European finance ministers on Tuesday reached a deal on tighter regulation of hedge funds, the latest step in the European Union's effort to increase the stability of its financial system in the wake of the credit crisis.
The deal, for the first time, puts hedge funds and other private investment vehicles under European supervision. It sets out requirements for risk management, transparency about who runs them, as well as minimal capital and liquidity cushions.
"It's in fact a new regulation for a new sector," said EU internal markets chief Michel Barnier.
Hedge funds promise the chance for outsize returns to rich or institutional investors and often pursue complex trading strategies that can involve large amounts of leverage, or debt.
These funds "on certain days are responsible for half of all transactions on European markets," Barnier said.
The deal also introduces a so-called "passport," under which funds that are approved in one country will have access to investors in other EU countries.
The passport will be valid for European funds as of 2013 under the current timetable and for non-EU-based funds as of 2015.
Industry representatives cautiously welcomed the proposals. "There is still much in the directive that will be difficult to implement for the industry and there will be a heavy compliance burden that the industry will have to bear," the Alternative Investment Management Association, which represents hedge funds from around the globe, said in a statement.
"But the impact will be far less severe than if something close to the original proposal had been agreed."
The deal comes after months of debate and after more than 70 proposed compromises were shot down. It now needs to be signed off by governments and the European Parliament _ a process that ministers hope to finish before the heads of the Group of 20 rich and developing nations discuss global financial regulation in Seoul, South Korea, next month.
Especially France had feared that a European passport would leave many decisions over which funds are allowed to operate to the U.K. _ Europe's largest financial center and the base of many hedge funds.
Paris softened its stance on the passport, after more powers were given to the newly established European Securities and Markets Authority.
"I think it is indeed a compromise, although we could possibly have come up with something better" said French Finance Minister Christine Lagarde.
EU finance ministers didn't reach any new decisions on proposed taxes on bank profits and pay packages as well levy on financial transactions such as bond and share purchases, which were also up for debate.
Several countries _ including the U.K., Germany and France _ have already introduced levies on banks, although they target banks' balance sheets rather the profits. They now hope to come up with pan-European cooperation on bank taxes.