FACTBOX-Differences over draft EU hedge fund law

LONDON, Sept 17 - A draft European Union law is under discussion to authorise and supervise managers of alternative funds such as hedge funds and private equity.

At a conference in London on Thursday, British financial services minister Paul Myners and the chairman of the French AMF markets regulator, Jean-Pierre Jouyet, outlined their country's positions on key aspects of the draft law.

EU governments and the European Parliament have the final say on the rules that may be adopted sometime in 2010 and would take effect two years later.

PASSPORT

A fund manager authorised in one EU state would be allowed to offer the fund's products in all the bloc's member states. But it would bar fund managers in non-EU countries from offering products to institutional investors in the EU unless they complied with the new law.

France says it "strongly" opposes giving offshore funds a "passport" to offer products across the EU and says each member state could allow offshore funds to offer products locally only. A full passport should be limited to funds domiciled in the EU, France says.

Britain says this will reduce competition and choice for European investors.

CAPITAL/LEVERAGE CAP

The draft law imposes capital requirements on fund managers to contain risks and keep markets stable but Britain wants a more tailored approach to hedge funds and private equity.

Britain says imposing a leverage cap is too simplistic and a more tailored approach is needed.

France also says imposing leverage caps may not be efficient and proposes making fund managers report on the use of leverage. The planned new European Securities Markets Authority should have powers to assess and intervene when needed, France says. Banks that have hedge funds as counterparties should also set limits for their exposures.

France wants a European register to record all the key data on risks obtained from managers.

Britain concerned that as drafted, the law may impose strict liability on depositories so that if assets were lost, they would have to compensate for them in full. This failed to recognise losses when it was not the fault of a depository.

CUSTODY

The draft law only allows a bank based in the EU to carry out the function of custody, or safekeeping of assets on behalf of a fund. Britain says this would reduce competition by giving business to a small group of banks.

France says provisions on depositories need clarifying and need "profound" amendment to be adapted each type of fund and include supervisory functions. Agrees with Britain that investment firms should also be allowed to become a depository.

PRIVATE EQUITY DISCLOSURE

Private equity groups would have to make disclosures to employees, shareholders and target companies. Britain says this could lead to less investment by private equity groups in European companies.

France says closely aligned with UK view on private equity aspects of the draft law, saying the requirements on the sector under the draft law may not be appropriate. The obligations of the draft law should be adapted to the type of fund, its size and the risks it poses.