MCXCCL Alternate Risk Management Framework: Navigating Near Zero & Negative Prices

In a proactive move to safeguard market integrity amidst volatile commodity price movements, the Multi Commodity Exchange Clearing Corporation Limited (MCXCCL) has issued Circular No. MCXCCL/RISK/130/2025, dated July 3, 2025. This circular outlines the implementation of an Alternate Risk Management Framework (ARMF) to address scenarios where commodity prices approach near zero or turn negative—a phenomenon observed in global markets during unprecedented events.

Commodities Under ARMF

The ARMF specifically targets commodities and indices susceptible to extreme price fluctuations, notably:

• Crude Oil
• Natural Gas

These commodities have historically exhibited significant volatility, making them prime candidates for the ARMF's protective measures.

Conditions Triggering ARMF Activation

The ARMF is not a blanket policy but is activated under specific market conditions indicative of potential price crises:

1. Significant Price Decline: A drop exceeding 50% in commodity/index prices within 20 trading days, assessed by comparing intra-day highs and lows.

2. International Precedents: Implementation of similar measures by international exchanges or clearing corporations for benchmark contracts.

3. Options Market Indicators: Introduction of options contracts with strike prices near zero or negative values.

4. Other Indicative Conditions: Any additional market developments suggesting the likelihood of negative pricing.

Upon identification of such conditions, MCXCCL, in consultation with MCX, will review the situation and communicate the activation of the ARMF through a separate circular.

Risk Management Measures Under ARMF

Once activated, the ARMF enforces stringent risk management protocols to mitigate potential market disruptions:

1. Absolute Minimum Initial Margins (August 2025)

To ensure adequate collateralization, the following absolute minimum initial margins per lot are stipulated:

• Crude Oil: ₹227,700
• Crude Oil Mini: ₹22,770
• Natural Gas: ₹155,300
• Natural Gas Mini: ₹31,060

These margins represent the higher value between the standard percentage-based margin and the absolute minimum, reinforcing financial safeguards.

2. Extreme Loss Margins (ELM)

ELMs are imposed to cover potential losses from extreme price movements, calculated at 1.25% of the threshold price or as an absolute value, whichever is higher:

• Crude Oil: ₹1,625
• Crude Oil Mini: ₹163
• Natural Gas: ₹1,250
• Natural Gas Mini: ₹250

3. Withdrawal of Spread Margin Benefits

To prevent underestimation of risk during volatile periods, all spread margin benefits are withdrawn under the ARMF, ensuring that positions are fully collateralized.

4. Adoption of Bachelier Option Pricing Model

Recognizing the limitations of traditional models in negative pricing scenarios, the Bachelier model, which accommodates negative prices, will be employed for option pricing, enhancing the accuracy of valuations.

Implications for Market Participants

The implementation of the ARMF underscores MCXCCL's commitment to maintaining market stability and protecting stakeholders from unprecedented price movements. Traders and clearing members are advised to:

• Monitor Market Conditions: Stay vigilant for indicators that may trigger the ARMF.

• Adjust Risk Management Strategies: Align trading and hedging strategies with the heightened margin requirements and the absence of spread benefits.

• Update Pricing Models: Incorporate the Bachelier model into option pricing frameworks to reflect the new valuation approach under the ARMF.

By proactively adapting to these measures, market participants can navigate periods of extreme volatility with greater resilience and confidence.

For further details, refer to the official circular: MCXCCL Circular No. MCXCCL/RISK/130/2025