MercoPress. South Atlantic News Agency

EU finance ministers agree on tougher regulation for the hedge fund industry

Hedge funds account for as much as 50% of all trades on the London Stock Exchange

European Union finance ministers have agreed to introduce tougher regulation of the hedge fund industry. Ministers overrode objections by the new UK government and the City of London, where 80% of European funds are based.

They will now negotiate with the European Parliament to decide the exact shape of the legislation - which is due to come into force from 2012. However, the final deal would take account of UK concerns, the EU said.

A UK Treasury spokesman said this was a “very good result in the circumstances, the best outcome we could have expected”.

There is a widespread view on the continent that hedge funds somehow caused the credit crunch and financial crisis of 2008. But there are concerns about implications for London's hedge fund industry, particularly that the rules will make it harder for fund managers to find investors across the EU's 27 countries.

Some European governments, notably France and Germany, have long suggested that hedge funds pose a risk to the stability of the world's financial system and so need more regulation.

“We are determined to accelerate the pace of regulation,” said Wolfgang Schaeuble, Germany's finance minister. “Up until now this was not regulated. This hole will now be closed.”

The EU said the directive it had agreed was aimed at fulfilling commitments made after the financial crisis to regulate “all players in the market that might pose a risk to financial stability”.

Hedge funds use sophisticated, complex investment strategies to make returns, and often make money when markets are falling. Currently hedge funds control around 1.5 trillion USD in assets globally, with about 300 billion managed from within the EU - mainly in London; they offer their investment capabilities primarily to very wealthy individuals or to professional investors such as insurance companies and pension funds; market experts reckon hedge funds account for as much as 50% of all trades on the London Stock Exchange; some governments therefore fear they could pose a risk to the stability of the world's financial system.

The European Commission wants new rules to overcome what it sees as gaps and inconsistencies in existing national regulatory frameworks.

The finance ministers have proposed rules that do not give hedge funds the automatic right to trade across the 27-nation bloc. Instead, fund managers who wanted to market to the EU will have to qualify through a new passport-style system.

However the UK argues that in exchange for accepting rules on closer scrutiny, fund managers should be given extra benefits - such as more freedom to function across EU borders.