The ripples of the overnight freefall in the WTI May crude oil contracts is being felt in the Indian commodities market, with Moneycontrol now learning that the clearing corporation of the Multi Commodity Exchange (MCX) of India (MCX) -- Multi Commodity Exchange Clearing Corporation (MCXCCL) -- has blocked pay out to brokers.

That’s because over 95 percent of all trades in crude oil futures in India pass through the MCX platform.The contracts are settled on the last day of trading of the MCX crude oil contract using the settlement price of the NYMEX front month contract.The MCX April contract expired on April 20. Given the restrictions imposed due to the novel coronavirus, or COVID-19, pandemic, trade now halts at 5 pm instead of the earlier 11:30 pm.

The issue arose because the US market opens for trade at 7 pm (IST). WTI opened lower and continued to trade in the negative.

So, had our market been open for trade, traders would have had the opportunity to settle/exit their positions.

Now, as per the MCX rules, contracts need to be settled at taking into account the price of the front month contract, i.e. May 2020 in this case, which was trading at a negative $37.63 per barrel around 11 pm.

As per an April 21 circular issued by MCXCCL, the settlement price has been arrived at converting the NYMEX crude oil front month contract’s settlement price of a negative $37.63/bbl into Indian rupees, which works out to Rs 2,884 per barrel or lot.

"Our market shuts at 5 pm and NYMEX crude traded in the negative late in the night. It is at those prices that MCX is settling its April expiry contract. When our market closed, neither were clients able to cut down their positions nor were brokerages able to seek additional margin against client positions. We had taken hundred percent margin exposure due to expiry day," a broker told Moneycontrol.

Another broker with an office in Mumbai suburbs added, “We can't imagine negative price settlement in crude contract that are cash settled unlike NYMEX where one has to take delivery.”

Brokers are upset with MCX and asked why is settlement happening at a negative price. “As per cash settled contract, the price can't go into negative territory unlike a delivery contract,” a broker said.

Traders with a long position in the April 2020 contract would now have to pay around Rs1 lakh for every one lot of crude, i.e. 100 barrels, at the MCX quoted closing price of Rs 965 on April 20. This is assuming the person would have paid the full value of the contract.

However, most traders would not have expected to lose the entire value of the contract and are now staring at a loss of over Rs 2.88 lakh.

To gauge the extent of the problem, around 11,000 contracts remained open at the end of the day. Market sources pegged the loss for all long positions around Rs 418 crore.

MCXCCL first announced a provisional settlement at Re 1 by mentioning that the final or differential settlement, if any, would be carried out separately. However, it later froze or blocked the amount against deposits by those brokers who held long positions at close of trade on April 20 to meet the final settlement.

The only silver lining for brokers is that market regulator Sebi and the exchange is in touch for easing the pain in the crude oil segment, sources told Moneycontrol. MCX refused to comment on this story.

The problem that brokers face is getting clients to pay up, especially in those long positions in which traders have paid the entire amount upfront. “As brokers don't have much option to recover money and as these options including a provision for arbitration and can be challenging in the court it is an expensive affair for broker to collect amount," a source told Moneycontrol.

The clearing members with short positions, who are in profit, have to be paid by MCXCCL, who is obligated to pay because it party offering the counter guarantee. Earlier, that responsibility was the exchanges but now it is with clearing corporations. If there is a shortfall in collection from any defaulting member, then CCL has to use the settlement guarantee fund to make good the pay out.