar – and so-called "naked credit default swaps trades", which critics say have been used by speculators to destabilise the euro and the market for Greek and other sovereign debts.

Mr Barnier said: "We're working on the fundamentals of derivatives, to understand who does what, and in CDS we're looking at the aspect that relates to states."

Michael Hampden-Turner of Citigroup Securities said: "You can't blame the mirror for your ugly face."

CDSs are a type of insurance taken out when an investor is concerned about risk of default. At the moment, for example, the premium to insure €10m of Greek government securities is €428,000. "Naked" shorting via the CDS market takes place where the trader does not own the underlying security, likened to taking out life insurance on other people, with similar homicidal intent. The Greek and Spanish prime ministers have publicly blamed "speculators" for undermining the single currency.

Mr Hampden-Turner added: "Statistics tend to challenge the popular image of sovereign CDS speculators driving bonds. There are $9bn of Greek sovereign CDS outstanding relative to $406bn of government bonds."

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