In this thread I want to talk about the crude oil loss which clients have faced in MCX and what was the role of brokers and what should we learn.

I think we were lucky to see this loss restricted to only around 400 crores. This could have been easily 4000 crores.

More...

What Happened ?

#MCX was open till 5pm on 20th Apr. This was the last day of expiry of the Apr contract.

Why 5pm?

This was because of the current CoronaVirus issue the timing was reduced and markets were closing at 5pm.

cont...

However the equivalent NYMEX contract which was May contract was scheduled to close at around midnight India time.

Means a Good 7 hour plus risk which people were carrying after 5pm for any Open Interest Outstanding. The final settlement price is derived from NYMEX settlement.

Some people are saying that if the timing would have been the same till 11.30pm, the Investors would have saved money and would have squared the position.

I say this could have been a disaster as more people would have brought crude oil when the price was in single digit.

Do you know the physiology of retail investors?

Imaging an instrument like crude oil available at Rs. 20 per barrel and you will not get entices to buy it.

No one would have imagined a negative number for sure.

Just Imagine for a moment. People would have traded full capital

Also, remember the maximum loss had happened due to the final settlement price of minus Rs 2,884 which happened in the last few minutes of NYMEX.

So technically it was beyond the control of Indian traders.

So who is to be blamed?

Regulator ?
Exchange ?
Broker?
Traders ?

I would say this was an exceptional case, something which has never happened.

It was a blessing in disguise that the amount is limited to only 400 crores.

But this highlight the importance of proper RISK MANAGEMENT POLICIES.

Why on earth positions were allowed after 5pm?

Was there proper communication given to the client for the risk attached.

Also, I want to harbour on what is the quantum of loss of each broker.

The top discount broker says INR 10 crores.
A reputed old broker says around INR 80 crores.

You dont know the actual numbers.

My conclusion is that we need to be careful in selecting the right broker. Someone who lays a very high emphasis on RISK MANAGEMENT. I discussed with someone and found that some of actually did not lose money due to their tight risk policies.

cont..

I would always recommend a bank-backed broker with reliable balance sheet and better risk management policies. I know one who has done well in this case.

We should ask all brokers to come open and share their losses so that we can see the extent of the failure.

God saved is this time. We will not be lucky always.

I think preservation of capital should be a primary objective of any investor and focus should be risk management first and profit and loss second.

I learned this hard way. Hope I can sensitise gullible retail.