• EU Commission launches wide-ranging consultation on hedge funds
  • Focus will be on overcoming current economic crisis and ensuring future financial stability
  • Key themes of consultation include role of regulators, transparency, short-selling, capital requirements and risk management
  • Findings will be discussed in February 2009 before final proposals decided

Speaking to the European Parliament's Economic and Monetary Committee (ECON) earlier this month, Charlie McCreevy, EU Commissioner for the Internal Market and Services, announced a wide-ranging consultation on hedge funds.

The initiative follows an agreement of G20 leaders last month that all financial markets should be regulated "as appropriate to their circumstances," and that all those developing best practices for hedge funds should bring forward proposals for a unified set of best practices by March 2009. Commissioner McCreevy was also responding to a recent report by the ECON committee calling for a new regulatory framework for hedge funds and private equity, authored by MEP and former Danish Prime Minister Poul Nyrup Rasmussen. The ECON report calls for measures to be taken in several areas including financial stability, transparency, excessive debt and conflicts of interest, although it watered down earlier proposals that would have required disclosure of remuneration of directors, corporate earnings and bonuses, and relationships with prime brokers.

Announcing the consultation, which will run until February next year, McCreevy said the work being embarked on by the Commission would "inevitably lead to a new architecture for financial markets."

The consultation will focus on two core issues: how to overcome the current economic crisis and how to ensure the financial system is never threatened again to the extent, says McCreevy, "that it almost caused the meltdown of the world financial system."

Key questions to be considered include:

  • Who should regulate hedge funds? Should hedge funds be regulated by financial regulators or central banks or both?
  • Transparency of hedge funds: Should hedge funds be required to be more transparent to regulators, or to the market?
  • Short-selling: Should short-selling be banned? Or only "naked" short-selling. In his statement, McCreevy says that his "instinct" is that short-selling is a "positive element" as it "alerts the market about companies making poor investment choices.
  • Capital requirements: Should hedge funds be subject to stricter capital requirements, or only the banks that lend to them?
  • Risk management: Is regulatory intervention or "dissemination of sound principles" the best approach?

Following the consultation, a conference will take place in February to discuss the findings, after which the Commission will decide on the measures to be taken.

To read McCreevy's announcement in full, click here: Commissioner McCreevy at the Monetary Affairs Committee of the European Parliament.

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