EU executive to consult on hedge fund oversight

BRUSSELS (Reuters) - The European Union's top financial regulator said on Monday he would start a wide-ranging public consultation on oversight and risks attached to hedge funds but that any new rules must not worsen the market crisis.

The consultation will study adequacy of transparency measures, oversight responsibility, risk management practices, assessment of systemic risks, need for capital requirements and supervisory responsibility, EU Internal Market Commissioner Charlie McCreevy said.

He made the comments in a speech to the European Parliament, which has urged McCreevy for legislative proposals to beef up oversight of hedge funds and private equity.

Parliament wants hedge funds and private equity to be required to set aside capital to cover risks on their books, as banks and insurers must do.

"We need to draw a clear distinction between hedge funds and private equity," McCreevy said.

"Our preliminary analysis indicates that the majority of the issues which warrant further investigation relate to the activities of hedge funds," McCreevy added.

McCreevy is under intense pressure from some EU governments and many lawmakers to make legislative proposals for regulating hedge funds, which are largely indirectly supervised through their prime brokers, the banks.

He had initially rejected calls for regulation. The announcement of a public consultation marks a shift in stance.

The consultation will focus on:

-- how should hedge funds be defined when most are domiciled in off-shore jurisdictions;

-- who should oversee hedge funds;

-- whether there is a need to return to a less sophisticated measurement of risk as internal modeling at funds is seen by McCreevy as having become too complicated;

-- whether short-selling should be banned.

The consultation will dovetail with a timetable set by the G20 nations, which include several EU states, that by March 31, 2009, hedge funds should make proposals for a set of unified best practices.

The results of the consultation will be discussed at a conference in Brussels in February.

PRIVATE EQUITY RISK

McCreevy said private equity posed no significant risk to financial stability and that industry codes of best practice being drawn up by the sector were going in the right direction.

"But I want to make sure that their codes apply across the industry, provide sufficient transparency and are subject to effective monitoring," McCreevy said.

"I also accept that some private equity deals have been over leveraged," he added.

Methods used to assess the risk in private equity deals needed a fresher and more critical look than taken by the Basel Committee of banking regulators from across the world.

He will report within three months on private equity.

McCreevy will also address next year remuneration in the financial sector, particularly the need for "reward structures to be more closely aligned to the real medium-term benefits accruing to companies."

(Editing by Dale Hudson and David Cowell)