MCX asks software vendor to enable negative price trading after broker ire

Exchange says cannot ascertain the date by which this would be achieved at this point in time

Following the controversy over settling the April crude oil contract in the negative territory,  India’s largest commodity derivatives exchange — the Multi Commodity Exchange (MCX) — has decided to enable its software for negative price trading, following the footsteps of the New York Mercantile Exchange (Nymex). The MCX earlier this week had restored all trading in non-agri commodities until 11.30 pm.

Talks are on with  63 Moons Technologies for upgrading the software, an MCX exchange official said, though the deadline for the upgrade is yet to be decided. Once the software is upgraded, India for the first time may see negative price quotations. 

Nymex had the software to conduct negative trading, and a week before the May contract expiry, it enabled the software and alerted market participants about the same on April 15.

Gnanasekar Thiagarajan, CEO, Commtrendz Risk Management Services, a risk advisory firm said: “The MCX crude oil contract is a mirror of the Nymex contract and all the MCX crude oil trading movements reflect the Nymex price movements, except part of rupee-dollar volatility. Hence, India has to make the required changes in its software.”

 

 

Sources said an interim arrangement has to made if Nymex again witnesses negative trading before the MCX's software is ready. 

The MCX has more than Rs 400 crore in settlement guarantee fund and over Rs 6,000 crore as collateral of brokers. The brokers, who made losses following the oil slump, paid money as per their pay-in liability and the settlement guarantee fund used. A number of such brokers have moved court against the MCX's decision to settle the price of the April oil contract in negative, arguing the MCX's software currently doesn't allow negative trading.

Oil rallied on Thursday because of rising tensions in West Asia (US President Donald Trump tweeted on Wednesday morning that he had told the American Navy to “shoot down and destroy” Iranian gunboats that “harass” US ships; the leader of Iran's elite Islamic Revolutionary Guard Corps has promised a "crushing response"), output cuts by producing nations to tackle oversupply, and the promise of more government stimulus to ease the economic pain.

On the MCX, it was 37.57 per cent up at Rs 1,289 (11:30 pm IST). Brent was trading at $21.68 a barrel, up $1.31 or 6.43 per cent (11:49 pm IST). The WTI price was  $22.71 a barrel, up $3.13 or 22.71 per cent.
 

According to industry leaders’ estimates, the actual loss because of the recent oil slump could be around Rs 315 crore. Motilal Oswal Financial figures among the top three commodity brokers, which have incurred Rs 80 crore loss. One discount brokerage having a large share is said to have lost Rs 10 crore.

The lion's share of the gain belongs to 10-15 brokers who had taken short positions. Sources said some of those who gained were arbitragers, whose first leg of the trade was on the MCX crude oil, while the second leg was on Nymex crude. Since Indian investors cannot trade international derivatives, this part of the trade was in dubba trading. 

Among holders of 11,500 lots, which were standing uncovered when the settlement was arrived, around a thousand of them belonged to small retail investors having one lot outstanding.