AEIP Newsletter • Week 20

17 – 21 May 2010

Table of Contents

EU FINANCIAL SERVICES............................................................................................................................... 2
I. NEW AUSTERITY MEASURES FOR PORTUGAL, SPAIN ........................................................................................ 2
II. GERMANY FIRST TO INTRODUCE BAN ON NAKED SHORT-SELLING ................................................................... 2
EU INTERNAL MARKET .................................................................................................................................. 2
I. ESTONIA INVITED TO JOIN EURO ON 1 JANUARY 2011 ...................................................................................... 2
II. EC POSTPONES CORPORATE GOVERNANCE REVIEW TO JUNE........................................................................... 3
EU HEALTH ......................................................................................................................................................... 3
I. STATEMENT BY JOHN DALLI, EUROPEAN COMMISSIONER FOR HEALTH AND CONSUMER POLICY ON EU
DIRECTIVE ON ORGAN DONATION AND TRANSPLANT ......................................................................................... 3
EU SOCIAL AFFAIRS......................................................................................................................................... 4
I. PROPOSED REFORMS WILL NOT MAKE FRENCH PENSIONS SUSTAINABLE .......................................................... 4
II. GERMAN EMPLOYERS PROPOSE SIMPLIFIED SOLVENCY LEVY .......................................................................... 4
III. LGPS MUST ADAPT TO AVOID SPENDING CUTS – MAYER .............................................................................. 5
IV. MINISTER DEFENDS LOWER FTK PARAMETERS ............................................................................................. 5
V. AUSTRIA NEEDS PENSION SIMPLIFICATION NOT GUARANTEES, EXPERTS WARN............................................... 6
ECONOMY ........................................................................................................................................................... 6
I. EP AND COUNCIL OF MINISTERS DIVIDED OVER HOW TO DEAL WITH HEDGE FUNDS FROM OUTSIDE THE EU... 6
II. CONFERENCE OF PRESIDENTS CALLS FOR SPECIAL COMMITTEE TO BE SET IN PLACE ON NEXT MULTIANNUAL
FINANCIAL FRAMEWORK...................................................................................................................................... 7

EVENTS AND COURT CASES.......................................................................................................................... 7

ND
I. 2 ANNUAL TRANSATLANTIC CONFERENCE.................................................................................................... 7
II. EUROPEAN COURT OF JUSTICE CALENDAR".................................................................................................... 8
IN DEPTH ANALYSIS ........................................................................................................................................ 8
I. GERMANY FIRST TO INTRODUCE BAN ON NAKED SHORT-SELLING .................................................................... 8
II. EP AND COUNCIL OF MINISTERS DIVIDED OVER HOW TO DEAL WITH HEDGE FUNDS FROM OUTSIDE THE EU.. 9

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EU Financial Services

EU Financial Services

I. New austerity measures for Portugal, Spain

Portuguese leaders agreed tough austerity measures on Thursday, joining a coordinated eurozone
push that has calmed market fears of a widening Greek-style crisis but provoked talk by Spanish
unions of a general strike. Prime Minister José Sócrates and opposition leader Pedro Passos Coelho
drew up steps to slash Portugal's budget deficit, including 5% pay cuts for senior public sector staff
and politicians, and increases of VAT sales tax, income tax and profits tax ranging from one to 2.5%.
The cabinet approved the programme later. The government said it would cut the deficit to 7.3% of
GDP this year and 4.6% in 2011. Last year it hit 9.4%, prompting a sell-off of Portuguese assets by
investors. "I ask all my compatriots for us to make this effort to defend the country, to defend the euro
and Europe," Socrates, a Socialist, told a news briefing. In neighbouring Spain, painful measures were
announced on Wednesday including 5% reductions in civil service pay and job cuts. "We radically
reject this austerity plan and both [main] unions are starting protests that could lead to a general strike
very soon," said Ignacio Fernandez Toxo, general secretary of Spain's biggest union Comisiones
Obreras. A public sector strike is planned for 2 June. Union leaders said the austerity plan breached
pension pacts and that economies should come from tax increases rather than cuts. (14/05/2010
Euractiv.com)

