What we need to do is to cultivate our own professional internal skills. The key is to have self-knowledge, respect for the market, and self-knowledge and understanding are something that each of us must constantly practice and improve throughout our lives.

Preface

In 1931, the world-renowned Russian mathematician Komogolov published a research result, saying that the changes of all things in the world can be attributed to only two forms: first, continuous slight movements in a very short time; second, huge jumping movements in a very short time. The first change leads to the famous continuous diffusion theory, and the second change becomes the mathematical embodiment of the extreme risk of discrete jumping in the black swan.

Survival and death are 0-1, discrete. And the general risk loss is the amount. The philosophical question answered by risk management is to strictly control the amount of losses and injuries while staying alive. Risk management is a belief and lifestyle, with only a starting point, no end point.

40 years ago, Apple co-founder Wayne sold his 10% stake to Jobs for $800. Today, this portion of the equity is worth $58 billion. But Wayne, who sold the stock, is still alive, while Jobs, who has huge wealth, has left. This is life. It doesn’t matter if he wins or loses, it depends on his own choice.

2008 financial crisis negative interest rate

paradigm The word Paradigm has become a household name with the development of artificial intelligence AI in recent years. Human thinking styles are all established on a certain paradigm (called axioms in mathematics). The reason why it is called axiom or paradigm is what everyone believes in and follows, and cannot be proved. From this dimension, it is very similar to religion. Don’t ask 100,000 whys.

People are born to like addition and multiplication; they hate subtraction and division. People like positive numbers, probably because they are more closely related to the actual intuitive feeling and are disgusted with negative numbers, let alone the illusory "image numbers". But in fact, in the lowest essence of mathematics, whether it is the general theory of relativity of Einstein in mathematical physics or the Riemann conjecture that tortured mankind for a long time, they must be portrayed by imaginary numbers.

The major assets in the financial market: stocks, commodities, interest rates, and foreign exchange are the first to rebel and surrender to the negative camp. In order to save the world economy that was shaking in the 2008 financial storm that swept the world, Western countries rushed to adopt the innovation of monetary policy of the then chairman of the U.S. Federal Reserve Fed: quantitative easing QE significantly reduced the real interest rate level in the U.S. financial market, while keeping the more symbolic Federal Reserve interest rate at the level of 0.25%, barely maintaining the face of positive U.S. interest rates and not falling into the abyss of negative interest rates.

If you have learned the interest rate curve pricing theory in finance, you will know that in the financial crisis, the term structure of the interest rate curve is reversed, with high near-end and low far-end, and their interest rate levels are still positive. However, a fatal problem follows one after another. Many interest rates or credit derivatives traded in the US fixed-income bond market require forward interest rates (near-end interest rates for a moment in the future). According to the principle of arbitrage-free pricing in modern finance, the calculated forward interest rates are negative!

In 2008, during my time working on Wall Street , I remember that the first main task of working in an investment bank every day was to artificially rewrite the negative forward interest rate calculated according to classical financial theory, and replace it with a non-zero and small positive number. Otherwise, the negative interest rate is like a dangerous deep-water bomb, and it will explode where it will cause the collapse of the entire risk calculation system!

forward interest rates are the second layer of information calculated. The current interest rate level in the first level is still positive. But the good times did not last long. After the euro zone was deeply trapped in the euro bond credit storm after the 2008 financial storm, the four countries of PIGS were successively caught in the national sovereign credit crisis. The ECB had no choice but to continue driving the QE bull cart with quantitative easing QE and stumble towards the quagmire of negative interest rates. It has been deeply trapped in the Japanese round of negative interest rate deflation since the collapse of the financial and real estate bubble triggered by the Plaza Accord in the 1990s.

Until now, interest rates are the only financial asset that enters the negative domain. But no one expected that this record was finally rewritten in the economic stagnation and financial market collapse caused by the black swan of the new coronavirus epidemic in 2020, and a new page of history was revealed.

The shocking drop in black crude oil futures

On Monday, March 9, 2020, the 11th bull market of the US stock market was the anniversary of the 11th bull market in the US stock market. It was because , Saudi Arabia, and Russia, as a member of the OPEC, did not reach an agreement on crude oil production cuts, resulting in a plummeting crude oil price. The US financial market started a magnificent circuit breaker chase race of speed and passion. Four circuit breakers occurred in a short period of time. Warren Buffet, the 89-year-old world-renowned value investing saint, was deeply moved in an interview with the TV station. He said that it was the first time he had seen these "miracles" when he lived so big, which was "live for a long time."

From that time on, the world crude oil Crude started an unprecedented marche of all the way south. From 30 USD to 20 USD to single digits, with the continuous lows of crude oil, a large number of Chinese investors are eager to roll up their sleeves and work hard, and buy the crude oil market with the dream of getting rich overnight, and are full of confidence.

April 20, 2020, another Monday. The May contract of the United States West Texas Intermediate Crude Oil Futures (WTI) staged a global hunting drama a few hours before the delivery , plunging by more than 300%, which shocked the world. But what is even more incredible is that the settlement price of WTI crude oil futures was set at an epoch-making price of -37.63 US dollars. Following the interest rate, Volkswagen commodity crude oil has made a historic (negative) leap.

On Monday night, countless Chinese investors far away from the East Coast of the United States New York Mercantile Exchange NYMEX witnessed this unprecedented negative oil price. I thought this was another moment of viewing on the wall and enjoying the rewriting of history of the US financial market, but the next morning, the news came and suddenly found that the last victim was us! A "wealth management product" named Crude Oil Treasure issued by the Bank of China was exposed to have caused huge losses to investors. The Crude Oil Treasure collapse incident quickly relayed the negative oil price incident and became explosive news, occupying all important pages of China's news social media, and the city is full of crude oil Treasures.

, Wall Street hedge fund manager Kyle Bass, known as the "king of short selling", warned that crude oil ETF was dangerous in an interview with CNBC on Monday, and he had shorted some crude oil ETFs. Kyle Bass refers to retail investors who thought they were gambling on oil prices but did not know that they were actually buying a barrel of crude oil worth minus 38 yuan for 22 yuan. They were deceived.

