How to Read The CME Vulnerability:The Impact of Negative Oil Futures Trading RTF
In 2020, the global lockdowns caused by the COVID-19, or coronavirus, pandemic had resulted in a sharp drop in demand for crude oil. This impact was so severe that on April 8, 2020, a proposal to update the Chicago Mercantile Exchange Holdings Inc. (CME) trading rule to permit negative prices was applied to CME's WTI Oil futures contracts; this led to a novel phenomenon in which the closing clearing price of WTI Oil May future was $–37.63/barrel based on fewer than 400 contracts' trading volume in the last three minutes, reflecting less than 0.2% of the total trading contracts volume on April 20, 2020. This occurrence of negative closing clearing price for CME's WTI Oil futures trading, cannot be explained simply by just the principle of supply and demand; instead, it highlights vulnerabilities caused by CME's allowance of negative price trading (based on its trading platform), a decision which brings potential and fundamental challenges to the global financial system.This event challenges not just our basic concepts of 'value' and trading 'price' of commodities and goods that underline our understanding of the framework for the invisible hand and general equilibrium theory in economics established by a few generations of scholars since Adam Smith in 1776 for market economies, but also have wider implications on the fundamentals that underpin our ideas of value and labor in the organization, activity, and behavior of civilizations and individual liberties.The scope of this book is limited to covering the impact of the negative oil futures derivatives' trading between April 20 and 21, 2020. This book focuses on exploring the issues, challenges, and possible impacts on global financial markets due to the negative clearing prices of WTI Oil futures contracts and related problems from different perspectives. Topics covered include the responsibilities and liabilities of the CME; critique to the fundamental theory of economics and the modern understanding of value and labor; and challenges to the global financial systems and businesses and introduction to new methods of application.Contents: Preface — The Fundamental Challenge Caused by CME's Negative Trading Price for WTI Oil FutureAbout the EditorAbout the ContributorsThe CME Vulnerability: The Best Practice and the Impact of Negative Oil Futures Trading Price:The Overview of WTI Crude Oil Futures' Epic Fall (Chern Lu)The Better Way for CME's Execution: Based on the Perspective of Industry's Best Practice Rule (Rongbing Huang and George Yuan)Impact of Negative Oil Price on Risk Measuring (James Zhan)Three Legal Reflections on the 'Crude Oil Treasure' Incident: Starting with the CME Rule Change (Duoqi Xu, Peiran Wang and Yicheng Wang)Why Oil Prices Plunged and Settled Negative:Why Oil Prices Plunged and Settled Negative: A Game-Theoretical Perspective (Chenghu Ma and Xianzhen Wang)Tanker Shipping and Negative Oil Prices: More Than Just the Freight Rates (Cong Sui and Mo Yang)Option Pricing with Shifted Lognormal Model for Negative Oil Prices (Henry Yang)The Paradox of Negative Oil Prices (Bin Zhu)To Meet the Challenge with Negative Price and Management in Practice:The Challenges of Negative Oil Future Price Posed to Risk Managers and Quants (Michael Peng)Negative Asset Pricing and Moral Hazard (Weiping Li)
