Court Upholds Re 1 Crude Settlement Amidst Pandemic Chaos

In a significant ruling on June 24, the Bombay High Court dismissed petitions challenging the Multi Commodity Exchange of India Ltd (MCX) settlement of crude oil futures contracts at Re 1 per barrel during the peak of the covid-19 pandemic. This decision revisits an unprecedented market event from six years ago.

During the early stages of the covid lockdown, global supply chain disruptions and inability of buyers to take delivery caused West Texas Intermediate (WTI) crude on the New York Mercantile Exchange (Nymex) to plummet to negative prices (-$37.63/barrel) on April 20, 2020. As MCX crude futures mirror Nymex pricing, a similar situation arose, with the rupee-equivalent price falling to ₹2,884 a barrel.

MCX, lacking a mechanism for negative price settlements, provisionally fixed the settlement price at Re 1. Traders who held long positions and incurred substantial losses challenged this, seeking to annul their trades. They argued that MCX had reduced trading hours during the lockdown, leading to missed opportunities to liquidate positions before the negative price collapse, which occurred after MCX trading hours had closed.

The court, however, found no merit in these arguments, deeming the reduced trading hours a reasonable pandemic-related measure. Justices R.I. Chagla and Advait M. Sethna stated that courts should not rewrite completed market settlements due to subsequent trader losses. They acknowledged that traders are aware of the risks associated with sophisticated instruments like futures contracts.

The Securities and Exchange Board of India (Sebi) supported MCX, asserting that the regulator's role is to oversee the market and protect investors as a class, not to compensate for every trading loss resulting from risky bets. The court concurred, noting the absence of any law or exchange rule prohibiting negative price settlements and that parties consciously agreed to Nymex price mechanisms.