China Tightens Rules on Derivatives Trading by State Companies

(Bloomberg) -- China’s state asset regulator has tightened its rules on commodities derivatives trading at companies owned by the central government after the nation’s top oil refiner lost almost $700 million in 2018 due to the practice.

The State-owned Assets Supervision and Administration Commission of the State Council capped hedging of commodities-related trades at 80% of physical volumes, it said in a statement posted on its website, a reduction from the 90% threshold stated in guidelines published 2009. It also reiterated that derivatives trading should be purely for the purpose of hedging, rather than speculation.

The new directive comes after China Petroleum & Chemical Corp., also known as Sinopec, was wrong-footed by zig-zagging markets, incurring $688 million of losses in 2018 from derivative trades. The losses, which were blamed on “inappropriate hedging techniques”, led to the suspension of two top executives from its oil trading unit and spurred a review by authorities.

Under the new rules, units of state-owned enterprises with high debt ratios that have posted losses for three consecutive years are banned from derivatives trading entirely, the regulator said. SASAC will also require SOEs to report their financial derivatives investments on a quarterly and yearly basis.

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