Caixin
Jan 01, 2021 05:46 AM
FINANCE

Bank of China May Have to Eat Most of Losses From Crude Futures Carnage

About 60,000 retail investors in the BOC product were exposed to 10 billion yuan ($1.4 billion) of losses
About 60,000 retail investors in the BOC product were exposed to 10 billion yuan ($1.4 billion) of losses

Investors who were exposed to $1.4 billion of potential losses on a speculative Bank of China oil futures product may wind up eating significantly less than the total amount, based on a court ruling Thursday in Nanjing.

In the first of a series of civil cases brought against the bank by investors, the court ordered that Bank of China (BOC) return 20% of the clients’ initial investments and shoulder all other losses related to the investment product, known as Yuan You Bao.

A collapse in oil prices last April not only wiped out the money investors put into the product but also left many of them owing the bank money. Under the court’s decision, BOC would assume the losses in excess of investors’ principal.

While BOC still faces similar suits in other jurisdictions, the Nanjing court’s ruling will probably serve as a model for other courts, analysts said.

The court’s decision was in line with a determination in May by the cabinet-level Financial Stability and Development Committee (FSDC) that Bank of China should return 20% of deposits to clients who invested less than 10 million yuan. The regulatory body concluded that the bank was at fault for not following investment suitability principles.

Caixin learned that about 60,000 retail investors in the BOC product were exposed to 10 billion yuan ($1.4 billion) of losses, including all of their 4.2 billion yuan of initial investments.

Clients of BOC, one of the country’s largest state-owned lenders, were trying to buy on a dip in crude prices using the Yuan You Bao paper investment product. However, the historic plunge in the value of the U.S. May crude futures contract led to extraordinary losses on the investment.

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In Depth: A Bitter, $1.4 Billion Lesson on Commodity Price Speculation

The incident spotlighted how China’s mom-and-pop investors betting on swings in oil prices through cheap access provided by Chinese lenders can be exposed to massive losses. While they are generally prohibited from directly investing in foreign crude futures markets, such investors can buy banks’ paper crude products without opening an offshore account. The investments are pegged to the flat price of the front-month contract and are settled in yuan.

The case also raised questions about whether there were significant design flaws in the product that put people with low risk tolerance into high-risk investments, industry experts said.

Earlier this month, China’s banking regulator slapped 50.5 million yuan of fines on Bank of China citing flaws in its management of the Yuan You Bao product. Several bank managers and traders were punished.

The China Banking and Insurance Regulatory Commission (CBIRC) said the bank’s violations of compliance rules included failure to pressure-test the investment product, failure to manage risks and failure to adequately disclose information to investors.

The Nanjing court said in the verdict that although there was no violation in Bank of China’s sale of products like Yuan You Bao or in its contracts with investors, the bank had flaws in product design and failed to provide adequate risk disclosure to investors.

Contact reporter Han Wei (weihan@caixin.com) and editor Bob Simison (bobsimison@caixin.com)

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