China’s Regulators Restrict Hedge Fund Leverage in Complex Derivative Trades

China’s securities regulators have implemented new restrictions on hedge fund leverage in complex derivative trades, according to sources. The China Securities Regulatory Commission (CSRC) has instructed brokerages to limit the leverage available to hedge funds that engage in the so-called DMA-Swap strategy, which involves borrowing large sums of money to trade stocks. Under the DMA-Swap strategy, hedge funds can borrow up to $4 for every $1 they deposit with the broker, while bypassing regulatory borrowing limits. The move follows the CSRC’s commitment to strengthening supervision in the stock market and preventing risks. This development aims to address concerns regarding excessive leverage and reduce the size of leveraged trades to a reasonable level, as stated by CSRC Chairman Yi Huiman. The authorities’ scrutiny on the DMA-Swap business comes after reports of regulators probing brokerages for data related to this practice. Hedge funds have now received notices from their brokerages, instructing them to cap their DMA-Swap business at current levels, effectively preventing its expansion. This move seeks to curb the rapid growth of the DMA-Swap business, which reportedly stands at approximately 400 billion yuan ($54.94 billion). The use of heavy leverage combined with unexpected market movements has raised concerns among analysts, who warn that it could lead to significant losses for investors, harm brokerages, and potentially disrupt the market. In response to the new restrictions, there have been calls on social media platforms to address the issue of funds profiting from an ailing stock market. The CSRC’s chairman has attributed previous market crises, such as China’s stock market crash in 2015, to the unchecked use of leverage. By imposing restrictions, the CSRC aims to ensure market stability in the long term.