Commodity derivatives (MCX) on Zerodha
The commodity derivatives segment on Zerodha provides access to futures and options contracts on the Multi Commodity Exchange of India (MCX), the country’s largest commodity exchange by volume. The segment covers metals (gold, silver, copper, aluminium, zinc, lead, nickel), energy (crude oil, natural gas), and agricultural commodities (cardamom, cotton, crude palm oil). Zerodha also offers access to the National Commodity and Derivatives Exchange (NCDEX) for agricultural commodity contracts.
India’s commodity derivatives market was merged under SEBI’s regulatory umbrella in 2015 after the Forward Markets Commission (FMC) was merged into SEBI pursuant to the Forward Contracts (Regulation) Amendment Act, 2010. This integration brought commodity brokers under the same regulatory framework as equity brokers and enabled equity broker-members such as Zerodha to offer commodity derivatives without a separate licence.
Regulatory framework
SEBI post-FMC merger
Prior to 2015, commodity derivatives were regulated by the Forward Markets Commission (FMC) under the Forward Contracts (Regulation) Act, 1952 (FCRA). The merger of FMC into SEBI on 28 September 2015 brought commodity exchanges, brokers, and participants under a unified securities regulator.
SEBI’s Commodity Derivatives Market Regulation Department (CDMRD) oversees:
- Exchange membership and eligibility norms.
- Margining framework and risk management.
- Warehousing and vault management for physical delivery.
- Position limits for hedgers, speculators, and institutions.
MCX operating framework
MCX was incorporated in 2003 and is headquartered in Mumbai. It operates under a nationwide, electronic, multi-commodity platform. MCX is a publicly listed company on BSE and NSE. Its trading platform is Spark (proprietary). Zerodha accesses MCX through its member code and routes commodity orders via Kite.
MCX’s clearing and settlement is handled by MCX-SX Clearing Corporation (now MCX Clearing Corporation Limited, MCCL).
Commodity option approvals
Commodity options were approved by SEBI in September 2017. MCX launched gold options in October 2017, followed by options on crude oil, silver, and copper. Options contracts are available only on select commodities that meet liquidity thresholds set by SEBI.
Major commodity contracts
Metals
Gold (GOLD)
- Lot size: 1 kg.
- Price quotation: Rs per 10 grams.
- Delivery centre: Ahmedabad; Mumbai.
- Settlement: Compulsory delivery for contracts held at expiry.
- Options: Available (European style, settled against the futures price).
Gold Mini (GOLDM)
- Lot size: 100 grams.
- Suitable for retail participants who cannot afford the 1 kg contract.
Gold Guinea (GOLDGUINEA)
- Lot size: 8 grams. The smallest gold contract on MCX.
Silver (SILVER)
- Lot size: 30 kg.
- Price quotation: Rs per kg.
Silver Mini (SILVERMIC)
- Lot size: 5 kg.
Copper (COPPER)
- Lot size: 2,500 kg.
- Benchmark contract for base metals.
Aluminium, Zinc, Lead, Nickel: Separate lot sizes; less liquid than gold and copper.
Energy
Crude Oil (CRUDEOIL)
- Lot size: 100 barrels.
- Price quotation: Rs per barrel.
- Settlement: Cash settled against the CME WTI crude oil price on expiry day, converted to INR at the RBI reference rate.
Crude Oil Mini (CRUDEOILM)
- Lot size: 10 barrels. Suitable for retail traders.
Natural Gas (NATURALGAS)
- Lot size: 1,250 mmBtu.
- Cash settled against NYMEX natural gas price.
Agricultural commodities
Agricultural commodities on MCX include cardamom and crude palm oil. NCDEX specialises in agricultural commodities such as soybean, chana, castor seed, and guar gum. Zerodha provides NCDEX access through Kite, though liquidity on NCDEX is lower than MCX metals and energy.
Contract specifications: key features
Most MCX commodity contracts have the following characteristics:
- Compulsory delivery: Contracts in metals and energy that are held until expiry result in physical delivery or physical receipt of the commodity. Buyers must arrange vault storage; sellers must deliver to accredited warehouses.
- Delivery centres: MCX has accredited delivery centres and vaults in cities such as Ahmedabad, Mumbai, Delhi, Kolkata, and Chennai. Gold delivery centres are MCX-approved vaults certified under the Hallmarking scheme.
- Price band: MCX applies daily price bands (circuit limits) to prevent runaway price moves. Bands are typically ±3% for most contracts, expanding to ±6% if the previous session hit the limit.
Product codes in the commodity segment
Kite uses the following product codes for commodity derivatives:
NRML
Carry-forward product. Full exchange-mandated margin required. Positions can be held overnight and rolled before expiry. Clients intending to take delivery at expiry must use NRML and ensure physical delivery arrangements.
MIS
Intraday product. Reduced margin (typically 40% of NRML). Auto-squared off before commodity market close.
Commodity trading hours
MCX commodity contracts trade in two sessions:
- Morning session: 09:00 to 17:00 IST for agricultural commodities (shorter session).
- Evening session: 09:00 to 23:30/23:55 IST for metals and energy.
