RPT-UPDATE 2-Britain cornered as EU cracks down on hedge funds

Tue May 18, 2010 9:37am EDT

Related Topics

* Britain outnumbered as EU ministers back hedge fund rules

* Schaeuble - determined to accelerate pace of regulation

* New curbs could be agreed by July, take effect around 2012

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By John O'Donnell

BRUSSELS, May 18 (Reuters) - European Union finance ministers backed stricter rules for hedge funds and private equity groups on Tuesday, handing a defeat to Britain's new coalition government at its first EU meeting.

The draft rules will control pay and borrowing at hedge funds as well forcing them to disclose extensive information to watchdogs about how they are investing or short-selling, breaking a taboo for the secretive industry.

The strict regime is part of a wider set of pledges by world leaders to learn from the global financial and debt crisis and create a more stable financial system.

"We are determined to accelerate the pace of regulation," Wolfgang Schaeuble, Germany's finance minister, told journalists after the meeting.

"Up until now this was not regulated," he said of the hedge fund and private equity industry. "This hole will now be closed."

"I think there is a general agreement around this," Spain's Finance Minister Elena Salgado told fellow ministers, despite also signalling that some concerns were unresolved.

Britain had fought hard to water down the law and was still hoping to overturn a provision that refuses to grant a single licence for foreign funds to do business across Europe. U.S. Treasury Secretary Timothy Geithner has also objected to this.

But London's objections were overruled in what was a rare break with Brussels diplomacy that says no country should accept a law that it does not want to.

British diplomats tried to put a positive gloss on the day's developments, saying they had achieved the "best possible" outcome from the meeting. But concerns remain about the impact tighter regulations will have on London's hedge fund industry.

Britain is home to 80 percent of the bloc's hedge funds and believes the new rules -- likely to take effect around 2012 -- will curb choice for investors by making it harder for managers to find investors across the EU's 27 countries.

Other political leaders played down any impression that Britain might have come off badly in the negotiations.

"Today, with goodwill and agreement from Britain and after very hard struggle in recent weeks, we have succeeded ... to rein in hedge funds," Austrian Finance Minister Josef Proell told journalists.

But Britain is isolated. Only the Czech Republic backed it in opposing the approval of the new rules by the finance ministers, insufficent support in the face of heavyweights France and Germany, who pushed for rigid restrictions.

BRITAIN OUTNUMBERED

The vote left Britain's new finance minister, George Osborne, outvoted at his first meeting with his peers. Officials said he did not speak during the deliberations on the issue.

The European Parliament's economic affairs committee approved its version of the draft measure on Monday evening, opening the door to formal negotiations on a final deal with EU states, perhaps by July.

"This is a big step forward," said Udo Bullmann, a German socialist involved in brokering support for a committee vote to back the new law.

"Now it is up to the countries to make a move. It is important for them to act against manipulative speculators."

Hedge funds have been accused of exacerbating Greece's borrowing difficulties by betting against its debt, although there are few trading records to show who is active in the market.

The planned legislation would change that, proponents say, making it easier for supervisors to see what is happening as well as intervene by curbing short-selling, for example. (Reporting by John O'Donnell, Gavin Jones, Sumeet Desai and Brian Rohan; editing by Stephen Nisbet)

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