Many investors who buy crude oil treasures were told that not only their original investment funds and transaction margin had been wiped out, but now, because WTI's May contract closed at a negative price, they owed a large amount of money to the Bank of China and needed to pay the margin to the Bank of China, otherwise they would be included in the list of bad credit records. This is another bolt from the blue for crude oil treasure investors who have suffered huge economic losses. Especially in the current severe situation of the new coronavirus epidemic, this large amount of money is even more precious. More importantly, investors are psychologically difficult to accept this absurd and cruel reality that is almost "Tangji Goethe-style".

On April 25, it was reported that according to the settlement price of the WTI agreement, Bank of China Crude Oil Treasure has about 60,000 customers, the margin of 4.2 billion has been turned into false ownership, and it still owes 5.8 billion yuan in margin. According to statistics from each branch of Bank of China , 95% are long positions, 5% are short positions, and the net risk exposure is 90%, corresponding to long positions of 24,000 to 25,000. From this calculation, the final financial loss of crude oil treasure is about 9 billion yuan.

According to the announcement issued by Bank of China and the agreement signed by Crude Oil Treasure with customers, Crude Oil Treasure is linked to the WTI crude oil futures contract of NYMEX on the US New York Commodity Exchange. According to the agreement, when the contract expires, the position will be moved or closed in accordance with the method specified in the customer in advance.

move position refers to the customer selling (for shorts, buys) all futures contracts for the month held by the customer, and at the same time buying (shorts) the next month's futures contract. If the customer wants to close the position before the expiration date, he needs to operate the liquidation himself, otherwise the system will automatically conduct the trading operation of moving the position according to the settlement price when the contract expires.

From the perspective of the business model of crude oil treasure business, Bank of China provides channel services for customer transactions. According to the contract agreement signed with the customer in advance, the operating rights of the customer transaction service itself are strictly stipulated that it is not allowed to close the position for the customer before the expiration date of the futures contract, the bank will independently decide to close the position for the customer for the customer.

Black crude oil ETF Daguanyuan

In today's international financial market, in addition to futures trading, the most convenient way to invest in commodities (including crude oil) is the passive investment ETF.

Since the 1980s, the concept of passive management and index investment has emerged. Later, ETFs emerged and took on the vanguard of popularizing and promoting passive index investment ideas, and were invincible. According to Goldman Sachs' research, passive investment has exceeded the management scale of active investment by 2020, and ETF trading must also catch up with and surpass the management scale of passive investment funds. The world's investment landscape has entered a new era.

All major asset types have corresponding ETF correspondence. In the world of commodity trading, oil and gold are the most powerful among all commodities, and naturally have an extremely huge voice in commodity ETFs. The emergence of

ETF has greatly promoted commodity trading, lowered the investment threshold, and allowed many ordinary Americans to participate easily and get a share of the pie.

Of course, there is no stable win deal in this world. Any investment is a double-edged sword: risk and return coexist. The convenience provided by ETFs and the simplified trading process allow every investor to easily buy commodities such as crude oil and gold on the computer; however, it is precisely the convenience of this investment that makes investors "feel" that investment is easy, and the risks seem to be reduced. This is a human cognitive illusion. This cognitive illusion has led many investors to let go of their high alert and prevention of commodity market risks. Invisibly, a Pandora's box was opened and financial risks took advantage of the situation.

I remember that around 2002, I just came into contact with ETFs, and HOLDERs issued by Merrill Lynch (acquired by Bank of America, which "surrounded the city in the countryside" of North Carolina's capital, became a pioneer in the ETF market. Among them, the ETF related to oil is the famous OIH. From the picture below, we can see that the peak moment of OIH was in early 2008, and since then, it has been in a slump and has been getting worse and worse. Note that OIH is an ETF in the oil service industry, not an ETF representing crude oil.

represents the largest asset management ETF of black crude oil, which is USO (United States Oil Fund), which plummeted 75% in the past two months, leaving shorts net profits of $300 million.在油价杀到负数之际，USO除了改变基金投资结构，还发布拆股计划，有分析师警告，“搞不清自己买的石油ETF是现货还是期货，小心钱被骗光”。

According to foreign media reports, the US oil ETF USO announced a stock split on April 22, that is, to carry out reverse stock splits, merge 8 shares into 1 share, reduce the number of outstanding shares, and raise the stock price. The share split has no impact on shareholder returns, and the fundamentals have not changed. It is expected to be held after the closing on April 28, Eastern Time and completed the next day. It is worth noting that in addition to increasing stock trading and liquidity, USO's stock split can also ensure that the stock trading price is higher than the minimum listing requirements.

As oil prices collapsed, USO announced on the 21st that it would change its holding structure, with 55% of assets investing in New York's July crude oil futures, 40% of assets investing in June crude oil futures, and 5% of assets investing in August crude oil futures. Since USO changes its investment structure, it reflects the "future price" of crude oil, not the spot price, investors should be more careful when buying at the bottom. An important part of

futures trading: delivery Settlement

futures, as the earliest financial derivative, was created to hedge market price fluctuations risks. Its financial connotation is to reduce the uncertainty of future asset trading prices, base itself on the present, set the future prices at the present, and based on investors' own risk preferences and subjective cognition.Futures are traded on margin, so (high) leverage is inseparable from the talent and mission of futures hedging risks, just like incarnated as Doctor Hyde, half a saint and half a devil. Investors always choose and struggle among two contradictory selves, whether to control risks and invest calmly or speculate and gambling wildly.

Your choices will make who you are! Your choice determines who you are!

futures contracts all have clear expiration dates Expiration Date. As the expiration date approaches, investors have two options: close the position and settle the Settlement, or as mentioned earlier, move the position and move to the next futures contract. There are two options for closing and settlement of

, cash delivery and physical delivery.

Most financial futures are settled in cash. Because both China and the United States have "printed" countless money (it is to create M2 credit numbers, not actually print M0, so it is actually credit credit). Therefore, cash delivery generally does not have a run and a liquidated position, and the problem that can be solved with money is not a big problem.