II. Germany first to introduce ban on naked short-selling

Germany today (19 May) became the first European country to ban naked short-selling in shares of
the country's 10 most important financial institutions, marking the latest step in Europe's crackdown
against speculators.
In depth analysis page: 8

EU Internal Market

EU Internal Market

I. Estonia invited to join euro on 1 January 2011

On Wednesday 12 May, the European Commission and the European Central Bank (ECB) announced
that Estonia meets the preconditions for joining the euro. In their 2010 report on convergence
(analysing the convergence of countries wishing to join the euro and to which a derogation applies - all
non-euro member states bar Denmark and the United Kingdom, which have fully opted out), the
Commission and ECB call for Estonia to join the euro on 1 January 2011. The Ecofin Council will rule
on Estonia's membership of the single currency in July 2010, once it has been given the go-ahead by
EU heads of state and the European Parliament. Expanding the eurozone to include Estonia shows
that the EU has confidence in its future but the decision is based on very strict, objective criteria,
explained the President of the European Commission José Manuel Barroso. EU Economic and
Monetary Affairs Commissioner Olli Rehn said it sent a very clear signal of the euro's role into the
medium-term, demonstrating that concerted efforts and a long-term view of stability-focused policies
generated positive outcomes. Estonia has been implementing a stable exchange rate policy since
1992, well before it joined ERM II on 28 June 2004, explained Rehn. In 2009, Estonia's deficit stood at
1.7% of GDP, well below the 3% maximum (despite an unprecedented 15% slump in nominal GDP)
and the country's sovereign debt levels are “exceptional”, added Rehn. Estonia has virtually no public
debt because whereas the EU average is 75% of GDP, Estonia's was only 7.2% in 2009. During the

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12 months ending 31 March 2010, Estonia's inflation averaged -0.7 %, well below the 1.0% reference
level for March 2010, and it is expected to remain under 1% in the following months. The Commission
comments that the long-term interest rates criterion does not directly apply to Estonia because it does
not have any long-term reference bonds or comparable gilts to assess the sustainability of the
convergence in rates since its gross public debt is so low. Uneven progress has been achieved by the
other eight countries covered in the report (Bulgaria, Latvia, Lithuania, Hungary, Poland, Romania,
Sweden and the Czech Republic), none of which meet all the criteria. (12/05/2010 Agence Europe)

II. EC postpones corporate governance review to June

The European Commission's green paper on corporate governance will now be published in the first
week of June. Speaking at a conference in Germany, Michel Barnier, the EU Commissioner for the
internal market and financial services, warned that regulatory reform needs to be co-ordinated globally
with the G20 agenda as a "common roadmap". He told delegates that the European Commission "will
deliver" on its G20 commitments, with the necessary proposals intended to be presented by spring
2011 "at the latest". Although he added it will also require effort from member states and the European
Parliament to ensure "rapid adoption so that all the measures can be implemented by the end of
2012". However, Barnier noted that proposals already "on the table" such as the Alternative
Investment Fund Manager (AIFM) Directive, and proposals on supervisory reform will need to be
concluded first. As he warned a delay in adoption of the supervisory reforms past the summer would
put back the creation of the European Systemic Risk Board and European Supervisory Authorities,
including the new European Insurance and Occupational Pensions Authority (EIOPA), until after the
start of 2011. Barnier also outlined a busy June that will include the adoption of a green paper on
corporate governance, expected on 3 June 2010, which will be followed by a consultation period. He
said: "The Green Paper will address a number of questions - How to manage risk effectively in
financial institutions? How to empower shareholders? This is important – because true crisis
prevention starts from within the companies." Chris Verhaegen, secretary general of the European
Federation of Retirement Provision (EFRP), said the organisation welcomes the Commission's move to
consult on the issue in the wake of the financial crisis. She said: "There are questions to be raised that
were not raised before. Also in this aspect, the financial crisis has consequences that are still to be
distilled and any policy response should be thought through extensively before taking any legislative
initiative." Meanwhile, Barnier also confirmed some amendments to the Regulation on Credit Rating
Agencies – that comes into effect later this year – will also be published in June "to ensure efficient
and centralised supervision. And transparency about the entities demanding the ratings in order to
ensure that all credit rating agencies have access to this information". He suggested this could help
competition, but also admitted the regulation on credit rating agencies is a "first step". He added: "We
may need to look into this particular market in more detail – the disproportionate role played by rating
agencies in today's financial markets and in our regulation; the handling of public debt rating and the
lack of competition in the market." (IPE.com 20/05/2010)

