Bank Of China Clients Lose Over $1 Billion During Oil Crash, Many End Up Owing The Bank Money

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by Tyler Durden
Sunday, Apr 26, 2020 - 03:35 PM

It's not just investors in the largest US oil ETF, the USO, the suffered billions in losses last week after WTI plunged, its May contract settling at minus $37.63 on Monday: the shockwave from the crash in near-dated crude prices, which has forced the USO to halt for trading on several occasions as it scrambles to rebalance daily and purchase as many longer-dated futures as it possibly can to avoid another deliverable disaster and stay in business, has also wiped out countless Chinese investors, many of whom ended up owing money to the bank.

The latest Bank of China estimates for the carnage to retail investors from the collapse in a product linked to U.S. crude oil futures has surged 11-fold to more than 7 billion yuan ($1 billion) as it consolidated reports from its nationwide network, Bloomberg reported. The fourth largest Chinese bank's estimate of losses to customers across China increased from just 600 million yuan in the middle of last week as more information was gathered from its over 10,000 outlets, said the sources. And since the number "isn’t final and subject to further changes as the lender examines the data from its branches", the full loss will likely be even greater.

The losses stem from the bank settling May West Texas Intermediate contracts that underpinned its very inappropriately named "Crude Oil Treasure" (Yuan You Bao in Chinese) product on April 20 at minus $37.63 a barrel, leaving Bank of China customers caught in the middle of oil’s unprecedented collapse below zero, one which some had speculated could leave clients owing money to the bank. Hundreds of investor took to the Internet to protest the lender’s handling of the contract rollover and to demand it shoulder some of the losses.

Bank of China hasn't disclosed the size or performance of “Crude Oil Treasure” since launching the product in January 2018, although it did suspend trading in the product on Tuesday after Monday's historic rout. China’s biggest banks including China Construction Bank and Bank of Communications also halted sales of similar vehicles that had become a popular way for individuals to speculate on swings in oil.

More than 60,000 clients have invested in Bank of China’s product, Caixin reported, adding that investors have lost their margins of 4.2 billion and owed the bank a further 5.8 billion yuan. BoC said Wednesday that investors still need to settle their positions at the Monday WTI settlement price, and the bank has completed settlement of all May contracts. Over the next few days, more investors were likely settling their losses with some strategically disappearing and hoping they can leave the bank to foot the bill. As Caixin adds, one investor took a 9.2 million yuan ($1.3 million) loss on a 3.9 million yuan investment in the product, according to a document circulating online. The oil price slump left the investor owing 5.3 million yuan to the bank.

On Saturday, Bloomberg carried a vivid depiction of how some Chinese investors lost all their life savings in the blink of an eye investing in the "Crude Oil Treasure":

26-year-old named A’Xiang Chen watched events unfold on her phone in stunned disbelief. A few weeks earlier, she and and her boyfriend had sunk their entire nest egg of about $10,000 into a product that the state-run Bank of China dubbed Yuan You Bao, or Crude Oil Treasure.

As the night wore on, A’Xiang began preparing to lose it all. At 10 p.m. in Shenzhen -- 10 a.m. in New York -- she checked her phone one last time before heading to bed. The price was now $11. Half their savings had been wiped out.

As the couple slept, the rout deepened. The price set new low after new low in rapid-fire succession: the lowest since the Asian financial crisis of the 1990s, the lowest since the oil crises of the 1970s, the first time ever below zero.

And then, in a 20-minute span that ranks among the most extraordinary in the history of financial markets, the price cratered to a level that few, if any, thought conceivable. Around the world, Saudi princes and Texan wildcatters and Russian oligarchs looked on with horror as the world’s most important commodity closed the trading day at a price of minus $37.63. That’s what you’d have to pay someone to take a barrel off your hands.

* * *

“It was mind-bending,” said Keith Kelly, a managing director at the energy group of Compagnie Financiere Tradition SA, a leading broker. “Are you seeing what you think you’re seeing? Are your eyes playing tricks on you?”

For A’Xiang who bet enthusiastically on oil, waking up the next day meant a new world with no life savings. She awoke to a text at 6 a.m. from Bank of China informing her that not only had their savings been lost but that she and her boyfriend may actually owe money.

“When we saw the oil price start plunging, we were prepared that our money may be all gone,” she said. They hadn’t understood, she said, what they were getting into. “It didn’t occur to us that we had to pay attention to the overseas futures price and the whole concept of contract rolling."

Yes, well, that's what happens when retail investors, or rather "investors" get complacent in a centrally planned market where central banks have removed all risk... except when risk makes an ugly appearance.

Naturally investors - none of whom ever expected that oil prices could turn negative and end up owing the bank money for being long a security - were livid, But multiple bank traders told Caixin that the settlement date was set well in advance, so it wasn’t as if the bank had suddenly changed it. A bank trader said this was a situation where the “trading mechanism encountered an extreme situation in the extreme.”

Several traders and market participants told Caixin that some investors in the paper crude trading products were caught up in the price plunge because they tried to "buy on the dip" when crude prices dropped to $20 a barrel... without considering that prices could sink further into negative territory. As a result buyers ended up owing money to the bank.