Many problems occur in physical delivery. One of the explosion points of the Bank of China's crude oil treasure liquidation incident this time is that the WTI contract is different from the Brent Brent crude oil futures contract. On the expiration date, it can only be delivered in physical (black crude oil). However, Bank of China has no ability and qualifications to complete physical delivery on the other side of the ocean. There is only one choice without choice, and it is wantonly crushed by the short seller and passively close the position. The right to decide on the transaction price completely falls into the hands of the other party.

In the history of Chinese financial, the 327 treasury bonds that shocked China and foreign countries was also because at the last moment of trading on the treasury bond futures, the shorts still fought to save the desperate defeat, and released a shocking number of short orders (at that time, the Shanghai Stock Exchange did not have a risk management mechanism for capital verification). After the transaction ended, the number of treasury bonds that could be delivered in physical form was a drop in the bucket compared to the number of short transactions, and the exchange faced an unbearable risk of reputation default. Everyone knows that the final result is the best, which is to win all the transactions and invalidate them. Only at the huge price of postponing treasury futures for ten years can we maintain the face of the exchange like a broken ice and maintain the last bottom line of credit and reputation.

Remember, when I was working at Bear Stearns' self-operated trading desk, ETFs were far from being as popular as they are now. Physical Settlement and Delivery are required to trade crude oil. To complete crude oil transactions through physical delivery, transportation and storage are two huge thresholds, which are huge, so ordinary investors can only sigh at the oil and are powerless. Morgan Stanley is a world-renowned investment bank on Wall Street second only to Goldman Sachs . It has established a huge oil storage depot near the port on the Hardison River in New Jersey . Crude oil is transported in through barges and stored in the oil depot for physical delivery. New Jersey and New York City ( Manhattan Island ) are only divided by the Hardison River, but the costs and costs on both sides are huge. Morgan Stanley is headquartered in Manhattan, New York, and takes the river crossing subway connecting New York and New Jersey to New Jersey and quickly arrives in New Jersey, so this arrangement is perfect.

is regarded as a quantitative book "Options, Futures and Other Derivatives" (I still keep the second edition of 1997, which is about to fall apart), John Hull, author of the book "On the Street" (I still keep the second edition of 1997, which is about to fall apart), tells a hilarious but thought-provoking story in the book: a young man who has just entered a Wall Street financial institution is assigned an important and arduous task to manage the futures trading account of a company client. In order to hedge risks, this investor often has to long the futures market for the futures market. The underlying asset is livestock futures positions and close the position one trading day before the futures expires (the asset won the bid for livestock trading contracts at the Chicago Mercantile Exchange is 40,000 pounds of live cattle).

When the futures approached their expiration date, the young man noticed that the customer had a livestock contract that had not closed. He then instructed traders in the futures trading market to buy another long contract (rather than the opposite short or sell futures contracts, so as to achieve the purpose of closing the position).The consequence of this error is that the investor has two long livestock contracts in his account. When this error is discovered, the trading of the futures contract has ended, so bad, livestock futures contracts are to be delivered in physical form.

The financial institution where young people are located has no choice but to be responsible for this careless transaction error, but the consequence is that the financial institution must handle the handover of a group of live livestock. And the company has no experience in this kind of physical delivery. Futures contracts provide that sellers can deliver livestock at several different locations in the United States at some time in the expiration month.

Finally, the financial institution finally received a physical delivery notice issued by CME, the Chicago Mercantile Exchange. The notice states that the livestock will be conducted at a farm 2,000 miles away and will be delivered on the first Tuesday after receiving the notice. So, as expected, the careless young man was sent to a remote handover site to handle the matter of livestock delivery.

At the handover location, there is a livestock auction every Tuesday. The seller of the futures contract bought the livestock at the auction and delivered it smoothly. Unfortunately, the auction market stipulates that the livestock bought this week must wait until the next week to be re-auctioned, so the poor new employee had to stay and manage the feeding of the livestock, which might have never expected when he entered Wall Street with joy and vitality.

transfer position (or extension) is a decision-making process that is determined by opinion. When to sell the current contract and buy the next contract, the price difference between the middle (assuming the term structure of futures is a premium structure) is the core consideration as the transaction cost of managing the investment portfolio. Some investment managers rely on intuition, experience, and are operated by Rule of Thumb.

My FALEX opening and closing trading strategies, index futures as risk hedging are all traded in the day and closed positions when closing, so there is no need to consider the transfer of futures. Later, I went to work in mainland China and joined a hedge fund company, called private equity in China, which manages quantitative trading risks. The trading strategies of fund managers are all overnight holding methods (China does not allow T+0 trading). Therefore, the problem of transferring positions in financial futures is vividly revealed and has become one of the key steps in managing the entire quantitative hedge fund.

Fund managers can have their own way. My rational position transfer risk model is also very direct and crude. It sets several key quantitative risk parameters, the number of positions, time and quantity of positions transferred, and uses traversal to exhaust all possibilities and brings them into historical big data. The real trading data before and after the expiration date are the benchmark. As risk and opportunity benefits, the transaction cost of position transfer and the hedging effectiveness (definition utility function) within one week of position transfer, and uses the risk value model VaR to complete the final natural evolution process of survival of the fittest. A taboo in moving positions is to stay slow and wait until the last minute delivery and settlement date arrives, because based on years of experience in the US market trading, the market's trading volatility will increase sharply on the expiration date or the day before. The expiration dates of US financial options futures are all together, which is the third Friday of each month, commonly known as the "Triple Witching Day", and sometimes it is the Four Magic Day. On this day, strange things will often happen. Every time this day comes, the boss tells us to be extra careful when trading.

The most impressive time was when I opened the trading market. For some reason (until now, this fan has not solved it), the opening prices of 7-8 stocks were far higher than the closing price of the previous day. I shorted them without hesitation. As a result, they returned to the level of closing last night. In other words, within one minute, I earned more than 100,000 US dollars. Just as I was celebrating with my trading buddies in the trading hall, the phone ringed on the trading desk. I picked up the phone and the people inside said that it was the Nasdaq exchange. The stocks I traded just now, because the opening price jumped hugely, beyond the scope of the exchange. I was told that these stock transactions that made me take advantage of the fisherman were cancelled and invalid.

You can imagine how big the shadow area of ​​my expression and soul is. WTF!

A principle of risk management, we can only be chosen by ourselves, rather than letting others or the market make choices. On the last day of the expiration date of the futures contract, when you have to move your positions, you will face huge psychological pressure and the risk of market fluctuations, and you don’t know what will happen.

Price is based on trading liquidity

I repeatedly mentioned it when teaching business schools of many famous universities in China that price is based on trading liquidity. Without trading liquidity, then the price loses its meaning of existence. The reason why WTI crude oil futures were chased by the short side this time is that on Monday night, Beijing time, only a few hours before the final due date. Most long customers had already escaped a few days ago (including positions of similar products in ICBC). Judging from the screenshots of the market at that time, there were still 109,000 contracts that rose stubbornly and made the final game, hoping that good luck would come. However, these investors did not know that their every move and this little thought were clearly seen by the exchange and WTI short side.

Most investors who hold long positions in WTI futures do not want to get crude oil, but just come to speculate and gamble on the bottoming out of crude oil. On the contrary, the short side of WTI futures, that is, the hedging camp of enterprises, needs to obtain crude oil as raw materials to complete the production of their own products. The decline in international crude oil prices will be of great benefit to them.

Whether it is on the NYSE, Nasdaq, or the NYMEX, which trades WTI, all trading orders are clearly listed on the exchange's trading entrustment account Open Book, and the trading information is open and transparent and clear at a glance. The liquidity of a transaction is the matching of the total transaction volume between the buyer and the seller and the matching of the order level of different prices. When one side crushes the other side with absolute advantage (total volume and depth), a "run run" in the transaction occurs.

Classic market micro-trading theory, the orders of buyers and sellers will have a short-term impact and lasting impact on the market. If the buyer and seller repeatedly compete at the same price, the competition is the depth of the transaction between the two parties. When the huge short orders break through several layers of long order defense lines in a row, if the long orders are still full of confidence in this price, they will launch a crazy counterattack like the Battle of Shangganling in the Korean War and engage in a desperate battle. In such a trading scenario, the impact caused by the first order is a short-term impact, and the lost price is immediately taken back; on the contrary, if the bulls see the bears driving straight in, they are invincible just like the shameful battle of the Chinese in the War of Resistance Against Japan and the Battle of Zhongtiaoshan, they collapsed across the board and fled in a hurry, then the damage caused by the bears is permanent, and the front line of the exchange of fire between the two sides is pushed to the hinterland of the bulls, and the lost price will not come back.

The high wall theory in micro trading is to set heavy troops at a selected price and defend it at all costs.

In general market scenarios, the assets traded on the exchange are all positive prices.

00, a neutral number that no one likes very much, silently plays the role of the ultimate guardian for investors, but no one realizes it, let alone thank you.

According to media reports, the trader of Bank of China left the market at 10 pm, New York time at 10 pm, and there were still 4 hours before the final liquidation.In the last thrilling four hours, a tragic massacre began!

The total position of crude oil treasure customers represented by Bank of China (long, because many Chinese customers want to buy crude oil at the bottom) is completely exposed to the bombardment of short sellers without any resistance. Although the long-term positions of WTI05 futures should be quite large, the most important thing is that in the life-and-death trading market, they do not actively and bravely fight and defend their positions, but hide in the corner of the battlefield, allowing short sellers to bully them arbitrarily, and the defeat is determined.

No traders take the initiative to trade before closing the market, and they cannot deliver in physical form. So, there is only one choice left to the crude oil treasure investment customers. Finally, after the game between the long and the short sides, the average price in the last few minutes is the WTI05 settlement price, which is the worst option without choice.

was once one of the product advantages of showing off. Bank of China moved its positions on the last day of the expiration of the WTI futures contract, so that it could best approach the current price of crude oil and reduce volatility, but now it has become the "Achilles heel" of the product.

Updated oil prices and human nature

Recently, Goldman Sachs chief commodity strategist Jeffrey Currie predicted that global storage capacity may reach its limit in the next 3-4 weeks, when the tragic situation of the "Black Monday Crude Oil Massacre on April 20" may reappear. "Will we see an oil price of -100 USD per barrel next month? It's very likely." My God, who actually saw a price of -100 USD.

Before the financial crisis in 2008, the huge support effect of crude oil on the economy was difficult to understand by current investors. In about 2006, the price of oil exceeded US$100 for the first time since 1861. For the masses living in the United States, sky-high prices of oil are simply a nightmare. The rising oil prices are equivalent to raising taxes on the hard-working people, because both the poor and the rich have to drive, and the cost of living is pushed up and overwhelmed. Adding a tank of oil costs hundreds of dollars!

I remember deeply and coincidentally, on the day when the oil price soared to its peak in 2006, I happened to drive from New Jersey where I live, and traveled through New York to interview for a hedge fund trading hall in Connecticut, where Bridgewater Fund is located. Because I had to span three states, in order to prevent myself from dozing off alone, I turned on the Honda Odyssey radio, and listened all the way. Until now, I remember very clearly that on the day when oil prices hit the highest level in modern history, the researchers at Goldman Sachs boldly predicted that oil prices would go up to the sky and exceed 200 US dollars, which was extremely shocking! This also shows that human thinking and prediction methods are simple and direct and linear. The performance of crude oil later was like a roller coaster, from more than 100 yuan to 20 US dollars in one go, and from 20 US dollars to challenge the highest peak of 120 US dollars again. Everyone knows what happened later. The oil industry is getting late and the good days are completely over.

In mid-2006, I joined a famous asset management company on Wall Street in New York, and ambitiously and confidently began trading the FALEX intraday trading strategy I invented. When I connected the quantitative trading platform to various exchanges through the famous FIX electronic ordering system, everything was ready, and I was about to start the extremely anticipated first day of the day opening and closing trading, but I received a notice from the HR of the company's personnel department that I had to participate in the trading legal compliance training and must not be absent. In desperation, I had to hand over the trading system to the boss and let him perform it on his behalf. I prepared two stocks and ETF baskets for quantitative trading at the opening, each with hundreds to thousands of stocks plus ETFs. One of the baskets is composed of stocks and ETFs related to the oil industry, and mainly tracks trends. Another basket is the trading trend reversal.

When I returned from the compliance training, I suddenly found that the investment portfolio had lost more than 100,000 US dollars. I was shocked. I checked carefully and found that the boss had reversed my two trading baskets. The oil company sector, which mainly focuses on trend tracking and breakthroughs, was treated as a trend reversal. Otherwise, half an hour after the opening, I could make the same profitable US dollars.

and oil-related stocks and ETFs have shown a strong trend, and they can only make breakthrough trading. Because the boss made a mistake in operation, he had to give up, but he still felt uncomfortable when he lost money on the first day of the transaction.

Later, it came true. Giving up my job in the trading hall in Connecticut and choosing to enter this New York financial institution became a watershed and turning point in my entire life and Wall Street financial career, and brought about a decisive change in my later life and destiny. Life is to constantly verify the famous path dependence law. Life is full of randomness. Their sudden appearance unexpectedly allows us to taste the various aspects of life full of flavors and ups and downs. From this perspective, life is a continuous test of Ergodic Theory, moving forward without hesitation along the coordinate axis of time, collide with the wave of uncertainty.

Return to Hong Kong, and encountered an asset that lost money and was below the neutral line. Accumulator

At the beginning of 2010, the aftermath of the financial crisis had not yet ended, and I returned to the Oriental Pearl of Asia, Hong Kong. Here, for the first time, I encountered a financial institution that could make investors lose money and lose money below zero. In other words, investors lost all their initial principal and still owed money to financial institutions that issued these financial structured products, which was exactly the same as the crude oil treasure incident issued by Bank of China.

This terrifying model in Southeast Asia at that time was the Knock Out Discount Accumulator (KODA) accumulated stock option contract. Generally sold to high-end customers by private banks. This product can be linked to foreign exchange or stocks. The contract usually lasts about one year and the minimum investment is US$1 million (or HK$8 million). Investors can buy stocks or foreign exchange at a discount price during a bull market. The issuer locks the upper limit of the stock price (or foreign exchange) and provides stocks to customers at a level lower than the current stock price for a period (usually one year).

KODA's fatal temptation is that it is extremely sweet and beautiful before the risk breaks out, because when investors start KODA, they can immediately obtain considerable positive returns at contract discount prices below the market price (often 10-20% lower than the current market price). Happiness comes too suddenly, causing the client to completely ignore the risk.

If the market conditions continue to move forward in a direction that is beneficial to customers (the financial institutions that issue KODA keep losing money), the contract has stipulated (for investment customers) take-profit terms, and the KODA investment contract will be terminated on its own.

take profit clause is the risk limit, risk bottom line and risk tolerance of the financial institutions that issue KODA.

When the market reversal and the asset trading price falls below the specified price in the KODA contract, the customer must uninterruptedly buy at a contract price (higher than the market price). In addition, the contract is valid for one year, but investors can complete the transaction as long as they have 40% of the contract amount of cash or stock mortgage, because this product is leveraged. The similarity between the

KODA product and the crude oil treasure incident is that due to the forced purchase of contracts and the transaction volume that must be purchased at 2 or 3 times when the asset price falls, it is not difficult to imagine that losing money to zero is a luxury, and it ends up with huge losses.

KODA's trading structure has exchanged the stocks of the underlying assets into foreign exchange, and the Australian dollar caused the once glorious , CITIC Pacific , to have a huge corruption, and caused its company's stock price to fall by 55% after the resumption of trading. CITIC Pacific's total profit of HK$15.22 billion in one year and a half was not enough to offset the estimated loss of HK$15.5 billion.

KODA not only made the speculators in the financial market bloody, but also caused huge damage to the real economy of Southeast Asian countries. In South Korea, a large number of small and medium-sized enterprises have all embarked on the KODA road of no return because they need to hedge against foreign exchange risks in import and export trade. As a result, the financial tsunami in 2008 hit, and many South Korean entrepreneurs watched the companies they had worked hard to build were beaten to pieces by the storm of the financial storm, and they were in pain, but they could not do anything. KODA's contract liquidated damages are sky-high, and these small businesses cannot afford them at all.

I repeatedly talked about in the courses for business schools that for a special type of risk, you must say NO before. Whether it is due to luck or intelligence, it is the only chance to escape; once you do not say NO before and enter the "siege" that looks glamorous, then all risk protection measures will be useless, and the only thing investors can do is pray.

Some mainland customers of DBS Bank DBS purchased Accumulator without their knowledge, not only lost tens of millions of yuan in principal, but also owed huge sums of money from the bank and were sued for retrieval, some of which even lost more than 100 million yuan. DBS Bank filed a lawsuit in a court in China, suing many customers in Beijing, requiring them to bear the guarantee liability for DBS Bank's relevant claims.

DBS Bank (Hong Kong) also submitted two indictments to the Hong Kong High Court, suing two Guangdong customers for defaulting on debts, thus opening the prelude to the lawsuit against DBS Bank for debt collection from mainland customers, and gradually exposed the truth that DBS Bank's mainland customers suffered huge losses.

According to reports, Ms. Xue, a private banking client of DBS Bank's Hong Kong Branch, once reported to the media that she had deposited a total of HK$80.88 million in DBS (Hong Kong) account in July and August 2007, and agreed to purchase so-called discounted stocks under the recommendation of the account manager. However, by November 2008, Ms. Xue's account at DBS Bank (Hong Kong) was frozen, and the bank's statement showed that her total net asset value was -94.46 million Hong Kong dollars, with a total loss of HK$175 million.

I joined PwC Hong Kong in 2010 shortly after I was in charge of risk management consulting. One of my tasks at that time was to assist HKMA in HKMA to calculate the reasonable pricing of KODA and another investment product that made ordinary Hong Kong people and celebrity politicians lose all their money (essentially, it is the big killer CDS credit default swap described in the American movie "Big Shorts"). These two Hong Kong structural products are equivalent to the US CDO and CDS, and are the most lethal to Hong Kong's financial market and the public in history.

The common feature of these two very well-packaged structural products is to short one or several put options. Whether it is the discount on Accumulator stocks or the "high interest" of mini bonds, it is not the real and simple discount and interest imagined by investors, but the insurance money obtained by selling a power and vowing to bear some risk liability.

In the financial market, the worst losses so far are caused by short options.

The general pricing of over-the-counter OTC financial derivatives is positive and negative, both in both directions. The OTC market with the best trading liquidity is swaps.

The risks of bank "wealth management products" crude oil treasure exposed

Looking at the whole story of the crude oil treasure incident, we can analyze it from the following aspects:

What kind of "wealth management" product is

Most of the wealth management products sold by Chinese banks are money funds at the near end of the interest rate curve or fixed income products at the short end. Moreover, after the 2008 financial crisis, global investors' risk awareness and risk concepts have been greatly improved (the characteristics of human nature can only be deeply remembered and lasting through negative education of personal pain).

financial products are the leader and giant in China's financial market. The banking industry has developed its main business of shadow banking in order to fight against the aggressive financial disintermediation trend led by Yu'ebao since 2010. The big family of financial products has experienced many ups and downs, from early non-standard products to P2P, to crude oil treasures in 2020, these are all packaged as "financial products", but from the nature of their risk, they should not belong to the financial products camp with very low risk preferences.

Crude Oil Treasure, according to the product agreement of Bank of China, is directly linked to the WTI futures contract traded on the NYMEX on the New York Commodity Exchange in the United States. The problem here is that if the Bank of China does not have substantial participation in the process of product operations (controlling trading risks, changing the structure of underlying trading assets, etc.), then Crude Oil Treasure is commodity crude oil futures trading, and futures trading is a highly leveraged zero-sum game, which is more cruel than spot trading.Almost without exception, futures investors have committed suicide by jumping off a building due to investment failure in China.

In 2015, Liu Qiang, a legendary figure in the Chinese futures industry, Ruilin Jiachi hedge fund trader, and author of " Futures Master Fengyunlu ", went bankrupt because he went long for futures indexes and capital allocation to buy stocks, and committed suicide by jumping off the building on the top floor of the Huamao Center Hotel.

2017, at 3:30 am on September 29, on the 31st floor of Xiang Xieli, a futures tycoon who has been in the industry for more than 20 years, Fu Xiaojun, who has been in the industry, died of a rubber bankruptcy.

On June 5, 2019, Bityi founder Hui Yi passed away at the age of 42. Several WeChat groups including the "Bitteyi 500-person investment group" show that Hui Yi's suicide is related to the huge loss of Bitcoin's 100-fold leverage short orders - or the loss of 2,000 Bitcoins due to the 100-fold leverage liquidation, resulting in a loss of 2,000 Bitcoins, equivalent to RMB 120 million.

Overall investors have heard of the cruelty of futures trading and avoid it. Futures exchanges and futures companies continue to strengthen control measures for futures trading and risk management, firmly checking in terms of investor suitability, funds, trading experience, etc., to prevent futures speculative and high leverage from killing. All this layer of defense has made the vast majority of investors entering the futures trading market with high trading qualifications and strong risk awareness and self-control ability.

Crude Oil Treasure is like the collapse of France's infamous Macedonian defense in World War II, easily bypassing the impregnable defense line of the China Securities Regulatory Commission, exchanges and futures companies, opening up a second battlefield. Crude oil treasure, after being packaged by the bank, makes investors believe that this is a "financial product" with much less risk than ordinary futures trading.

Bank has always been a representative existence of "low risks". As the last and most solid line of defense of China's finance, it is extremely safe in people's minds. This is just like the "representative" heuristic thinking in behavioral finance. People cannot know the essence and connotation of financial products themselves, and can only be judged by the clear representative characteristics of financial novices on the outside, because crude oil treasures are built and sold by the century-old bank of China, so investors judge that the risk is not very high based on the "representative" of investment products.

At this point, it is exactly the same as the Hong Kong Rieman Brothers mini bond I experienced. But it must be emphasized that the Hong Kong market is a market that is extremely free and open to international investors, and risk control and management of qualified investors are not very strict, which creates opportunities and space for regulatory arbitrage for investment banks on Wall Street in the United States. Rieman Brothers' financial innovation product Mini Bonds (I emphasize again that the essence of mini bonds is to sell CDS, so the "high" interest received by investors in mini bonds is actually the premium of CDS policies, and they are obliged to cover the losses and losses of credit financial products such as CDOs and MBSs insured by CDS on the back end!) It cannot be sold to ordinary investors in the United States because the United States has a strict financial product risk rating system and a qualified investor access system, which is very cautious and has clear ratings, and cannot go beyond the line.

Accumulator and Liman Brothers mini bonds are sold by banks in Hong Kong, such as Bank of China, UBS , Bank of America, Citigroup , Singapore DBS Bank, etc. Almost all major banks in Hong Kong are in it driven by interests and are scrambling to promote mini bonds. The Hong Kong wonder I encountered when I arrived in Hong Kong in early 2010. In front of every bank on Wall Street in Central, there were customers pulling banners, playing sorrow and recording broadcasts of "Repay Money, Return Money". Like Crude Oil Bao customers, these investors hurriedly entered the market without carefully examining the essence of the product.

The futures industry has been baptized by the financial crisis in 2008, especially in 2011, with the bankruptcy protection case filed by MF Global Holdings Ltd., one of the world's largest futures and financial derivatives brokers, prompting US financial regulators to increase legal compliance requirements and strengthen monitoring of the futures industry to completely prevent the rights and interests of investment customers from being infringed by investment institutions.

Jon Corzine, former CEO of Global Mann Financial Holdings, took over the fifth largest futures trader in the United States with a history of 218 years in 2010. She once wanted to build Mann Financial into a comprehensive investment bank of the "mini version of Goldman Sachs", but she fell into the vortex center of the evaporation of more than one billion US dollars in customer special funds.

After this former Wall Street lucky man, CEO of Goldman Sachs and star governor, filed for bankruptcy protection, as much as $1.2 billion in customer special funds evaporated out of thin air. The customers' funds were used by futures companies privately. Korzin was convinced that the sovereign bonds of EU countries could bring high interest rates, so Mann Financial spent $6.3 billion to purchase bonds. However, in 2011, none of the global markets could get rid of the "scalding" of the European sovereign debt crisis. Korzin's "European debt gamble" failed, resulting in Mann Financial's bankruptcy.

According to the requirements of today's futures supervision, each investor's account and funds must be isolated from each other in the futures company, and one by one corresponds, so as to avoid the emergence of the past lessons of Man-style financial holding companies' private use of customer funds and margins.

In the crude oil treasure incident, Bank of China did not provide services to customers in the form of futures companies. It is very likely that in order to reduce trading and management costs, the Dark Pool, which was once popular on Wall Street in the United States, was adopted. It is not that every order placed by the customer is directly sent to the overseas NYMEX exchange for completion, but that the overall buy order and sell order placed by the customer over a period of time are paired internally, and the remaining net positions (whether long or bearish) are sent to NYMEX for completion. Bank of China plays a part of the role of market makers and brokers. In the process of formal futures trading, the customer places an order to the futures company or broker. At this stage, the customer pays the service fee for placing the order to the futures company or broker. The order is transferred to the futures exchange by the futures company or broker. The market maker in the exchange completes the transactions required by the customer, and the bid-ask spread earned by the market maker Bid-Ask Spread.

If it is the black pool model, then crude oil treasure is more like a trust's shareholding model. The holdings are overall and cannot be matched one by one to the level of the investor’s account. Each customer only holds a certain amount of shares.

From the perspective of professionalism of financial services and penetration of underlying assets, crude oil treasure is the WTI crude oil futures contract for trading NYMEX. The normal time of WTI transactions is the night time in China. China's trading time and international market trading time are not matched. This potential risk should be considered from the initial stage of this business design.

After more than 22 o'clock at night, although the United States is still trading vigorously, investors as crude oil treasures are unable to trade in time because the trading channels of Bank of China are closed. Not only do they lose many trading market opportunities, but more importantly, they leave a potential risk gap. This risk should be classified as a "gray rhino" risk. Everyone knows its existence, but they don't think it will cause huge risks if they are not inferior to these few hours. But unfortunately, in the end, it was precisely these few hours that made many investors lose all their money and cry without tears, causing huge damage to the reputation of Bank of China.

As described in the preface, in a normal market environment, the loss of crude oil treasure customers is only the amount of money, but after 22:00 on April 20, 2020, customers are facing a 0-1 choice for the survival and demise of trading accounts.

Since you have taken the customer's money, you must provide professional and in-depth financial services, which is fair symmetry.

Customer Suitability Access

Classic problem of customer suitability. Logically speaking, Bank of China, as one of the four major banks in China, customer suitability access is like the bank's anti-money laundering AML. It is already a bank's instinctive and subconscious "lifestyle", and the risk of the product determines the choice of the customer group. However, under the guidance of the performance stick, short-term effects and "ostrich spirit" are everywhere, and risk considerations (if any) are placed in a secondary position.Only by correctly understanding the risk nature of the product can we find the most suitable customers for risk preference and risk tolerance. This is a game of "energy conservation". The appropriateness of customer access is ignored in the front. When risks come unexpectedly, customers do not have enough risk awareness and have no ability to stand alone. They can only use the most classic Chinese method to fight back and attribute everything to financial institutions.

The mistake of Bank of China is to sell a product with a higher investment risk level to a group of customers with too low investment experience and only want to buy at the bottom and get rich overnight. But misfortune never comes singularly, and I encountered this unprecedented super black swan event!

The description of an investment customer who is also a crude oil treasure can reflect the awareness level of this product customer group: "From the service of Bank of China, it is actually better than ICBC. The financial manager has been professionally trained and contacted each other before delivery to notify the risks. I personally escaped because I received a call from a risk warning and realized that there might be a problem. Now that I think about it, I am still quite scared! Being alert and respectful to the investment market you don't understand is something that every investor must realize!" But other customers, probably, still had a hint of luck and had to bet again at the last moment before the delivery. Unexpectedly, the outcome would be so tragic.

NYMEX's WTI crude oil futures correspond to 1,000 barrels of oil per contract. They must be delivered in physical form at the centralized oil storage depot in Cushing, Russia, the United States. The crude oil treasure products sold by Bank of China to investment customers were split into units of one barrel. Therefore, it is impossible for the trading instructions of the investment customers to be transmitted to NYMEX by Bank of China only as a channel, waiting for the opening of trading in Beijing at night. Based on this kind of analysis, many online articles say that Bank of China has set up a virtual disk for domestic customers. No one knows how many WTI05 orders the bank has placed to NYMEX after receiving the transaction instructions from customers.

In addition, for the sake of trading liquidity risk management, overseas fund managers must reserve a liquidity cash to deal with the sudden redemption of the customers' trading instructions (Chinese Americans are immersed in their sleep during the day).

Margin management and forced closing of futures trading

Futures trading is margin trading, which increases or decreases margin every day based on the profit and loss of the account. Once market risks come, futures companies will set warning lines and closing lines in advance to conduct real-time monitoring of the account. Once the (reducing) value of the position touches the warning line, the monitoring terminal of the risk department of the futures company will receive an alarm, and once the asset level meets the closing line, the closing trading will be initiated.

It can be said that the soul of futures trading risk management is to monitor real-time changes in margin and use programmatic algorithm trading to complete timely and effective closing positions, prevent and prevent the spread and expansion of market risks.

There are two margins for futures trading. When the position was opened, it was Initial Margin to build a position margin. During the trading process, it was Maintenance Margin to maintain the account margin. The CME Group on the Chicago Mercantile Exchange has always been famous all over the world for its cutting-edge dynamic margin algorithm SPAN. It can most effectively improve the efficiency of margin use while covering trading risks (relying on the risk algorithm model). Another prominent aspect is the calculation of margin in the investment portfolio.

On June 4, 2019, CME announced that it will launch a new generation of industry-leading standard portfolio risk analysis (SPAN) margin system - CME SPAN 2 (CME SPAN 2). The new system is scheduled to be tested in the second half of 2019 and will be released in the first half of 2020 after passing regulatory approval (because of the impact of the epidemic, CME will postpone the launch of the new system).

