Warning for all after investors skid badly in oil futures market
- A derivatives trading platform set up by the Bank of China has resulted in huge losses for many small players, underlining the need for action by the lenders themselves and their regulators
Mainland retail investors want more financial options to play the market. The big banks are happy to oblige. This has been a recipe for selling risky products to mom-and-pop investors. An unhappy ending is almost guaranteed. The latest to blow up in their faces is the so-called crude oil treasure, sold to ordinary punters as a wealth management product by the Bank of China. Other big players offering similar oil-linked trading platforms include the Industrial and Commercial Bank of China, China Construction Bank, Bank of Communications and Pudong Development Bank, though the losses they have incurred for clients seem to have been much smaller.
The root of the problem is that in China, there are so few sound and reliable investment options that retail buyers are often forced to take on greater risks for higher yields. Furthermore, as part of a financial reform under the World Trade Organisation, banks have been instructed to wean themselves off fat margins provided by tightly regulated interest rates and to generate more revenue from financial products as well as advisory and other financial services.
That is in the right direction. But regulators often fail to keep up with the products being offered to ordinary clients by banks, insurers and other financial institutions. From peer-to-peer lending and futures for precious and rare metals to cryptocurrencies, Pu’er tea and now oil futures, there has been a long litany of regulatory failures.
The latest debacle sees the Bank of China effectively setting up an oil derivatives trading platform for lay investors to trade futures contracts on the West Texas Intermediate (WTI), one of the main gauges of crude prices. Many took the plunge, thinking oil would bounce back from the lows it hit last month. What they didn’t count on was the bank only rolling over the May contracts at a late date close to expiry, leaving many of them on the hook for huge losses.
Because WTI at one point fell into negative territory, sinking to its lowest ever at minus US$37.63, some punters didn’t just lose all their principal investments, but also incurred additional liabilities. Caixin, the financial news service, calculated they could be exposed to losses of US$1.4 billion. Bank of China initially took a hard line, insisting that investors would have to bear the full losses. It has since softened its stance, most likely because of pressure from state regulators. With a US$1 billion hole, the bank is probably being arm-twisted to cover it.
There is a lesson for everyone here. Futures markets, especially those tied to commodities, are for professionals and ill-suited for “wealth management” for ordinary investors. Banks need to be more conscientious in structuring financial products to meet the risk tolerance of different clients. And regulators must hold them to clear standards beforehand, not after a disaster.
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