SHANGHAI/SINGAPORE: China’s securities watchdog is asking brokerages to restrict leverage available to hedge funds that borrow large sums of money via a complex derivative business to trade stocks, three sources told Reuters.
Hedge funds using the so-called DMA-Swap strategy were told by their brokers late on Wednesday (Nov 8) to start limiting leveraged bets, two sources who received notices from regulators said.
A source at one of China’s big brokerages confirmed the guidance, citing regulators’ concern over market risks.
Through the DMA-Swap, hedge funds can borrow up to US$4 against every US$1 they deposit with the broker in the margin account, while also skirting regulatory borrowing limits by having such trades sit on brokers’ books.
The new restrictions come after China’s securities watchdog vowed to strengthen supervision and prevent risks in a volatile stock market.
Yi Huiman, chairman of the China Securities Regulatory Commission (CSRC) told a conference on Wednesday that regulators would “strictly guard against excessive leverage, and gradually reduce the size of leveraged trades to a reasonable level”.
The CSRC did not reply to a request from Reuters for comment.
Sources told Reuters in September that regulators were probing brokerages for data around the DMA-Swap business.
Hedge fund managers received notices from their brokerages after trading closed on Wednesday asking them to cap their DMA-Swap business at current levels, two sources said.