MCX offers chance to exit trading if crude oil price slips into negative

Asking members and clients to be extra cautious while dealing in crude oil, the exchange has said trading will be halted if the trading price falls to Re 1

Days after the BSE enabled trading in Brent Oil contracts when the price slips into negative – that is, when the price on the benchmark overseas exchange falls to less than zero – Multi Commodity Exchange (MCX) also created a separate exit window on Thursday to allow exit from trading in such a scenario. Traders will now be able to square off at the minimum of Re 1, before the price turns negative. This, however, only leverages to exit positions and does not mean the final settlement price will be Re 1.
 
On April 21, MCX had to settle its April contract at a negative price because its terms had stated the settlement would be at the Nymex closing price on the day of expiry of the Indian contract.
 

This move led some brokers to approach courts, and many of them discontinued trading in crude oil or raised margins for clients sharply. On Wednesday, MCX also increased the margin on crude oil, especially for short sale. A day after, however, the exchange came up with a special auction facility to square off the case, should the price turn negative.
 
According to a circular issued by the exchange, it is retaining the terms of contract as they were – settlement at the Nymex closing price – but asking members and clients to be extra cautious when dealing in crude oil. If the trading price falls to Re 1, trading would be halted. And if the international price (on Nymex) slips into negative, and price remains at Re 1 during the last 15 minutes of trading, “the exchange will provide an additional facility and conduct a separate auction session for the said futures contract to facilitate market participants to square off their open positions.”
 
The terms of MCX’s contract circular noted the following:
 
Please note that there is no change in the contract specification of crude oil futures and the computation of due date rate (DDR) is independent of trading on the exchange platform and will continue to remain according to the applicable contract specification, which is reproduced as below:
 
“Due date rate shall be the settlement price, in Indian rupees, of the New York Mercantile Exchange’s (NYMEX) Crude Oil (CL) front month contract on the last trading day of the MCX crude oil contract. The last available RBI dollar-rupee reference rate will be used for the conversion. The price so arrived will be rounded off to the nearest tick. For example, on the day of expiry, if Nymex Crude Oil front-month contract settlement price is $40.54 and the last available RBI dollar-rupee reference rate is 66.1105, then DDR for MCX crude oil contract would be Rs 2,680 per barrel (that is, $40.54 x 66.1105, and rounded off to the nearest tick). Also, there will be no change in the contract specification of options on crude oil futures.”
 
The circular would apply prospectively and not affect any past contracts and settlements, said MCX.