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EU defends hedge fund rules against US critics

The European Union hit back against US criticism of plans to crack down on hedge funds, saying its push for openness in the industry met a commitment also given by Washington and others.

US Treasury Secretary Tim Geithner has complained to EU financial markets chief Michel Barnier about proposed rules to curb hedge fund borrowing and pay, the European Commission said.

A spokesman for Barnier denied the legislation would discriminate against foreign funds.

“The EU decision to act on hedge funds is in line with a G20 decision to reinforce transparency,” the spokesman, Amadeu Altafaj, said. “The new hedge fund rules do not discriminate against foreign players and are not protectionist.”

Brussels wants foreign investors -- such as New York hedge funds based in London -- to be more closely supervised. Washington is worried this could hobble hedge funds' efforts to attract money from wealthy Europeans and other local investors.

The spat comes at a critical time. Sources with knowledge of the matter told Reuters on Wednesday that Britain was preparing concessions that would pave the way for European finance ministers to unveil draft regulations on hedge funds next week.

A deal would not limit the short-selling of credit default swaps -- insurance against an unpaid government bond. Many say trading in such instruments compounded difficulties in Greece, the most troubled economy in the 16-country euro zone.

But it would send a signal that the EU is acting decisively against an opaque industry by introducing rules that will put secretive investors under unprecedented regulatory scrutiny.

The timing of Geithner's letter could help London to wring out final concessions to these rules. Britain, home to most of Europe's hedge funds, has become increasingly isolated in fighting for lighter regulation of the sector.

Its financial centre, the City of London, is worried that Britain has been outmaneuvered by Berlin and Paris, which want tighter control of speculators and banks.

Geithner's letter also widens further a rift between Washington and Brussels.

While European politicians have accused hedge funds of exacerbating Greece's difficulties and called for emergency measures to stop them betting on government debt, Washington says the country is the author of its own misfortune.

The two sides also disagree over how to deal with large banks that pose a risk to the wider economy.

US President Barack Obama wants to ban banks from trading on their own account as well as demanding they ditch stakes in hedge funds and private equity. Europe is more lenient.

The tug-of-war will put pressure on leaders of the G20 major countries who are trying to maintain momentum in a regulatory crackdown on banking. (Reuters)