EUROPE - Charlie McCreevy, the European Commissioner for internal market and services, has announced he will start a wide-ranging public consultation on the supervision and risks of hedge funds.
Speaking at the Monetary Affairs Committee (ECON) of the European Parliament in Brussels last night, he said the consultation - due in February - would be launched within the next 10 days, though stressed any new rules must not aggravate the credit crisis.
The consultation will study the adequacy of transparency measures, oversight responsibility, risk management practices, assessment of systemic risks, the need for capital requirements and supervisory responsibility.
McCreevy, often portrayed as the ultimate market liberal, agreed to the consultation following pressure from MEPs who made a formal request in September to the European Commission (EC) for new legislation to improve the regulation of financial markets, related, in particular, to hedge funds and private equity. (See earlier IPE story: Eternal sunshine for the spotless hedge fund)
He suggested a clear distinction was needed between hedge funds and private equity, so the consultation will focus on the former investment vehicles while a separate review on the latter will be drawn to a close in the next three months.
"Our preliminary analysis indicates that the majority of the issues which warrant further investigation relate to the activities of hedge funds," he said.
The consultation will focus on a definition of hedge funds, and how to deal with their usually "offshore" domiciles but will also look at who should oversee hedge funds, and the transparency of the vehicles, while a special focus will be given to short-selling and whether or not it should be banned, while also looking into risk management practices of hedge funds.
"But the most important concrete input I want is on the contagion and systemic risks to the financial markets if we were to continue to rely on the existing regulatory framework surrounding hedge funds and banks," concluded McCreevy.
The commissioner, the EU's top financial regulator, aims to dovetail the results of the consultation time-wise with those of Jacques de Larosière, who has been charged with a wide ranging review of this crisis, to formulate the EU input into a G20 discussion on hedge funds.
The G20 concluded earlier this year "private sector bodies that have developed best practices for private pools of capital and/or hedge funds should bring forward proposals for a set of unified best practices" by the end of March next year.
McCreevy added private equity does not pose any significant risk to financial stability and said industry codes of best practice being drawn up by the sector were going in the right direction.
"But I want to make sure that their codes apply across the industry, provide sufficient transparency and are subject to effective monitoring," he said, stating he will report on his review to the parliament within the next three months.
He said he accepted some private equity deals have been over-leveraged.
On derivatives, McCreevy branded inducing the industry to move credit default swaps (CDS) onto central clearing in the EU over the coming months as an essential step in restoring counterparty confidence along with having sufficient security and oversight of the risks inherent in this market.
The move comes as part of a separate, wider review of all derivatives to be completed by the end of March 2009.
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