EU Health

EU Health

I. Statement by John Dalli, European Commissioner for Health and Consumer Policy on EU
Directive on Organ Donation and Transplant
The European Parliament today voted (19/05/2010) in favour of the EU Directive on standards of
quality and safety of human organs intended for transplant.
John Dalli said : "I welcome today's vote by the European Parliament and I thank the Rapporteur, Dr
Mikolášik , and the Spanish Presidency for their work. Today's vote is a major step forward for the
over 50 000 European patients waiting for an organ transplant.

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Organ transplant is a life-saving operation and often the only available treatment for end-stage organ
failure. Common standards across Europe will ensure the highest level of quality and safety of organs
while ensuring that all donations must be voluntary and unpaid. This is key to ensure that European
citizens that need an organ transplant can benefit from the best possible quality and safety conditions.
This is a concrete example of how EU legislation can work to save lives and foster create solidarity in
Europe. I look forward to a swift implementation of this text by the Member States". (19/05/2010
europa.eu/rapid)
EU Social Affairs

EU Social Affairs

I. Proposed reforms will not make French pensions sustainable

A French government minister has conceded that sustainable funding for its current pension system
“is not possible”. The admission comes after simulations exposed funding shortfalls facing the
country’s pension system, despite proposed reforms. In a paper published earlier this week,
the Conseil d'orientation des retraites (COR) ran several simulations with the assistance of CNAV and
ARRCO showing that proposed reforms would not be able to shore up the financial shortfall projected
for 2050. Éric Woerth, the minister for budget, public accounts, civil service and state reform,
acknowledged the problem while speaking on national television. “The figures show that in reality
sustainable funding of our pension system is not possible, due to demographic reasons," he told
Canal+. Woerth added that the predictions did not take the government by surprise and that he would
submit concrete reform proposals for discussion next week. Proposed reforms include lengthening the
contribution period, currently rising from 40 to 41.5 by 2020, as well as increasing the retirement age,
at 60 lower than in many other European countries. The COR projections show that even these
measures will not be able to combat the looming pensions deficit, which is predicted to be €50bn by
the end of the decade. The news comes in the same week as President Nicolas Sarkozy ruled out any
compulsory levies as a means of financing any pension reform. (13/05/2010 IPE.com)

II. German employers propose simplified solvency levy

The German federation of employer representatives (BDA) is suggesting a simplified alternative to its
proposal for a risk-based levy to the German pension insolvency fund PSV. Last year, the BDA
demanded a reduction in the PSV levy for companies with plan assets which were invested under
certain regulations and checked by external advisers. At this year’s annual conference of the German
pension fund association Aba, Alexander Gunkel of the BDA said his organisation has amended its
proposal to allow for reductions for companies with plan assets under the new German accounting
standards BilMoG, as they are almost identical to the plan assets under IAS19. “Using plan assets as
described in German accounting standards will make it easier for SMEs as they could be deterred by
international accounting standards,” Gunkel pointed out. However, even with this amendment the BDA
found that many companies did not want to commit to investment regulations for their CTAs or other
external funding vehicles as they might be tightened in the next crisis. “A much easier alternative
would be to just take into account plan assets under BilMoG, which have to be insolvency-proof
anyway, as any company will create these assets anyway and figures would be easy to get,” Gunkel
pointed out. This would mean a much less pronounced cut in the PSV-levy which last year reached a
record high of 1.4% (from a former five-year average of around 0.3%) which would also assuage
critics of PSV cuts who fear a major shift in levy-payments by a reform. Gunkel also pointed out that
companies which had their external funding vehicles fully re-insured should get a major discount as
well. This last suggestion was also seconded by Claus Berenz, head of the legal department at the
PSV. But he was critical about discounts for companies with a CTA as the fact that this vehicle was
unregulated and not clearly defined meant it was not certain whether the PSV would be able to work

