A look at why brokerages dragged MCX to court over negative pricing

MCX had settled crude oil contracts on the bourse at '-Rs 2,884 a barrel', post the historic rout in WTI crude on Monday.

In their plea, the brokerages have said that crude futures contracts are settled in cash on the exchange and there is no delivery-based mechanism for these contracts in India and, therefore, these contracts can be traded at base price of Re 1 in case of an unprecedented eventuality. So, assigning a negative value is "arbitrary and illogical", it said.

The petition said that as MCX closed at 5 p.m., investors were not able to cut their positions. If trade would have been open, traders would have had the opportunity to exit positions as the price of the contract on benchmark NYMEX was in positive territory till 10.30 p.m. (IST), it added.

Motilal Oswal Financial Services, in a series of tweets, clarified its position. The brokerage firm said that it has many clients with exposure in crude and it was fully covered till the price was zero and even little more, but with the unforeseen movement and settlement occurring nearly 400 per cent lower there is no way any broker can have ample cover to take care of such risk.

"We are confident of fully recovering the money from clients and also we are helping them with all possible legal recourse. Total dues from the clients are about Rs 80 crs," it said in one of its tweets.

"There are no proprietary positions. We hope regulator will also look into this issue in the right perspective," it added.

In an unprecedented price movement, the May delivery contract of West Texas Intermediate (WTI) crude went below zero dollars on Monday and shed more than 300 per cent to settle at -$37.63 per barrel on the NYMEX.

The plunge in oil prices was largely due to the lack of demand and a supply glut in the US, leading to shortage of storage facilities.

However, due to the nationwide lockdown, the exchange was active from 9 a.m. to 5 p.m. (Indian Standard Time) and the Indian traders missed the opportunity to trade amid the volatility or square their positions as the losses increased.

The closing price at 5 p.m. on April 20 was Rs 994 per barrel. The MCX issued a circular keeping the intermediate settlement price at Re 1 per barrel, which was agreed upon by the brokers and members. But, the next day the exchange put out another circular and set the settlement price at minus Rs 2,884 per barrel, exposing brokers to a potential loss of Rs 435 crore. The exchange paid out Rs 242.32 crore to members of Multi Commodity Exchange Clearing Corporation Ltd (MCXCCL).

Apparently, the brokers were not informed about change in the mechanism. Experts said that as crude oil is not a deliverable contract in India, but is settled through cash, it cannot be settled at a negative rate.

Currently, the June contract of WTI on the NYMEX is trading at $15.61 per barrel, higher by 13.28 per cent from its previous close.

On the MCX, the May contract was trading at Rs 1,233 per barrel, higher by 31.59 per cent from its previous close.