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Photo: Mint
Photo: Mint

Crude fiasco at MCX has brokers staring at a loss of 435 crore

  • Reduced market hours have been blamed for the fiasco at the exchange
  • Crude oil prices fell at Nymex between 5pm and 11.30pm IST, but trading was shut in India during those hours

MUMBAI : Settlement of crude oil contracts at the Multi Commodity Exchange (MCX) suffered a double whammy on Tuesday. One was the unprecedented crisis in international markets, where prices turned negative. The exchange also failed to arrive at a settlement price for its contract ended on 20 April. The two factors combined to have brokers staring at an estimated loss of 435 crore.

MCX relies on the Nymex (New York Mercantile Exchange) rates for pricing its crude oil contracts. The May futures on the New York exchange had settled at an unprecedented negative rate: Minus $37.63 a barrel. However, the Indian commodity exchange had to provisionally settle the contracts during the early hours of Tuesday at 1.

This is perhaps the first time since the 1980s when such a call or provisional pricing was implemented. The provisional pricing has also resulted in concerns about whether it could lead to an artificial settlement price. However, by evening the exchange released the final settlement price of minus 2,884 per barrel in line with global prices.

“Due to the unprecedented price fluctuation in the international crude oil markets, the due rate for crude oil futures contract expiring on April 20, 2020, is under finalisation. In the interim, the provisional settlement price for April 20, 2020, is considered as 1 per barrel for the computation of members’ obligation for trade date April 20, 2020. The differential settlement, if any, on fixation of the final settlement price shall be done subsequently," said a circular issued by MCX.

The biggest reason for the settlement fiasco was the reduced market hours. On 27 March, bourses had announced a reduction in commodity trading hours till 5pm. Crude oil prices fell at Nymex between 5pm and 11.30pm, India time on Monday and as trading was shut in India during those hours, many brokers could not get out of contracts.

This also affected MCX’s ability to calculate correct settlement prices. The debacle then forced the exchange to revert to regular trade timings of 11.30pm for globally-referenced non-agri commodities.

“This is a settlement disaster and is based on poor contract design, considering you cannot trade between the end of day in India till the contract is settled in the US. Under current rules, buyers of the contracts will have to pay large sums for a negative settlement price in a cash-settlement, but the settlement price of 1 was temporarily arrived at," said Deepak Shenoy, founder and CEO, Capitalmind Wealth.

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