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September 8, 2009

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Oil option trading by SOEs probed

CHINA'S state asset watchdog yesterday said in an online statement it is investigating the oil option trading of some state-owned enterprises, and it encouraged these firms to use legal measures to minimize potential losses from the transactions.

The statement came after an August 28 report of Caijing Magazine said the State-owned Assets Supervision and Administration Commission had sent legal letters to six foreign banks saying that SOEs reserved the right to default on some derivatives contracts.

Yesterday's statement confirmed that some SOEs had previously sent letters to their trading counterparts concerning oil structured options trading. These state firms said they would reserve their rights of recourse as an internal investigation into the trading is under way, according to the statement.

The SASAC said this is "a very normal action" for companies to use legal tools to safeguard their rights and interests in commercial activities. It said it is paying close attention and called on these firms to support the action.

The SASAC said it would "support companies to minimize losses and safeguard their rights through negotiations and holdings management."

The SASAC said it also "reserves the right to take further legal actions, such as to launch legal suits."

It did not specify the names of firms or foreign banks that are involved.

A total of 28 SOEs that are under SASAC's supervision have been trading in financial derivatives, and many of them have made losses from such transactions, according to the SASAC statistics.

The SASAC also said it had repeatedly prohibited SOEs from speculating in derivatives. It had also reminded them to be careful when trading in them.


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