Brokers told to cut hedge fund leverage

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, 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 US$4 (HK$31.2) 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 the China Securities Regulatory Commission vowed to strengthen supervision and prevent risks in a volatile stock market. CSRC chairman Yi Huiman 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."

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 (HK$429 billion).