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EU watchdog backs 'passport' for US hedge funds in Europe

Tuesday, July 19, 2016 - 17:16
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Hedge funds from the United States, Singapore and Hong Kong should be allowed to market themselves in the European Union, the bloc's financial watchdog said on Tuesday.

[LONDON] Hedge funds from the United States, Singapore and Hong Kong should be allowed to market themselves in the European Union, the bloc's financial watchdog said on Tuesday.

The long-delayed recommendation from the European Securities and Markets Authority (Esma) to the EU's executive European Commission for endorsement is a taste of what Britain's financial services sector might face after it leaves the bloc.

A new EU law requires Esma to say for the first time if rules for hedge funds and other alternative investments such as private equity in non-EU countries are as strict as those in the 28-country bloc.

A positive view means that asset managers based outside the EU get a "passport" to continue offering services to investors across Europe, replacing a system of country-by-country private placement authorisation.

Esma also gave the green light to hedge funds from Canada, Guernsey, Japan, Cayman Islands, Jersey, Australia, and Switzerland, with provisos for some of them.

In a preliminary finding, Esma had not been able to recommend equivalence for the United States, the world's biggest hedge fund centre, because of competition concerns.

Equivalence will allow the much bigger US mutual funds sector as well as hedge funds to operate across the EU, Esma had said.

"With respect to the competition and market disruption criteria, Esma considers there is no significant obstacle for funds marketed by managers to professional investors which do not involve any public offering," Esma said of the United States.

"However, Esma considers that in the case of funds marketed by managers to professional investors which do involve a public offering, a potential extension of the AIFMD (alternative investment fund managers directive) passport to the US risks an un-level playing field between EU and non-EU AIFMs." Esma recommended the EU took action to "mitigate this risk".

Britain, which voted last month to leave the EU, has one of the world's biggest hedge fund centres and would have to undergo the same "equivalence" process unless the UK is able to keep its "passporting" access to the single market like at present.

The EU watchdog had already deemed Jersey, Guernsey and Switzerland as being "equivalent", but the Commission said it would wait for Esma to approve more countries before endorsing these decisions.

It said that for Bermuda and the Cayman Islands it could not give a definitive recommendation regarding investor protection and effectiveness of enforcement.

"For the Isle of Man, Esma finds that the absence of an AIFMD-like regime makes it difficult to assess whether the investor protection criterion is met," it added.

Granting passports starts a three-year countdown to the expiry of the national authorisation regime, raising issues of timing if some countries obtain passports well before others.

REUTERS