Monday, November 01, 2010

Geithner and Barnier Pledge Non-Protectionist Hedge Fund Legislation and Harmonized Derivatives Regulations

In a joint statement, Treasury Secretary Tim Geithner and EU Commissioner for the Internal Market reaffirmed their on-going commitment to the principle of non-discrimination in current hedge fund legislation and in the future implementation of rules for fund managers and funds, in recognition of the importance of maintaining a global level playing field. They also welcomed the important step made by the European Member States and the European Parliament in negotiations on the Alternative Investment Fund Management Directive, which is expected to be implemented in November with a vote by Parliament.

The US hedge fund industry earlier praised Secretary Geithner’s call for the European Union to participate in a globally coordinated approach toward financial regulatory reform and resist protectionist-driven initiatives in hedge fund regulation. Earlier this year, the Secretary sent a letter to UK, German and French Finance Ministers asking that EU legislation regulating hedge funds not discriminate against US and other third country hedge funds not based in the EU. The compromise draft legislation approved by European authorities foresees a passport for US and other third-country funds and managers. According to Commissioner Barnier, it will be a passport on merit, founded on a solid basis and providing strong controls in terms of risk management.

Secretary Geithner and Commissioner Barnier also reaffirmed their commitment to continue their strong and close bilateral co-operation on regulatory reform in the OTC derivatives markets. This co-operation has allowed for the proposed new rules regarding the clearing of over-the-counter derivatives and the development and regulation of derivatives infrastructure to be consistent and implemented in an open, convergent, and non-discriminatory manner. With the Dodd-Frank Act mandating the federal regulation of derivatives and the European Commission having proposed similar legislation, Secretary Geithner and Commissioner Barnier confirmed their commitment to achieve convergence during the implementation and the finalization of all the OTC derivatives reforms on both sides of the Atlantic. Separately, they also reaffirmed their support for the G-20 Leaders' commitments on accounting convergence.

They also welcomed the agreement reached in the Basel Committee on September 12, 2010 on stronger capital and liquidity requirements for financial institutions. They reaffirmed their intention to implement the agreement in the respective jurisdictions in accordance with the internationally-agreed timing. Both sides agreed to a December 2011 implementation date for the Basel trading book rules.

Finally, with Dodd-Frank providing for an orderly liquidation authority for failing financial firms and similar legislation proposed in the EU, the officials agreed on the importance of robust crisis management mechanisms and the implementation of strong resolution regimes, as endorsed by G-20 Leaders in Toronto, which require additional resolution powers and expanded institutional capacity. They reiterated that no firm is too big or too complicated to fail and that taxpayers should not bear the costs of resolutions. They agreed that systemically important global financial institutions must improve their capacity to absorb losses and be subject to enhanced supervision and regular stress tests.

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