The Bombay High Court upheld the validity of the Multi Commodity Exchange of India Limited (MCX) circular fixing the final settlement price of crude oil futures at a negative rate during the unprecedented market collapse triggered by the COVID-19 pandemic. The Court held that crude oil futures are cash-settled derivative contracts linked to an agreed benchmark, and traders cannot seek judicial intervention to rewrite contractual settlement mechanisms after suffering commercial losses.

The dispute arose after Dhanera Diamonds and other experienced commodity traders entered into Crude Oil April 2020 Futures Contracts on the MCX platform. Under the contract specifications, the Due Date Rate (DDR) was linked to the settlement price of the corresponding crude oil futures contract traded on the New York Mercantile Exchange (NYMEX). Amid the global economic disruption caused by the COVID-19 pandemic and an unprecedented shortage of oil storage, the NYMEX contract settled at a historic negative price of USD (-)37.63 per barrel on 20 April 2020. MCX initially fixed a provisional settlement price of ₹1 per barrel but subsequently issued a circular fixing the final DDR at ₹(-)2,884 per barrel, resulting in substantial losses for traders holding net long positions.

The petitioners challenged the circular, contending that a negative price was legally impermissible, that the reduction in trading hours during the lockdown deprived them of an opportunity to square off their positions, and that MCX and SEBI ought to have exercised emergency powers to annul the trades or cap the settlement price at ₹1 per barrel.

“At settlement, no conventional sale or purchase takes place; the contract merely structures the financial payout based on an agreed external benchmark.”

The High Court observed that crude oil futures are sophisticated financial derivatives that are settled entirely in cash and do not involve physical delivery of the commodity. It held that the settlement mechanism merely determines the financial obligations between counterparties based on the benchmark agreed under the contract, irrespective of whether the benchmark price turns positive or negative.

Rejecting the plea to substitute the settlement price with ₹1 per barrel, the Court held that such a direction would fundamentally alter the contractual framework and unjustly deprive counterparties of the benefits arising from the agreed settlement mechanism. It also noted that the petitioners were experienced traders who had voluntarily retained their positions until expiry despite having opportunities to square off or roll over their contracts.

“Exchange settlements are final, irrevocable and binding, and courts cannot rewrite contractual settlement mechanisms merely because traders incur commercial losses.”

The Bench further observed that the revised trading hours introduced during the pandemic had not been challenged when they were implemented, and therefore could not subsequently be relied upon to invalidate the settlement process. Holding that interference with established exchange clearing and settlement mechanisms would undermine market certainty and financial stability, the High Court dismissed the batch of writ petitions and upheld the validity of the impugned MCX circular.