The negative crude oil price settlement for a Multi Commodity Exchange April contract that expired on Monday has led to national brokers like Religare, Motilal Oswal , PCS securities moving the Bombay High Court challenging the MCX circular. The three have filed separate petitions. Many other brokers will be moving courts Today and Tomorrow in Delhi and Mumbai.
After a volatile session on Monday, ahead of its expiry, WTI May contract price settled at $-37.60 a barrel. The contract finally expired at $10.01 a barrel.
However, due to the lockdown, the exchange was active from 9 am to 5 pm (India time) and the Indian traders missed the opportunity to trade the volatility or square their positions as the losses increased.
The closing price at 5 pm on April 20 was Rs 994 per barrel. The MCX issued a circular keeping the intermediate settlement price at Re 1 per barrel, which the brokers and members agreed with. The next day's circular from the exchange put the settlement price at minus Rs 2,884 per barrel and a subsequent circular said pay-ins and pay-outs had been completed. The exchange paid out Rs 242.32 crore to members of MCXCCL.
The pay-ins were completed with the brokers' margins lying with the exchange.
The brokers, however, were not intimated before changing the mechanism. Crude oil is not a deliverable contract in India, but a cash settled one and for that reason can't be settled at a negative rate. There is no mechanism built in Indian stock exchanges to trade at negative rates. Thus, a settlement rate can not be below Re 1.
Brokers told CNBC-TV18 that nearly 135 brokers were involved in the trade, of which, 13 made profits thus bringing the loss and profit ratio to 90:10. Nearly 80% of the profit generated goes to just two brokers. The losses have been high and hard for the smaller brokers , eroding 10-50% of their net worth.
While the brokers' accounts have been debited, they say it's going to be a herculean task to seek 300% additional money towards losses from clients. Moreover, the online platforms do not know their clients hence making it more challenging to recover monies.
Read: Explained: What is WTI crude and why is it falling faster than Brent crude? The Negative Trade
The Comex is a deliverable contract and that is precisely why it went to negative as there were no buyers and the sellers were ready to pay to offload the crude oil. Also, Comex, on April 15, had intimated its members on the volatility in crude oil prices and a possibility of negative crude oil pricing. The Indian exchanges, as the brokers say, did not intimate and hence there was no caution.
The petition from the brokers reads: "The Exchange itself does not accept any negative value for calculating risk and margins for futures contracts."
MCX said that all global exchanges have settled in negatives and hence, there was no reason why it shouldn't even as the exchange works on modifying its software to accept trades in minus.MCX is resuming normal trade from Thursday to not miss out on the highly volatile markets. But the question everyone is asking is that if the prices fall into negative in a real time market, is the exchange equipped to manage the trade?