CDS/MCX product circle on Zerodha
Overview
Indian financial markets are divided into distinct regulatory segments, each governed by its own set of SEBI and exchange regulations, and each requiring specific regulatory approvals for both brokers and clients. At Zerodha, the “product circle” refers to the set of market segments a client’s account is enabled to trade in. By default, a Zerodha account is enabled for equity trading on the NSE and BSE – both the cash (equity delivery) and derivatives (equity futures and options) segments. Additional segments, specifically currency derivatives (traded on the NSE’s CDS segment and the BSE’s CD segment) and commodity derivatives (traded on the Multi Commodity Exchange, MCX), require separate activation.
The product circle concept reflects the regulatory structure: SEBI governs equity and currency derivatives markets, while commodity derivatives are governed by SEBI following the merger of the erstwhile commodity market regulator (FMC) with SEBI in September 2015. Despite the unified regulatory framework, the operational infrastructure for commodity derivatives (MCX and NCDEX) is separate from the equity and currency derivatives infrastructure, and clients must specifically opt in to access each segment.
Currency derivatives segment (CDS)
What is CDS
The Currency Derivative Segment (CDS) allows trading in currency futures and currency options. The primary underlying assets are four currency pairs: USD-INR, EUR-INR, GBP-INR, and JPY-INR. These contracts are settled in Indian rupees based on the Reserve Bank of India’s reference rate at expiry, making them cash-settled instruments.
Currency derivatives serve two main purposes:
Hedging: Importers, exporters, and others with actual foreign currency exposure use currency derivatives to hedge their exchange rate risk. A company that has invoiced an export in US dollars but expects payment in three months can sell USD-INR futures to lock in the exchange rate.
Speculation: Traders who have a view on currency movements can express that view through currency futures without holding physical foreign currency.
Eligibility for CDS trading on Zerodha
Under SEBI’s regulatory framework, currency derivative trading is permitted for:
- Persons with genuine hedging needs (exporters, importers, Indian investors with foreign currency assets).
- Retail investors and traders, subject to position limits that distinguish hedgers from speculators.
SEBI mandates that Indian residents trading in currency derivatives do so on recognised exchanges (NSE, BSE, or Metropolitan Stock Exchange) and that the trading is within prescribed position limits. There are no complex suitability criteria for retail access to the standard USD-INR, EUR-INR, GBP-INR, and JPY-INR contracts, though SEBI has imposed restrictions on USD-INR contracts for certain categories of participants beyond a specified position limit (requiring demonstration of underlying exposure).
To enable CDS trading on Zerodha, the client submits a request through Console or the account management interface. Zerodha activates the CDS segment, and the client can then access currency futures and options on Kite.
Margin and settlement for currency derivatives
Currency derivatives on CDS use a margin-based framework similar to equity F&O. SPAN margin and exposure margin are collected upfront. Positions are marked to market daily, and settlement at expiry is in cash based on the RBI reference rate. Currency derivatives have a contract cycle with monthly and quarterly expiries, and the contract size for USD-INR futures is USD 1,000 (with settlement in rupees).
Position limits
SEBI and the exchanges prescribe position limits for currency derivatives to prevent excessive concentration and to ensure the market reflects genuine hedging and price discovery rather than speculative distortion. Zerodha’s Kite interface displays a warning when a client is approaching or has reached the prescribed position limit for a currency contract.
MCX commodity derivatives
What is MCX
The Multi Commodity Exchange of India (MCX) is India’s primary commodity derivatives exchange, trading futures and options on a range of physical commodities including metals (gold, silver, copper, aluminium, zinc, lead, nickel), energy products (crude oil, natural gas), and agricultural commodities. MCX is operated by Multi Commodity Exchange of India Ltd, which is a publicly listed company and is regulated by SEBI.
MCX futures are cash-settled for most contracts, though some agricultural contracts provide for physical delivery. Gold and silver futures, which are the most actively traded MCX contracts among retail participants, are cash-settled.
Enabling MCX trading on Zerodha
To trade on MCX through Zerodha, the client must activate the MCX segment. This requires completing a separate Know Your Client (KYC) process specific to the commodity derivatives segment, as required by SEBI’s regulations for commodity market participants. In practice, for most existing Zerodha clients who have already completed full KYC for equity trading, the MCX activation requires minimal additional documentation – typically just the activation request through Console.
Once activated, MCX futures and options are accessible in Kite alongside equity and currency instruments. MCX instruments appear in search results and can be added to the watchlist and traded using the same order interface as equity derivatives.
Margin for MCX contracts
MCX contracts use SEBI-prescribed SPAN margin requirements. The margin percentages vary by commodity category: precious metals like gold typically have lower margin percentages (reflecting lower price volatility) while energy products like crude oil have higher margin requirements (reflecting higher volatility and price risk).
Collateral margin from pledged equity shares or mutual fund units may be used to meet MCX margin requirements, subject to the same cash component rules that apply to equity F&O. Zerodha’s Kite margin display shows the unified margin picture across all enabled segments.
Key MCX contracts
The most actively traded MCX contracts among Zerodha’s retail client base are:
- Gold and Silver: Precious metal futures with monthly expiries. Gold futures are available in two contract sizes (Gold Mini at 100 grams and Gold Petal at 1 gram in some configurations, in addition to the standard 1 kg contract).
- Crude oil: Crude oil futures priced at NYMEX WTI-linked rates, with monthly expiry.
- Natural gas: Monthly expiry contracts linked to NYMEX Henry Hub prices.
- Base metals: Copper, aluminium, zinc, lead, and nickel futures.
Commodity transaction tax
A commodity transaction tax (CTT) is levied on non-agricultural commodity derivatives transactions, including gold, silver, and energy futures. CTT is distinct from the securities transaction tax (STT) levied on equity trades. Zerodha displays the applicable CTT in the order summary for MCX trades and reports it in the client’s tax P&L for the relevant financial year.
NCDEX and other exchanges
In addition to MCX, the National Commodity and Derivatives Exchange (NCDEX) operates a commodity derivatives platform focused on agricultural commodities (guar, soybean, chana, castor seed, etc.). Zerodha provides access to NCDEX through a similar product circle activation process. NCDEX is less actively used by Zerodha’s retail client base compared to MCX, since agricultural commodity derivatives attract a more specialised participant base.
Regulatory rationale for segment separation
The product circle structure reflects SEBI’s regulatory philosophy that different market segments carry different risks and serve different purposes. Equity trading is the most widely accessible segment. Currency and commodity derivatives, while regulated under the same SEBI umbrella, have specific characteristics – linkage to foreign exchange markets, physical commodity price dynamics, and commodity-specific risk factors – that justify a separate activation step. The activation step ensures that clients have explicitly acknowledged that they are entering a distinct segment with its own risk profile and margin framework.
References
- SEBI Circular on currency derivatives eligibility and position limits, latest edition.
- SEBI Circular, “Merger of FMC with SEBI and commodity derivatives regulation,” 2015.
- MCX, “Contract specifications for key commodity derivatives,” MCX.in.
- Zerodha Support Documentation, “Enabling CDS and MCX segments,” support.zerodha.com.
- Zerodha Z-Connect Blog, “Trading currency and commodity derivatives on Zerodha,” Zerodha.com.
- NSE, “Currency Derivatives Segment: operational framework,” NSE.in.