Bombay HC Upholds MCX Circular Allowing Negative Crude Oil Settlement, Says Traders Must Bear Risks

On 24 June, the Bombay High Court upheld the validity of a Multi Commodity Exchange of India Ltd. (MCX) circular permitting negative settlement pricing in crude oil futures, holding that traders in derivative markets must bear the risk of extreme volatility, including unprecedented price crashes.

Justices R.I. Chagla and Advait M. Sethna dismissed a batch of petitions filed by Dhanera Diamonds and others challenging MCX's circular dated 21 April 2020, which fixed the final settlement price of crude oil futures at Rs. -2,884 per barrel following the global oil price collapse during the COVID-19 pandemic. Justice Chagla held:

“The Petitioners being traders always were at the liberty to exit the Crude Oil Futures contracts prior to the expiry by squaring of or rolling over their positions…..The Petitioners having themselves chosen to hold on to their Net Long Position at the time of expiry of the contract, cannot now contend that the remaining trades which they consciously took a chance of not squaring off, cannot be settled at a negative rate.”

The lead petitioner, Dhanera Diamonds, traded crude oil futures through Motilal Oswal Financial Services Ltd. Under MCX contract specifications, crude oil futures were linked to benchmark prices on the New York Mercantile Exchange (NYMEX), with trading permitted between 9 a.m. and 11:30 p.m. During the COVID-19 lockdown, MCX reduced trading hours to 11:30 p.m. to 5 p.m. after consultation with the Securities and Exchange Board of India (SEBI).

On 20 April 2020, when the petitioners' contracts expired, they held 2,965 crude oil futures contracts after depositing substantial margin money. MCX initially fixed a provisional settlement price of Rs. 1 per barrel, but on the following day issued the impugned circular revising the settlement price to Rs. -2,884 per barrel, which led to the present challenge.

They argued that MCX could not introduce negative settlement pricing without SEBI approval and adequate notice, and that reduced trading hours during the lockdown prevented them from exiting positions before the crash. They further contended that SEBI and MCX failed to protect investors during the unprecedented market collapse.

SEBI submitted that the petitioners were seasoned traders who knowingly assumed market risk. It further argued that crude oil prices on NYMEX had turned negative due to an unprecedented demand collapse, and since the petitioners had linked their contracts to NYMEX benchmarks and held positions till expiry, the settlement outcome was contractually binding.

Rejecting the petitions, the Court held that derivative trading is inherently risk-based and courts cannot interfere merely because traders suffer adverse outcomes. It held that contractual allocation of risk between counterparties cannot be rewritten under writ jurisdiction. Justice Chagla observed:

“The Petitioners being traders always were at the liberty to exit the Crude Oil Futures contracts prior to the expiry by squaring of or rolling over their positions…..The Petitioners having themselves chosen to hold on to their Net Long Position at the time of expiry of the contract, cannot now contend that the remaining trades which they consciously took a chance of not squaring off, cannot be settled at a negative rate.”

He further held that every futures contract necessarily involves one party gaining and another incurring loss, and accepting the petitioners' plea to cap settlement at Rs. 1 would distort the contractual structure and unfairly prejudice the counterparty. He also noted that the petitioners were fully aware of volatility risks through disclosure documentation and continued trading even after revised trading hours were introduced during the COVID-19 period, without contemporaneous objection.

Justice Chagla also held that SEBI's regulatory role does not extend to insulating traders from adverse market outcomes. It observed:

“Although, it is SEBI's role to protect investors as a whole and regulate markets, SEBI is not expected to act as a nursemaid to traders in respect of individual trading decisions.”

In a concurring opinion, Justice Sethna agreed with the lead judgment and held that the petitioners failed to establish any legal basis to assume commodity prices must remain positive. He observed:

“As experienced traders, the Petitioners clearly understood the risks of fluctuations in the price of crude oil. The Petitioners being sophisticated traders accepted the kernel of volatility in the price of such commodity. A negative price shift and the consequential loss arising therefrom, ought not to be the raison d'être for approaching this Court under Article 226 of the Constitution of India.”

Accordingly, The High Court refused to quash the impugned MCX circular and dismissed the petitions.

For Petitioners: Senior Advocates Darius Khambata, P.N. Modi, Advocates Dr. Abhinav Chandrachud, Shreyash Shah, Darshan Patankar, Pratik Dixit, Kalpana Desai, Rihal Kazi, Guru Shanmugam, Zainab Tinwala, Dr. Anurag Agarwal, Kokila Kalra, Beerta Bajwa, Alifiya Manasawala, Prateek Agarwal, Surabhi Mittal, Rahul Malik, Nisha Kaba, Abhijit Singh, Areen Shaikh, Shyam Dewani, Sumit Khanna, Chirag Chanani, Sachet Makhija, Dashang Doshi, Mihika Joshi, Kartik Pandey, Rohan Sawant, Asmita Maurya and Tanveer Singh Narula

For Respondents: Senior Advocates Mustafa Doctor, Zal Andhyarujina, Janak Dwarkadas, Advocates Vishal Kanade, Manish Chhangani, Sumit Yadav, Abhay Chauhan Atul Agarwal, Sameer Pandit, Sarrah Khambati, Aastik Agarwal, Sameer Pandit, Sarrah Khambati, Aastik Agarwal, Sameer Pandit, Sarrah Khambati, Aastik Agarwal, Ashutosh Misra and Deepak Dhane