The historic collapse in US crude prices is reverberating through Asia's financial trading sector and sparking discontent among investors in India and China.
Several Indian brokers are suing the Mumbai Commodity Exchange (MCX), alleging that negative prices on the Nymex WTI crude futures contract left them with huge losses. The MCX's crude contracted is settled against WTI crude futures, which closed on 20 April at a negative $37.63/bl for May delivery.
The MCX, which is India's largest commodity exchange, did not have the ability to account for negative prices on its platform. It also reduced its trade and settlement hours to 9am-5pm earlier this month because of India's nationwide Covid-19 lockdown, meaning that exchange users were unable to settle their contracts when US markets opened.
This has left brokers facing big losses, and prompted at least three firms — Motilal Oswal Securities, Religare Broking and Kunvarji Commodities — to file suits this week holding the MCX and the Securities and Exchange Board of India (Sebi) responsible for the losses, and seeking compensation from the MCX. Brokers say the MCX should have advised them that negative prices were a possibility.
The MCX yesterday resumed its previous trading hours and plans to upgrade its software to accommodate negative prices, as other exchanges are doing, an official said. Crude futures trading has not been affected. But some brokers, which are important customers for MCX, are reluctant to take fresh positions in crude contracts for their clients or are demanding margins of up to 300-400pc to facilitate such trades. Motilal Oswal said it is not offering crude contracts to its clients until Sebi and MCX settle the case.
The exchange previously required 10-15pc margins from brokers but raised this to 65pc on 3 March because of crude price volatility caused by the coronavirus pandemic and the Russia-Saudi oil price war. It started demanding 100pc margins this month. It paid 2.42bn rupees ($32mn) to settle the negative priced contracts using the margin funds and other guarantees posted by brokers.
Brokers have to meet their commitments to the exchange first and then try to recover client funds, which can be difficult. Contracts on MCX are cash settled with no physical delivery.
The MCX accounts for 95pc all crude futures trading in India. Monthly volumes on the exchange's crude contract in January-March averaged 9.37mn lots, each of 1,000 bl, but have fallen to 2.67mn lots so far in April.
Treasure, buried
The negative prices are also causing turmoil for investors in China. The Bank of China (BoC) and other Chinese banks this week halted new transactions in a financial product linked to US crude prices, although not before some investors were exposed to big losses.
BoC's oil products, known as bao or treasure in Chinese, include contracts linked to the CME's WTI crude futures. The settlement price of the Chinese product is determined based on the US crude futures close.
The BoC this week confirmed that its WTI-linked product would be priced against the -$37.63/bl settlement price of the May WTI contract on 20 April.
Some retail investors have been hit hard. One investor claimed on Chinese messaging platform WeChat to have been asked by BoC to pay losses of 6mn yuan ($850,000) and forfeit a Yn3mn initial investment. The details could not be confirmed.
The problems accounting for price impact of the slump in demand are another challenge for China's oil-linked financial sector. Shanghai's INE exchange – which lists the country's flagship crude futures product – is struggling with storage constraints that have sent prices well above global levels.
