Brokerages drag MCX to HC over negative price settlement of crude

The three commodity brokers that have filed separate petitions against MCX and Sebi in include Motilal Oswal Financial Services, PCS Securities, and Religare

Three leading commodity brokers moved the Bombay High Court (HC) on Wednesday against the Multi Commodity Exchange (MCX) of India and the Securities and Exchange Board of India (Sebi) over negative settlement price of crude oil for an April contract that expired on Monday.

The three commodity brokers, which have filed separate petitions against MCX and Sebi, are Motilal Oswal Financial Services, PCS Securities, and Religare.

“Three brokerages have moved Bombay HC seeking redress. A lot of other brokerages, too, are moving courts on Thursday and Friday,” said Narinder Wadhwa, president, Commodity Participants Association of India.  An executive from Motilal Oswal Financial Services said: “It is our duty to protect our clients’ interests. It is shocking that a cash-settled trade in crude oil could be settled at a negative rate, when there is no mechanism built into Indian stock exchanges to trade at negative rates.” Emails sent to PCS Securities and Religare did not elicit any response at the time of going to press.

MCX crude oil contract has a provision that allows the settlement price to be the closing price of the NYMEX WTI crude oil on a day the contract is settled.  The MCX settled the contract at minus Rs 2,884, against the closing price on the MCX at Rs 995 per barrel, when trading closed at 5 pm on Monday.
 

The MCX Clearing Corporation (MCXCCL) also said in a release on Wednesday that the pay-in and pay-out have been completed. “International exchanges, such as ICE Futures US, ICE Futures Singapore, DGCX, and Moscow Exchange, have settled their corresponding contracts at minus $37.63 a barrel fixed by NYMEX WTI crude oil futures. Wednesday’s pay-in and pay-out, including the settlement of April 20 crude oil contract, have been completed, and a payout of Rs 242.32 crore has been made to members of the MCXCCL,” said MCXCCL.  

 

 

Brokers’ margins with the exchange, according to sources, was used to complete pay-in and pay-out. Motilal Oswal executive said the brokerage, by challenging the MCX decision, was trying to help the interests of investors who had paid the full value of the contract. It is yet to pay 300 per cent more because of negative closing in the international markets which is delivery settled; in India, it is cash settled and hence, should be settled at a rate not below Rs 1.

“There is no system of trading any commodity in the negative in India. We are not asking for any payment from the exchange or any relaxation from the regulator. Neither the exchange nor the regulator has given us a hearing. Hence, we moved court since we sniffed a conspiracy,” he added.

Trade sources estimate around 135 brokers are involved in crude oil contracts, of which 13 made profits. Around 80 per cent of the entire profit generated from this crude oil fiasco was made by just two brokers. While brokers on average lost 10 per cent, smaller ones have lost more than 50 per cent of 

their networth.

The total loss is estimated at Rs 450 crore. A large part of the loss was on account of retail investors. The entire fiasco erupted after the West Texas Intermediate (WTI) futures declined to trade in the negative at minus $37 a barrel in New York at around 11.30 pm Indian standard time on Monday.

“Nobody is at fault. MCX followed the laws, and clients traded legally. But, brokers who facilitated the trade between the exchange and clients have incurred losses. We cannot go to our clients seeking 300 per cent additional money; they will not pay once they have already paid 100 per cent. So, Sebi or MCX must settle the April crude oil contract at Rs 1, below which trade is not allowed,” said another broker.