France pushing tougher financial regulation

By Anna Willard

PARIS (Reuters) - France said on Thursday it will not allow draft EU rules to regulate hedge funds to pass unless they are toughened up, putting it at odds with Britain which has been trying to dilute them.

France has been an advocate in Europe for stronger financial sector regulation and the speech by Economy Minister Christine Lagarde was intended to spell out the details of reform she hopes will happen in the months ahead.

"The (European) Commission's project (on hedge funds) is a step forward, but it is not up to my ambitions," Lagarde, who has been leading a drive to toughen up financial sector regulation, said in a speech to a conference.

"I will not let this directive be adopted in this state."

She said hedge funds located in non-cooperative tax centers should not be allowed to operate in Europe. Britain and the hedge fund industry say the draft rules make it difficult for non-European Union managers and funds to operate in the EU.

Lagarde also proposed a new EU directive to harmonize clearing house rules.

"For our financial stability, I want credit derivatives (denominated) in euro to be cleared by clearing houses located and supervised in the euro zone and that they are able to access European Central Bank liquidity," she said.

Britain, which is not a member of the euro zone, is the EU's biggest center for trading off-exchange derivatives and dealers warn the market could be fragmented by many clearers.

The G20 countries agreed this year that clearing is key to making the huge derivatives sector less risky and more transparent.

Companies that chose to use clearing houses should be rewarded with a "bonus" of lower capital requirement rules, she said.

Lagarde also favors the creation of a euro zone data warehouse that would store copies of credit default swap contracts, in an effort to make the market safer.

In the United States, the DTCC already operates a warehouse which keeps "gold copies" in digital form of credit default swap contracts.

BETTER STANDARDS

Lagarde urged the G20 group of industrialized and emerging market countries to make reforming accounting standards a priority.

"Fair value is not always market value. I would like a revision of the field of application of market value," she said.