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with the assets in the CTA should the company file for insolvency. “For example, the problem with one
major company with a CTA that became insolvent is now that because there is [legally] no such thing
as a CTA, we have to check what was put into this CTA, and what the company had agreed to.”
Gunkel also proposed to increase the annual levy slightly for all members in order to fill the PSV fund,
which has to cover the average pay-out sum over the last five years, to double that amount. “This
would decrease cyclical payments which currently mean high spikes in contributions in years when the
companies are struggling with difficult economic situations,” said Gunkel. Hans-Ludwig Flecken, head
of the state pension department in the German social and labour ministry, noted that the government
would like to see an agreement on the subject between companies, unions and the Aba before making
a decision. (13/05/2010 IPE.com)

III. LGPS must adapt to avoid spending cuts – Mayer

Public sector pension schemes will have to accept changes if they are to survive potential funding
cuts, the London Pension Fund Authority (LPFA) has warned. Speaking at the National Association of
Pension Funds' (NAPF) local authority conference, Anthony Mayer, chairman of the LPFA, said even
the local government pension scheme (LGPS) would not be immune to public spending cuts under the
new UK government, given the high level of national debt in the country. Mayer told delegates: "If we
are to be listened to by this new government, then a cap to public expenditure must be on offer, along
with steps to ensure the long term sustainability of the LGPS. If not, the LGPS will wither away,
because without real and radical action the scheme will be unaffordable in the long term no matter
what current cashflow is." He argued that campaigning for higher employer contributions would
therefore be to "enter cloud cuckoo land", and instead reiterated calls for a new independent pensions
commission to develop "positive, realistic and practical ideas" for making public sector pensions
sustainable. This was one of the issues highlighted in the coalition document published last week,
which stated the commission would look at making public sector pensions sustainable while protecting
accrued rights. Meanwhile, the day after George Osborne, chancellor of the exchequer, and David
Laws, chief secretary to the Treasury, announced plans to cut £6bn (€7bn) of public spending and a
forthcoming emergency budget on 22 June 2010, Mayer admitted "public sector pension schemes will
be under attack in the coming months". He added: "And yes, the guardians of the LGPS need to
respond with positive and effective measures to ensure its long term affordability and our
responsibilities to the public purse. "But in doing so let us remember we represent millions of ordinary
working people who deserve a decent pension even if they may have to work longer, pay more and
receive a little less for the privilege." (19/05/2010 IPE.com)

IV. Minister defends lower FTK parameters

Dutch pension contributions can remain at the same level for the short term for most funds following a
decrease in the upper limits for forecast returns, according to social affairs minister Piet Hein Donner.
Pension funds’ ability to grant indexation may also be unaffected, as their options for indexation will be
determined by achieved returns, Donner said in a written consultation with MPs about his proposals
for lowering the parameters of the financial assessment framework FTK.However, lower parameters
could lead to a decrease in expected future indexation, he noted, adding that his proposals will require
pension funds to raise their contributions by 8% on average, or lower their indexation ambitions by 10-
20% for the longer term. The minister previously wanted to decrease the upper limit on return
assumptions for listed equity and indirect property by 0.8% to 6.8%, while also proposing parameters
for fixed income investments at gross 4.5%, rather than without investment costs. In response, the
pension bodies VB and OPF claimed the new parameters could require a 50% rise in contributions.
Donner said the new parameters would not affect recovery plans, as long as they were ahead of the
mapped-out improvements. In addition, the consistency check (on the feasibility of indexation
promises) for recovering pension funds would not require changes in contributions and indexation
ambitions for five years either, he said. The minister acknowledged the biggest impact of his proposals
was that pension funds might have more difficulty in passing the consistency check. “This might force
schemes to raise their contribution or lower their indexation ambition,” he said. According to Donner,
lower parameters will affect a relatively small number of pension funds, as most schemes have based

