Crude oil futures plunges into -ve, but MCX seeks interim settlement at Re 1; Sebi gets into action

Crude oil futures contract price may have plunged into negative territory in the international market, but India's leading commodity exchange MCX has fixed an interim settlement price of Re 1 per barrel -- a move some traders said would help big brokers avert losses amounting to hundreds of crores of rupees at the cost of others having taken a short position.

Officials said capital market regulator Sebi is aware of the situation and is actively looking into the issue, while the matter has reached the government authorities as well, and they want an immediate action if the exchange has acted against regulations or was trying to benefit any particular trader at the cost of others.

Last night, the NYMEX WTI Crude futures May 2020 contract settled at an unprecedented USD (-)37.63 a barrel, after slipping into the negative zone on fears of fast-filling storage facilities globally and an unprecedented plunge in demand due to the novel coronavirus pandemic.

Multi-Commodity Exchange (MCX) of India, which uses the NYMEX price for determining its own settlement price and the available RBI's reference rate for USD-INR for conversion, however, said in a circular that due to the unprecedented price fluctuation in the international markets in crude oil, the due date rate for Crude Oil futures contract expiring on April 20, 2020, is under finalisation.

"In the interim, the provisional settlement price for April 20, 2020, is considered as Re 1 per barrel for the computation of members' obligation for trade date April 20, 2020. Differential settlement, if any, on fixation of the final settlement price shall be done subsequently," it told its members.

Traders said MCX crude has open positions of 11,522 contracts, meaning 11,522 open positions on expiry were outstanding. Also, since the number of futures buy positions should equal the number of futures sell positions, there would be 11,522 sell or short positions at the time of expiry of the contract.

Several traders said MCX's decision to fix a settlement price of Re 1, even on an interim basis, would lead to people holding these 11,522 short positions losing their legitimate gains.

Officials, however, said it would need to be probed whether the decision to fix an interim price is aimed at giving some undue respite to those having suffered huge losses.

As per the prevailing practice, the Monday night's NYMEX (New York Mercantile Exchange) closing price of USD (-)37.63 a barrel would have given a settlement price differential of about Rs (-)2,860 a barrel for India. As the last trade price at 5 pm on Monday here was Rs 965, the total difference from MCX's last trade price till the actual/ideal settlement price should therefore be around Rs 3,825 (965+2,860) per barrel.

However, with MCX deciding on Re 1 interim settlement, the positions outstanding at close of trade at Rs 965 will only get benefit up to Re 1, thus losing nearly Rs 2,860 a barrel.

As one contract at MCX is equivalent to 100 barrels, the total open positions amount to 11,55,200 barrels, thus resulting in a huge loss of over Rs 440 crore (based on Rs 3,825 a barrel).

However, a settlement at Re 1 would limit the loss to just about Rs 110 crore, thus helping some big brokers avert losses amounting to Rs 330 crore at the cost of others having held short or sell positions, traders said.