Chinese Retail Investors Suffered Massive Losses When WTI Futures Settled Below Zero

China’s financial industry regulator, the China Banking and Insurance Regulatory Commission, or CBIRC, has asked the state-owned Bank of China to probe apparent problems in its structured products linked to oil benchmarks which led to huge losses for some retail investors.

These investors lost more than $1 billion when West Texas Intermediate futures settled in negative territory – closing at minus- $37.63 a barrel -- for the first time ever on Apr. 21.

CBIRC also asked banks to better assess risk when they offer structuring products linked to crude oil price fluctuations. In addition, the regulator instructed banks to suspend sales of such products that could potentially led to unlimited losses for investors.

Chinese retail investors cannot directly invest in the international crude oil futures markets, including WTI or Brent. However, some Chinese state-controlled lenders do offer structured products with exposure to price swings in WTI and Brent crude futures.

Bank of China, Agricultural Bank of China, Industrial and Commercial Bank of China, China Construction Bank, Minsheng Bank and Bank of Communications all offer structured products linked to crude oil prices.

However, the unprecedented volatility and behavior of the crude markets – especially in WTI futures – has led to some catastrophic losses for some investors.

Bank of China’s “Yuan You Bao” structured product led to 60,000 Chinese retail investors losing at least 10 billion yuan ($1.4 billion).

Many of these investors claimed they were unaware of the high risks of such investments.

One such investor lost his entire 50,000-yuan ($7,063) investment in the bank’s Yuan You Bao product after WTI futures sank below zero – he was left owing 80,000 yuan ($11,330) to the bank.

Another investor took a massive 9.2-million yuan ($1.3 million) loss on a 3.9 million yuan ($552,000) investment and now owes 5.3 million yuan ($750,000).

“How come the investors were exposed to losses that are multiples of their initial investments?” said one BOC investor.

Caixin Global reported that structured and derivative products linked to commodity futures have become popular with Chinese retail investors in recent years.

But after the huge losses incurred by Bank of China’s clients, most banks have stopped selling these complex products.

Many burned investors think Bank of China should absorb some of the losses they suffered.

“The product design [of Yuan You Bao] had never taken negative value into account,” one banker said. “It reflects the operational risks, and banks must always consider the most extreme situations”

Bank of China now says it will review its product’s design and risk controls and negotiate with angry investors who suffered big losses.

Bank of China has also asked CME Group, the U.S. futures exchange operator, to investigate the factors behind the “abnormal fluctuations” in crude futures prices on Apr. 21.

CME, which owns the New York Mercantile Exchange where WTI futures are traded, had itself already updated its systems in early April in order to be able to process negative commodity prices.

CME told Reuters that its markets worked properly as designed.

“Our futures prices reflect fundamentals in the physical crude oil market driven by the unprecedented global impacts of the coronavirus, including decreased demand for crude, global oversupply, and high levels of U.S. storage utilization,” CME said. “After advance notice to our regulator and the marketplace in early April, CME Group accommodated negative futures prices on WTI on Apr. 20 so that clients could manage their risk amid dramatic price moves, while also ensuring the convergence of futures and cash prices.”