The US commodities regulator on Wednesday issued a rare warning to brokers, exchanges and clearing houses, cautioning them that oil prices could again reach sub-zero levels.

It may be recalled that the May crude oil futures on the New York Mercantile Exchange (Nymex) had settled at an unprecedented negative rate of minus $37.63 a barrel. This rattled the brokers, exchanges and traders worldwide. India’s MCX was no exception, with several traders and brokers suffering huge losses.

In the light of the negative price, the US Commodity Futures Trading Commission (CFTC) has issued fresh warning to all participants.

“We note that we are issuing this advisory in the wake of unusually high volatility and negative pricing experienced in the May 2020 West Texas Intermediate (WTI), Light Sweet Crude Oil Futures contract on April 20 (the penultimate day of trading and expiration of the contract). The Divisions wish to emphasise that the subject of this notice applies equally to trading in other commodities, and registrants should remain vigilant and prepare accordingly,” the CFTC said in a notice.

The June contracts of crude oil will be settled on May 19 at Nymex.

In addition to considering risk controls and related issues, designated contract markets (DCMs), futures commission merchants (FCMs) and derivatives clearing organisations (DCOs) are encouraged to ensure their customers and members have appropriate information on the risks and technical elements of contracts and trading around upcoming expirations, it further said.

In light of these considerations, the divisions remind DCMs, FCMs, and DCOs of their obligations to assess changing market conditions and take appropriate measures in response as contracts approach expiration. Given the current market conditions, they are encouraged to regularly assess whether their risk controls and related mechanisms are reasonably designed, fit for purpose and appropriately implemented, the regulator added.

Beware, MCX

Unprecedented panic engulfed MCX April crude oil contracts as the prices turned negative at Nymex. MCX failed to arrive at a settlement price for its contract ended on April 20. Initially, it had to provisionally settle the contracts at ₹1 and then revised to negative ₹2,884 per barrel in line with the Nymex. As several brokers and traders suffered huge losses, they dragged the exchange to court, and the hearings are on.

Following the fiasco, all exchanges have now changed their systems to allow all contracts to move in negative territory, too. Earlier, as none of the exchanges envisaged that the futures prices can go below zero, they did not have any system for negative pricing.

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