A DEAL on pan-European rules to regulate hedge funds and private equity funds moved closer after France dropped its outright opposition to a key element in the European Union’s proposals.

But the concession was made subject to possibly controversial conditions, ensuring lengthy negotiations ahead. “This is progress but not yet a breakthrough,” said one diplomat.

Until yesterday, Paris had been opposed to a part of the draft legislation that would give non-EU fund managers pan-EU marketing rights – or a “passport” – provided certain conditions were met.

This proposal is backed by the European Commission, European parliament and some countries, including the UK. But it would be a significant shift from the current system, whereby funds outside the EU seek approval from member states individually if they wish to sell into EU markets.

French officials say they are prepared to accept the principle of a passport for third-country funds, but subject to strict conditions. In particular, Paris insists that it should be the new European Securities and Markets Authority that issues a passport to a third-country fund and supervises it.

The French move came just 24 hours after Tim Geithner, US treasury secretary, sent a letter to Christine Lagarde, French finance minister, protesting at French “limits or delays” to granting third-country fund managers a passport, which he said was discriminatory.

France denies that charge. “Our position is not protectionism but has always been about ensuring maximum protection for investors,” an official said. – (Copyright The Financial Times Limited 2010)