Council to negotiate with Parliament on stronger rules for hedge funds and private equity
18 May 2010
EU finance ministers agreed on a general approach backing the adoption of the AIFM directive in first reading with the European Parliament. The decision was made by qualified majority. The presidency took note of remaining concerns expressed by delegations such as third country rules.
The Council agreed a mandate for negotiations with the European Parliament on a draft directive aimed at introducing harmonised EU rules for entities engaged in the management of alternative investment funds, such as hedge funds and private equity.
The negotiations with the Parliament will aim to enable the directive to be adopted in first reading. The presidency will negotiate on the basis of a Council general approach agreed today; it took note of remaining concerns expressed by delegations, for instance with respect to third country rules.
The draft directive is aimed at:
– establishing a harmonised framework for monitoring and supervising the risks that alternative investment funds pose to their investors, counterparties, other market participants and to financial stability;
– allowing alternative investment fund managers (AIFM) to provide services and market EU funds throughout the EU single market, subject to compliance with strict requirements.
It is aimed at fulfilling commitments made within the G-20, in the wake of the global financial crisis, as well as the European Council's pledge to regulate all players in the market that might pose a risk to financial stability.
The impact of AIFM on the markets in which they operate is largely beneficial, though the difficulties on financial markets have underscored how their activities may also serve to spread or amplify risks though the financial system.
The activities of AIFM are currently regulated by a combination of national regulations and general provisions of EU law, supplemented in some areas by industry standards. The global financial crisis showed that uncoordinated national responses to the risks to which the funds were exposed made the efficient management of these risks difficult.
Besides hedge funds and private equity, the draft directive also covers real estate funds, commodity funds and all other funds that are not covered by the directive on collective investment funds.
The main features of the Council's general approach are as follows:
– Authorisations. To operate in the EU, fund managers would be required under the directive to obtain authorisation from the competent authority of their home member state. Once authorised, an AIFM would be entitled to market funds established in the EU to professional investors in any member state.
– Risk management and prudential oversight. AIFM would be required to satisfy the competent authority of the robustness of their internal arrangements with respect to risk management, including liquidity risks. To support macro-prudential oversight, they would be required to disclose on a regular basis the principal markets and instruments in which they trade, their principal exposures and concentrations of risk.
– Treatment of investors. In order to encourage diligence amongst their investors, AIFM would be required to provide a clear description of their investment policy, including descriptions of the types of assets and the use of leverage.
