Berlin, 23/04/2007 (Agence Europe) - The systematic risks that hedge funds can bring to bear on the stability of the financial markets featured on the agenda of the informal meeting of finance ministers on Friday and Saturday, which was also attended by the governors of the national central banks. The discussion focused on the increased liquidity of the financial markets due to speculative hedge funds. It also confirmed the need to increase the transparency of the activities of these funds. Whatever happens, any initiative must be in the domain of the financial markets only, non-binding and at international level. “Everybody agreed” that something must be done, said Peer Steinbrück; “even the United Kingdom felt that it would be very useful to have more intense exchanges of information”. The German finance minister said that “the implementation of a non-binding code of conduct” on hedge fund activities “would be something excellent” which would work “in the interests of the sector”. He added that there would be “no need to have everybody on board”, but just the “10 to 15%” of the hedge funds which manage “80 to 90%” of the thousand billion EUR managed by the industry. The questions raised relate to the content of the standards to be set in place and “the follow-up and control process” for the implementation of this kind of code, he added. On 8 May, the Ecofin Council is to adopt conclusions which will serve as a basis for the debate to be held in mid-May in Potsdam (Germany) by the finance ministers of the group of the eight most industrialised countries (G8).
“There are information efforts to be made” in terms of “investor protection”, said Joaquín Almunia, Commissioner for economic and monetary affairs, who described the Berlin debate on the “improvement of the transparency” of hedge funds as “extremely useful”. We “need a better understanding of the phenomena”, said Jean-Claude Trichet, President of the European Central Bank (ECB), speaking along the same lines. According to Axel Weber, President of the BundesBank, it is important to ensure that new players and financial instruments are capable of “holding their own in an (economic) environment which is less favourable”. He added that “the indirect approach can only work if the information required is made available by the hedge funds”.
Currently, the rules in force in this field are indirect: they focus on professional investors - investment banks and “prime brokers” - which lend money to hedge funds, rather than the funds themselves. They aim to ensure that these investors have a risk management policy allowing them to avoid overexposure to the risks related to hedge fund activities. Commissioner Charlie McCreevy, who is in charge of the dossier and favours this indirect approach - and who did not attend the press conference - reiterated his well-known position in Berlin, that specific European legislation for hedge funds was not necessary. The Commission will report back on this issue in summer 2008.
Shareholder activism. The last few years have seen a dramatic rise in hedge funds. This industry is characterised by highly speculative investment activities, betting, amongst other things, on a reduction in value of the shares of a company quoted on the stock exchange. It is a follower of shareholder activism and intervenes directly in takeover and merger operations of quoted companies which the sector considers to be under-valued. At the informal meeting, the Dutch minister was said to have been the only one to have raised the question of shareholder activism. He asked how this phenomenon, which focuses on short-term returns, can affect the internal balance of companies focusing more on the medium or longer term.
ABN Amro. “The Children Investment Fund” (TCI) hit the headlines last February, when it exposed the low value of the Dutch bank ABN Amro (see EUROPE 9376 on 9379). This initiative is behind two competing takeover offers for this bank, one by the British bank Barclays and the other from a consortium involving three European banks (The Royal Bank of Scotland, Santander and Fortis). On Monday, Barclays and ABN Amro announced the conclusion of a relationship which will lead to the creation of the second-largest banking group in Europe (with 220,000 employees), the former buying the latter for a price of €67 billion. This record merger is likely to see more than 20,000 jobs shed within the new group, due to redundancies and externalisation. Notwithstanding this announcement, the heads of the Dutch bank were meeting their counterparts from the three European banks on Monday, in line with the request by the TCI hedge fund that ABN Amro study all the offers on the table. On Monday 23 April, the European Commission had no specific comments to make further to the announcement of the merger between Barclays and ABN Amro. That the parties must verify whether the operation falls under the scope of application of European legislation, which requires a notification to be made to it, was all that the Commission cared to point out. If this is the case, the European institution will carry out an investigation on the impact of the announced merger on competition in the banking sector.
The Commission, taking pains to ensure an anti-discriminatory assessment of both offers, did not hesitate, last week, to rap the Dutch Central Bank over the knuckles for voicing its concerns regarding the consortium's offer, which has the objective of dismantling ABN Amro. “Commissioner McCreevy is disappointed when a member state opts for the path of protectionism and would be even more so if this member state was the Netherlands”, said his spokesperson. The Netherlands, which previously had to deal with problems encountered by ABN Amro in taking over the Italian bank Antonveneta, was an ardent promoter of the recent regulatory reform which led to limits on political interference in cross-border mergers and acquisitions in the financial sector (see EUROPE 9395 and 9386).
FSF. In Berlin, information filtered through on the recommendations of the report on hedge funds to be presented next May in Potsdam by the Forum for Financial Stability (FSF). Taking very much the same stance as the declarations of the finance ministers, the preliminary recommendations seen by EUROPE “encourage” the national regulators to explore the issue of whether “systematic and consistent information” on the exposure of financial investors to hedge funds would constitute “a useful addition” to their efforts aiming to reinforce risk management policies implemented by the financial investments. According to the FSF, “the managers of 'hedge funds' should provide sufficiently detailed and frequent information to enable investors and counterparties to be informed (of their) strategies and of the level of risk management procedures”. The report of the economic and financial committee, which dates from mid-April, proposes to continue the follow-up of risks related to hedge funds and suggests that the Commission and the Committee of European Securities Regulators (CESR) carry out a more detailed analysis of the composition of the strategic portfolios of hedge funds. The informal meeting in Berlin gave its agreement to this proposal. (mb)