Trading

FYERS policies on Commodities

“There are decades where nothing happens, and there are weeks where decades happen” – Vladimir Lenin

In fact, there are days! This precisely implies to the unprecedented meltdown in the WTI crude oil contract listed on NYMEX (New York Mercantile Exchange). Since the MCX (Multi Commodity Exchange) relies on the NYMEX rates for pricing its crude oil contracts and therefore impacted many commodity traders and brokers to its consequential impact on the settlement price. The May futures on the New York exchange had settled at an unprecedented negative rate: Minus $37.63 a barrel. For those who want to get a good understanding of the Crude oil markets to check out the Crude oil Chapter on our School of Stocks. 

 

So what happened exactly?

Crude oil is one of the most actively traded commodities on MCX and It is a cash-settled monthly derivative contract.  Crude oil has had a huge amount of volatility in the last few weeks and has continuously breached it’s threshold limits many times followed by cooldown period. On Monday 20th April, MCX Crude oil contract was trading at Rs 965, the market woke up the next day to an overnight crash in crude oil prices at NYMEX, where prices plunged to a negative $37 and the final settlement price decided to -Rs 2880 per barrel.

 Until Monday, the margin required to buy one lot of crude oil is approximately Rs. 80,000 and as per the open price i.e 1385, the contract value is 1,38,500 so, the margin required is just at 58% of the contract value. Crude Oil April contract settled at -Rs 2880 which is down by 398% or a loss of Rs. 3.85 lac for a trader who is holding a long position from it’s previous close. Here the loss incurred by the client is over and above the margin money he brought in and the onus is on the brokerage firms to recover the amount from its clients. There were 11100 contracts open at 5 pm on Monday, which means a killion loss of Rs 450 crores for the Commodity brokerages and the exchange went ahead to debit the money from brokers’ accounts to settle the contract. Fortunately, we don’t have any exposure here!

 

Risk management policies in Commodities contracts

Due to this settlement debacle, affected brokers have filed a petition in the Bombay High Court to determine the fate of this controversy. It is interesting to note that no amount of money/margin collected from the clients can cover such kind of price risk and many big brokerages are staring at clients defaults. Commodity brokers and market veterans feared that the market may see a negative expiry again and hence it’s a need of the hour to take curative measures to safeguard ourselves and facilitate uninterrupted trading in commodities. Therefore, we’re introducing the following risk management policies in physical and cash-settled commodities and will be applicable hereon. 

  1. An additional margin of 300% of the contract value will need to be introduced one day prior to expiry day on all open cash-settled commodity contracts. If you have a position without sufficient margins (including additional margin) to hold a futures/options position before expiry, your position will be squared off by our RMS team anytime during the day. Commodity futures contracts namely – Crude oil, Natural Gas, CPO (Crude Palm Oil) are cash-settled.  
  2. Intraday products (Intraday, CO, BO) will not be allowed during the last two days of expiry for cash-settled commodity contracts. 
  3. MCX commodity contracts that come under compulsory delivery will be closed off before the staggered delivery tender period i.e.  5 days prior to the expiry date to avoid physical delivery. This policy will be applicable to all the commodity contracts which fall under compulsory delivery, namely –  
     Agri Contracts  – Mentha Oil, Rbdpmolein & Cotton
    – Base Metal Contracts – Alumni, Nickel, Copper, Lead mini and Zinc mini
    – Gold Contracts – Gold Petal & Gold Guinea
    – Precious Metal Contracts – Silver and GoldMFor example refer to this latest post Gold Petal & Gold Guinea Contracts Expiry On 30th April, 2020 – Compulsory Delivery on our Notice Board.

As a brokerage, we have to take the necessary measures to safeguard everyone’s interests and such risk management measures are a result of the ongoing changes in the financial environment. We encourage traders to estimate the risks carefully before entering into trades and rollover near-month positions to the next/far month contracts or close the positions before RMS square-off is triggered as per our policies.

Tejas Khoday

Tejas Khoday

Tejas is the Co-Founder & CEO at FYERS, the youngest team to get NSE’s broker license. He has a specialization in finance and has over 10 years of work experience spanning across proprietary trading, risk management, and broking. Tejas & his team started FYERS, a technology-focused brokerage as a mission to transform the trading/investment landscape in India.

16 Comments

  • Avatar Kaushik says:

    Very informative, thank you

  • Avatar Bhupathi says:

    It is good to here Fyers has come up with this kind of risk measure to safe guard their clients can we except trading with Crude in CO, Intraday, & BO in coming days.

  • Avatar Sukerthi says:

    Very nice information given coz the article is in lay man terms and very understandable. And as a broker Fyers is taking all the necessary steps to safe guard the investors capital. And the best part is they are always updated.

  • Avatar Raju Mahendar says:

    A nagative price! Does that mean, sellers are paying traders to take oil off their hands?

  • Avatar soorya says:

    It’s most important to have an account with the broker who manages risk well during the uncertainties. Fyers RMS team is really doing an excellent job

  • Avatar Raghavendra S. says:

    Sir, how can small trader like avoid such huge risk in future?

  • Avatar Harsha says:

    Very useful information.

  • Avatar Amit Pandey says:

    Means no one took the long position on crude oil on that day?

  • Avatar Pravin Kamatkar says:

    With the advanced technology, I think it’s possible to send a mail to the concerned traders alerting them on this, else, a pop-up message on that USER ID’s screen can be managed, else, an SMS can be sent ELSE, a mail can be sent only to the concerned trader, alerting on this. I think, either of this all of this can be easily done, which will help FYERS as well the customer well in time.

    • Tejas Khoday Tejas Khoday says:

      Hey Pravin, Doing that on a monthly basis to those clients that have positions may not be feasible, hence we have implemented these policies that will apply to any client that has such positions. Other than that, we do communicate with clients in case they need to roll over their positions or need to know something that they may not be aware of to the best of our abilities. but it may not be possible all the time.

  • Avatar Ravi Gupta says:

    Good job

  • Avatar Gunjan Mehra says:

    Hi Tejas, how much was Fyers exposed to this and how did you overcome?

    • Tejas Khoday Tejas Khoday says:

      Hey Gunjan, we were not exposed to the expiry. I’d say a combination of careful risk management and good fortune.

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