Sweden, holder of the European Union presidency, wants to ditch a proposed borrowing limit for hedge funds in a move that will please Britain but anger France and others seeking tougher control of the secretive industry.
Although hedge funds did not play a central role in the global financial crisis, many politicians have long been suspicious of their activity, prompting the European Commission, or EU executive, to draft rules to keep close tabs on them.
But Sweden, concerned that the draft rules as they stand, could drive the funds that one German politician dubbed locusts into exile, has proposed a radical compromise, according to a document obtained by Reuters.
It is trying to broker a deal with European countries to drop a central part of the proposed EU rules — a cap on borrowing by the funds that are best known for making reverse bets on company stocks rising or falling.
Instead of an automatic cap, the Swedes want a watchdog to monitor hedge funds and decide when to clamp down on wayward firms with borrowing limits.
"When it is deemed necessary, the authorities … may impose limits to the level of leverage," officials write in the document.
"The leverage cap is being taken out," said one diplomat close to the negotiations. "That was too blunt. It is still possible for the supervisors to impose a cap but on a case by case basis."
"This is not watering down the rules. In fact it is tightening them up. The Commission had made a proposal with no bite — this one has bite," the diplomat said.
The Swedes are also against closing entry to Europe to foreign hedge funds whose rules at home are softer — another contentious part of the original plan. And they are working to disentangle private equity and other investors from the law.
"We are disappointed," said one diplomat against the Swedish position. "We can't do less for hedge funds that what we are doing for banks, insurance or financial markets."
Another said the Swedes, whose presidency ends at the turn of the year, would have to give teeth to the hedge fund watchdog in order for their suggestion to be credible.
"We really want strong rules," said the diplomat. "We are not sure we are going to fix this under the Swedish presidency."
Diplomats, who met last Friday to discuss the proposed compromise, plan to gather again in the coming weeks to continue what is set to be a difficult negotiation.
