New MCX rules raise more questions than answers

On April 20, after the close of trading in the commodity futures market in India, WTI crude futures at NYMEX dipped into the negative terrain, forcing the MCX Clearing Corporation to settle all open positions in MCX crude futures at a negative price.

Traders who had long (buy) positions became furious as they suffered huge losses.

Since then, the market participants have been expecting the exchange to come forward and give clarity on how to do the daily settlement when prices in the international market turn zero or negative (they have no provision for negative price in their system).

The exchange was silent till last Friday. The new circular, issued on April 30, too, does not address all the issues.

Here, we decode the two circulars — one of MCX and the other of MCXCCL.

Interpreting the circulars

According to the circular issued by MCX, on any trading day, if the price is at ₹1 during the last 15 minutes of trading (at present, 11.15 pm to 11.30 pm) at MCX and, during that time, the trading at NYMEX is at negative price, the exchange will provide an additional facility of an auction session to the traders with open contracts to square off their positions.

As per the circular of MCXCCL, for the positions squared off during the auction session, the settlement price will be the price discovered during the auction.

Further, for the positions that remain open even after the auction session, the daily settlement price will be based on the closing price of WTI crude futures at NYMEX — this will be used to calculate the mark-to-market (MTM) obligation.

Remember that for the auction session to be conducted, both the conditions mentioned in the circular — of MCX crude oil futures price remaining at ₹1 in the last 15 minutes of trading and WTI crude futures at NYMEX trading at negative price in those 15 minutes — need to be met; even if one is not met, there will be no auction session.

On days when MCX does not conduct an auction session, the daily settlement price, ie, the closing price, will be arrived in the normal manner — where it is the weighted average price of all trades done during the last 30 minutes of the trading day.

That said, the due date rate (DDR), ie, the final settlement price, the price at which a contract is settled at expiry, will be continued to be arrived at the same price as before — by taking the price of the front month contract of NYMEX WTI crude oil futures and converting it to rupees at the reference rate provided by the Reserve Bank of India.

It helps, but only partially

MCX has given an exit option to traders who will be stuck at ₹1 in its crude contract during the last 15 minutes of trading (when NYMEX crude prices trade at negative next time) .

Though, it is not clear from the MCX and MCXCCL circulars if the exchange will allow negative price quote/bidding in the auction session, it looks probable; otherwise, the auction session would be meaningless.

Maybe, the exchange should also make it adequately clear for the layman/trader whether it is only the front month contract at NYMEX in each case that it would consider when it states about the price in the corresponding international reference market.

That said, this solution has limited purpose.

If NYMEX crude futures price move into the negative terrain any time between 9 am and 11.15 pm (IST), a trader in MCX crude futures contract will be stuck.

The orders will freeze at ₹1 and not accept prices below ₹1 (given that MCX crude futures has a minimum price tick of ₹ 1).

This will de-link the MCX crude futures contract from the international price, expose the traders to the unlimited risk, and make it a not so useful tool for hedgers/traders.