UK ready to compromise on hedge funds

BRUSSELS/LONDON (Reuters) - Britain is preparing concessions to Germany and France that will pave the way for European finance ministers to agree draft regulations on hedge funds as soon as next week, sources with knowledge of the matter said.

European leaders including German Chancellor Angela Merkel and French President Nicolas Sarkozy have accused hedge funds and others of exacerbating the problems of Greece, the region’s most troubled economy, by betting on its debt.

European Union ambassadors -- in talks about new rules to curb hedge-fund pay and borrowing -- are now edging close to winning the backing of Britain, diplomats told Reuters ahead of a key meeting on Thursday.

“In the spirit of getting an agreement, they would be prepared to look at issues such as remuneration and leverage,” one said.

A deal would not include a ban or other limits on the short-selling of credit default swaps, the name given to insurance against an unpaid government bond. Many say trading in such instruments has compounded Greece’s difficulties.

It would, however, send a signal that the EU is acting decisively against an opaque industry amid a prolonged debate over whether its member countries should give Greece financial support.

“There is increasing convergence behind the ... compromise,” EU officials wrote in an internal report about progress towards a deal.

The Spanish presidency of the EU “has indicated that the council (of finance ministers) should confirm an agreement ... on 16 March.”

Although watered down in the course of negotiations, the rules will put the secretive hedge fund industry under unprecedented scrutiny by regulators.

Before that happens, however, EU countries need the approval of the European Parliament. The assembly, which some believe may push for tougher rules for the industry, aims to vote in July.

Britain, which is home to nearly all of Europe’s hedge funds, stands to lose most and is seeking assurances that foreign players from the U.S., for example, would not be forced into exile by additional regulation.

The advance towards a compromise by London has worried many in Britain’s financial centre, and next Monday the City of London’s lord mayor Nick Anstee and policy chief Stuart Fraser will visit Brussels to meet EU financial markets chief Michel Barnier.

One source with knowledge of their plans said they would voice concerns among banks and others that the City of London will be overregulated.

“It does seem as if (the British government) are going to do a compromise,” he said. “I don’t think Britain has any friends.”

On Wednesday, Paul Myners said the draft law needed further changes. “The UK has a dominant role in these specialist markets,” he said at an industry event.

“The industry is important to our economy. I want to see the UK continue to develop as the natural place from which to manage private equity and hedge funds,” Myners said.

Doubts have increased that hedge funds are the source of the Greek problems. Germany’s financial watchdog said an investigation had found no proof of widespread speculation.

Editing by Dale Hudson, John Stonestreet