BACHY Bank of China Ltd (PK)

By Xie Yu and Frances Yoon 

Oil derivatives sold to Main Street investors, including some that could be bought with a few clicks on a bank app, have produced hundreds of millions of dollars of losses in South Korea and China.

Their plight echoes losses suffered by individual investors in the U.S., who were also burned by this week's extraordinary price action, in which one futures contract for West Texas Intermediate crude plunged below zero.

In China, an investment product known as "crude oil treasure" could saddle both the bank behind it, Bank of China Ltd., and end-investors with losses.

And in nearby South Korea, this week's turmoil added to a difficult year for the country's mom-and-pop investors, who are avid buyers of complex investment vehicles.

Hyo Seob Lee, senior research fellow at the Korea Capital Market Institute, estimated local investors have lost the equivalent of about $1.6 billion this year on products linked to U.S. oil futures.

Chinese banks have designed commodity-linked products for a few years, as they innovate to make up for falling profits on traditional lending, said Wang Hong Ying, director of the China Financial Derivatives Investment Institute. The banks mainly benefit from trading commissions.

"Although many of these products are linked to complicated derivatives like futures, they are promoted among individual investors as wealth-management products, which do not require savvy financial knowledge or a minimum investment threshold," he said.

The oil investment product sold by Bank of China was marketed to individuals large and small, who could buy or sell it with a few taps of the bank's mobile app. The minimum investment amount was the equivalent of about $61, according to a marketing document, and investors could place bets on price moves in either WTI crude or Brent. The bank collected fees for facilitating various transactions.

The trouble for Bank of China's investors came because the life of one of its products ended on Monday, as futures for May delivery went negative, a statement from the bank showed. That timing effectively resulted in holders being cashed out at minus $37.63 a barrel--meaning whatever they had invested was wiped out.

Bank of China's clients might also be on the hook for more money than they put into the investments. The product's contract terms say Bank of China can dip into investors' other accounts with the bank to make up any shortfall.

Jefferies analysts, citing a screenshot published by Chinese media, calculated that 3,261 investors owed Bank of China collectively the equivalent of about $52.2 million. The analysts said this figure was also consistent with traders' estimates.

However, the bank itself could ultimately incur a loss of roughly $28 million to $71 million, given the possibility of lawsuits, arbitration and fines, the Jefferies team said. Bank of China didn't immediately respond to a request seeking comment. In a filing, it said it would handle "follow-up matters" in accordance with laws and regulations.

Rivals such as Industrial & Commercial Bank of China and China Construction Bank offer similar products, but avoided the same problem because their products had earlier settlement dates, according to Jefferies as well as a message from ICBC viewed by The Wall Street Journal.

In South Korea, some energy-backed investments are part of a booming, broader market for complex investment vehicles tied to the prices of assets such as stock indexes or commodities. This is one leg of a global trade based around market volatility that is known as "risk recycling."

"Investors in Korea and Hong Kong seem to have a lot of appetite for risk," said Mr. Lee, the capital-markets researcher.

The equivalent of more than $1.1 billion of so-called structured notes primarily linked to WTI and to Brent crude, the global oil benchmark, were outstanding at end-March, according to Korea Securities Depository data. The majority of those notes were linked to WTI.

In addition to those exchange-traded notes, rich investors can also buy derivative-linked securities, which aren't publicly traded.

As an example, one derivative-linked security sold by Samsung Securities pays an annual 11.18% coupon for three years, provided that none of Hong Kong's Hang Seng Index, the European Euro Stoxx 50 index or WTI futures falls more than 50% during the product's lifetime.

Jing Yang and Grace Zhu contributed to this article.

Write to Xie Yu at Yu.Xie@wsj.com and Frances Yoon at frances.yoon@wsj.com

(END) Dow Jones Newswires

April 23, 2020 08:03 ET (12:03 GMT)

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