Hedge funds that employ long-short strategies have been hit by the imposition of a new cap on OTC derivatives by Chinese regulator the CSRC, with the country’s securities firms having been instructed to cease expanding their operations in this area, according to a report by Bloomberg.
The report cites unnamed sources as confirming that last week, multiple major brokerages were told by the CSRC to cap OTC business, including total return swaps and options, at current levels, with similar restrictions also being imposed on the lending of shares for short selling, as well as some proprietary trading activities.
Brokerages have also reportedly notified some quant hedge funds that they can’t expand the size of swap agreements that add leverage to so-called market-neutral products, effectively limiting “Direct Market Access” which has helped quants boost returns this year.
The caps are part of a wider set of revised risk-control measures for securities firms aimed at providing better support for the country’s sluggish economy by easing capital rules for market making and asset management while raising requirements for riskier businesses like OTC derivatives.
Despite a raft of regulatory initiatives so far this year though, including slowing initial public offerings and cutting stamp duty, as well as tightening short-selling rules, the benchmark CSI 300 Index is down almost 7% YTD, with a prolonged property market debt crisis weighing heavily on the economy.
