Business Standard

Post-negative crude shocker, MCX sharply hikes margins up to 125 pc


Press Trust of India Mumbai
To avoid a repeat of the past Tuesday's negative price shocker on crude futures, MCX that controls 95 per cent of the country's market traded crude has increased the margin requirements to up to 125 per cent or Rs 1,95,000 per lot effective Thursday.
With this extremely cautious move which mandates risk margins up to Rs 95,000 to Rs 1,95,000 per lot, investors will have to pay in full to open a position in crude futures on MCX, besides replenishing it with mark-to-market loss overnight from Thursday.
The new margin is steeply higher the existing levels, which since early March has been going up from 12.75 per cent on March 6 to 57.9 per cent on April 16.
The new margin requirement came after a week of the negative pricing shocker on April 20, which saw brokers taking a hit of around Rs 400 crore on their May contracts. MCX has not yet made any changes in its trading software to allow commodity derivatives to trade at negative prices.
Following the historic price crash to -USD 37.63 a barrel on the May crude futures on the NYMEX on April 20, MCX, which prices its trade to the NYMEX prices, on April 21 settled the trade at Rs 2,884 a barrel.
In a circular on Wednesday, the Multi Commodity Exchange Clearing Corporation (MCXCCL) announced additional risk management measures, effective April 30, to cover fluctuations in crude prices.
The move came after both the Bombay and Delhi high courts over the week refused to give any interim relief to the brokers who are upset over the exchange settling the last expired crude contracts at negative prices for the first time in the history of commodity trading. The HCs, however, accepted the petition for further hearing.
The changes in additional margin requirements by Multi Commodity Exchange of India (MCX) follows the BSE allowing trading in commodity derivatives at negative prices on Tuesday when it modified its BOLT Plus trading system to accept orders and execute trades at negative prices.
However, Unlike the BSE, MCX despite controlling 95 per cent of the crude trading market, has not yet made any changes in its trading software to allow commodity derivatives to trade at negative prices. However, it said it is in the process of making such changes.
The new margin requirements by MCX include hike in additional margins on crude futures contracts based on the price movement. Accordingly, an initial margin of 100 per cent will be levied for all existing and yet to be launched crude contracts, while a minimum initial margin of Rs 95,000 per lot will be levied from April 30.
"An additional margin of Rs 1,00,000 per lot will be levied on near-month crude futures contracts and on short side of the same contracts. Further, an additional margin of Rs 50,000 per lot will also be levied on all other crude futures contracts and on short side contracts," the circular said.
The new margins will kick in if crude price falls between 50 and 75 per cent from previous close to current price on MCX/NYMEX) then an additional 50 per cent margin of the mark-to-market loss will be levied, the exchange that controls 94 per cent of the commodities market volume said.
Similarly, if the price falls between 75 and 90 per cent, an additional 100 per cent margin will be required and if the price plunges beyond 90 per cent, then 125 per cent additional margin will of the MTM loss will be levied.
It also said no spread margin benefit on initial margins will be provided in crude contracts going forward.
The bourse has also increased the volatility scan range from 5 to 20 per cent for all existing and yet to be launched crude options contracts.
"Extreme loss margin of 1.25 per cent shall continue to be levied on all crude futures contracts and on short positions of all options contracts," it added.
It can be noted that following the massive crash of commodities as the COVID-19 pandemic engulfed the world from March, MCX has been increasing its margin requirements.
While it had increased the margins to 12.75 per cent on March 6, it was raised to 16.32 per cent on March 9, to 38.32 per cent on March 10, and to 47.27 per cent on March 23 and finally to 57.94 per cent on April 16, according to data from the exchange.
Meanwhile, the US West Texas Intermediate crude futures, based on which MCX settles its contracts, closed at USD 13.85 to a barrel up 8.8 per cent Tuesday even as the US crude inventories rose by 10 million barrels to 510 million barrels in the last one week.
It can be noted that the Delhi High Court on Monday refused to grant interim relief to Akshay Aluminium Alloys, of its investors, who filed a petition against MCX, its clearing corporation MCXCCL and Sebi over negative pricing of the crude contracts but directed the respondents to file their replies in four weeks to the petition and agreed to hear the matter on June 24.
Similarly, Motilal Oswal Financial Services and PCS Securities had moved the Bombay High Court last week on the same issue but the judge who was allotted the case had recused himself the hearing the petition.

Disclaimer: No Business Standard Journalist was involved in creation of this content

Don't miss the most important news and views of the day. Get them on our Telegram channel

First Published: Apr 29 2020 | 2:34 PM IST

Explore News