MCX fixes April crude interim settlement price at ₹1 as US oil turns negative

Mumbai: MCX has fixed the settlement price of April crude oil contract at a provisional ₹1 per barrel to avoid large-scale defaults as crude prices crashed into the negative territory on Monday.

The commodity exchange relies on Nymex rates for pricing its crude oil contracts. The May futures on the New York exchange had settled at minus $37.63 a barrel.

This is the first time since 1980s when such a call or provisional pricing has been implemented.

"Due to the unprecedented price fluctuation in the international markets in crude oil, the due date 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 Re 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 MCX in a circular.

"MCX is currently negotiating a price with brokers and is also consulting Securities and Exchange Board of India (Sebi) before it arrives at a final settlement price," said an official familiar with the developments.

Due to the settlement price, an estimated loss of ₹435 crore had been reduced to ₹110 crore. An estimated loss is based on the contract size, value of rupee and crude oil prices. Typically in case of huge losses, exchanges can use the settlement guarantee fund (SGF), but the total sum in MCX's SGF stands at ₹390, which is lower than the estimated losses.

"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 has been temporarily arrived at until they finalize the actual number," said Deepak Shenoy, founder and CEO, Capitalmind Wealth.