Bombay High Court Upholds Negative Crude Oil Futures Settlement on MCX
The Bombay High Court has rejected a series of writ petitions filed by commodity traders who challenged the Multi Commodity Exchange (MCX) over its decision to settle April 2020 crude oil futures contracts at a negative price. The traders also sought to annul these trades, a request denied by the Securities and Exchange Board of India (SEBI). The case, titled Dhanera Diamonds & Ors v. SEBI & Ors, was presided over by Justices RI Chagla and Advait M Sethna.
The traders, represented by Dhanera Diamonds, had approached the court to direct the market regulator SEBI to annul the trades in crude oil futures that expired on April 20, 2020. This was after the New York Mercantile Exchange (NYMEX) crude prices fell below zero amid the COVID-19 pandemic shock.
In their judgment, Justices Chagla and Sethna found no legal basis to overturn the settlement of these futures contracts. Justice Chagla affirmed SEBI’s stance that the petitioners, being sophisticated commercial traders, had knowingly chosen to maintain their long positions until the contract’s expiration, banking on a potential price recovery.
“The traders, having chosen to retain their net long positions at expiry, cannot now argue that these trades, which they consciously decided not to settle, should not be concluded at a negative rate,” Justice Chagla stated. He further noted that SEBI was not obligated to nullify trades simply because some traders incurred significant losses.
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The court also addressed the potential repercussions on counterparties who had profited from the challenged settlement circular. “Annulment would have had a severe and adverse impact on the other brokers and clients who accepted the circular and completed settlements based on it. Their trades and profits would have been unfairly nullified,” the judgment noted.
Justice Sethna, concurring with the decision, underscored that the MCX circular of April 21, 2020, which stipulated that crude oil futures would be settled at the “Due Date Rate” (DDR) based on NYMEX crude’s front-month settlement price in rupees, was consistent with MCX’s regulatory framework. “There is no ambiguity in the circular dated April 20, 2020,” he remarked.
Regarding the issue of negative pricing, Justice Sethna highlighted that no evidence suggested NYMEX crude prices had always been positive. He also observed that there was no public interest warranting interference in this commercial decision, which aimed to maximize profits.
“As a writ court, we find it neither just nor appropriate to intervene for traders facing financial losses due to market downturns,” Justice Sethna concluded.
The traders were represented by Senior Advocates Darius Khambata and PN Modi, with law firms M&M Legal Ventures and Dewani Associates representing some traders. Senior Advocate Mustafa Doctor represented SEBI, with The Law Point law firm advocating for them. Senior Advocates Zal Andhyarujina and Janak Dwarkadas represented the exchange and its clearing corporation, with Wadia Ghandy & Co as their legal counsel.