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their forecast on lower yields than the maximum of the current parameters, and have higher than
costs-covering premiums as well. He indicated that pensions funds that have applied the maximum
limits of the parameters, and charged relatively low contributions, represented no more than 1% of the
combined yearly contributions of over €26bn. “In the long term, the costs of necessary adjustments will
be approximately €2bn for schemes, which need to be forced to scale down their forecasted returns,
by 0.56% on average,” the minister said. Last week, the €210bn civil service scheme ABP indicated
that the proposed parameters were a threat, “as they will lead to a premium increase of 20% while
sticking to the current prudence margin”. The parameters should be discussed as part of all other
proposals for changes in the pension system, Xander den Uyl, ABP’s vice-chairman stressed.
Although the lobbying organisations OPF and VB acknowledged that Donner has delivered a solid
response to the questions and criticism from both the pension sector and Parliament, they said they
needed some time for a proper response. An extensive discussion about the issues has been
scheduled in Parliament after the national elections on 9 June. (19/05/2010 IPE.com)

V. Austria needs pension simplification not guarantees, experts warn

More guarantees in Austria's second pillar would serve only to complicate the system and fuel public
doubts, according to advisory and academic experts. Thomas Kassler, occupational pensions
managing director at the new consultancy group Koban, told a press conference in Vienna on
Wednesday that current reform discussions around the re-introduction of guarantees in
Pensionskassen were headed in the wrong direction. His views received support from independent
academic expert Wolfgang Mazal. “We already have an occupational pension vehicle with guarantees
– the insurance-based BVK – so people should get free choice between the two vehicles according to
their risk profile,” Kassler said. Separately, Kassler told IPE that additional choices, such as
Pensionskassen with life-cycle models, were serving only to confuse people. He added that such rigid
models were, in any case, not suitable for everybody. Mazal, professor for social and labour law at the
University of Vienna, lent support to Kassler's comments, stating: “Simplification is the key to
strengthening peoples’ trust in the system”. Mazal said current debates concerning a return to a
mandatory system in Austria were counterintuitive, as “we already have a mandatory system”,
referring to the BVK severance pay funds employers are required to contribute to. “We have made the
systemic step to introduce a mandatory system but we are not calling it that – there is a lot of political
dancing around the issue but not saying it out loud,” he said. That said, the BVK severance pay funds
are not intended as retirement provision vehicles, and Kassler suggested that individuals should
transfer their money from BVK funds into their Pensionskassen, arguing that BVK guarantees on
capital would not help people in an inflationary environment. Koban would also like to see more tax
incentives and flexibility for contributions in the system. Mazal also said Austria did not need to raise
the level of the second pillar to that of other countries, because “the first pillar is much more
sustainable”. Consequently, he saw the second pillar as having the potential to act as something akin
to a "bridging income", which could be used by individuals, for example, who were working part-time
before retiring in a bid to increase their state pension through higher pre-retirement contributions.
(20/05/2010 IPE.com)
Economy

Economy

I. EP and Council of Ministers divided over how to deal with hedge funds from outside the EU
Following the agreement in principle reached at the ECOFIN Council on Tuesday 18 May despite
concerns expressed by countries like the United Kingdom, and the draft report on private equity funds,
hedge funds and other “alternative funds” adopted by the European Parliament's economic and affairs
committee, the EU Council of Ministers and the European Parliament agree on the need for greater

