European lawmakers on Monday will approve tighter controls on hedge fund and private equity firms as political leaders seek a clampdown on speculators following Greece's debt crisis.
The moves to control and monitor hedge funds' borrowing, investment and compensation are due to become law in 2012. They also need the blessing of European Union countries and remain mired in a dispute between Britain and France.
The European Parliament's approval will accelerate the introduction of controls on hedge funds and speed up a wider regulatory overhaul of European financial services.
It coincides with a summit of European leaders set to approve aid for debt-laden Greece and call for swift action against speculators.
"It can't be that we come to put out the fire and speculators add oil to the flames," Austrian chancellor Werner Faymann told reporters.
German chancellor Angela Merkel also called for tougher rules for a financial sector that is blamed for triggering the worst global recession in a generation.
"The regulation of finance markets needs to be accelerated," she said. "We don't have any time any more. That must happen quickly."
Hedge funds have been blamed for exacerbating Greece's borrowing difficulties by betting against its debt, but there are few records to show who is active in these markets.
The new regime would change that, proponents say, making it easier for supervisors to see what is happening as well as intervene with bans on short selling, for example.
European lawmakers will back curbs on pay at hedge funds, as well as limits on private equity investors trying to extract dividends from companies within the first four years of ownership.
"We want to have clear rules that these managers have to stick to," said Udo Bullmann, a German Socialist member of the European Parliament who plays a central role in deciding the law. "The hedge funds played a role in the Greek crisis."
Mr Bullmann was also critical of private equity. "There are good private equity companies," he said. "But there are others that do no more than buy companies, bulk up their debts and then asset strip. We want to restrict that."
Most importantly for the sector, parliamentarians want to place both private equity and hedge funds under closer scrutiny by supervisors and give watchdogs the power to impose limits on borrowing.
Supervisors will demand hedge funds tell them how they are investing, breaking an industry taboo. This information, which can give hedge funds an edge over rivals betting on the markets, is closely guarded.
Britain, home to eight out of 10 European hedge funds and most of the region's private equity, has fought hard to water down the rules, concerned that tough new measures could prompt funds to move to Switzerland, Dubai or elsewhere.
British opponents hoped to derail the new rules. Germany and France sought a heavier clampdown.
The proposed law has led to disagreement between Washington and Brussels. US treasury secretary Timothy Geithner complains it could discriminate against American firms.
Washington is worried the rules would make it harder for a New York hedge fund, for example, to find investors in Europe.
Lawmakers in Brussels will address these concerns by giving foreign funds a license to do business across all 27 EU countries if they meet European standards.
Reuters