MCX’s negative price: Brokers move HC

Partha Sinha & Swati Deshpande | TNN | Updated: Apr 23, 2020, 11:01 IST

(Representative image)

MUMBAI: At least three brokers — Motilal Oswal Financial Services, Religare Broking and PCS Securities — have together moved the Bombay high court against Sebi, Multi Commodity Exchange (MCX) and Multi Commodity Exchange Clearing Corp (MCX-CC).
The three brokers have filed a plea against fixing a negative settlement price of Rs 2,884 for April crude futures contracts, resulting in a total payout of about Rs 410 crore for the buyers.
In the petition, the three brokers alleged inaction on the part of markets regulator Sebi that failed to protect the interest of investors. They also said that a negative price for a commodity was “unprecedented and against the contours of law and rules” of MCX. They prayed that the MCX’s circular on negative settlement price be quashed.
The petitioners are aggrieved that the MCX circular was issued despite their representation to Sebi for the regulator’s intervention in fixing the settlement price.
The petitioners, through advocate Ravichandra Hegde, sought a hearing via video-conferencing since this was an urgent matter.
On Monday night, WTI crude contracts on Nymex closed at -$37.6/barrel, which caught these three brokers and some others on the wrong foot with their combined obligation ballooning to about Rs 410 crore. This is because, according to MCX’s rules for the last 16 years, the WTI closing price has been the reference rate for settlement of trades on the Indian bourse.
On Tuesday, at first MCX had set a Re 1 per contract provisional settlement price, but was later changed under pressure from those who were to receive the payments from the brokers who lost heavily. The financial services firms are questioning if the new circular was not in violation of principles of natural justice and fair play.
Those who sold the contracts and are the gainers in these MCX trades said that the petitioners’ contention that the price of a commodity can never turn negative is untenable if one looks at some of the recent developments in the global oil market.
On April 15, six days before the expiry of the MCX crude contract, Chicago Mercantile Exchange, the world’s largest derivatives bourse and also the parent of Nymex from where MCX derives its settlement price, had tested its systems for negative crude price. And on April 1, global financial major Goldman Sachs, through a research report, had warned that the price of crude could trade in the negative territory. The brokers who gained in the MCX trade have not been named in the petition.
Exchange officials also said that the petitioners’ contention that they lost heavily due to the Covid-19 lockdown-induced change in market timings may not be tenable as well. When the trading hours for commexes were changed from March 30, it was done after consulting all the stakeholders in the system including Sebi, exchanges, brokers, banks and clearing corporations — the March 26 releases from all the exchanges show.
On Wednesday afternoon, MCXCC said it has already completed the pay-ins and payouts, meaning settlement of trades through exchange of money, “including the settlement of April 20, 2020 crude oil contract”, and a payout of Rs 242 crore has been made to the brokers.
Without mentioning the grievances of some of MCX brokers, the release from MCXCC said that international exchanges such as ICE Futures US, ICE Futures Singapore, DGCX and Moscow Exchange “having cash-settled Nymex WTI crude oil futures contracts have also settled their corresponding contracts at Nymex WTI crude oil front month contract’s settlement price of (-) $37.63”.