Finance ministers to resist call for hedge-fund rules

German Finance Minister Peer Steinbrück is failing in his attempts to persuade other EU finance ministers to step up regulation of hedge funds.

Steinbrück has been arguing for a code of conduct for hedge funds, which make potentially high-yielding investments taking advantage of price volatility.

Next Tuesday (8 May) finance ministers will sign up to formal conclusions praising hedge funds’ role in contributing to the "efficiency" of the financial system. They will also take the line that the Commission should consider regulating such funds only once it has taken all "relevant regulatory and market developments into account".

The conclusions, which have been prepared by member states’ financial services experts, amount to a show of support for European Internal Market Commissioner Charlie McCreevy who has said he does not think there is a need for regulation of hedge funds.

The conclusions say that hedge funds have "contributed significantly to fostering the efficiency of the financial system" although they stress the "potential systemic and operational risks associated with their activities". Hedge funds, the conclusions state, play a role in "supporting growth and job creation through proper allocation of capital". Rather than advocating new regulations for the sector, the conclusions invite the Commission to "take all relevant regulatory and market developments into account in assessing the case for and against providing a single market framework for a number of non-harmonised retail fund categories which might include some funds of hedge funds".

The conclusions state that the existing "indirect supervision" approach through "close monitoring of credit institutions’ exposure to hedge funds" has "enhanced resilience to systemic shocks". But it emphasises the need for investors to "remain vigilant" and adequately assess the potential risks that hedge funds present "including by examining whether the current level of transparency of hedge funds activities is appropriate".

The conclusions also acknowledge concerns about retail distribution of hedge fund products in some member states and recognise the need to ensure adequate investor protection.

The calls from Steinbrück, a Social Democrat minister in Germany’s left-right coalition, for a code of conduct come amid strong public criticism of aggressive investment and management firms which have been buying up German companies and shedding workers as part of a drive to increase profitability. During the 2005 election campaign, German’s deputy Chancellor and Labour Minister Franz Münterfering, also a Social Democrat, famously attacked "faceless" financial investors who "attack companies like locusts, strip them bare and move on".

Steinbrück has also been pushing for a voluntary code for hedge funds through Germany’s presidency of the G8 group of the world’s richest nations plus Russia.

McCreevy said in February that he did not see the need for greater regulation of hedge funds and other innovative investment vehicles like private equity firms. "Hedge funds and private equity are good for the market. They have given greater liquidity, they have added shareholder value and they have helped the rationalisation and innovation of companies," McCreevy said. He stressed that despite concern about the potential effects of such funds "there has not been a threat to financial stability". The commissioner said that it was the job of national financial market regulators to make sure that "no element of the banking industry is over-exposed to" hedge funds. McCreevy has warned that if hedge funds were regulated more heavily in the EU they would simply transfer their business to other parts of the world.

German Finance Minister Peer Steinbrück is failing in his attempts to persuade other EU finance ministers to step up regulation of hedge funds.