India's largest commodities bourse MCX on Monday decided to extend the negative pricing mechanism to all commodities futures contract by giving an exit option to traders if the prices enter negative zones, after the controversial settlement of the May crude contracts in negative territory on April 21.
This means that the exchange is offering an alternative mechanism of an exit opportunity to traders in all commodities if the prices fall into the minus zone.
The exit will not be on the expiry day when the due date rate is published, but on all other trading days if clients through their brokers or prop traders chose to square off their positions.
The exit will be enabled through an auction that will be held in a 15 minute window after market closing, currently 11:30 pm, from 11:40-11:55 pm, the exchange said.
The move comes as the market is fearing that natural gas also may fall into the negative territory as the COVID-19 pandemic driven lockdowns are being extended across the world.
It can be noted that last week, the CME Group had announced that the New York Mercantile Exchange was putting measures in places to support negative prices and strikes on certain natural gas contracts effective trading from May 18.
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On any trading day, if the price of crude contracts freeze at the lowest price (that is Re 1) in the trading system and remains at the same level during the last 15 minutes of trading (currently 11.15 pm to 11.30 pm) and the corresponding international reference contract is trading in negative price, then the exchange will provide an additional facility," MCX said in a circular on Monday.
Under this facility, a separate auction session will be conducted for the said future contract to facilitate market participants to close out or square off their open positions, and this facility will not be available on expiry day of crude futures contract, the circular said.
Interestingly, the exchange has said, "This facility will also be available for all other commodities, subject to fulfilment of certain conditions.
In such a scenario, a separate message will be flashed on the trading workstation/member admin terminal or the terminals of the members that auction session will be initiated in crude oil (expiry) contract from (start time) to (end time).
The May crude contracts were settled at Rs 2,884 a barrel on the MCX on April 21 after the Nymex crude rate had closed at a UDD 37.64 a barrel on the previous day for the first time in the history of oil trading. The price had fallen 305 per cent or to USD 49 a barrel in the opening trade on NYMEX.
After MCX had settled crude at -Rs 2,884 a barrel, several traders moved the courts, and from which the exchange's latest move stems. None of the high courts, however, granted any relief to the brokers.
The new decision assumes significance as the MCX software, which is developed and being serviced by 63 moons, which was earlier called Financial Technologies that had founded the exchange, doesn't allow trading below Re 1 in any commodity.
Following the row, the BSE changed its software to allow negative pricing.
MCX chief executive P S Reddy had last week told PTI that the exchange was working on changing the software on a war footing but refused to offer a timeline as to when the changes would be complete.
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