World Scientific Publishing Company The CME Vulnerability: The Impact of Negative Oil Futures Trading

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. About the Author <p><strong>Dr George Xianzhi Yuan</strong> is a Distinguished Professor at the Business School, Sun Yat-sen University (Guangzhou, China), the Center for Financial Engineering, Soochow University (Suzhou, China), and Shanghai Lixin University of Accounting and Finance (Shanghai, China). He is also the Editor-in-Chief of the <em>International Journal of Financial Engineering</em> and is on the editorial board of several academic journals.</p> <p>Dr Yuan has rich working experience in academic institutes and the practice of financial and technology sectors, financial engineering, financial mathematics and related big data disciplines from theory to industry practice. He has published more than 150 academic papers and two monographs.</p> <p>Since the 1990s, Dr Yuan has worked at The University of Queensland (Brisbane, Australia), Tongji University (Shanghai, China), KPMG, Deloitte, TXU energy trading company, The Bank of Montreal Group, and other international companies. He established a pricing and measurement risk department for Deloitte China, and has provided professional risk measurement and management services based on the New Basel Accord II and III for Bank of China, Industrial and Commercial Bank of China, Construction Bank, Agricultural Bank of China, China Merchants Bank, and Pudong Development Bank. Dr Yuan plays a leading role in the framework of credit rating systems, digital asset valuation using fintech, and AI and related big data tools for the development of the digital economy.</p> <p>Dr Yuan holds Bachelor, Master and PhD degrees in mathematics, statistics and financial engineering from Sichuan University (Chengdu, China), University of Toronto (Toronto, Canada) and Dalhousie University (Halifax, Canada).</p>