EU defends hedge fund rules against U.S. critics

BRUSSELS Thu Mar 11, 2010 12:16pm EST

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BRUSSELS (Reuters) - The European Union hit back on Thursday against U.S. criticism of plans to crack down on hedge funds, saying its push for openness in the industry met a commitment also given by Washington and others.

U.S. Treasury Secretary Tim Geithner has complained to EU financial markets chief Michel Barnier about proposed rules to curb hedge fund borrowing and pay, the European Commission said.

A spokesman for Barnier denied the legislation would put foreign funds at a disadvantage.

"The EU decision to act on hedge funds is in line with a G20 decision to reinforce transparency," the spokesman, Amadeu Altafaj, said. "The new hedge fund rules do not discriminate against foreign players and are not protectionist."

Brussels wants foreign investors -- such as New York hedge funds based in London -- to be more closely supervised as well as face stricter regulatory standards set in Europe.

Washington is worried this could make it difficult or impossible for a U.S. hedge fund to do business in the 27-country bloc or pursue wealthy local investors there.

The spat comes at a critical time. European finance ministers meet next week to seek a deal on hedge fund regulation after an EU diplomat said talks among EU ambassadors on the matter had ended on Thursday with no agreement.

Although the regulations would not limit the short-selling of credit default swaps -- insurance against a borrower's failure to repay debt -- they would send a signal that the EU is acting against an opaque industry.

Greece's difficulties -- which many politicians have blamed on hedge funds betting on the country's debt -- will put pressure on finance ministers including Britain's Alistair Darling and Germany's Wolfgang Schaeuble to reach a deal.

Should they fail, it could delay a host of new laws to control banking and finance and prove embarrassing for the EU, which has been criticized as failing to act decisively throughout the economic crisis.

BATTLE OF BRITAIN

The timing of Geithner's letter could help London to wring out final concessions. Britain, home to most of Europe's hedge funds, has become increasingly isolated in fighting for lighter regulation of the sector.

Its financial center, the City of London, is worried that Britain has been outmaneuvered by Berlin and Paris, which want tighter control of speculators and banks.

Earlier on Thursday, Germany and France called for an inquiry into speculators who trade credit default swaps.

Geithner's letter widens further a rift between Washington and Brussels, with Washington saying Greece is the author of its own misfortune.

The two sides also disagree over how to deal with large banks that pose a risk to the wider economy.

U.S. President Barack Obama wants to ban banks from trading on their own account as well as demanding they ditch stakes in hedge funds and private equity. Europe is more lenient.

The tug-of-war will put pressure on leaders of the G20 major countries who are trying to maintain momentum in a regulatory crackdown on banking.

(Editing by Dale Hudson/Ruth Pitchford)

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