Under physical settlement, contracts can be classified into Intention Matching, Seller’s Option or Compulsory Delivery; and each of these results in actual physical delivery of the underlying asset.
Intention Matching: For intention matching contracts, buyer/seller needs to mark the intention for delivery during three trading days prior to five trading days before expiry of the contract, including the date of expiry. The intention from both the parties should match for quantity and warehouse location. Only the minimum quantity of the request will be matched. If the intentions do not match, both the requests are cash settled at the final settlement price.
Seller’s Option: In seller’s option contracts, seller has the option of specifying the quantity and warehouse location for delivery. For such contracts, a delivery obligation is created for all valid sellers’ request received by the exchange. Even for seller’s option contract, buyers/ sellers interested in physical delivery of the underlying asset must submit their intention following the same procedures as in Intention Matching. If the seller does not mark his intention for delivery for Seller option contract, and a short position is kept open at the expiry of the contract a penalty of 0.5 per cent on final settlement price is charged. Out of the penalty of 0.5 per cent, 0.45 per cent will be given to the counterparty buyer and balance 0.05 per cent will be transferred to Investor Protection Fund (IPF).
Now, if the seller marks the intention but defaults in delivering the commodities, a penalty of 2.5 per cent and difference between spot price on the settlement day and final settlement price on the expiry date will be levied on the seller. Out of the 2.5 per cent penalty, 2.0 per cent will be transferred to IPF and the balance 0.5 per cent along with the price difference (if any) will be given to the counterparty buyer.
Members giving delivery requests for Seller’s Option and Intention Matching contracts are not permitted to square off their positions once delivery intentions are submitted. A penalty of 5 per cent of the final settlement price on the position squared off, if any, will be levied on the members violating this stipulation.
Compulsory Delivery: In Compulsory Delivery contracts, all the open positions on the expiry date need to be settled through physical delivery. That is, the seller needs to deliver the commodity and buyers need to accept the delivery. If the seller marks the intention for delivery but defaults in delivering the commodities, a penalty of 2.5 per cent and difference between spot price on the settlement day and final settlement price on the expiry date will be levied on the seller. Transfer of penalty fund is effected by following procedure set out under Seller’s Option.
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