Bank of Russia presents a set of proposals based on analysis of negative futures prices during trading at PJSC Moscow Exchange

The Bank of Russia took a close look at the situation that arose during trading at PJSC Moscow Exchange (hereinafter, the Exchange) and was related to the expiration of oil futures contracts for Light Sweet Crude Oil and their settlement at negative prices. Based on the analysis, the Bank of Russia developed a set of suggestions on how to mitigate similar risks in future, improve the stability of the Russian financial market and protect the investors.

These suggestions were sent to the Exchange for further discussion with trading participants, including through consumer committees. They cover the following issues:

• the need to provide market participants with more detailed disclosures on the risks related to traded instruments (in particular futures and options), as well as information on how the risk parameters of traded instruments and trading suspension mechanisms are used, all this to be presented in a manner that is clear and accessible for most investors;
• the need to monitor information on external pricing contracts traded on the Exchange and disclose and communicate collected information to trading participants in cases where such information can have a significant impact on the trading process;
• resolving the issues of standartisation and regulation of the principles for changing instruments’ risk parameters and making special decisions in case of emergency;
• development and disclosure of the list of traded instruments, prices for which could potentially dip into negative territory;
• the need to assess strengths and weaknesses of the difference in time of organised trading, as compared to foreign trading facilities, regarding the instruments that have other instruments (indicators) traded on foreign exchanges as an underlying asset. Then it is necessary to discuss the results of this assessment with the Bank of Russia and decide on the appropriate trading time.

In addition, the Bank of Russia expects the professional community to consider the possibility of providing services related to the acquisition of the instruments in the derivatives market only to investors (clients) who fully understand and accept derivative market risks, and (or) consider taking measures to limit clients’ losses.

The Bank of Russia notes that global practices of using derivatives market instruments point to higher risks for investors, mostly related to the very nature of these instruments, as well as their historical volatility and unpredictability of market anomalies that can affect organised trading. In the context of the coronavirus pandemic these aspects were particularly evident during commodity derivatives trading (also due to the specifics of their settlement and a significant drop in demand).

The Bank of Russia points out that the situation with negative prices may happen again to some contracts traded on the Exchange. This statement is also supported by the US regulator CFTC.

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28.07.2020 00.00.00