JPMorgan Stops China Synthetic Shorts After Regulatory Crackdown

  • Bank won't offer synthetic shorts on Shanghai Connect
  • Credit Suisse said to cut synthetic shorts of Shangai stocks

Some banks are scaling back offerings that enable clients to indirectly wager against Chinese stocks through Hong Kong’s stock exchange link with Shanghai, as China’s regulators clamp down on practices such as short-selling.

JPMorgan Chase & Co. stopped offering so-called synthetic shorts on shares under the Shanghai Connect arrangement, according to an e-mail from its prime brokerage unit to clients including hedge funds this week. Credit Suisse Group AG also cut back on products that enable synthetic short-selling of Shanghai Connect stocks, said two people with knowledge of the matter who spoke on condition of anonymity.

JPMorgan’s email to clients, a copy of which was seen by Bloomberg News, said the decision was related to the recent market selloff and increased scrutiny from Chinese regulators. The Shanghai Composite Index has plummeted 39 percent from a June 12 peak, prompting China to clamp down on practices that authorities deem damaging, such as “malicious” short-selling. The crackdown has snared senior industry executives including Citic Securities Co. President Cheng Boming.

Marie Cheung, a spokeswoman in Hong Kong for New York-based JPMorgan, declined to comment. Candice Sun, a Credit Suisse spokeswoman in Hong Kong, declined to comment.

China has allowed foreign investors with Qualified Foreign Institutional Investor quotas to buy yuan-denominated securities traded on domestic exchanges since 2003. Shanghai Connect, which started last year, has permitted foreign investors without a dollar or yuan QFII quota to buy certain stocks traded on the city’s exchanges.

Short-Selling

Short-selling is the practice of wagering against securities by selling borrowed assets to bet on a decline, hoping to buy them back later and pocket the price difference. Synthetic shorts typically are wagers against stocks using instruments such as options, futures and swaps to simulate a bearish position without actually borrowing shares.

Some brokerages have made available yuan-denominated class-A shares owned by clients through Shanghai Connect for synthetic short sales, according to the people. A scarcity of stocks that can be used in synthetic shorting has resulted in limited usage of the product, one of the people said. Banks who offer synthetic shorting aren’t themselves taking a bearish bet on the market.

Bearish Bets

Foreign investors have also made bearish bets on China stocks through index futures traded in the country, or the Singapore-listed FTSE China 50 index futures and Hong Kong-traded iShares FTSE A50 China Index ETF. JPMorgan will continue to offer swaps and notes that allow clients to buy China stocks through Shanghai Connect and the QFII arrangements, according to the e-mail.

Unlike JPMorgan, Credit Suisse hasn’t sent out a notice to clients about scaling back synthetic shorts, one of the people said. 

Trading volume of China’s CSI 300 Index and CSI 500 Index futures have plunged after authorities raised margin requirements, tightened position limits and started a police probe into bearish bets.

Since the market crash, the government’s targets have ranged from so-called “malicious” short sellers to a journalist from business magazine Caijing whose report was alleged to have caused investor panic. Authorities have said they want to “purify” the market.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE