Usually such deals are struck in Hong Kong or Singapore. Apparently these deals were not made on listed exchanges. When commodities are traded on a listed exchange, all margin monies must be paid by noon the next day, usually via bank wires. If the margin is not met, the house automatically sells out the account. This keeps losses from growing too large.

If banks had been forced to use clearinghouses, these same rules would have been in effect, and chances are we would not have had the financial meltdown that occurred last year.

This is what happened to some Chinese companies. They lost millions of dollars in the oil market last year. Now, the Wall Street Journal (subscription required) reports that the companies are in such dire straits that they may default on their losses. China Eastern Airlines (NYSE: CEA), Air China Ltd. (OTC: AICF) and China Ocean Shipping sent letters to a handful of banks, including Citigroup (NYSE C), Deutsche Bank (NYSE DB), Goldman Sachs Group (NYSE GS), JPMorgan Chase (NYSE JPM), and Morgan Stanley (NYSE MS). The letters warned that the companies had the right to default.

Cases such as these usually go to arbitration. However the Chinese have stated that they reserve the right to overrule any judgments set out by arbitration.

These cases bear watching. We haven't had defaults since last year. Now, out of left field we see this happening. What is also strange is that these deals have been left hanging for the almost a year. You can bet that if these three are still open, that there many more still out there.

This is a reminder that the big banks still have losses that they are hiding. Who knows? China may default on these deals.

Do you believe that the Chinese companies will default on their trades?