Hedge Funds Fear EU Regulatory U-Turn04.03.2012
Europe’s hedge funds are worried that the European Commission is going off-message from proposed rules laid out by the pan-European markets regulator for the sector.
The Alternative Investment Management Association (Aima), a hedge fund lobby group, says that the Commission’s new draft text for the implementation of the Alternative Investment Fund Managers Directive (AIFMD), rules which were agreed last year after much debate, shows many alterations from the advice given to the Commission at the time by regulator European Securities and Markets Authority (Esma).
“We are concerned that this draft regulation appears to significantly and substantially diverge from the Esma advice in a number of key areas, including third country provisions, depositaries, delegation, leverage, own funds, professional indemnity insurance, appointment of prime brokers and calculation of assets under management,” said Andrew Baker, chief executive of Aima.
However, Michel Barnier, the European Union’s financial services commissioner, has hit back at suggestions that the new technical standards drafted by the Commission move away from advice given by Esma last year to regulate the industry for the first time.
“I am not surprised by this rearguard lobbying,” said Barnier. “Many would like to see the financial markets left unregulated. Some would like to pretend that there are no lessons to learn from the crisis and advocate a return to self-regulation.
“Despite the pressure from those trying to reopen old issues, we won’t abandon our efforts to ensure that all financial actors, be they banks or hedge funds or other financial institutions, are appropriately regulated. I will not be intimidated by those trying to undermine the real progress we are making.”
The AIFMD was one of the most rigorously debated pieces of financial regulation ever to emerge from the EU, with around 2,000 amendments tabled by MEPs to the Commission’s original draft. The new standards are part of the Commission’s work to implement the hedge fund law from 2011.
Barnier says that most of the Esma advice was accepted but on some areas the language of the text was altered so as to make the legislation workable.
However, Aima says that the Commission has diverged from Esma on many key issues that caused particular angst during the original political process, including standards for allowing fund managers from the U.S. and Asia to access EU investors.
“The proposed third country provisions do not appear to reflect advice the European Commission received from Esma on implementing AIFMD,” said Baker at Aima.
“The Commission is contemplating a requirement that EU and non-EU regulators sign co-operation agreements which are legally binding on both parties. These would be extremely problematic if not impossible to conclude if the regulation prescribes that the co-operation agreements ensure that third country regulators enforce EU law in their territories.
“It could be extremely difficult for many regulators to be able to sign up to that. We urge the Commission to clarify this issue in their final text.
“Without cooperation agreements, asset managers outside the EU will not be able to access investors in the EU except through reverse solicitation. This would close the door to national private placement regimes in the EU, which would have a major impact on asset managers globally. It would also prevent delegation of portfolio management outside of the EU, which would be of great concern for global asset managers.”
The AIFMD legislation has set down rules on management and information disclosure for funds across the 27-nation bloc. The law also toughens liability rules for banks that hold fund assets. AIFMD will become law across the EU from July 2013.
Changes in delegation could lead to increased costs for investors and retaliation from other domiciles.
EU funds routinely delegate portfolio management to hubs including New York, Tokyo and Hong Kong.
The regulator recommended changes in 19 areas including harmonizing the AIFMD and UCITS regimes.
Most funds are managed cross-border using passporting rights.
KPMG is researching how the alternative fund regulation has worked in practice.