LONDON (Bloomberg) — Hundreds of London hedge fund managers may escape European limits on bonus payments as the UK regulator considers allowing them to opt out of the rules, according to five people with knowledge of the plans.

Funds may have the option to explain to the Financial Services Authority why they are unable to comply with rules that require half of bonuses to be paid in shares, said the people, some of whom declined to be identified because the negotiations are private. The regulator is still reviewing whether the largest hedge funds must fully comply with the rules, according to the people.

The FSA in July proposed expanding the companies covered by its bonus rules from 27 banks to 2,500 firms, including building societies and hedge funds, to comply with European Union legislation on bank capital. The regulator proposed the possibility of giving firms a "comply or explain" exception and the Committee of European Banking Supervisors supported that position last month, said Darren Fox, a partner at Simmons & Simmons, who represents hedge funds.

"There is a growing sense that this approach is firming up," Fox said in London. "The panicky calls from clients have reduced. People seem to be less concerned about the most severe implications of the code because the FSA has been making the right noises."

The FSA may also extend the deadline for firms to comply with the new rules from January 1 until July. Franca Rosa Congiu, a spokeswoman for CEBS in London, declined to comment.

"What we've said all along is that we would apply proportionality," FSA spokeswoman Heidi Ashley said in a telephone interview yesterday.

"The smallest firms may well not have to do what the biggest firms do. We'll have a single set of rules, but they may be applied in a different way depending on the size of the firm."