Saturday August 29, 04:10 PM

China warns banks on OTC hedge defaults - report

By Tom Miles

BEIJING (Reuters) - Chinese state-owned enterprises (SOEs) may unilaterally terminate derivative contracts with six foreign banks that provide over-the-counter commodity hedging services, a leading financial magazine said.

China's SOE regulator, the State-owned Assets Supervision and Administration Commission (SASAC), has told the financial institutions that SOEs reserved the right to default on contracts, Caijing magazine quoted an unnamed industry source as saying.

It did not name the banks or the firms in question but cited a SASAC official as saying that almost every SOE involved in foreign exchange or trade had some exposure to derivatives such as crude oil, non-ferrous metals, agricultural commodities, iron ore and coal, although only 31 SOEs were licensed to do so.

Nobody at SASAC was immediately available to comment on Saturday.

Caijing said Keith Noyes, regional director, Asia Pacific, at the International Swaps and Derivatives Association, had confirmed he was aware of the letter. But he told Reuters on Saturday that he had been over-quoted by Caijing and had not seen any letter, although he was aware of such rumours.

SASAC took over the job of overseeing SOEs' derivatives trading from the securities regulator in February after several Chinese firms reported huge losses from derivatives.

It quickly tightened the rules, ordering firms to quit risky contracts and report their positions on a quarterly basis.

In January, Air China, Shanghai Airlines and China Eastern reported book losses of almost $2 billion on aviation fuel hedging contracts, the official Xinhua news agency said at the time.