EU Commissioner McCreevy on Hedge Fund Regulation

EU Internal Market Commissioner Charlie McCreevy has voiced support for the guidance for hedge funds and other private pools of capital recently set forth by the President’s Working Group on Financial Markets. He also reiterated his position that no new regulation of hedge funds is needed in the European Union. And, importantly, he praised private equity funds for helping ensure that the businesses in which they invest adapt to the realities of rapidly changing markets.

Much of this was widely reported in the financial press, and some criticism was directed at the commissioner. But what was not widely reported was that, at the same time, he emphasized that regulators responsible for systemic risk must closely monitor the activities of financial institutions who take exposures to private equity and hedge funds.

In his view, regulators must be vigilant in their supervision of the risks inherent in private pools of capital. They must ensure that the financial institutions they regulate adopt state-of-the-art risk management techniques. More specifically, portfolio risk concentrations must be properly identified and managed.

The commissioner is clearly in the camp of those who believe that rigorous and closely monitored risk management can fend off calls for regulation. Stress testing is part of the picture. But the commissioner correctly points out that only when a major accident happens will the effectiveness of the supervision of financial institution risk management be tested.

Finally, the commissioner said that he wants to establish a common cross-border private placement regime to free up cross-border transactions in private equity funds between suitably qualified investors. He noted that the MIFID and Transparency Directives have put in place some of the building blocks of such a regime. However, the picture must be completed by identifying any remaining obstacles and assessing how they can be removed in a cost effective manner. He will be reporting within the next six to eight months on the steps needed to accomplish this goal in a measured and proportionate way.