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How Are MCX Contracts Settled

28 Jul 2023

Introduction

Settlement is an integral part of financial markets that ensures their smooth functioning and orderly conclusion of trades. India's premier commodity derivatives exchange (MCX) settlement plays a pivotal role in defining obligations and outcomes among market participants. Hence, understanding how MCX contracts settlement occurs is necessary for traders or investors interested in trading at MCX. In this article, we will understand the settlement process of MCX contracts. But first, let's understand the basics. 

What Is Trading In Commodities?

Commodity trading has seen tremendous growth over the last decade. This investment is easier than ever, and investors use commodities as hedges and diversification tools. Moreover, commodity trading has seen tremendous growth over the last decade. This investment is easier than ever, and investors use commodities as hedges and diversification tools.

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Commodities are tangible goods we consume daily, such as grains, fuel, cotton, and sugar; gold, copper and zinc metals; etc. Commodities serve as raw material inputs used to manufacture various finished goods. Hence, it can be seen as tangible physical goods which can be bought and traded between parties. The broad classification of commodities is as follows:

  • Agriculture: copper, grains, sugar, rubber, palm oil, etc.
  • Metals: zinc, copper, iron, lead, brass, etc.
  • Bullion: silver, gold, and platinum.
  • Energy: natural gas, crude oil, uranium, etc.

Commodity prices are determined by demand and supply, with demand directly proportional to its price and supply has inverse proportion to the price. Furthermore, pricing fluctuates based on geopolitical tensions, government policies, the global economy, and production factors. Commodity trading entails multiple contracts whose values derive from the commodity they represent. In India, such contracts are futures, options and spot contracts.

  • Spot contracts provide instant trading and settlement, while commodity futures trade at an agreed-upon future price. 
  • A futures buyer is legally obligated to purchase their commodity at this predetermined rate in the futures from sellers. Also, sellers must sell at this predetermined rate as part of their future contracts.
  • An options contract allows the buyer to exercise their right but not commit to purchasing an asset at an agreed-upon future price.

How Does Commodity Trading Take Place In India?

India's commodity trading occurs on the Multi Commodity Exchange or MCX. To trade in this exchange, an individual must open a commodity trading account with an MCX broker. Next, they will help guide your decisions when trading. Also, the individual must link this account with their DEMAT account

How Are MCX Contracts Settled?

Contrary to shares and securities contracts, commodity contracts involve delivery at the end of each contract, either through delivery or cash settlement. The delivery involves the transfer of physical goods following the contract's termination. However, cash settlement refers to the ownership transfer from buyer to seller against cash.

Motilal Oswal offers commodities trading. However, Motilal Oswal doesn't offer physical settlements in MCX contracts. Contract profits or losses are calculated based on the price difference between buying and selling contracts. In expiry, all ITM commodity options contracts will automatically convert to their respective futures contracts of the current month. Any ITM contracts held until expiry will require margins equal to its futures contract to devolve on the following trading day. 

Devolvement refers to converting an ITM option contract into its counterpart futures contract with a similar underlying. Devolvement typically occurs when commodity options reach In the Money (ITM). When this occurs, their strike price becomes either the buy average for take delivery or the sell average for futures contract give delivery. 

Final Words

So this is all about the MCX contract settlement process. When trading in the commodity market, it is important to understand the settlement process so that you can take proactive steps when necessary. 

 

Related Articles: Know the Difference between Forward and Futures Contract | Commodity options and futures contracts? | Why Different Derivative Contracts Have Different Lot Size

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