Commodity derivatives: BSE gets negative price feature

BSE brings negative price feature for commodity derivatives segment

This will help members in checking the readiness of their internal systems and make suitable modifications, if any required, the exchange noted.  (Credit: PTI Photo)

BSE will make available the negative price level feature at its trading system for commodity derivatives segment, the leading exchange said on Tuesday.

This comes following a recent global development in the crude oil derivatives market where trading of derivatives contracts happened at negative prices owing to various underlying factors.

Market experts welcomed the move, saying it is a very progressive step.

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In a circular, BSE informed its trading members of commodity derivative segment that the exchange's trading system has been modified to accept orders and execute trades at negative prices.

To facilitate testing of this feature in the simulation (test) environment, the exchange said that trading price range of Brent Crude Oil futures contracts will be suitably updated to accept orders at negative price levels and execute trades.

The new feature will be made available to members to test from Monday, May 4, 2020, onwards, it added.

According to the exchange, trading members and front-end trading application vendors will be able to place test orders and trade in these contracts at those price levels.

This will help members in checking the readiness of their internal systems and make suitable modifications, if any required, the exchange noted.

Narinder Wadhwa, President of Commodity Participants Association of India (CPAI) welcomed the clarity from BSE on contract specifications and infrastructure capability at trading platform for negative rates especially after the recent crude oil fiasco on MCX and NYMEX. The crude prices went into an unprecedented negative USD 37 per barrel.

"Although we have realised after this episode that they are non comparable contracts for our settlement reference rates because of deliverability factor in NYMEX. Since crude oil contracts on our exchanges are cash settled, in our opinion it should not be negative. At lower end it should be Re 1," he added.

M Sriram Iyer, Senior Research Analyst at Reliance Securities said this is a very progressive step and will make the commodity trading on Indian exchange platform ready for any black swan events as witnessed in the last few weeks on NYMEX.

"We hope other Indian exchanges too implement such systems soon," he added.

Last week, May futures for West Texas Intermediate (WTI) -- a benchmark for US oil -- fell to an unprecedented negative level of USD 37 per barrel level amid concerns over crude storage capacity worldwide and declining demand due to coronavirus pandemic, which halted travel and suppressed economic activity.