MCX prepares for negative trading in all commodities after crude oil row

MCX prepares for negative trading in all commodities after crude oil row
After the controversial settlement of the April crude oil contract at a negative price on the 20th of that month, the exchange has now decided to introduce an alternative mechanism that will provide an exit opportunity to traders in any commodity that starts trading in the minus zone.

It would be recalled that MCX had settled April crude at (minus) -Rs 2,884 per barrel price on the 20th of that month, prompting several traders to move court, and from which the exchange’s latest move stems.

The April crude oil contract was settled in the negative as MCX follows Nymex crude oil, which had also entered the minus zone. The matter assumes significance because the exchange software doesn’t allow trading below Re 1 in any commodity. Nymex had earlier developed the system where negative trades were possible.

According to MCX’s latest circular, “On any trading day, if the price of crude oil contract freezes at the lowest price (that is Re 1) in the Trading system and remains at the same level during the last 15 minutes of trading (currently 11.15pm to 11.30pm) and the corresponding international reference contract is trading at negative price, then the Exchange will provide an additional facility by conducting a separate auction session for the said future contract to facilitate market participants to close out or square-off their open positions. This facility will not be available on expiry day of crude oil futures contract.

Interestingly the exchange has categorically said that, “this facility will also be available for all other commodities, subject to fulfilment of conditions.”

Expanding the horizon of the coverage for the auction window, till the exchange’s software enables trading at negative price. Another interesting point is expanding the auction facility to any commodities apart from crude oil.

This is another significant move as market has already started discussing possibility of natural gas contract may trade in negative price. Last week, CME group announced that the New York Mercantile Exchange, Inc. (NYMEX) is putting measure in places to support negative prices and strikes on certain natural gas contracts effective trading from May 18.

On MCX, after negative price settlement last month, many big players having large volumes in crude oil contract have stopped trading in crude oil or have increased margins multi-fold for clients. As a result, the trade and positions have shifted to natural gas contract.
Source: Business Standard