Commodity settlement is the phase that follows trade execution, where positions are cleared, obligations fulfilled, and contracts closed.
This article explains the entire lifecycle, from the moment a trade is matched to its final resolution, whether by cash or physical delivery.
Knowing this flow helps prevent penalties, forced actions, or settlement failures.
What Happens After You Execute a Commodity Trade
Once a trade is executed, the exchange system initiates a chain of settlement operations. The first action is the matching of trade orders between the buyer and seller. This match is then routed to the clearing corporation for further processing.
The clearinghouse assumes counterparty risk and updates margin accounts as per mark-to-market pricing. Traders must maintain required margins, failing which the clearing member initiates risk-reduction measures or auto-square-off.
Settlement operations begin at this stage, moving beyond trade execution into a formal clearing cycle. This includes margin revaluation, position confirmation, contract expiry monitoring, and delivery instruction tracking.
This phase is critical to settlement integrity. Errors in margin funding, expiry handling, or delivery compliance can trigger penalties, forced closures, or regulatory flags.
Trade execution refers to the transaction agreement. Settlement refers to the actual financial or physical fulfillment. The two are structurally different and managed by separate entities within the exchange ecosystem.
The Settlement Lifecycle, Step-by-Step Flow
Before any profit or delivery takes place, a commodity trade must pass through a structured settlement lifecycle.
This process begins the moment a trade is executed and continues through a series of post-trade obligations enforced by the exchange and clearinghouse.
Understanding this flow is critical, not only to avoid penalties or forced closures, but also to actively manage margins, meet regulatory deadlines, and ensure smooth closure of your position.
The following step-by-step breakdown outlines how settlement actually works across most commodity exchanges, including cash and physical contracts.
Step 1: Trade Execution and Order Matching
A commodity trade is initiated and matched on the exchange. Both buy and sell orders are confirmed with timestamps and order IDs. This forms the legal basis for the contract.
Step 2: Trade Routing to Clearing Corporation
The matched order is immediately routed to the clearinghouse. The clearing corporation becomes the central counterparty (CCP), replacing both buyer and seller to ensure trade integrity.
Step 3: Initial Margin Blocking
Initial margin is blocked from both parties’ accounts to secure the position. This margin acts as a safeguard against default during the holding period.
Step 4: Daily Mark-to-Market (MTM) Settlement
At the end of each trading day, the clearinghouse calculates the gain or loss on open positions based on the settlement price. The difference is credited or debited to the trader’s margin account in cash.
Step 5: Ongoing Risk and Margin Enforcement
Throughout the contract period, traders must maintain sufficient margins:
- Variation Margin: Adjusts for MTM changes
- Exposure Margin: Covers sudden price shocks
- Delivery Margin: Applied closer to expiry for physical contracts
Shortfalls may trigger margin calls or auto square-off.
Step 6: Contract Expiry and Final MTM
On the expiry date, the final MTM is settled. This closes all cash-settled contracts. For delivery-based contracts, the system checks for delivery intent and obligation.
Step 7: Final Settlement, Cash or Delivery
- Cash-Settled: Profit/loss is finalized and credited to the trader’s account.
- Physically Settled: Delivery instructions are matched, and commodity delivery is initiated as per contract specs.
Standard Timeline Overview (MCX/NSE/CME Aligned)
| Day | Event | Description |
| T | Trade Execution | Orders matched and initial margin blocked |
| T+1 | MTM Settlement | Daily gain/loss booked; margin ledger updated |
| T+2 | Final Settlement | Cash payout or physical delivery allocation |
(Timeline may vary by asset or exchange. Refer to MCX/CME calendars for contract-specific rules.)
What Type of Settlement Will You Face: Cash vs Physical
Commodity contracts conclude in either cash settlement or physical delivery. Understanding the difference is essential for managing obligations, logistics, and profit realization.
A cash-settled contract is closed by paying or receiving the net difference between the entry price and final settlement price. There is no need to handle the physical commodity. These contracts are typically preferred by short-term traders and speculators.
A physically settled contract requires the actual delivery of the commodity upon expiry. The seller must deliver the specified quantity and grade to the designated warehouse or delivery center, while the buyer must accept and arrange payment.
Settlement Comparison: Cash vs Physical
| Feature | Cash Settlement | Physical Settlement |
| Fulfillment | Net difference in price is settled | Actual commodity is delivered or received |
| Logistics Involved | None | Yes, requires warehousing and transport |
| Common Users | Traders, speculators | Hedgers, producers, and large-scale buyers |
| Margin Risk at Expiry | Limited to price fluctuation | Includes delivery margin and storage conditions |
| Examples | Crude Oil (CME), Natural Gas (MCX), select contracts | Gold, Cotton, Mentha Oil, Steel (MCX) |
How to Identify Settlement Type
Settlement type is defined in the contract specification document published by the exchange. Look under the “Settlement Type” or “Contract Terms” section on MCX, NSE, or CME platforms. This detail determines whether you are obligated to settle in cash or arrange physical delivery.
Delivery Intent Declaration (If Physical)
For physically settled contracts, traders must submit a delivery intent form through their broker or clearing member before expiry. Failure to declare intent may result in compulsory delivery or penalty charges. Exchanges set cutoff times (usually 2–3 business days before expiry) for submitting intent.
Example Insight:
- Gold (1kg, MCX): Physical delivery mandatory at designated vaults.
- Cotton: Delivered through accredited warehouses based on grade.
- Natural Gas (Henry Hub, CME): Both cash and physical variants exist depending on the contract chosen.
