The China Securities Regulatory Commission (CSRC), the country's securities watchdog, wants brokerages to limit the amount of leverage available to hedge funds that borrow large sums of money via a complex derivative business to trade stocks, according to a report by Reuters.

The report cite unnamed sources with knowledge of the mater as confirming that late on Wednesday, brokers informed hedge fund clients employing the so-called DMA-Swap strategy that they had to start limiting leveraged bets.

According to one of Reuters sources, the CSRC's guidance has been prompted by concerns over the heightened market risks posed by the DMA-Swap, which allows hedge funds to borrow up to $4 against every $1 they deposit with a broker in a margin account, while bypassing regulatory borrowing limits by having the trades sit on brokers' books.