China bans OTC derivative lending for stock trades

Brokerages told to stop offering the products to investors for stock trading, the latest move to wind down leveraged financing in the country’s stock markets.

China’s securities regulator has ordered brokerages to stop offering financing to investors through total return swaps and other over-the-counter derivatives, the latest move to wind down margin financing in the country’s stock markets.

Total return swaps are a previously little-regulated business at Chinese brokerages, which easily enable investors to obtain margin financing to invest in listed and over-the-counter stocks.

Margin financing was a major factor in the year-long stock market rally that turned to a rout over the summer, wiping trillions of dollars of the year’s gains. The Shanghai Composite Index is now up more than 20% from its August lows.

“Some brokerages have...

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