Internal Market Commissioner Michel Barnier moved, on 11 March, to calm US fears that a draft EU directive on alternative investment fund managers has protectionist leanings. In response to a letter he received from US Treasury Secretary Tim Geithner this week, a spokesman for Barnier said, “The commissioner is extremely mindful of the fact that the adopted directive should not constitute a form of protectionism by imposing specific demands on non-European funds”.

The statement comes on the day EU ambassadors are expected to wind up talks on the draft, which as Europoliticswent to press had yet to solve the foreign funds issue. Under examination is a controversial clause (Article 35) that puts in place a regime where non-EU managers would have to comply with EU-style rules in order to be able to offer hedge funds and private equity to European investors.

The London-based Alternative Investment Management Association (AIMA) has said the draft as it stands would force fund managers to relocate outside of Europe, but the Commission insists that it is only adhering to G20 calls to bring the shadow financial market out into the open.

Finance ministers are due to sign off on a compromise text at a meeting, on 16 March, but a lot still rests on whether member states can be convinced of the need for “cooperation agreements” to be in place in the countries where foreign managers are based. The spokesman added, “Commissioner Barnier is convinced that the treasury secretary shares his desire to comply with procedure in preparing texts, and in particular the work of co-legislators on the proposal from the Commission”.

Last April, the Commission released its draft directive (COM(2009)207) seeking to regulate managers, but not funds, who were not covered under the existing UCITS rules – from hedge funds and private equity to commodity and real estate funds. The EU executive estimates such managers held assets worth €2 trillion at the end of 2008.

Barnier will travel to the US in the coming weeks to meet with Geithner and his colleagues to talk about financial regulation, but hedge funds will likely be top of the list. He made a short visit to London last week – where 80% of the EU’s hedge funds are based – to placate lobbyists that the rules would not be overly punitive.

CREDIT DEFAULT SWAPS

Meanwhile, Barnier also welcomed calls by France and Germany to regulate sovereign credit default swaps (CDS), derivatives where investors bet on the default of a government on its debt. On 9 March, President José Manuel Barroso said the Commission would look into regulating ‘naked’ selling of sovereign CDS – where investors bet on the underlying bonds without owning them – as part of new rules on derivatives, due out before the summer. “We need to proceed with an in-depth analysis on credit default swaps markets so as to better determine how these markets function and if they are the subject of questionable practices,” a spokesman said.