ESMA Recommends Passport Expansion to Three Locales, But Not U.S.

Jul 30 2015 | 4:04pm ET

European regulators have expanded – albeit only slightly – the domiciles from which hedge funds can market their products to investors in the 28-nation European Union. 

The European Securities and Markets Authority (ESMA) has decreed that hedge funds and other alternative investment managers from Guernsey, Jersey and Switzerland should be allowed market across the EU, according to statement released Thursday. The opinion essentially delivers a so-called passport to companies in those locales under AIFMD rules.

At the same time, ESMA noted that it has not yet reached a view on whether hedge funds and other alternative investment funds from the United States, where the majority of the world’s alternative investment managers reside, should be given such as a passport. Ditto for funds residing in Singaporean or Hong Kong.

"No definitive view has been reached on the other three jurisdictions due to concerns related to competition, regulatory issues and a lack of sufficient evidence to properly assess the relevant criteria," said ESMA.

While welcome for funds in Guernsey, Jersey and Switzerland, the ruling (or lack thereof) is bound to frustrate managers in the other three. ESMA presides over a complicated securities regulation framework in the EU that somewhat resembles the U.S.’s amended Blue Sky regulations, allowing EU-authorized hedge funds to market across the EU without registering in each individual nation. Non-EU funds, however, have to seek permission in each jurisdiction in which it wants to market, an expensive and extremely tedious process that essentially shuts out smaller managers. 

Reasoning behind the decision was hard to comprehend for anyone with familiarity with both European and U.S. financial systems. 

"ESMA is of the view that in the context of a potential extension of the…passport towards the US, there is the risk of an unlevel playing field between EU and non-EU alternative investment fund managers as regards market access," said ESMA in a statement to Reuters. 

Moreover, the ruling maintains the asymmetric access afforded to EU fund managers, who need only open an office in the U.S. in order to market to some U.S. investors, not one in every state. Meanwhile, without a AIFMD passport, U.S. funds must apply for access in every EU country in which it would like to market. 

The opinion is the latest in a series of post-crisis regulatory disagreements with the securities regulators of the EU and the U.S. It joins a long-running argument between the two agencies regarding derivatives regulation.

The U.S., Hong Kong and Singapore account for the large proportion of global hedge fund assets, as well as the growth of those assets, according to data from Preqin. ESMA's ruling, which pushed a decision regarding these three jurisdictions until some undefined “practical” moment, can be overridden by the European Commission, although observers do not believe such an outcome is likely. 

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