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Brokerages move HC against MCX on negative settlement price of crude oil

MCX on Tuesday fixed minus  ₹2,884 per barrel as its final due date rate for the contract that expired on Monday. Photo: MintPremium
MCX on Tuesday fixed minus 2,884 per barrel as its final due date rate for the contract that expired on Monday. Photo: Mint

  • The brokers said no commodity exchange has provisions to trade commodities or stocks by assigning a negative value
  • The brokerages also grouched against the reduced trading hours, and dubbed it as the biggest reason behind the settlement fiasco

MUMBAI : Motilal Oswal Financial Services Ltd, Religare Securities and PCS Securities Ltd jointly moved the Bombay high court on Wednesday against Multi Commodity Exchange (MCX) settling crude oil contracts at minus 2,884 a barrel, following the historic crash in US oil prices.

Crude oil contracts on MCX reflect prices on the New York Mercantile Exchange (Nymex) and since Indian commodity markets closed for trading at 5pm on Monday, local traders were unable to exit their positions, while US prices plunged to minus $37.63 later in the night.

MCX, which initially announced a provisional settlement price of 1 for its contract that ended on 20 April, later calculated a price of minus 2,884 per barrel, exposing brokers to a potential loss of 435 crore.

Despite the prayer to delay payouts, MCX made the payout on Wednesday. In a press statement, it said, “Today’s pay-in and payout, including the settlement of April 20, 2020 crude oil contract, has been completed and a payout of 242.32 crore has been made to clearing members of the MCXCCL".

The brokerages said in their petition that no commodity exchange in India, including MCX, “has any provision to trade commodities/stock by assigning a negative value to it".

The companies are seeking a stay on the contract settlement till final orders. Mint has seen a copy of the petition.

“Crude futures contracts are settled in cash on the exchange and there is no delivery-based mechanism for these contracts in India and, therefore, these contracts can be traded at base price of 1 to say the least in case of an unprecedented eventuality. Thus, assigning a negative value is arbitrary and illogical and demonstrates utter disregard of basic principles and fundamentals of the settlement system in India," the plea said.

The firms that risk management software does not accept any negative value for calculating risk and margins for the futures contract, adding that this has resulted in unreasonable and undue profits to one segment of investors to the detriment of others, which is unhealthy and against the spirit of a regulated ecosystem. “The circular has adverse and far-reaching consequences, which are detrimental to the interest of the investors and the market participants of the commodity market," the petition added.

The firm also complained about the truncated trading hours. On 27 March, the bourses had reduced commodity trading hours till 5pm due to the lockdown. “Since MCX closed at 5pm, investors were not able to cut their positions. Had MCX been open for trade, clients would have had the opportunity to exit positions as the price of the contract on Nymex was in positive territory till 10.30pm (India time)," the petition added.

Despite the plea to delay payouts MCX made a payout on Wednesday. In a note, MCX said “Today’s pay-in and payout, including the settlement of 20 April crude contract, is completed and a payout of 242.32 crore has been made to clearing members of MCXCCL".

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