China’s securities regulator told brokerages to stop offering leverage financing to clients through so-called total return swaps, Caixin magazine reported, citing an unidentified person.
Brokers were told to wind down the business of offering total return swaps for clients who want to bet on listed or over-the-counter stocks, Caixin reported.
The products are over-the-counter derivatives. At the end of October, the over-the-counter derivative businesses of 39 brokerages had an outstanding nominal value of 279 billion yuan ($43.7 billion), Caixin reported, citing data from the Securities Association of China. Of that, swaps accounted for 44 percent by value, while options contracts accounted for the rest.
The total return swaps can offer three to five times leverage because the investor pays only a deposit to the broker and then a fixed-interest payment at the end of the contract in return for a floating return on the stocks. An investor normally needs at least 20 million yuan of net assets and a minimum of two years’ equity investing experience, Caixin said.
The amounts involved in the swaps compare to China’s official margin finance balance of more than 1.2 trillion yuan.
— With assistance by Jun Luo