The EU and the Hedge Funds: regulation or the relinquishment of European sovereignty?

Published on, by Jean-Claude Paye, 22 November 2010.

In a blaze of publicity, the European Union has just adopted a regulatory code for hedge funds to manage the systemic risk that they impart to the general economy. In reality, observes Jean-Claude Paye, the new directive is a sieve which will have an effect contrary to that announced. Its real objective is to summarily control the European funds, while opening the door to U.S. funds which will be able to speculate without restriction at the expense of Europeans.

Unlike the financial institutions, banks, insurance companies, investment banks which draw on savings, the hedge funds have no designated regulators. They are able to fully utilise the exemptions allowed by the relevant statutes. 

However, if the speculative funds are not the cause of the actual crisis, but rather the easing of bank credit conditions and the money creation that it triggered, the systemic risk that hedge funds spread to the entire financial system has been brought to light. To enhance their performance, hedge funds have recourse to leveraging. They borrow heavily from the banks, to compensate for the smallness of their outlay and thus induce, in case of problems, a multiplier effect on the imbalances … //

… Domination of Anglo-Saxon finance

A provision of the accord presents itself as a means to fight against tax havens. The speculative funds, located in some countries which inhibit effective information exchange, especially on taxation matters, are no longer able to be marketed in the EU. The issue is important when one knows that 80% of hedge funds are located in these offshore centres.

However, following pressure from London, the final text limits the scope of the directive to ‘active’ marketing. This signifies concretely that nothing will prevent a European investor, a bank, an insurance company, a mutual fund, from buying units of funds located outside the EU, which should not have obtained a European passport for non-compliance with the directive’s criteria. This provision thus gives access to European territory to capital located in the tax havens but in contact with the City, such as the Channel Islands and the Cayman Islands or, for example, those managed directly by the US, such as Delaware.

This is a violation of the spirit of the legislation for, in this case, no information will be conveyed to the regulators who will not be able to evaluate the exposure to risk of European ‘investors’. But above all it is a new abandonment of the EU member countries to the omnipotence of Anglo-Saxon finance. Even the formal possibility for an EU member State to appeal before the ESMA, in case of disagreement with the national authority of a third country, will not produce a modification in the balance of forces.

This directive thus falls within the restructuring of financial markets, revealed by the G20 of April 2009 regarding “the fight against tax fraud” [6], that is to say in the legitimation of the Anglo-American stranglehold on European finance. However, if the primacy of the City throughout the European Union, regarding the management of the speculative funds, is overwhelming (80% of the industry is British, as against 5% for France), this power must be put into perspective. The British funds represent $212 billion, compared to a total of $1000 billion for those located in the US. Thus the London market appears above all as the Trojan horse of U.S. hedge funds. (full text).

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