Despite the legal wrangle over the negative settlement price of crude oil and lack of technology to handle trades quoting below zero, the Multi Commodity Exchange (MCX) has decided to resume normal trading until midnight from April 23, it is learnt.
The move is expected to disappoint many brokerages as neither MCX nor any other commodity exchange in India has any provision to trade commodities or stock by assigning a negative value to it.
In the wake of a record slump in the West Texas intermediate (WTI) contract price for May, Multi Commodity Exchange Clearing Corporation, a subsidiary of MCX, settled April expiry during the late hours of April 20 at a negative Rs 2,884 per barrel. Thanks to the unprecedented move, many retail traders with long positions in the April 2020 contract would have to pay around Rs 2.88 lakh more for every lot of crude, i.e. 100 barrels, at the MCX quoted closing price of Rs 965 on April 20.
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According to sources, MCX is still struggling with the negative pricing mechanism, as unlike the New York Mercantile Exchange (Nymex) one, its system is not equipped to take negative pricing of commodity.
Brokers who moved Bombay and Delhi High Courts also mentioned this matter in their petitions. "The risk management software (PCSPAN), provided by the Respondent Exchange itself does not accept any negative value for calculating risk and margins for the futures contract," the petition reads.
A source close to the development told Moneycontrol that the exchange is trying to resolve the issue. "The exchange is working on modifying its software to accept negative trades, but the said process will take time," the person noted.
“We have incurred losses due to market closure at 5 pm. But even if the market was open, the exchange would have not been able to control this trade as they don't have mechanism for negative pricing," a broker who lost money in this trade told Moneycontrol.
Another broker told Moneycontrol: "MCX is resuming normal trading from April 23. Now if the price goes down, will they be able to manage the trade? The exchange is not answering our query."
Chicago Mercantile Exchange had issued an advisory on April 15 for negative price trajectory in crude and energy contracts. However, MCX did not issue any such advisory to their clients.
In fact, the Securities and Exchange Board of India has also sought inputs from all exchanges about their software preparedness and ability to handle negative pricing.
MCX now uses software prepared by 63 Moons Technologies. The exchange was planning to decrease dependency on 63 Moons and is expected to make a decision by October this year on using it after 2022.
The case filed by Motilal Oswal Financial Services Limited, which has exposure worth of Rs 80 crore, and PCS Securities, against the MCX’s decision will be heard on April 23. Religare Securities also has moved the Delhi High Court against the settlement.
A source told Moneycontrol: "Though it is likely that the petition will be taken up for hearing tomorrow, for all practical purposes, considering the prayers, the petition has become infructuous since the payout has already been done as per the impugned circular. MCX also has filed a caveat in this case".
Discount broking firms such as Zeroadha have lost money due to the negative settlement. "Discount broking houses will have to write off all these losses. Chances to get the money back are bleak. Many small brokers too lost large amounts," a source pointed out.