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Chinese brokerages, including state-owned behemoth China International Capital Corp (CICC), have restricted the amount of cross-border swap transactions domestic investors can undertake, as authorities seek to defend the weak stock market, according to six sources familiar with the matter.
Since Monday, domestic CICC clients cannot add new positions via total return swaps, to make overseas investments, as the broker seeks to limit its derivatives book, said the sources. Three sources said at least three other major Chinese state brokerages have taken a similar approach.
A total return swap (TRS) is a financial derivative contract where one party agrees to pay or receive the total return of an underlying asset in exchange for a fixed or variable financing rate from the other party.
It has been a popular over the counter (OTC) cross-border derivative for Chinese onshore funds, especially hedge funds, to access offshore stock markets, effectively side-stepping restrictions on capital flows.
The restrictions could thwart domestic fund managers who were tapping TRS to short-sell offshore China stocks, such as China A50-related contracts, one source with direct knowledge of the curbs said. This will also allow brokers to limit overall exposure to derivatives, he said.
CICC is among 10 major brokerages in China licensed to provide TRS services, and is a top player.
CICC did not respond to Reuters' requests for comment.
The measures come as China's stock market faces renewed pressure and plumbs multi-year lows. The country's securities regulator has vowed to prevent abnormal market fluctuations and crack down on "ill-intended short selling".
China's blue-chip CSI300 Index tumbled nearly 5% last week to the lowest since early 2019, amid signs of panic selling and forced liquidation of leveraged trades.
The outstanding balance of cross-border OTC derivatives at Chinese brokerages, including TRS and OTC options, amounted to 825.4 billion yuan ($114.7 billion) by the end of November 2023, up 8.5% from October, according to official data published by Chinese newspaper Securities Times.
Shorting Chinese equities has been a crowded trade among global funds seeking to profit from the woes of the world's second-largest economy.
Chinese authorities have been ramping up efforts to stem the selloff in Chinese stocks, including suspension of lending of restricted shares for short selling and curbs on leveraged stock trades.
A brokerage source said the firm had been limiting the new volume of cross-border TRS business since late last year, when regulators told brokers to curtail leverage for derivatives. ($1 = 7.1974 Chinese yuan renminbi)
(Reporting by Summer Zhen, Selena Li and Xie Yu in Hong Kong, and Reuters Shanghai newsroom; Editing by Vidya Ranganathan and Emelia Sithole-Matarise)