EU further delays vetting of hedge fund rules outside the bloc

A large chunk of the world's hedge fund sector faces further uncertainty after the European Union extended a deadline for deciding if non-EU firms can continue marketing themselves in the 28-country bloc. A new EU law requires the EU's European Securities and Markets Authority (ESMA) to say for the first time if hedge fund and private equity rules 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 would be given a "passport" to continue offering services to investors across Europe, replacing a system of country-by-country private placement authorisation. The EU's executive European Commission takes the final decision on whether a passport is granted in an already lengthy process that has created uncertainty in the sector. In a letter to ESMA published on Tuesday, the Commission asked ESMA to say by June 20 whether rules in the United States, Singapore and Hong Kong are "equivalent".
Assessments for Japan, Canada, Isle of Man, Cayman Islands, Bermuda and Australia face the same deadline, which marks a three-month delay on previous deadline. The assessments should look at the track record of regulators to enforce global standards, the letter said. In a preliminary finding, ESMA could not grant equivalence to the United States, the world's biggest hedge fund centre, because of competition concerns. Equivalence would allow the much bigger US mutual funds sector to operate across the EU, ESMA has said.
"To be able to better assess any potential market disruption and competition effects of grating the passport to third countries, we also invite ESMA to provide a preliminary assessment of the expected inflow of funds by type and size into the EU from relevant third countries," the Commission said in its letter. ESMA has 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.
"Those who were expecting an imminent extension of the passport to the three countries already assessed positively by ESMA will be discouraged by the implication that, even for these countries, there is more work to be done," said Edward Smith, a partner at Linklaters law firm. 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. The Commission is also asking ESMA to look at this in time for a review of the EU law in 2017.