Commodities - Expiry Day / Physical Settlement / Devolvement
Some commodity futures contracts are cash-settled whereas some are physically settled. Learn more about the settlement types of commodity futures and options contracts below:
MCX has two different modes of settlement for its commodity contracts. They are:
1. Cash Settlement- These contracts are cash settled on the expiry day at the due date rate declared by the exchange
2. Physical Delivery Settlement - Delivery of the commodity equal to the lot size is given to the buyer(long position) by the seller of the contract from the exchange defined delivery warehouse.
Physical delivery settlement can also be of two types:
- For all such ITM and CTM options, exchanges will start assigning ‘Devolvement Margin’, this means you will have to fund your account with enough margin money to carry forward the option position. 25% of underlying futures margin will be charged on the beginning of T-2 days and 50% of underlying futures margin will be charged at the beginning of T-1 day where ‘T’ refers to the expiry day of the Options contract. At the end of the T day (after expiry) – the options will get converted to futures contract (if not closed) and 100% of the futures margins would apply. If you holding a deep ITM option, then the profits arising out of this position will be considered to offset a portion of the margins required
- How much margin, expiry dates, tender date etc will vary based on the commodity
- On expiry of options contract, the open position shall devolve into underlying futures position as follows:-
- Long call position shall devolve into long position in the underlying futures contract
- long put position shall devolve into short position in the underlying futures contract
- Short call position shall devolve into short position in the underlying futures contract
- Short put position shall devolve into long position in the underlying futures contract
- All the OTM contracts will be closed automatically with zero price
- All options contract belonging to ‘CTM’ option series shall be devolved only on ‘explicit instruction’ for devolvement by the long position holders of such contracts failing which they will expire worthless.
- All In the money (ITM) option contracts, except those belonging to ‘CTM’ option series, shall be devolved automatically, unless ‘contrary instruction’ has been given by long position holders of such contracts for not doing so.
- CTT will be charged on the devolved contracts and the clients should have the sufficient margin on the next day to avoid exchange penalties.
- Devolved contracts of the current month will be closed as per the future contract expiry.
- There will not be any margin charged to the OTM contracts on the day prior to the expiry of the contracts on the expiry day.
Margin calculation with Premium
On the first day margin will get charged, based on the premium if the option contract is in profit, so in this case the margin requirements will be as follows,
- Option Contract profit- Premium - margin applicable on the 1st day,
- If the Option is loss , premium will not be considered and 25% of the margin is applicable on the 1st day,
What is the effect of the devolvement margin in the accounting process?
Presently this margin is not part of the span file and it is provided by the exchange at the end of the trading day. So the back office will debit this margin in the back end and this devolvement margin is not reflected in the trading system.
- Devolvement margin is not part of the span file
- Devolvement margin is not uploaded in the front end.
Navia’s risk management Policy on Devolvement.
Navia shall follow the following process and shall square off the entire ITM and CTM contracts before devolving to the future contract. The Process is given below.
- Sensitivity Report provided by exchange prior 4 days from the expiry day.
- Blocking the expiry option contract 2 working days prior from the expiry in NON-Square off Mode (Block fresh open position)
- Informing to the clients on best effort basis about the levy of devolvement margins and the shortfall in margins, if any after the levy.
- Square off the all ITM & CTM option open position after auto square off execution at the option expiry day.
- All the OTM contracts expire worthless and it will be zero
- Short position settlement happens based on the counter buyer consent. If you have open hedge positions on expiry day, it may result in a net-off. In such an event, these positions won’t be carried forward. If you have Long futures and short call option, the short call option will be devolved into a short future position after 11:30 pm on the expiry day. In such a case, the positions will be netted off and these won’t be carried forward.
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