Negative price trading on MCX: Brokers approach Sebi with alternatives

MCX move follows after it settled April crude oil futures at minus Rs 2884 price even as their software was not permitting negative price trade following close of Nymex crude

Brokers have made a case to the Securities and Exchange Board of India (Sebi) against the trading of crude oil contract at negative price.

This comes a month after a controversial settlement of crude oil contract at negative price, during which the MCX has enabled its software system to quote and trade at negative price (below Rs 1). 

A few large brokers spoke, via a video call, with a senior Sebi official a few days back, and represented their case on trading in crude oil contract. 

Among several suggestions, they said intermediate auction window, suggested by the MCX, should start soon after the price turns negative.  However, the controversy that started with the first settlement, announced on April 21, is refusing to die down.

It could take some time for actual trading in negative price to take place. This is because brokers will have to amend their front-end trading software and other processes will have to be followed.

MCX’s move comes after it settled April crude oil futures at minus Rs 2,884 even as its software was not permitting negative price trade. This was following the close of Nymex crude at -$37, according to MCX contract terms. Many brokers lost crores. Clients were not paying and the brokers challenged the exchange settlement in court.

 

 

Till the actual negative price trading happens, MCX has offered a special auction window. If during trading hours, any commodity’s price falls to negative, there will be an auction window for the last 15 minutes at the end of the day. This is not acceptable to brokers, many of whom have stopped trading in crude oil since a month. 

Others have increased margins for clients to cover up their own risks. Only a 15-minute cooling off period will be given in between by halting trading. Sebi has left this decision on the MCX.

Brokers wanted settling of the contract at a minimum of Rs 1 as a price below that will make them open to high risk while collecting money from investors. Basically, brokers want a mechanism to limit their risks with clients’ trade.

They also suggested a Brent Crude oil-based contract instead of the current one on the MCX that is WTI-shale oil-based contract. They want that to be made deliverable. 

As of now, oil and natural gas futures are only cash settled contracts. All others have been made deliverable.

The law doesn’t allow everybody to hold and store physical quantities of crude oil and gas. There is no mechanism to hold and sell energy products. But WTI oil has to be stored in particular tanks while Brent can be held in a ship on the high seas. Since there is no opportunity for delivery, only speculation takes place. Brokers told Sebi that if their risks are not capped, “better not to allow trading in crude oil contract.”

Last September, “the commodity derivatives advisory committee of the Sebi categorically said that no derivative contract shall be cash settled,” said a source. However, the energy segment remained outside delivery-based settlement.

Now, another issue of speculation (of a diamond firm trading in crude oil) came up after the settlement in negative price last month. A broker had filed a case against his client, a diamond exporting firm, for recovering money, which the firm lost in the crude oil contract. Its exposure was said to be to the tune of Rs 80 crore.