The top U.S. commodities markets regulator warned exchanges and brokerages that they should be prepared for volatility and possible negative pricing for certain contracts, nearly one month after U.S. oil futures plunged into negative territory for the first time in history.
Last month, the expiring U.S. crude futures contract slumped to a minus $37.63 a barrel as panicked investors bailed out of positions upon realizing that many would be forced to take physical delivery of oil without a place to put it. Holders of that contract are required to take delivery at the main storage hub in Cushing, Oklahoma, but storage has filled rapidly there as market demand plunged by more than 30%.
The U.S. Commodities Futures Trading Commission, the federal agency overseeing futures and options trading, said in a letter dated Wednesday that exchange operators and brokerages need to consider their internal risk controls and protect markets from manipulation.
The notice comes before next week's expiration of the U.S. West Texas Intermediate crude contract for June delivery.
"We are issuing this advisory in the wake of unusually high volatility and negative pricing experienced in the May 2020 physically-delivered WTI contract, and related reference contracts, on April 20," the CFTC said in its letter.
The CFTC told exchanges in its letter that they are responsible for preventing manipulation, price distortion. It also said exchanges need rules to give them emergency authority to either liquidate or transfer open positions in a contract, or potentially suspend trading in a particular contract if needed.
The regulator also said brokerages need to monitor customer accounts to make sure that they do not default on positions or fall below required levels of margin.
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