Crude oil shock: MCX raises margin to 60% to prevent client defaults

Exchange says it covered price volatility risk adequately with no default occurring during the price decline; brokers, however, says some margin calls were triggered

India’s largest commodity derivatives exchanges, the Multi Commodity Exchange (MCX), raised trade margins to as high as 59.12 per cent on Monday to prevent its trading clients from defaulting due to a sharp decline in crude oil prices.

After opening at Rs 3,130 a barrel, crude prices slumped by over 31 per cent to Rs 2,151 a barrel in early Monday trade. Immediately after opening trade on Monday, the commodity hit the lower circuit of six per cent. Trading resumed after a cooling period of 15 minutes, but there was another slump with crude oil hitting the lower circuit of four per cent. The cooling period and lower circuit alternated during the first two hours of trade till the cumulative decline reached 31.27 per cent.

Hitting lower circuits repeatedly caused panic in crude oil futures. Traders stayed away from active participation till the volatility settled, with eventually fewer orders matching in the first two hours.

The sharp decline in crude oil prices triggered mark-to-market (MTM) margin calls, but the exchange increased margins in sync with the price decline to cover risk.

“The exchange covered the price volatility risk adequately with no default occurring during the crude oil price decline,” a senior MCX official said.

Brokers’ sources, however, said that the sharp decline in crude oil prices triggered margins calls on MCX. Many brokers raised their margins to cover price volatility. However, the price decline, also gave trading clients some room to increase exposure to some extent.

 

Early Monday, overall margins in crude oil were hovering at 19.57 per cent, and steadily went up to 59.12 per cent. Total open interest in crude oil declined to 22,623 lots on Monday, from 29,267 lots on Friday.

With crude oil prices recovering marginally from the day’s lows, the exchange reduced margins accordingly to adjust price volatility. At the end of morning session, overall margins in crude oil were hovering at 42.99 per cent.

“Crude oil prices extended the 10 per cent decline of the last week on Monday, with a fresh fall of 31 per cent in early trade. Both, the exchange and brokers were prompt in increasing margins to cover the risk of crude volatility adequately,” said Naveen Mathur, Director (Commodities and Currencies), Anand Rathi Share and Stock Brokers.

In the international markets too, Brent prices declined by 30 per cent to trade at $31 a barrel early Monday, following Russia’s decision not to cut its production to arrest further fall. In response, the Saudi Arabia-led Organisation of Petroleum Exporting Countries (Opec), the premier organisation monitoring crude oil production and supply, decided to get into a price war with Russia. This was a key reason for the sharp decline in crude oil.