|Vol.7, No.7, 22.2.01, p22
GOVERNMENTS are set to bury their differences and agree on a law to cut the red tape governing the Union's € 3 trillion market for mutual funds.
Diplomatic negotiations on the issue earlier this week increased hopes of a compromise on a legislative package of reforms ahead of the 1 March deadline set by finance ministers.
Governments were split over a draft directive for harmonising the way mutual funds are marketed and regulated by member states.
But sources familiar with this week's talks say a majority of governments are set to support a deal on the minimum levels of capital that fund managers should be forced to hold in reserve.
"An agreement is now sight which will be little changed from the Swedish compromise at last week's Ecofin," said one diplomat. Agreement would mean that the EU would not have to re-open negotiations on a linked set of proposals, agreed last October, which set out rules on which kinds of investment - including, for the first time, high-risk derivatives - can be lumped into the funds.
Governments stipulated that they would rubber-stamp that deal only if a compromise were thrashed out on the accompanying directive by next month, arguing that the two sets of rules should be adopted in tandem.
"There is a 1 March deadline and we agreed that this should be respected," said a Swedish diplomat.
Under the Commission's proposals, managers would be required to have an initial € 125,000 in capital to set up a new fund. They would also have to maintain reserves of 0.05% of the capital up to a € 10 million maximum if they are trading in riskier assets, such as derivatives.
But the UK, Denmark and Finland want to lessen this burden. The UK tabled an alternative, suggesting firms would have to keep only 0.01% of their assets in reserve or the equivalent of six weeks' operational costs. Stockholm's compromise calls for a charge of 0.02% and an exemption for small fund managers.
The idea behind the reforms covering what is known in financial jargon as Undertakings for Collective Investments in Transferable Securities (UCITS) was to give managers more freedom to choose what areas they could invest in.
For example they would, for the first time, be able to invest in unlisted money market investments such as commercial bonds and bank deposits, and also unlisted mutual funds.
The blueprint approved by member states would relax restrictions on index-tracking funds in some European markets dominated by one large stock. It would also allow managers to invest up to 100% of their assets in derivatives - in a direct challenge to
MEPs who signalled that they wanted a 30% ceiling on such investments.