EU Hedge Fund Rules On The Brink Over ‘Passport’ Dispute

Jun 24 2010 | 12:01pm ET

As the United States nears a compromise on financial regulation reform, Europe’s efforts to match is trans-Atlantic rival are once again foundering, in part over disagreements about controversial new hedge fund rules.

The fate of foreign hedge funds under the proposed European Union directive—which would impose strict new reporting and custody requirements on hedge and private equity funds, as well as possible leverage and borrowing limits—has always been a sticking point. And once again, the U.K., the alternative investments industry’s greatest champion in Europe, is at the center of the disagreement.

The British are holding out for an exception to the “passport” approved by the European Parliament. Under that provision, hedge funds and private equity firms from abroad that meet certain standards would be allowed to operate across the 27-member EU, much to the consternation of the French and the EU finance ministers, who approved a version of the directive without the passport.

The U.K. has long supported the passport, but now wants to allow funds that fail to pass the EU’s muster to apply with individual countries’ financial regulators for permission to market in each country.

But the Parliament is hearing none of it, according to Reuters.

“The Parliament is not budging,” a source told the news agency. “It is passport or nothing.”

Hedge funds aren’t the only stumbling block to comprehensive European regulation. The member states and Parliament are also battling over banking, insurance and markets rules. According to Reuters, negotiations over the differences may not recommence until September.

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