The latest move by the China Securities Regulatory Commission (CSRC) to decrease leverage in the equity market comes after CITIC Securities was discovered to have inflated its swap trading by $166 billion, which it blamed on an IT upgrade.

The CSRC did not respond to calls requesting comment.

CSRC is mainly targeting the total return swap business, which in effect allows investors to obtain leverage from brokerages to bet on stocks traded both on exchanges and in the OTC market, said one source with direct knowledge of the matter.

According CSRC's window guidance, brokerages must cease such swap businesses, while existing businesses cannot be extended upon maturity.

The source said CSRC had wanted to suspend the business during the summer market rout but did not do so due to lobbying from brokerages.

The OTC swap business has been growing rapidly over the past two years, with an accumulative 458.2 billion yuan (48 billion pounds) worth of transactions conducted during the first 10 months of this year, according to the China securities industry association. Outstanding business stood at 121.7 billion yuan ($19.05 billion).

(Reporting by Samuel Shen and Pete Sweeney; Additional reporting Zhang Xiaochong in BEIJING; Editing by Simon Cameron-Moore and Sam Holmes)