How to minimize risks for contracts with negative value
In order to insure brokers against negative prices, the Bank of Russia plans to minimize the risks of settlement futures execution. According to the institution, a number of new measures will prevent the situation, which was observed in April last year. At that time futures contracts traded at negative prices caused huge losses for the players who operated at the Moscow Exchange. The capital market has already introduced changes, which make trading in futures contracts available at a price below zero. However, the conflict with traders has not been solved, and the participants of the exchange demand compensation of losses, and have filed a class action in court.
In order to improve the processes, the Bank of Russia offered the Moscow platform a number of events that will minimize the risks for bidders at a negative price. First of all, it concerns information education, in the framework of which derivatives market players are familiarized with risks. Exchange participants are introduced to the trading instruments that will allow them to operate at a negative price for futures. They are taught to analyze contracts with external pricing, which are available for operations at the exchange. In addition, the Bank of Russia offers the platform and its participants to develop an action plan for complex situations to reduce the possibility of losses. It is also important to understand and track those assets that have the potential to reduce their value to negative.
On April 20 last year, the value of a futures contract with an execution date the next day decreased to $8.8 per barrel, which is the lower limit of the price corridor. Once this mark was reached, Moscow Exchange participants were unable to conduct transactions, although trading on the New York market continued. On April 21, the Moscow Exchange fulfilled the contract and its price was -37.6 dollars per barrel, which resulted in huge losses for brokers. According to victims’ estimates, the amount of damage was fixed at the level of 1.5-1.7 billion rubles. This caused the brokers to go to court.
The analysts of the Bank of Russia do not rule out that such a situation may happen again. The reason is an increase in risks, which is observed in a number of futures market instruments. These assets have always been highly volatile, but due to the impact of a pandemic the situation is becoming increasingly unstable.
The Moscow Exchange has already started to implement recommendations from the Bank of Russia. The market representatives do their best to minimize risks for brokers even in case of negative prices.
The measures announced by the Bank of Russia do not affect the processes in the market itself, but they will help the participants to avoid situations that may lead to losses.