Supreme Court Upholds MCX Circular Allowing Negative Settlement Pricing For Crude Oil Futures

The Supreme Court on Thursday refused to interfere with the Bombay High Court judgment upholding the validity of Multi Commodity Exchange of India Ltd. (MCX)'s April 21, 2020, circular permitting negative settlement pricing for crude oil futures.

The High Court had 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.

A Bench of Justices Sanjay Kumar and Sanjeev Sachdeva declined to interfere with the Bombay High Court's decision.

Senior Advocate Abhishek Manu Singhvi, appearing for Dhanera Diamonds, argued that Dhanera Diamonds had taken long positions in crude oil futures and challenged the negative settlement, contending that a seller could not be required to pay money to transfer a commodity. During the hearing, Singhvi submitted:

“It's the first time that your Lordships find that a seller, on a negative price, has to pay out money.”, Singhvi submitted.

He argued that negative settlement was unprecedented and contended that traders could lose the amount they had invested but could not be required to pay additional money merely because the settlement price became negative.

“In a speculative futures contract, which is officially allowed, you can lose whatever you bet. You can never be made to pay out extra money.”

Singhvi also relied on the alleged manipulation of the NYMEX market on April 20, 2020, referring to proceedings before a US court and submitting that the relevant conduct required examination.

“This very transaction, this very date, was manipulated by a gang of brokers called 'Mish' in the US.”

He argued that MCX and SEBI had powers under their respective rules to intervene where there was market manipulation, but failed to exercise those powers.

“When they find market manipulation, they must intervene. There is a specific provision.”

Singhvi further challenged the reduction in MCX's trading hours during the COVID-19 lockdown. He submitted that trading hours, which ordinarily extended until 11:30 p.m., had been curtailed to 5 p.m., leaving traders exposed to the subsequent collapse in the NYMEX price.

He also referred to the fact that Motilal Oswal Financial Services, through which Dhanera had traded, had sought information from MCX after the negative settlement and had questioned the payout.

Singhvi relied on MCX's own bylaws empowering the exchange to annul trades in cases involving fraud or price manipulation. He referred the Bench to the provision permitting annulment where there was sufficient cause, including “fraud”, “market price or price manipulation” and “designing artificial prices”.

He also relied on a US court proceeding concerning alleged manipulation of the West Texas Intermediate futures market, pointing to allegations of coordinated trading and communications between traders before the negative settlement.

The Bench questioned Singhvi about where such allegations could be examined and whether the exchange was bound by the NYMEX settlement price under the applicable contract specifications.

Singhvi maintained that his case was not against a genuine market-determined price but against a price allegedly affected by manipulation.

“I am bound by a market-found price. I am not bound by a fraudulent or a manipulative price. My case is that if it's a market-found price, I'll be bound.”

Appearing for the respondents, the Senior Advocates Dhruv mehta, Naveen Pahwa and Mukul Rohatgi defended the validity of the settlement mechanism and the application of the NYMEX-linked contract specifications.

The submitted that the petitioners had entered into sophisticated derivative transactions and were bound by the contractual mechanism governing determination of the final settlement price.

The Supreme Court thereafter declined to interfere with the Bombay High Court's judgment.