Banks and Financial Institutions package and market a lot of financial products to individuals, most of whom do not understand the under lying factors that may affect their investments. Some of them come in fanciful names and has ruined many people financially; example is the Collaterized Debt Obligations (CDOs) that was synonymous with the 2008 financial crisis.
“Yuanyou Bao” literally meaning “Crude Oil Treasure” is a structured product marketed by the Bank of China (BoC), and made up of a bundle of crude futures contracts, both domestic and foreign. The product includes futures contracts for the West Texas Intermediate (WTI) and Brent Contracts.
Its appeal to retail investors is the one barrel minimum investment volume required for the product, compared to 1,000 barrels per lot in standard oil contracts.
On Monday, the oil market was rattled as traders dumped their May futures contracts, a move that saw WTI May contract futures trade deep in negative territory. Subsequently, many crude oil-linked products like the “bao” racked up loses running into millions and in some estimates billions of US Dollars.
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The Bank of China was forced to settle its crude oil “bao” product at minus $37.63 a barrel following the market collapse on the last trading day for the May contract, leading to investors to cry foul.
Monday happened to be the day that BoC had set for investors of the product’s WTI-linked contracts to settle up, either by simply closing their positions or rolling over their contracts — opening positions for June contracts while closing their May contracts to maintain their investments. In either case, investors with long positions suffered losses.
The investors hit were those who did not settle or roll out of the expiring May contract ahead of the last trading day.
There are over 60,000 individual investors who lost deposits as much as $593mn (4.2 billion yuan), a third of whom had invested more than $7,000 each (50,000 yuan). These individuals range from University Students to White-Collar workers.
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News out of Shanghai China, indicates that retail investors may have lost more than $1.27 billion (9 billion yuan) from the “bao” sold by the Bank of China, according to a Reuters article referencing financial news outlet Caixin.
According to a report by Caixin, seen by Investogist, some of these Investors believe that the Bank of China should be responsible for the loses due to design defects in its product and its flawed risk management.
BoC had in the past said that they while it charges operational fees for the product, it is not the manager of the investment.
According to a recent news article by Caixin, “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”.
Investors trade the Yuan You Bao products through margin deposit accounts at BoC, in which the investors deposit certain cash to conduct trading.
Reuters reported that a spokesman for the Bank declined to comment on the reported $1.27 billion loses when contacted by the news agency. It remains unclear how much BoC lost.