Market regulator SEBI has classified derivatives of commodities that need specialised storage space in physical markets and that cannot be destroyed easily as susceptible to near zero and negative prices.

In a detailed guidelines for handling the issue of negative pricing, SEBI on Monday ordered clearing corporations of commodity exchanges to set up alternative risk management framework (ARMF) for susceptible commodities within 60 days.

In recent times, extreme volatility has been observed in commodity prices globally, particularly in the case of crude oil, wherein the prices had gone down to unprecedented zero and subsequently, even negative. In such a scenario, SEBI said margins equivalent to even 100 per cent of the futures price would not have been sufficient to cover the steep upward or downward price variations in the futures market.

Task force

In order to enable risk management framework to handle near zero and negative prices, SEBI had constituted a task force of clearing corporations and market participants to review the risk management framework.

SEBI clarified that clearing corporations that do not presently provide for clearing and settlement services of any such susceptible commodity, are not required to update their systems for the prescribed ARMF. However, the exemption is subject to certification by the risk management committee, added SEBI. However, in future before the launch of any such susceptible commodities exchanges have to ensure that their systems are updated for the ARMF.

The exchanges have also been advised to make necessary amendments to their regulations for the implementation of the prescribed changes in risk management.

Crude shock in MCX

MCX, which was affected by negative pricing in NYMEX, had implemented the option of negative pricing for all commodities.

The exchange recently attracted investors ire for settling the April crude contract at negative ₹2,885 a barrel.

MCX crude contract are cash settled, while its benchmark NYMEX crude contracts are deliverable. On the back of Covid pandemic demand for crude in the US fell sharply leading to storage issues. Subsequently crude futures contract on NYMEX plunged below zero for the time ever. Reeling under the Covid impact, MCX investors were caught unaware.

MCX, which initially announced a provisional settlement price of ₹1 for the crude oil futures contract that expired on April 20 later it calculated a price of minus ₹2,884 per barrel, leading to a loss of about ₹435 crore for investors.

Though India is huge consumer of metals and energy there are no transparent domestic platforms for price discovery to settle futures contracts. This has forced exchanges to depend on international prices for settlement of futures contracts, said an analyst.

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