Chinese banks have suspended the opening of new positions for trading products that track US crude oil futures as the historic plunge of the May contract to below zero has left many retail investors staring at huge potential losses.
Bank of Communications, one of China’s “big five” banks, said on Thursday that it has suspended opening new positions for crude oil trading products, citing significant pricing and liquidity risks in the international oil market. The move followed the decisions of Bank of China and China Construction Bank, which announced similar trading suspensions on Wednesday.
The trading halt came after the price of US crude oil futures collapsed on Monday with the West Texas Intermediate for May delivery falling below zero for the first time in history and settling at $-37.63 a barrel on the New York Mercantile Exchange.
The price plunge was triggered by the oversupply of oil and sharp contraction of demand amid the COVID-19 outbreak. Traders and speculative investors rushed to sell their May contracts to avoid taking delivery of physical oil shipments. The May contract expired on Tuesday and settled at $10.01 per barrel.
The unprecedented turmoil in the international oil market caught many Chinese investors, especially retail investors, by surprise and many of them could face huge losses.
Bank of China said in a statement on Wednesday that it had consulted with US exchange operator CME Group and the latter confirmed that its crude oil trading product would settle at $-37.63 a barrel. This means that some investors would not only lose all their principal but also owe a huge amount of cash to the bank.
Other Chinese banks also offered similar products to investors but they have rolled over the May contract into June several days before the price collapse on Monday, which helped limit the loss their clients would suffer.
The development also triggered discussions among investors and experts on whether there are flaws in product design and the trading rules and if there was adequate information disclosure to investors about the potential risks before the banks sold the products.
Experts have urged the country’s financial regulator to look into the case and carry out investigations. They also said that the regulator should step up scrutiny on the trading products and improve market regulation to protect the investors’ interests.
“The country’s banking and insurance regulators should conduct investigations and find out if there are issues such as product design defects and inadequate information disclosure,” Chen Xin, a finance professor at Shanghai Jiao Tong University, wrote in an article published in Chinese business magazine Caixin.
“The incident is a good case for investor education as it reminds people that there are many unexpected risks in the financial market. The regulator should further improve regulation on wealth management products to strengthen investor protections,” he said.