A look at why brokerages dragged MCX to court over negative pricing
New Delhi/Mumbai, April 23 (IANS) In an unexpected fallout of the recent US oil price crash, the Multi-Commodity Exchange finds itself drawn into a legal battle, with major brokerage firms, Motilal Oswal Financial Services, and PCS Securities approaching the Bombay High Court against the bourse for settling crude oil contracts on the bourse at ‘(-)Rs 2,884 a barrel’, post the historic rout in WTI crude on Monday.
Religare Broking has approached the Delhi High Court in same matter.
In their plea at the Bombay High Court, the brokerages have said that crude futures contracts are settled in cash on the exchange and there is no delivery-based mechanism for these contracts in India and, therefore, these contracts can be traded at base price of Re 1 in case of an unprecedented eventuality. So, assigning a negative value is “arbitrary and illogical”, they said.
The petition said that as MCX closed at 5 p.m., investors were not able to cut their positions. If trade would have been open, traders would have had the opportunity to exit positions as the price of the contract on benchmark NYMEX was in positive territory till 10.30 p.m. (IST), it added.
“We have moved to Delhi High Court in the interest of our clients and have filed a case related to negative settlement price of crude. This is in response to the MCX circular where they have settled the crude oil prices at negative. Against that circular, we have submitted our writ petition. Beyond that, we will not be able to say anything as the case is sub judice,” Gurpreet Sidana, Chief Operating Officer, Religare Broking said.
Motilal Oswal Financial Services, in a series of tweets, clarified its position. The brokerage firm said that it has many clients with exposure in crude and it was fully covered till the price was zero and even little more, but with the unforeseen movement and settlement occurring nearly 400 per cent lower there is no way any broker can have ample cover to take care of such risk.
“We are confident of fully recovering the money from clients and also we are helping them with all possible legal recourse. Total dues from the clients are about Rs 80 crs,” it said in one of its tweets.
“There are no proprietary positions. We hope regulator will also look into this issue in the right perspective,” it added.
In an unprecedented price movement, the May delivery contract of West Texas Intermediate (WTI) crude went below zero dollars on Monday and shed more than 300 per cent to settle at (-)$37.63 per barrel on the NYMEX.
The plunge in oil prices was largely due to the lack of demand and a supply glut in the US, leading to shortage of storage facilities.
However, due to the nationwide lockdown, the exchange was active from 9 a.m. to 5 p.m. (Indian Standard Time) and the Indian traders missed the opportunity to trade amid the volatility or square their positions as the losses increased.
The closing price at 5 p.m. on April 20 was Rs 994 per barrel. The MCX issued a circular keeping the intermediate settlement price at Re 1 per barrel, which was agreed upon by the brokers and members. But, the next day the exchange put out another circular and set the settlement price at minus Rs 2,884 per barrel, exposing brokers to a potential loss of Rs 435 crore. The exchange paid out Rs 242.32 crore to members of Multi Commodity Exchange Clearing Corporation Ltd (MCXCCL).
Apparently, the brokers were not informed about change in the mechanism. Experts said that as crude oil is not a deliverable contract in India, but is settled through cash, it cannot be settled at a negative rate.
–IANS
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