Commodity Margins and Mark-to-Market Settlement on MCX Explained

Key Takeaways

1. In commodity trading on MCX, a futures position needs only a margin, which is a portion of the full contract value, to be maintained with the broker.
2. Initial margin is collected upfront, while additional or special margins can be applied under applicable exchange rules during periods of high volatility.
3. Mark-to-market settlement means profits and losses on open futures positions are calculated and settled every trading day based on the daily settlement price.
4. If your margin falls short, you have to add funds, or your broker may square off the position.
5. Option buyers pay the premium upfront, while futures traders and option sellers must meet the applicable margin requirements. Futures positions are subject to daily mark-to-market settlement.

Many traders enter commodity trading after looking at the margin amount alone. It looks small compared to the value of a gold or crude oil contract.

But margin is only the starting point. Futures positions are subject to daily mark-to-market settlement. If the price moves against you, the resulting loss can reduce your available funds and may lead to a margin shortfall.

Through this blog, you can understand how margins work on MCX, how daily mark-to-market settlement is calculated, and how to avoid a margin shortfall.

What Is Margin in Commodity Trading?

Margin is the amount you must keep with your broker to take a position in a commodity futures contract. It is not a fee. It serves as a financial buffer against potential losses and helps manage the risk of open positions.

On MCX, the margin is a percentage of the total contract value, so you block only that portion instead of paying the full value. The percentage varies by commodity contract and market conditions; it is not a fixed percentage for all MCX contracts.

This is why commodity trading is called a leveraged activity. A small price movement can create a large profit or loss compared to the margin you have deposited.

Types of Margins on MCX

Here are the common margins that apply:

• Initial Margin: The margin required to open a futures position. It is calculated using the applicable risk based margin method. 
• Extreme Loss Margin: This is additional margin that is intended to cover potential losses beyond those covered by initial margin.
• Additional Margin/Special Margin: Additional or special margins may be imposed by the exchange under applicable rules. The conditions and positions to which they apply can differ.
• Delivery Margin: Delivery-period margin may apply when a contract enters its delivery period. The timing and amount depend on the contract specifications.

SEBI's upfront margin framework requires brokers to collect applicable margins before providing exposure to clients. Margin requirements and the rules for verifying their collection depend on the applicable regulatory framework and exchange requirements.

What Is Mark-to-Market Settlement?

Mark-to-market (MTM) is the daily process of settling profits and losses on open futures positions. At the end of each trading day, MCX fixes a daily settlement price for every contract. Your position is valued at this price.

If the price has moved in your favor, the gain is credited to your account. If it has moved against you, the loss is debited. Daily settlement continues while the futures position remains open, subject to the exchange's settlement rules.

How Mark-to-Market Works: A Simple Example

Suppose you take a futures position with an initial margin of ₹1,00,000. For this example, assume the contract value is ₹10,00,000 and the required margin remains ₹1,00,000 throughout the period. These figures are hypothetical and do not represent actual MCX margin requirements.

The table below shows how daily gains and losses affect the funds available in your account.

What Happens if Your Margin Falls Short?

When your account balance falls below the margin required, it is called a margin shortfall. Here is what usually follows:

• Your broker may ask you to add funds before a specified time.
• If the shortfall is not addressed, your broker may reduce or square off the position according to its risk policy and applicable rules.
• A penalty may apply under the relevant exchange rules

This is why active commodity trading needs regular monitoring, especially in volatile contracts like crude oil or natural gas.

Common Doubts About Margins and Mark-to-Market

Is margin money a charge I lose?

No. Margin is not a fee. It is used to meet the applicable requirements for your position. Your available funds can change due to losses, profits and other obligations. Any remaining eligible margin is released after the position is closed and the applicable obligations are settled.

Does mark-to-market apply to commodity options?

Option buyers pay the premium upfront and are not subject to daily MTM settlement on the purchased option in the same way as futures traders. However, the option's market value can change, and the buyer can lose the premium paid. Option sellers must meet the applicable margin requirements, and their risks can be substantial.

Why did my margin requirement change overnight?

The exchange can revise margins based on volatility, price levels and contract expiry. Higher volatility can lead to higher margins.

How mastertrust Helps With Commodity Trading

mastertrust offers a commodity trading account on mastertrust.co.in that lets you trade futures and options on MCX contracts such as gold, silver and crude oil.

You can access different features available on the platform before placing an order such as tracking daily MTM on open positions, adding funds from the same platform. If you are new to MCX contracts, you can read our guide on MCX futures contracts, lot size, margin and expiry and the common beginner mistakes in commodity trading.

With regard to fees, mastertrust charges Rs. 20/- per order for Stocks, F&O and Commodity. Account opening is zero, which keeps the starting cost simple for anyone entering commodity trading. Check the mastertrust pricing summary for the current charges and applicable terms

Final Thoughts

Margin determines the funds required to open and maintain a futures position, while mark-to-market settlement records daily gains and losses.

Before entering a commodity futures trade, check the applicable margin, keep sufficient funds available to meet potential shortfalls, and monitor your position regularly. Remember that margin requirements can change and losses can exceed the amount initially deposited.

Frequently Asked Questions (FAQ)

1. What is the margin in commodity trading?

The margin is the amount of money that must be deposited with the brokerage firm for entering into and maintaining a position in the futures market.

2. How is mark-to-market calculated on MCX?

Open positions are valued daily at the settlement price fixed by the exchange. The difference from the previous day is credited or debited to your account.

3. What happens if I don't add funds after an MTM loss?

Your broker may square off the position as per its risk policy, and a penalty for margin shortfall may also apply under the relevant exchange rules.

4. Are MCX margins fixed?

No. Margins can change based on volatility, price levels and contract stage, as decided by the exchange.

5. Is commodity trading suitable for beginners?

It depends on your understanding of leverage, margins and risk. Beginners should understand the contract terms and potential losses before trading.

6. Can I check margin requirements on mastertrust?

Yes. You can view the margin required for a commodity contract on the mastertrust platform before placing your order.