Your Role in the Settlement Process: What You Must Do
Traders play an active role during the post-trade phase. Settlement is not fully automated, missed actions can trigger penalties, delivery defaults, or forced contract closure.
1. Maintain Required Margins
Keep the initial margin and variation margin at or above required levels. Failure to meet margin calls may lead to square-off by the broker or exchange.
2. Monitor Contract Expiry
Know your contract’s expiry date and last trading day. These determine when final MTM is applied and whether physical delivery obligations begin.
3. Declare Delivery Intent (If Applicable)
If you’re holding a physically settled contract, submit a delivery intent before the cut-off date. This informs the clearinghouse of your choice to make or take delivery.
4. Follow Broker Alerts and Cut-Offs
Brokers issue instructions via email, app, or trading dashboard. This includes delivery instructions, margin updates, and contract rollover alerts. Ignoring them may lead to forced exit or penalties.
Pre-Expiry Checklist: 5 Mandatory Actions
| Action | Description |
| Monitor margin ledger | Ensure margin balances are sufficient per daily MTM |
| Track contract expiry | Verify expiry calendar and trading schedule |
| Submit delivery intent (if needed) | Use broker portal/form before cut-off |
| Read broker communications | Follow action items and compliance instructions |
| Review exchange circulars | Confirm contract-specific settlement protocols |
Settlement Mistakes That Can Cost You, and How to Avoid Them
Mistakes in the settlement phase often result in forced exits, penalties, or unintended delivery obligations. Many are avoidable through basic compliance and timeline awareness.
Margin Shortfall → Auto Square-Off
If margin falls below the minimum threshold and is not replenished on time, the broker may square off your position without consent. This could lock in losses during unfavorable market movement.
Real Case: MCX Circular (Ref. No. MCX/MEM/796/2023), “Failure to maintain SPAN + Exposure Margin on crude oil contracts led to forced liquidation of 420 contracts.”
Missed Delivery Declaration → Penalty & Delivery Risk
Failure to declare intent for delivery in physically settled contracts triggers automatic delivery obligation. This incurs warehousing, transportation, and compliance charges, or delivery rejection penalties.
Example: A trader in cotton futures failed to file intent and was auto-assigned delivery worth ₹17 lakh, with additional warehousing charges from MCX-accredited center.
Forgetting Expiry → Unintended Physical Delivery
Holding a position beyond the last trading day results in automatic conversion to delivery mode. Traders often overlook this in low-volume contracts.
Red Flag: Brokers issue warning pop-ups and circulars 3 days before expiry. Ignoring them often leads to unwanted physical settlement.
Examples of Real Trader Losses
- Case 1: A retail trader in silver mini futures forgot to square off before expiry, assigned delivery worth ₹3.2 lakh. No logistics ready, ended in default.
- Case 2: Natural gas contract MTM loss of ₹48,000 due to shortfall in margin during volatile price action, broker executed forced square-off near day-low.
Broker Notices You Must Understand
| Notice Type | Meaning |
| Margin Shortfall Alert | Immediate fund transfer needed to avoid square-off |
| Delivery Intimation | Submit form or system input to express delivery intent |
| Contract Expiry Reminder | Square-off recommended; after expiry, delivery obligations apply |
| Position Freeze Warning | Your position will be locked until obligations are cleared |
Tip: Always review broker app notifications, emails, and dashboard alerts 48–72 hours before expiry.
Final Settlement Summary: Know the Path, Avoid the Pitfalls
Settlement isn’t just a backend process, it’s a trader’s operational responsibility. Errors at this stage can nullify months of strategy or profits.
Understanding the lifecycle and staying alert to deadlines is essential.
The 5-Step Settlement Lifecycle
- Trade Match – Your order is executed and routed to clearing.
- Margin Block – Initial margin is debited immediately.
- MTM Settlement – Daily gain/loss adjusted through your margin account.
- Delivery Intent (if applicable) – Submit form ahead of cut-off.
- Final Settlement – Contract is closed via cash or delivery.
The 3 Non-Negotiable Trader Responsibilities
- Track expiry and margin calls, Especially in volatile contracts.
- Submit delivery intent on time, For all physically settled contracts.
- Review broker/exchange alerts, Ignorance leads to forced delivery or square-off.
Always Know Before You Trade
Check the contract specification for:
- Settlement type (cash vs physical)
- Expiry date and last trading day
- Margin rules and delivery protocols
Trader’s Settlement Checklist: Never Miss a Step
| Step | Why It Matters |
| Know your contract’s expiry | Prevents auto-delivery or forced exit |
| Maintain margin funds daily | Avoids square-off during MTM |
| Check if it’s cash or physical | Defines delivery or payout obligation |
| Submit delivery intent (if required) | Mandatory for physical settlement |
| Follow broker communications | Brokers alert deadlines, margin calls, rollover info |
FAQs
Q1. Do all commodity contracts result in physical delivery?
No. Many contracts, especially index-based or speculative ones, are cash-settled. Physical delivery typically applies to contracts linked to warehoused goods (e.g., metals, agri).
Q2. What if I take no action before expiry?
If no delivery intent is submitted, brokers may:
- Square off your position before expiry
- Assign delivery if it’s a physical contract
- Impose penalties as per exchange rules
Q3. Are settlement processes identical across MCX, NSE, and CME?
The core steps (trade → margin → MTM → delivery) are consistent.
But:
- Timelines, delivery centers, and margin calculations differ by exchange and contract type.
Q4. Can I exit my position before settlement?
Yes. You can exit any open position before the expiry date. Doing so avoids delivery obligations and final settlement processing.
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