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Why is an additional margin charged for Crude Oil & Natural Gas contracts close to expiry?

MCX (Multi Commodity Exchange) collects an additional margin on Crude Oil & Natural Gas contracts on the last 5 trading days before expiry (called “tender period”). The additional margin will be applicable from April 2021 expiry onwards as per this exchange circular.

The additional margin amount (also called the pre-expiry or tender margin) is blocked from your commodity account funds under the ‘delivery margin’ field as shown below:


For instance, the expiry day for the April 2021 Crude Oil contract is on the 19th. The additional tender margin will be levied as a percentage of the contract value in the following manner:

April 13th, 20215%
April 14th, 2021
10%
April 15th, 2021
15%
April 16th, 2021
20%
April 19th, 2021
25%

The additional tender margin on commodities is charged to cover the risk of large price fluctuations in commodity contracts that can happen close to expiry. 

For instance, in April 2020 the Crude Oil contract had expired with a negative price value. This resulted in extraordinary losses for many traders and brokerage firms. The normal margins collected by the exchange were not sufficient to cover the losses. Learn more about the event in this TradingQ&A post

You can also check out this circular on SEBI's Alternate Risk Management Framework to know more about tender or pre-expiry margins.