CME SPAN second generation will retain SPAN's current algorithms and functions while adding a number of new improvements in modeling, reporting and margin replication to provide stronger risk management capabilities on a single unified interface.

Like SPAN, CME SPAN second generation will continue to use historical data to model the possible value rise and fall of positions or portfolios in various risk scenarios based on the in-in-protection value (HVaR) framework.SPAN second generation will allow users to make dynamic and detailed adjustments to margins at the product and portfolio levels. In addition, SPAN II also optimizes margin reporting for different risk factors (such as market risk, liquidity and concentration).

When the trading price of the futures market changes drastically, the high leverage of futures may consume all existing margins in a short period of time. Exchanges or futures companies will require investors to increase margins within a specified time, otherwise forced closing of positions will be adopted to reduce the risks of customers, exchanges and futures companies.

Once "breaking the position", that is, during the closing process, the total loss of the position exceeds the customer's original margin. The customer owes the futures company money. According to the contract signed by the customer when opening a futures account, he or she has the obligation to repay the part of the loss (unlimited bottom-up liability). Otherwise, the futures company or exchange will initiate a legal lawsuit against the customer to recover the economic losses.

From the perspective of risk management, risk has completed a qualitative transformation, transforming from market risk to counterparty credit risk CCR. Credit risk is much more troublesome than market risks, because credit risk involves human nature and morality.

Crude Oil Treasure investment customers are required to pay 100% margin. Therefore, from the perspective of classic futures trading risk management, Bank of China's crude oil risk exposure (note, an important risk basic assumption here, the minimum price is zero!) is completely covered by the customer's margin, and there is no counterparty credit risk CCR.

If Bank of China is as mentioned in the report, through US JP Morgan as its agent for trading in NYMEX, when purchasing or shorting WTI crude oil futures, only a part of the margin is needed, and the liquidity is very abundant.

Bank of China, as the risk manager of crude oil treasure, according to the agreement, when the account fell to 20% margin, but at midnight on April 20 and early morning on the 21st, when investors' accounts fell to 20% with the flash crash of WTI crude oil, Bank of China did not play the role of risk control as it should.

The trading desk of Bank of China has already got off work, and it is on this crisis-ridden WTI futures contract expiration date.

"This price appeared after 2 a.m. on April 21, and the trading deadline for Crude Oil Treasure US WTI Crude Oil 2005 contract is 22 a.m. on the 20th, and the contract then enters the settlement stage. According to the agreement, the expiration will be processed according to the CME official settlement price, and the Bank of China will no longer focus on the market and force settlement." The industry insider said that during the trading period before 22 a.m. on the 20th, market fluctuations did not trigger the conditions for suspending trading or forced closing. This paragraph is clearly written into the contract and transaction operation process.

Risk Management is a belief

After the financial crisis in 2008, the World Clearing Bank BIS, which leads the global financial market risk management, launched an updated version of the Basel Capital Agreement, which strengthened and improved the requirements of financial supervision from multiple aspects such as risk capital arrearance, risk management structure, liquidity risk, counterparty credit risk, operational risk, etc.

But risk management is not done by cold machines, but by many people with various ideas and complex ideas. The unity of risk awareness is very important for financial institutions and is also the basis for carrying out risk management. Employees need to establish a correct understanding of risk management and make risk management a belief and paradigm.

The COSO Committee, the leader in comprehensive risk management of enterprises, updated the framework, dimensions and content of comprehensive risk management of enterprises for the third time in 2017. One of the most prominent changes is to elevate the internal control, supervision, systems, and processes emphasized in the first two editions to higher levels of humanity such as mission, vision and core value culture. The effective implementation of risk management requires unswerving recognition from the bottom of your heart.

In my class explaining to many business schools "Enterprise Comprehensive Risk Management ERM" and "Financial Market Risk Management", I mentioned that the attitude of risk management is the most important, and Attitude is Everything. The attitude of risk management determines the strategy, measures, processes and risk models of risk management. The selection and belief are discrete 0-1 states, while the subsequent operations are continuous.

The comprehensive risk management of modern enterprises is gradually shifting, focusing more on the human nature. At this point, financial transactions are the same as my old business on Wall Street, and the most essential thing is the management of people. The company's comprehensive risk management is impossible, and there are people to inspect and supervise it. The cost is too high. This is just like the supervisor holding a whip in the famous article " Contract Worker " written by Mr. Xia Yan in middle school. He stood behind the "reeds sticks" and gave him a whip when he saw someone working slowly. What can be checked by

system process can only stay above a certain dimension. The following is the part of self-discipline and belief, and it is still completed seriously without supervision. The inner driving force rather than the external carrot and stick is the real motivation for Zhiyuan.

Risk management is the value connotation that penetrates into the blood of enterprises and financial institutions. The choice of enterprises and financial institutions determines who you are? Is it everyone exempted from liability or everyone responsible? Should we respect professionalism and grasp the essence of risks? Or should we put the mechanical and rigid process first? Those companies that make risk management loudly but think about exemption all day in private will definitely pose risks. Because everyone's focus has changed to whether the process is compliant and whether he is exempt from liability, but he rarely cares about the risks itself. What a painful understanding!

Conclusion

I ended up with the words of a live broadcast celebrity named Liu on YouTube. This is also the strongest resonance I feel since I came to work in China's financial market in 2014. Liu said: "When playing finance, Americans are the ancestors, so there is no shame in losing to Americans when playing finance. But we cannot waste this expensive tuition casually. We need to be more professional in playing finance."

Americans' gameplay is just like the CME changed the trading rules on the 15th. Due to their extremely strict compliance and supervision, they can only put these "means" on the surface. You can see through his tricks. I said no, but the rule of the financial market is, if you go out, don't do Crying Baby, admit your bet and accept your losses, and don't regret it. By the way, regret is of no use! What we need to do is to cultivate our own professional internal skills. The key is to have self-knowledge, respect for the market, and self-knowledge and understanding are something that each of us must constantly practice and improve throughout our lives.