China asks brokerages to curb leveraged stock trades - sources
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[November 09, 2023] SHANGHAI/
SINGAPORE (Reuters) - 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 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 $4 against every $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.
A brokerage source said that the new guidance effectively prevents
expansion of the DMA-Swap business, which Chinese media says has grown
to roughly 400 billion yuan ($54.94 billion).
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Investors wait for China's stock market to open in front of an
electronic board at a brokerage house in Beijing, China, January 8,
2016. REUTERS/Jason Lee/File Photo
In a typical deal, hedge funds deploying long-short equity
strategies buy shares and sell stock index futures with borrowed
money through DMA. The swap, wherein funds get to reap gains from
the trade, while brokers earn interest, sits on the books of
brokerages.
The business has been popular as annualised returns of some
DMA-Swap products exceed 150%, an eye-popping contrast to a domestic
stock market struggling to steady in a wobbly economic backdrop.
Those returns have spurred a social media outcry against funds
profiting from bleak market conditions.
Analysts have cautioned that a combination of heavy leverage and
sudden, unexpected market movements could burn investors, hurt
brokerages, and trigger market disorder.
CSRC Chairman Yi on Wednesday attributed previous market crises -
including China's 2015 stock market crash - to leverage getting out
of control.
"Only by putting leverage under control, can we ensure market
stability over the long term", he said.
($1 = 7.2809 Chinese yuan renminbi)
(Reporting by Shanghai newsroom; Editing by Vidya Ranganathan &
Simon Cameron-Moore)
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