Bank of China Ltd (中國銀行) customers learned an US$85 million lesson on the perils of speculating on crude oil this week.
Hundreds of angry retail investors have flooded onto the Internet to protest against the lender after its investments in products linked to West Texas Intermediate (WTI) were wiped out by oil’s unprecedented collapse below zero on Monday.
Heaped on top of about 200 million yuan (US$28.24 million) of initial losses is about 400 million yuan that they owe Bank of China due to the plunge into negative territory, people with knowledge of the matter said.
The losses thrust Bank of China into the center of oil’s shocking collapse and show how retail investors have been caught up in the catastrophic crash.
TRADING HALT
The bank suspended trading in the product earlier this week and has been joined by more of China’s biggest banks in halting sales of similar vehicles, which had become a popular way of speculating on swings in oil.
A majority of the about 3,700 customers that invested in the doomed product had been betting on an increase in prices, said the people, asking not to be identified because the details are private.
Irate investors are now demanding the bank shoulder some of their losses.
RISK MANAGEMENT
“In theory, these oil-linked bank funds should have their own risk management tools that prevent losses on behalf of retail investors,” said Chen Tong, an analyst at First Futures in Tianjin.
“First, the fund manager should have set a ratio to liquidate the positions for investors when certain principal is lost. Second, they need to at least start rolling the contract two weeks before expiry date,” Chen said.
Bank of China settled customers’ outstanding positions in its product on Monday at minus-266.12 yuan a barrel, it said.
That is nearly in line with the Monday close of minus-US$37.63, but not with the actual US$10 that was the price when the May futures contract expired on Tuesday.
The bank maintains that it settled the contract in accordance with guidelines previously disclosed to clients. Those include rolling over the underlying contracts the day before expiry, which for the May contract was on Monday.
Investors online questioned the price and the bank’s handling of the contract rollover.
The “Crude Oil Treasure” product had offered Chinese retail investors access to WTI oil futures without opening an offshore account, and was pegged to the flat price of the front-month contract and settled in yuan.
The product requires 100 percent margin and does not allow any leverage.
China Construction Bank Corp (中國建設銀行) and Bank of Communications Co (交通銀行) were among lenders that cited price volatility and liquidity risks in suspending the opening of new positions on WTI-linked products for individuals, statements sent out on Wednesday and Thursday said.
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