EU executive to consult on hedge fund oversight

By Huw Jones

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.