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Bank of China scrambles after losing bet on Texas oil

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In a sure sign of social unease, bank regulators in China are investigating the Bank of China (BoC) scheme in oil futures that lost 60,000 customers nearly $1.5 billion USD in April.

The BoC made big bets on West Texas crude oil on behalf of retail investors who didn’t necessarily understand all the risks involved.

“The incident has exposed the shortcomings of risk disclosures to retail clients and potentially insufficient or improper risk tolerance and products suitability assessments among Chinese banks,” said Lance Yau Tat-cheung at China Xin Yongan Futures.

Oil investors were a financial victim of COVID-19 when prices of West Texas Intermediate (WTI) crude oil, which began the year over $60 per barrel, collapsed to -$36.98.

That’s right: On April 20 2020, to sell one barrel of WTI, investors had to give the buyer a barrel of WTI and $36.98 in cash.

A combination of a high demand for cash, little oil storage capacity left over because of weak world-wide demand in light of the COVID-19 shutdown created a nexus that drove prices into the red temporarily.

Unfortunately for the BoC customers, oil futures contracts, which is how investors invest in oil, are margined. That is, customers only need about 3-12 percent cash to buy the underlying contract. That allows outsized gains, and, in this case, outsized losses.  

Investors in the BoC WTI product lost not just the original investment on April 20th, but found themselves owing the bank money.

The total loss for investors represents around 42 percent in the original investment and 58 percent in margin costs, according to Caixin, the official financial publication of the Beijing regime.   

The bank has said it settled over 80 percent of all trades thus far, and have offered investors a buyout.

“The bank offered to shoulder all losses from the fall into negative territory and compensate up to 20% of investors’ original investments,” Reuters reported.

But some investors in China are saying that it’s not enough. And they must have high-level patrons or the bank regulators would not be investigating.

It’s unusual for Beijing to allow any public protest, but in this case they have made an exception.

Tweeted Bloomberg’s @TomMackenzieTV:

Investors protest outside Bank of China – put their savings in an oil-linked investment product which went to 0 after WTI’s collapse. Woman kneeling apparently lost $700,000

On April 30, the official Xinhua, state-run news agency issued a terse statement, saying it would conduct an investigation.   

The statement included this at the end: “Once violations of laws and regulations are found, they will be investigated and dealt with in accordance with laws and regulations to protect the legitimate rights and interests of financial consumers.”

Not “if” they find any wrongdoing, but “when” they find some wrongdoing, someone will likely go to jail.

“It’s against the law for the Bank of China to issue a product like Crude Oil Treasure,” said Yang Zhaoquan, partner of Beijing Weinuo law firm, who represents over 100 clients with over $500 million in losses.

Gulp. Being a banker in Beijing is as dangerous business as being a doctor in Wuhan.

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