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transparency in how hedge funds and “alternative investment” funds (speculative and private equity
funds) operate, in line with the decisions taken recently by the G20. The Council of Ministers and the
EP fall out, however, on how to deal with hedge funds and hedge fund managers from countries
outside the EU, countries like the United States and islands in the Caribbean. Informal negotiations
are under way between the two institutions to reach formal agreement on the new hedge fund
directive before the summer break. It is too early to say what the institutions will decide on non-EU
hedge funds. The EP is scheduled to vote in plenary in July on the new EU rules with a view to them
coming into force in 2012.
In depth analysis page: 9

II. Conference of Presidents calls for special committee to be set in place on next multiannual
financial framework
During its meeting in Strasbourg on Thursday 20 May, the Conference of Presidents of the European
Parliament political groups suggested forming a special committee for preparing the work for the EU's
next multiannual financial framework (MFF) post 2013. The European Parliament is to vote during the
June plenary session on the proposal by the Conference of Presidents to set up this special
parliamentary committee which could begin work in July. The proposed committee will have the task of
determining “the policy challenges and budgetary resources for a sustainable European Union after
2013”, according to a press release diffused by the European Parliament. The committee will have six
tasks: - define Parliament's priorities for the EU's next long-term budget framework, in both political
and budgetary terms; - estimate how much money the EU will need to achieve its objectives; - define
the duration of the next long-term budget framework (traditionally, this has been seven years, but
MEPs want to adjust it to match the mandates of the Parliament and the Commission); - propose a
structure for the future long-term budget frameworks; - draw up guidelines on how resources should
be distributed within and between different parts (“headings”) of the EU budget; - and specify the link
between a reform of the EU's financing system and a review of expenditure. The Conference of
Presidents proposes that the new committee should present the results of its work in a report to be
approved by Parliament before July 2011, when the Commission is to present its proposal for the next
MFF. On a proposal from the Conference of Presidents, Parliament may at any time set up special
committees, whose powers, composition and term of office shall be defined at the same time as the
decision to set them up is taken. Their term of office may not exceed 12 months, except where
Parliament extends that term on its expiry. (20/05/2010 Agence Europe)
Events and Court Cases

Events and Court Cases

nd
I. 2 Annual Transatlantic Conference
AEIP along with its North American partners, the National Coordinating Committee for Multiemployer
Plans (NCCMP) from the USA and The Multi-Employer Benefit Plan Council (MEBCO) from Canada,
nd
will hold the 2 Annual Transatlantic Conference on 09 - 10 June 2010 in Brussels. The overall aims
of this conference are to develop a transatlantic view on four specific issues effecting social protection.
This transatlantic view will then be pushed at the different national levels, aiming to prepare the
different heads of state to have a harmonized approach to social protection during the G20 summit.
The four issues to be covered during the conference are: 1. the impact of the financial crisis on
collectively managed pensions funds and the transatlantic reaction; 2. solvency, sustainability and
adequacy of pensions in North America and Europe; 3. a transatlantic comparison of healthcare and
its reforms; 4. policies of health and safety at work. Moreover, the conference will outline the
challenges faced by social protection in the USA, Canada and Europe and propose possible solutions
which would benefit all actors. To register please send an email to info@aeip.net.

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II. European Court of Justice Calendar"

Date Case Language Courtroom

Judgment Commission v Spain - Freedom of ES Courtroom III -

C-158/09 movement for persons Level 6
Thursday Court of Justice - Fifth Chamber
20/05/2010
09:30 Failure of a Member State to fulfil obligations – Infringement of Article 1(3) of
Directive 2003/88/EC of the European Parliament and of the Council of 4 November
2003 concerning certain aspects of the organisation of working time (OJ 2003 L 299,
p. 9) and Article 18(a) of Council Directive 93/104/EC of 23 November 1993
concerning certain aspects of the organisation of working time (OJ 1993 L 307, p. 18)
retained by Article 27(1) of Directive 2003/88 read in conjunction with Annex I, part B,
to that directive – Non-civilian personnel in public authorities Advocate General
: Mazák

