Physical delivery of commodities

Today’s classroom explains how physical delivery happens at commodity futures exchanges.

Most commodity futures contracts expire on the 20th of the month. If there is no intention to take or give delivery, the buyer or the seller has to close his position before the expiry date.

Do note that there is a system of staggered delivery in agri futures contracts, where, right from the 11th of the month, the seller can tender delivery and the buyer has to keep funds available to make the payment.

If you are a seller…

A seller who is willing to give delivery has to book warehouse space with one of the WSPs (Warehouse Service Providers) accredited by the exchange. The samples of the goods received are sent to the assaying agency for testing and quality checks. The exchange accepts the commodity only if it meets the specifications of the contract. If you keep your futures contract open after the 11th, it is necessary to provide delivery. Note that if you fail to make delivery of goods within two working days (since initiation of delivery) you will have to pay a penalty.

If you are a buyer…

If you want to take delivery of a commodity on the futures exchange, you need keep the contract open until expiry and also ensure that the necessary funds are available in your account. Also, remember that buyers have to pay for a pre-expiry margin of 1.5 per cent (on contract value) everyday for the last 11 days. The pre-expiry margin received by the exchange shall be refunded after the transfer of goods and title. The time period available to settle the contract amount is two working days referred generally as T+2.

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