* State-owned firms may default on commodity hedges - report * Bankers dismayed, confused by report; seek more details * Lawyers question legality of the move * Traders suspect lurking losses may have prompted warning (Adds analysts comments) By Eadie Chen and Chen Aizhu BEIJING, Aug 31 (Reuters) - A report that Chinese state-owned companies will be allowed to walk away from loss-making commodity derivative trades provoked anger and dismay among investment bankers on Monday as they feared it may set a damaging precedent. The State-owned Assets Supervision and Administration Commission, the regulator and nominal shareholder for state-owned enterprises (SOEs), told six foreign banks that SOEs reserved the right to default on contracts, Caijing magazine quoted an unnamed industry source as saying in an article published on Saturday. While the details of the report could not be confirmed, it was Monday's hot topic in financial circles from Shanghai to Singapore as commodity marketers feared that companies holding underwater price hedges could simply renege on the deals, costing banks millions of dollars in profit. The warning from SASAC follows a series of measures from Beijing this year to crack down on the sale of derivative products by foreign banks to Chinese enterprises, principally big consumers, who bought protection against higher prices last year only to watch the market collapse -- leaving them with losses. While many companies including top airlines have come clean on the losses, some analysts fear another wave may follow. "I wouldn't be surprised if more state firms emerge with big derivatives trading losses, otherwise SASAC wouldn't come out with such a radical move," said a Hong Kong-based derivatives analyst, who like most other industry officials and bankers declined to be named due to the high sensitivity of the issue. A SASAC media official said on Monday that he was waiting for the "relevant department's" official comment before he can clarify to media. A government official said that the Bureau of Financial Supervision and Evaluation under SASAC was handling the issue. The official declined to be named and did not elaborate. Spokespersons at Goldman Sachs (GS.N) and UBS (UBSN.VX) declined comment, and media officials at Morgan Stanley (MS.N) and JPMorgan (JPM.N) were not immediately available for comment. All are major global providers of commodity risk management. No bank were named in the Caijing report. The SASAC media officer also declined to identify any specific banks. "It's a handful of companies who are being encouraged by regulators to re-negotiate," said a second banking source. "It's outrageous, but it's China, so everyone is treading very carefully." DAMAGING PRECEDENT Continued...UPDATE 1-Beijing's derivative default stance rattles banks
Wednesday, 2 September 2009
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