Hearing van Delft and Others - Social security NL New Great

C-345/09 for migrant workers Courtroom
Court of Justice - Second Chamber
Thursday
20/05/2010 Reference for a preliminary ruling – Centrale Raad van Beroep – Interpretation of the
14:30 EC Treaty, Articles 28, 28a, 33, and Annexe VI, R, (1)(a) and (b), of Council
Regulation (EEC) No 1408/71 of 14 June 1971 on the application of social security
schemes to employed persons and their families moving within the Community (OJ
English special edition 1971 (II), p. 416) and of Article 29 of Council Regulation
(EEC) No 574/72 of 21 March1972 fixing the procedure for implementing Regulation
(EEC) No 1408/71 (OJ English special edition 1972 (I), p. 159) – Persons entitled to
a pension or annuity – Obligation to register with the health care insurance board in
the Netherlands – Obligation to pay a contribution

In Depth Analysis

In Depth Analysis

I. Germany first to introduce ban on naked short-selling

Germany today (19 May) became the first European country to ban naked short-selling in shares of
the country's 10 most important financial institutions, marking the latest step in Europe's crackdown
against speculators.

A spokesman for the German Finance Ministry said on Tuesday (18 May) that the ban on naked short-
selling will also apply to credit default swaps (CDS) on euro government bonds, which some
policymakers believe has fuelled the Greek debt crisis. "The ban takes effect at midnight," the
spokesman said. The 10 financial institutions covered by the ban on naked short-selling
include Allianz, Commerzbank, Deutsche Bank, Deutsche Postbank, Generali Deutschland and
Munich Re. Chancellor Angela Merkel is expected to formally announce the measure today (19 May).
The ban will initially apply for one year.

In naked short-selling, a trader sells a stock or a bond - betting that it will fall - without owning it or
ensuring that it can be borrowed, as would be necessary in a conventional short sale. A naked CDS

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contract is typically a bet taken by investment firms like hedge funds that the bond's issuer will end up
in trouble. The move represents the latest attempt at shielding financial institutions from speculative
attacks after the global financial crisis led European governments to inject hundreds of billions of euros
to save ailing banks.

Germany becomes EU pioneer

In recent months, the German government has been working on a new law aimed at increasing
protection for investors and improving the functioning of capital markets. The draft rules, a response to
the financial crisis, were expected to be approved by Merkel's cabinet by mid-July and become law
after passing through parliament later this year.

Coalition sources said German Finance Minister Wolfgang Schäuble was enacting the ban with an
executive order. Under plans sketched out earlier this year, naked short-selling would be forbidden by
law as a risk to the stability of financial markets. An electronic system for reporting and publishing
short sale positions would be set up, with sanctions to ensure compliance by short sellers.

The German ban follows calls by Greece, Germany, France and Luxembourg in March, which called
for speedy action to limit or even ban naked credit default swap (CDS) contracts (EurActiv 11/03/10).
European Union finance ministers discussed possible action in the CDS market on 16 March after the
bloc's executive said it would consider a ban on naked selling.

Britain, which is home to the vast majority of Europe's hedge funds, has expressed doubts about the
effectiveness of the measure. "We need to think about it and think about it clearly but, given that, it is
not the key driver of what has gone on with perceptions of Greek risk," said Britain's Financial Services
Authority chairman, Adair Turner, in March. (20/05/2010 Euractiv.com)

II. EP and Council of Ministers divided over how to deal with hedge funds from outside the EU
Following the agreement in principle reached at the ECOFIN Council on Tuesday 18 May despite
concerns expressed by countries like the United Kingdom, and the draft report on private equity funds,
hedge funds and other “alternative funds” adopted by the European Parliament's economic and
monetary affairs committee, the EU Council of Ministers and the European Parliament agree on the
need for greater transparency in how hedge funds and “alternative investment” funds (speculative and
private equity funds) operate, in line with the decisions taken recently by the G20. The Council of
Ministers and the EP fall out, however, on how to deal with hedge funds and hedge fund managers
from countries outside the EU, countries like the United States and islands in the Caribbean. Informal
negotiations are under way between the two institutions to reach formal agreement on the new hedge
fund directive before the summer break. It is too early to say what the institutions will decide on non-
EU hedge funds. The EP is scheduled to vote in plenary in July on the new EU rules with a view to
them coming into force in 2012.

