Parliamentarian steers EU to strict hedge fund rules

By Julien Toyer and John O'Donnell

BRUSSELS (Reuters) - Top parliamentarian Jean-Paul Gauzes has written to members of an influential European Union committee recommending strict rules for hedge funds that clamp down on pay and borrowing, according to his report.

The EU is scrutinising a raft of regulations for the funds and other niche financial groups that includes imposing tough borrowing limits on the secretive industry, which has provoked increasing suspicion among politicians.

For weeks, the European parliament, which alongside the bloc's member countries will write the final version of the law, has been waiting for a report from Gauzes, the parliamentarian appointed to broker a deal.

On Saturday, Reuters obtained a copy of the Frenchman's report, which recommends tighter controls than many had expected for the industry, a significant setback for London which lobbied to water down the rules.

While acknowledging that hedge funds were not central to causing the worst financial crisis in a generation, Gauzes warns that they must now be subject to tight monitoring.

He recommends that hedge fund managers tell watchdogs how much they intend to borrow to pursue investments and stick to this self-imposed limit, a move many will see as unwelcome intrusion into their business.

Gauzes also wants to give a new pan-European watchdog -- due to be set up in an overhaul of financial supervision -- the power to intervene if, for example, it believes a hedge fund is taking too many risks.

The parliamentarian writes that the industry, best known for making reverse bets on company stocks rising or falling, should be subject to the same curbs on pay as bankers.