How to handle commodity physical delivery risk on Zerodha

Compulsory physical delivery is the defining characteristic that separates commodity futures from cash-settled derivatives like USDINR currency futures or equity index futures. On MCX, every non-agricultural commodity derivative – including crude oil, gold, silver, copper, zinc, aluminium, natural gas, and others – is subject to compulsory physical delivery if the open position is not closed before the contract’s tender period begins.

This guide explains the delivery mechanism, the timelines that matter, the consequences of default, and the step-by-step process for avoiding or managing delivery obligations on Zerodha.

Regulatory framework

SEBI’s compulsory delivery mandate

SEBI circular SEBI/HO/CDMRD/DMP/CIR/P/2018/96 dated 12 June 2018 directed that all commodity derivatives (excluding agricultural commodities covered by a separate framework) on recognised exchanges in India shall be settled by compulsory physical delivery. This replaced the earlier option of cash settlement for several commodity contracts.

The rationale stated in the circular is to align the futures market with the physical commodity market, reduce the risk of manipulation through purely cash-settled contracts, and improve price discovery for commodities consumed and produced domestically.

Before this circular, several MCX contracts (including some metal futures) allowed cash settlement at the exchange-determined final settlement price, making it easier for retail traders to hold positions to expiry without delivery risk. That option no longer exists for the affected contracts.

MCX bye-laws and delivery rules

MCX bye-laws (available at mcxindia.com) govern the delivery procedure in detail. Key provisions:

• Delivery intention: In the tender period, a participant with a short position must file a delivery intention through the exchange. The exchange matches it with a long position.
• Delivery centre and warehouse: Delivery occurs at MCX-empanelled warehouses (accredited by SEBI-registered Warehousing Development and Regulatory Authority, WDRA). Locations vary by commodity.
• Commodity specification: The commodity must meet the exchange’s quality specification (for example, Gold 995 purity, Silver 999 purity, Crude Oil specific API gravity and sulphur content).
• Penalty for delivery default: MCX bye-law provisions specify a penalty of 3 percent of the contract value for any delivery default, plus the cost of the exchange procuring the commodity through an auction (buy-in) or selling it at market. In practice the total cost of default often exceeds the margin deposited.

Key dates and timelines

Every MCX commodity contract has a specific schedule that traders must know. The following are typical patterns; always verify the exact dates on the MCX website for each contract and expiry.

These dates shift slightly based on public holidays. Check the MCX holiday calendar at the start of each month.

The tender period in detail

The tender period is the window during which delivery matching occurs. Once the tender period starts:

1. Short position holders must formally file a delivery intention through MCX (via their broker, which in this case is Zerodha’s commodity desk).
2. MCX matches short delivery intentions with long position holders.
3. Once matched, both parties are obligated to complete delivery – the short to deliver the commodity to the designated warehouse, and the long to make full payment and take possession.
4. The exchange’s clearing house (MCX SX Clearing Corporation Limited, or the designated clearing corporation) oversees financial settlement.

During the tender period, a short position holder who has not filed a delivery intention may be compulsorily assigned. A long position holder who is matched but cannot pay will be in default.

What Zerodha does with unhedged positions

Zerodha’s Risk Management System (RMS) monitors all open positions as they approach expiry. According to Zerodha’s stated policy (documented on support.zerodha.com):

• Zerodha will attempt to square off commodity positions that are heading into the delivery period, at approximately three to four days before the last trading day, or earlier if margin deterioration triggers a squareoff.
• This squareoff is done at market price, which may be at a circuit limit or at a wide bid-ask spread, particularly for illiquid far-month contracts or during volatile market conditions.
• Zerodha does not guarantee the price at which the forced squareoff will occur.
• If the forced squareoff is not possible (for example, because the contract has hit a circuit limit and there are no buyers/sellers), the exchange’s delivery procedures will take over and the client will face delivery default penalties.
• Delivery default charges and auction losses are passed on to the client.

This means Zerodha’s intervention is a safety net, not a guarantee. The safest course is always to square off yourself, well before the deadline.

Step-by-step procedure

Step 1: Identify the last trading day and tender period

Before entering any commodity futures position:

1. Go to mcxindia.com > Market Data > Contract Specifications > select the commodity and contract month.
2. Note the Last Trading Day and the Tender Period Start Date (also called the “Delivery Period Start Date” in some MCX documents).
3. Write these dates in your trading journal or calendar, with an alert set at least one week before the tender period start.

Kite displays the contract expiry date in the contract detail panel, but does not prominently display the tender period start date. Rely on the MCX website for this.