The extended evening session aligns MCX prices with international commodity markets (COMEX for metals, NYMEX for energy) that are active during Indian evening hours. Clients trading in the evening session must plan MIS square-off accordingly; Zerodha auto-squares MIS positions by 25 minutes before the session closes.
Margin requirements
Commodity margins follow SPAN methodology adapted for commodity markets (referred to as MCX-SPAN). Margins vary significantly by commodity and market conditions:
| Commodity | Approximate initial margin (% of contract value) |
|---|---|
| Gold (1 kg) | 4% to 6% |
| Silver (30 kg) | 4% to 6% |
| Crude Oil (100 barrels) | 5% to 8% |
| Natural Gas | 8% to 15% |
| Copper | 3% to 5% |
Margins increase during periods of high volatility. SEBI has the authority to direct MCX to increase margins when speculative activity is deemed excessive.
Brokerage and charges
| Charge | Futures | Options |
|---|---|---|
| Brokerage | Rs 20 or 0.03% per executed order | Rs 20 per executed order |
| MCX transaction charge | 0.0026% of turnover (metals/energy) | 0.0417% of premium |
| Commodity Transaction Tax (CTT) | 0.01% on non-agricultural sell-side | Nil for agricultural; 0.05% for options sell |
| GST | 18% on brokerage + transaction charges | 18% |
| SEBI regulatory fee | Rs 10 per crore | Rs 10 per crore |
| Stamp duty | 0.002% on buy | 0.003% on buy |
Commodity Transaction Tax (CTT) was introduced in the Finance Act, 2013 and applies to non-agricultural commodity futures. Agricultural commodity futures are exempt from CTT. CTT is levied on the sell side at 0.01% of turnover.
Physical delivery mechanics
For clients who intend to take delivery of physical commodities (primarily gold, silver, and copper), the following process applies:
- The client holds an NRML position through expiry without closing it.
- MCX Clearing Corporation issues a delivery notice specifying the quantity, quality (grade), and delivery centre.
- For buyers: funds are debited from the trading account; a Delivery Order (DO) is issued enabling the buyer to collect the commodity from the designated vault.
- For sellers: the commodity must be delivered to the designated vault by the settlement deadline.
Most retail participants on Zerodha do not take physical delivery. Zerodha’s RMS team typically flags near-expiry open positions in delivery-settled contracts and may impose additional margin or request confirmation from the client.
Commodity options
MCX options are European-style options that settle against the futures price of the relevant commodity on expiry. Gold options (options on Gold 1 kg futures), crude oil options, copper options, and silver options are among the most traded.
Key features:
- Strike prices are set at intervals around the prevailing futures price.
- Premium is quoted in Rs per unit of the commodity (e.g., Rs per 10 grams for gold options).
- Options are not physically settled; they settle against the closing futures price.
Tax treatment
Commodity derivative gains and losses are treated as non-speculative business income under Section 43(5) of the Income Tax Act, 1961. This is identical to equity F&O tax treatment.
CTT paid on commodity futures is deductible as a business expense under Section 36 of the Income Tax Act, similar to STT deductibility for equity F&O business income (post the 2016 amendment clarifying this).
Turnover for tax audit purposes is computed as the absolute sum of profits and losses from all commodity trades in the financial year.
Comparison with equity F&O
| Feature | Commodity F&O (MCX) | Equity F&O (NSE) |
|---|---|---|
| Underlying | Physical commodities | Stocks, indices |
| Settlement | Cash or physical delivery | Cash (most); physical for stock F&O at expiry |
| Tax | CTT (not STT) | STT |
| Trading hours | Until 23:30/23:55 IST | Until 15:30 IST |
| Position limits | Commodity-specific; export/import-linked | SEBI-set per underlying |
| Option style | European | European (index); European (stock) |
Common operational considerations
Delivery obligation awareness
Unlike equity F&O where physical settlement applies only to stock derivatives in the expiry week, virtually all MCX commodity contracts that are not closed before expiry result in physical delivery obligations. Retail traders who do not intend to take or give delivery must close positions before the last trading day.
International price correlation
MCX commodity prices are directly correlated with international benchmarks (COMEX, NYMEX, LME). The key driver of INR-denominated commodity prices is the combination of international price and USD/INR exchange rate. This creates a dual exposure for commodity traders: the commodity price and the currency.
Agricultural commodity restrictions
SEBI and the government have, on occasion, suspended futures trading in specific agricultural commodities (e.g., wheat, sugar, soybean oil) to control domestic price inflation. Such suspensions are announced on short notice and can leave traders with positions that must be liquidated immediately. Zerodha communicates exchange notifications to clients via email and Kite alerts.
References
- SEBI Circular SEBI/HO/CDMRD/DMP/CIR/P/2017/55, Introduction of commodity options.
- Forward Contracts (Regulation) Amendment Act, 2010.
- Finance Act, 2013, Commodity Transaction Tax (CTT) provisions.
- Income Tax Act, 1961, Section 43(5) and Section 36.
- MCX Contract Specifications, Gold, Silver, Crude Oil, Natural Gas (current edition).
- SEBI Commodity Derivatives Market Regulation Department, Master Circular.