Bombay HC Backs MCX Negative Settlement: Crude Futures Precedent

The Bombay High Court dismissed over 20 petitions that challenged Multi Commodity Exchange’s decision to settle its crude oil futures contract at a negative price during the April 2020 Covid-19 crash. The bench of Justices RI Chagla and Advait M Sethna upheld the exchange’s April 21, 2020 circular, ruling that MCX acted within contract specifications that tied the due date rate to the benchmark NYMEX crude oil contract.

The dispute traces to April 20, 2020, when the NYMEX May 2020 crude oil contract settled at an unprecedented negative $37.63 per barrel. A collapse in demand and storage shortages during pandemic lockdowns drove the move. Since MCX’s contract specifications linked its due date rate to that NYMEX settlement, the Indian exchange’s contract also went negative, settling at minus ₹2,884 per barrel.

A group of petitioners, including Dhanera Diamonds, argued that a price in law requires consideration paid by buyer to seller, meaning it cannot be negative. They said MCX and SEBI should have used emergency powers to annul trades or settle at ₹1 per barrel given the extraordinary circumstances. According to the petitioners, the negative settlement allowed 10 brokers to book overnight profits of ₹215 crore – an amount the petitioners said they lost.

SEBI countered that MCX crude oil futures are cash-settled derivative contracts governed by a special statutory framework, not ordinary contracts for the sale of goods. The regulator said negative prices have occurred globally in energy, electricity, and interest-rate markets during severe supply-demand imbalances. SEBI also rejected demands for compensation from the Investor Protection and Education Fund, arguing the traders took speculative positions and suffered losses from market movements.