The Spanish finance minister Elena Salgado commented that the Spanish Presidency now has a
mandate to enter with the European Parliament but that at this stage, it was simply a matter of
entering a new stage in the codecision procedure (in which the EU Council of Ministers and the EP are
co-legislators). She said she had taken note of the UK's concerns. Backed by the Czech finance
minister, the United Kingdom's new Chancellor of the Exchequer, George Obsborne, was shown that
the UK is in a minority on this issue (although 80% of the hedge fund industry is based in the City of
London). EU Internal Market Commissioner Michel Barnier said that the Council's compromise did not
include his own preference for a rigorous and very strict European passport for hedge funds from
outside the EU. He said fair rules had to be developed for market players abiding by identical, or
similar, rules.

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The Spanish Presidency's mandate is based on the draft compromise submitted to the member states'
delegations in March (see EUROPE 10099), which rules out the option of a European passport for
non-EU funds sold by managers based in the EU or elsewhere. According to the Council of Ministers,
it should be the member states that decide whether or not to allow investment in non-EU funds
managed by EU-based fund managers as long as the mangers respect certain measures to be set out
in the new directive - transparency rules, for example. Non-EU fund managers may also be allowed to
sell non-EU funds in the EU as long as they provide sufficient information to investors and the
supervisory authorities in the country or countries in which the funds are to be sold and as long as
there are exchange of information deals in place between the supervisory authority of the country in
which the hedge fund manager is based and the country in which the funds are being sold.

The Gauzès report. On Monday evening in Strasbourg, the European Parliament's economic and
monetary affairs committee adopted a draft report by Jean-Paul Gauzès (EPP, France) on hedge
funds and alternative fund managers by a comfortable majority (31 to 11 with 3 abstentions), including
all the compromise amendments tabled by the rapporteur (see EUROPE 10110). The vote reflects
agreement between three major political parties at the European Parliament (the EPP, S&D and
Greens/EFA). The Liberals and the Conservatives (CRE) voted against, seeing the draft Gauzès
report as protectionist.

The MEPs suggest that a European passport should be granted to hedge funds from outside the EU
that meet five criteria: - exchange of information agreements among supervisory authorities; proper
standards to combat money laundering and terrorist financing in the country in question; good fiscal
governance in the country in question; reciprocal access for EU funds to the market of the country in
question; and recognition and respect by the country in question of rulings issued by the EU on
“alterative funds” management based on the 1958 New York Convention on mutual recognition of
legal rulings. Non-EU fund managers wanting to sell non-EU funds (funds not registered in the EU) will
have to voluntarily pledge to respect the EU directive and register with the future European Financial
Markets Authority, which will delegate its powers of scrutiny to the supervisory authorities in the non-
EU country where the fund is registered.

This means that European hedge funds will no longer be able to work in the shadows and speculate
against Greece or against the euro with impunity, said Pascal Canfin (Greens/EFA, France) in a press
release. He said the Council of Ministers' ideas about the draft directive amount to cloud cuckoo land
regulation because it would still allow London-based fund managers to sell funds registered in the
Cayman Islands, hence providing European institutional investors access to such funds through the
investors' British subsidiaries. Taking the opposite view and slamming highly protectionist draft
legislation that would make it very difficult for Europeans to invest in non-EU funds, Syed Kamall
(ECR, UK) said that the draft legislation, in the form in which it has been adopted by the EP
committee, would slash the value of pension funds and make it practically impossible to invest in
development funds for the world's poorest countries. (18/05/2010 Agence Europe)

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