by WANG Chen, LIN Jian

Chinese securities firms have begun suspending new cross-border equity total return swap (TRS) positions following regulatory guidance, according to people familiar with the matter, in the latest move by authorities to tighten oversight of offshore investment channels.

Brokerages began suspending new positions on Tuesday, while existing positions are allowed to run to maturity and be unwound normally without forced liquidation. Market participants are still awaiting clarification on whether the restrictions prohibit all new trades or only prevent net increases in exposure while allowing adjustments within existing limits.

Several brokerage executives told Cailian Presss that the current interpretation points to a halt in new stock-linked cross-border TRS positions, with outstanding contracts gradually rolling off as they mature.

Industry sources said the measures currently affect mainly equity-linked TRS products. Futures-related TRS transactions, local government financing vehicle bond swaps and some fixed-income, currency and commodities (FICC) businesses have not been affected so far, according to industry sources.

Cross-border TRS products have become a popular tool for professional investors seeking exposure to overseas equities, including Hong Kong and US-listed shares. Under the structure, brokerages or their offshore subsidiaries hold the underlying assets while clients receive the economic returns through swap agreements.

The move comes amid broader efforts by Chinese regulators to strengthen oversight of cross-border securities activities and offshore investment channels.

In recent years, authorities have tightened scrutiny of platforms including Futu Holdings⁠ and Tiger Brokers⁠, limiting channels through which mainland investors can access overseas stock markets. As those avenues narrowed, some capital shifted toward private-fund structures that used TRS products to gain offshore market exposure, according to industry participants.

Demand for cross-border TRS products increased over the past year as global technology stocks rallied, with some private fund managers using the structures to gain exposure to overseas technology companies, Hong Kong IPO placements and block trades.

Market participants said the latest restrictions reflect concerns over leverage, investor-suitability risks and the rapid expansion of offshore equity exposure through swap structures. Because brokerages or their offshore units typically hold the underlying assets, growing TRS activity can also increase overseas equity exposure on firms' balance sheets.

One brokerage executive said the move should not be interpreted as opposition to overseas asset allocation itself, but rather as an effort to prevent equity-linked TRS products from becoming a fast-growing alternative channel for offshore investment.

The business remains relatively small compared with the broader securities industry, limiting the potential earnings impact on brokerages.

Industry estimates put outstanding cross-border equity TRS positions at between 200 billion yuan and 300 billion yuan. Based on annual fees of about 1.5%, the segment is estimated to generate roughly 3 billion yuan to 4.5 billion yuan in annual fee income.

That represents less than 1% of total revenue for China’s listed securities sector, suggesting the impact on industry-wide earnings is likely to be limited. However, the restrictions could weigh more heavily on brokerages with sizeable derivatives businesses and extensive offshore institutional-client operations.

The larger effect may be on private fund managers that rely on swap structures to access overseas markets.

Funds with existing positions can continue holding them until maturity, but restrictions on renewals or new positions could constrain the capacity of offshore investment strategies and make it more difficult for smaller managers to replicate exposure to overseas equities.

Market participants are now waiting for regulators to clarify the final implementation rules. Whether existing quotas can be reallocated within current limits, or whether expiring positions must simply run off, will determine how quickly the market contracts.

Either way, industry executives said growth in cross-border equity TRS products is likely to cool significantly as regulators tighten control over offshore investment channels.