Why is an additional margin charged for energy futures contracts close to expiry?
Multi Commodity Exchange(MCX) collects an additional margin on Crude Oil, Natural Gas, Crude Oil Mini and Natural Gas Mini contracts during the last 5 trading days before expiry, which is known as the tender period. This margin amount, also called the pre-expiry or tender margin (WEB), is blocked from the funds in the commodity account and is displayed in the Delivery margin field.
Example Scenario
The expiry day for the April 2021 Crude Oil contract is the 19th. The additional tender margin will be levied as a percentage of the contract value in the following manner:
| April 13th, 2021 | 5% |
|
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.
In April 2020, the Crude Oil contract 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. To learn more, visit tradingqna.com/t/the-crude-episode-the-risk-of-running-a-brokerage-business/75479.
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