Step 2: Assess your delivery capability

Ask yourself:

• If long: Can you pay the full contract value (lot size x price per unit x number of lots) and arrange receipt of the physical commodity from an MCX warehouse? For Gold Mini (10g), this may be feasible. For Crude Oil (100 barrels), it almost certainly is not for an individual retail trader.
• If short: Do you physically possess the commodity (or have warehouse receipts for it) in the required specification and quantity? Almost no retail trader does.

If the answer to both questions is no – which is true for the overwhelming majority of retail traders – treat the tender period start as your hard deadline for squareoff.

Step 3: Square off before the tender period begins

Open Kite and go to the Positions tab. For each open commodity futures position that is approaching expiry:

1. Click Exit next to the position.
2. Select Limit as the order type and enter a price close to the current market price. Avoid Market orders in commodity futures, as bid-ask spreads can be wide, particularly for less liquid contracts or during off-peak hours.
3. Monitor the order in the Orders tab. If unfilled, adjust the limit price.
4. Confirm the position is zero in the Positions tab.

Do this at least three to five business days before the last trading day, and earlier for contracts with earlier tender period starts.

Step 4: If you are already in the tender period

If you have missed the squareoff deadline and the tender period has started:

1. Contact Zerodha support immediately. Go to support.zerodha.com and raise a ticket, or call the commodity desk directly.
2. Zerodha’s RMS will attempt a forced squareoff. This may be at a price significantly below (for longs) or above (for shorts) the fair market price, because the tender-period book is typically thin.
3. Note any penalty communications from MCX/Zerodha. These will appear in your ledger as exchange-imposed charges.

Step 5: If delivery is unavoidable

If squareoff failed (for example, due to circuit limits) and you have been assigned delivery:

• Long position: Zerodha’s commodity desk will contact you with payment instructions and warehouse details. You must pay the full contract value and arrange to collect or store the commodity at the MCX warehouse. Vault charges (handling, storage, insurance) are additional.
• Short position: You must deliver the commodity in the specified quality and quantity to the designated MCX warehouse within the exchange’s prescribed timeline. A warehouse receipt (negotiable instrument) is issued by the WDRA-accredited warehouse and tendered to MCX.

For most retail traders, this situation is best avoided entirely by following steps 1 through 3 diligently.

Managing delivery risk systematically

The most effective approach is procedural:

1. Never hold commodity futures positions without knowing the tender period date.
2. Set a personal cutoff of at least five business days before the last trading day – more conservative than the minimum and accounts for unexpected market closures or system outages.
3. Use calendar alerts. MCX publishes the holiday calendar for the year in advance. Identify every month’s commodity expiry dates and tender period starts at the start of each month.
4. Reduce position size as expiry approaches. If you want to maintain exposure to the commodity, roll to the next contract (square off the expiring contract and buy the next month).
5. Avoid adding new positions in a contract that is within two weeks of expiry. Open the next available expiry instead.

Charges related to physical delivery

Conflict-of-interest disclosure

The WebNotes Editorial Team has no financial relationship with Zerodha, MCX, or any commodity broker. No brokerage referral arrangement exists. All regulatory references are drawn from publicly available SEBI circulars and MCX bye-laws.

Related guides

• How to trade crude oil futures on MCX via Zerodha
• How to trade gold mini futures on Zerodha
• How to trade silver micro futures on Zerodha
• How to compute commodity margin on Zerodha
• How to calculate SPAN margin on Zerodha
• Zerodha commodity segment
• Zerodha MCX membership
• Zerodha commodities
• MCX
• SEBI
• Commodity transaction tax
• Kite, Zerodha’s trading platform

References

1. SEBI Circular SEBI/HO/CDMRD/DMP/CIR/P/2018/96 dated 12 June 2018, Compulsory delivery in commodity derivatives, Securities and Exchange Board of India.
2. MCX Bye-Laws and Business Rules (current version), Multi Commodity Exchange of India Ltd, mcxindia.com.
3. SEBI (Warehouse Development and Regulatory Authority) Rules 2010, Warehousing Development and Regulatory Authority (WDRA), wdra.gov.in.
4. MCX Circular regarding delivery procedures and tender period schedules (updated periodically), mcxindia.com.
5. SEBI Circular SEBI/HO/CDMRD/DMP/CIR/P/2021/020, Margining framework for commodity derivatives, Securities and Exchange Board of India.
6. Zerodha support article: “Commodity delivery at Zerodha”, support.zerodha.com.
7. Finance Act 2013, Section 116, Commodity Transaction Tax, Ministry of Finance, Government of India.