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Andrew Baker: G20 path the way forward

April 15, 2010

Guest blogger Andrew Baker is chief executive of the Alternative Investment Management Association (AIMA), a global hedge fund industry trade association with more than 1,100 corporate members worldwide. Prior to joining AIMA he spent six years at Schroders in London where he was COO – Alternative Investments, and he has also held senior management positions at Gartmore and UBS Asset Management.

The views expressed here are entirely the author’s own and do not constitute Reuters’ point of view.

RTXD6I9It is now a year since the historic G20 summit in London that set the course for global hedge fund regulation. Within a month the European Commission would propose its controversial Alternative Investment Fund Managers Directive (AIFMD), and legislation would follow on Capitol Hill too.

The importance of the path set out by the G20 can be seen by the fact that both U.S. Treasury Secretary Tim Geithner and EU Internal Market Commissioner Michel Barnier, on opposite sides of a trans-Atlantic dispute about the potentially protectionist consequences of the AIFMD, claimed to be following the G20 mandate.

So it is worth remembering just what world leaders did sign up to in London, in terms of hedge fund regulation. They agreed that all hedge fund managers should be registered and authorised by their national regulators, and that those managers should report systemic data to those regulators in the interests of financial stability. They concluded with a ringing declaration that they would not follow a protectionist path.

Not only does AIMA, as the global hedge fund industry organisation, support these laudable goals, we had actually issued an important policy statement before the summit (on 24th February 2009) announcing our support for transparency by the industry — the reporting of systemically relevant data — and for the registration of hedge fund managers.

Had Europe’s AIFMD followed the G20 path of manager registration and systemic risk reporting, then it is extremely likely that it would not be in the mess it currently is. AIMA and the vast majority of the industry would have had little problem with a Directive that followed this path, and indeed we continue to support what could be called the G20 parts of the AIFMD.

Where Europe erred was in inserting a lot of additional regulation covering issues like marketing, leverage and depositaries into the AIFMD. It is these issues that have caused the current woes, not least the trans-Atlantic row.

It is also worth noting that the draft U.S. hedge fund legislation on Capitol Hill is following an essentially G20 path of manager registration and systemic risk reporting.

The AIFMD is currently stuck in an impasse – it was due to be discussed at a key meeting of European finance ministers in mid-March, but was pulled from the agenda following an intervention by Gordon Brown. The committee of the European Parliament (the Economic and Monetary Affairs Committee) looking at it has also postponed a decision on compromise amendments.

The reason for the impasse is that the UK opposes what it perceives to be protectionist marketing provisions (and is supported on this by the U.S). The Member States who support the Directive are quite entitled to use Qualified Majority Voting to approve it, but it would break what Sharon Bowles, the British MEP who chairs the European Parliament’s Economic and Monetary Affairs Committee, has called a “taboo” — that other member states do not push through a measure about an industry which is largely based in one state against that state’s wishes.

Ramming the Directive through in this manner would also potentially create major divisions at a G20 level, given the concerns already expressed by the U.S. It will be interesting to see what emerges from the G20 Finance Ministers meeting on 22nd-23rd April in Washington DC.

There is still the opportunity for Europe to get out of this impasse by returning to the G20 principles expressed a year ago in London and passing a Directive focusing on manager registration and systemic risk reporting in the interests of financial stability.

Doing so would allow the original supporters of the Directive to claim victory. They could claim that they had been campaigning for years for European regulation of the hedge fund and private equity industries and that they had now achieved it. They could say that alternative investment fund managers were now required to be registered, authorised and to report systemic data to their regulators. And this would be a sensible solution focusing on preventing future financial instability — which is after all the stated intention of this proposed legislation — which the industry would be happy to support.


What do you think? Anyone who supports the Directive want to comment?

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