The Overnight Crude Long and a Stop-Loss That Did Not Work
A proprietary trader in Ahmedabad holds long 12 lots of crude oil futures, 100 barrels per lot, bought at Rs 5,900 per barrel. At the end of the trading session the settlement price is Rs 5,720. The account shows a ledger balance of Rs 4,20,000, made up of Rs 2,40,000 cash and a Rs 1,80,000 bank guarantee lodged as collateral. Exchange initial margin is 10% of contract value, and an additional 2% margin was announced that morning. The trader had placed a stop-loss at Rs 5,800 for the whole position, but it did not execute because the contract gapped through that level and subsequently traded at the exchange's daily price band. The broker's risk team wants to square off at the next session. The trader argues that the band will widen and that squaring off will only crystallise a paper loss. Crude oil is a non-agricultural commodity, so CTT applies at 0.01% on the sell side.
1. Compute the mark-to-market loss, the margin requirement and the shortfall. Is the broker entitled to act, and what should it do first?
Read the worked answer
Contract value at settlement = 12 x 100 x 5,720 = Rs 68,64,000. Margin at 12% = Rs 8,23,680.
MTM loss = 12 x 100 x (5,900 - 5,720) = Rs 2,16,000. Available collateral after the loss = 4,20,000 - 2,16,000 = Rs 2,04,000.
Shortfall = 8,23,680 - 2,04,000 = Rs 6,19,680, i.e. the position is covered to only about 30% of the required margin.
The broker is entitled, indeed obliged, to act: a member must collect margin before carrying a position and must square off or collect on shortfall as per exchange norms. The right sequence is to issue a margin-call notice with a deadline, freeze further position-taking, and then square off only the quantity needed, not automatically the whole position, unless the shortfall persists. The trader's 'paper loss' argument is not a defence: the loss is real to the member's clearing obligation the moment it is debited.
2. The stop-loss at Rs 5,800 never executed. Explain why, and assess whether a stop-loss order is an adequate substitute for a margin-based risk system.
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A stop-loss becomes a market order only once the trigger price trades. If the contract gaps from above Rs 5,800 straight through it, the order fills at the next available price, here closer to Rs 5,720. Worse, if the contract is locked at the daily price band, there may be no counterparty at all: the band is a circuit breaker, not a liquidity guarantee, and the position cannot be exited until the band widens or the market reopens.
A stop at Rs 5,800 would have capped the loss at 12 x 100 x 100 = Rs 1,20,000, about 1.7% of contract value, which is inside the 12% margin. That looks prudent, but the protection is illusory in a gap.
The real control is the margin and limit framework: upfront margin collection, intraday mark-to-market alerts, a per-client position cap, and a buffer above minimum margin. A stop-loss is a trading tool, not a risk system, and the broker should not have allowed the position to run with collateral so far below requirement.
3. Assume the broker squares off at Rs 5,640 the next morning. Compute the final trading loss, the CTT on the closing sale, and state the trader's rights.
Read the worked answer
Final loss = 12 x 100 x (5,900 - 5,640) = Rs 3,12,000, against Rs 2,16,000 at the previous settlement, so the delay cost the trader Rs 96,000.
Sale value = 12 x 100 x 5,640 = Rs 67,68,000. CTT at 0.01% on the sell side = Rs 676.80, in addition to brokerage, exchange transaction charges, stamp duty and GST, which together may exceed the CTT.
The trader's rights are procedural, not economic. The broker must act under the signed risk disclosure and the client-broker agreement, issue a contract note for the square-off within the prescribed time, give prior notice where the rules require it, and execute at a price reasonably available in the market rather than at a price arbitrarily chosen. The trader can complain to the broker and escalate to the exchange's investor grievance process if the square-off was not preceded by a margin call or was executed at an off-market price. He cannot recover the loss itself: it flows from his own failure to meet margin, not from the broker's act.