What is physical settlement in MCX?

What is physical settlement in MCX?

The Multi Commodity Exchange of India (MCX) offers physical settlement for certain commodity futures contracts. Physical settlement means that upon the contract's expiry, the seller must deliver the actual commodity, and the buyer must take delivery of the commodity. Here's an overview of how physical settlement works in MCX:

Key Points of Physical Settlement:

  1. Eligible Commodities:
    • Not all commodities are eligible for physical settlement. It typically applies to specific commodities such as gold, silver, crude oil, and certain agricultural products.
  2. Delivery Period:
    • The delivery period starts a few days before the contract expiry and continues until the expiry date. During this period, participants must inform the exchange of their intention to deliver or take delivery.
  3. Intention to Deliver or Take Delivery:
    • Sellers: Must submit a delivery intention indicating the warehouse where the commodity will be delivered.
    • Buyers: Must submit a delivery intention indicating the warehouse where they intend to take delivery.
  4. Quality and Quantity Specifications:
    • The commodity delivered must meet the quality and quantity specifications defined by MCX. These specifications ensure standardisation and fairness in the delivery process.
  5. Warehouse Receipts:
    • Commodities must be delivered to approved warehouses, and warehouse receipts are issued. These receipts are then transferred to the buyer as proof of delivery.
  6. Marking for Delivery:
    • On the expiry date, the exchange matches the delivery intentions of buyers and sellers. The matching process ensures that all delivery obligations are met.
  7. Settlement Price:
    • The final settlement price is determined based on the closing price on the expiry date. This price is used to settle any outstanding positions and determine the final payment amounts.
  8. Payment and Delivery:
    • The buyer must make the payment to the seller, and the seller must deliver the commodity to the designated warehouse. The warehouse receipts are then transferred to the buyer, completing the settlement process.