Commodity futures contracts can be either cash-settled or physically settled. Below is an explanation of the different settlement types and how they work.

Futures Contracts

The Multi Commodity Exchange (MCX) has two modes of settlement for commodity futures contracts:

• Cash Settlement: In cash settlement, contracts are settled on the expiry day at the due date rate declared by the exchange. The settlement involves no physical exchange of the underlying commodity.

• Physical Delivery Settlement: Physical delivery settlement involves the actual delivery of the commodity. The seller delivers the commodity equal to the lot size to the buyer from an exchange-defined delivery warehouse.

• Types of Physical Delivery Settlement: Staggered Delivery: The exchange can mark any open contract for delivery during the delivery intention period. Even if you close your position after it is marked for delivery, you are still obligated to fulfill the delivery.

Compulsory Delivery: All contracts that remain open on the expiry day must be settled through physical delivery.

At Navia, we do not offer physical delivery of commodities. Therefore, clients are required to close their open positions before the delivery period starts.

Options Contracts: Commodity options that are Close to the Money (CTM) at expiry are devolved into the respective futures contract. This means that if you hold a CTM options contract at expiry, you must maintain a margin equal to the futures contract margin on the expiry date to allow it to devolve into a futures contract the next trading day.

Note: If the exchange cannot match your contract with a counter-party, your In-The-Money (ITM) options trade will be cash-settled instead of being devolved into a futures contract.

What is Devolvement in Commodity Options and How Does It Work?

Commodity options prices are based on the underlying commodity futures contracts, not the spot market. For instance, crude oil options are based on crude oil futures prices rather than the spot price of crude oil. In this way, commodity options are essentially derivatives on futures contracts.

Devolvement into Futures Contracts: Devolvement refers to the conversion of ITM/CTM option contracts into futures contracts upon expiry. If you hold an ITM option, it will automatically convert into a futures position at expiry. However, a futures position requires margin, so exchanges introduce a "Devolvement Margin" a few days before the option's expiry to ensure you have enough funds.

Devolvement Margin Schedule:

• T-2 Days: 25% of the underlying futures margin is charged.
• T-1 Day: 50% of the underlying futures margin is charged.
• Expiry Day (T Day): If the option is not closed, it converts to a futures contract, and 100% of the futures margin is required.

Navia’s Risk Management Policy on Devolvement

To manage the risks associated with devolvement, Navia implements the following policy:

1. Sensitivity Report: The exchange provides a sensitivity report 4 days before expiry to identify likely ITM and CTM options.
2. Blocking Expiry Contracts: 2 working days before expiry, Navia blocks the opening of new positions in these options.
3. Client Notification: Navia informs clients on a best-effort basis about the required devolvement margins and any shortfalls.
4. Square Off: On expiry day, Navia will square off all ITM and CTM options positions to avoid physical delivery.

Key Considerations:

• Brokerage Fees: A 0.25% brokerage fee is charged for physically settled contracts due to the additional processing effort.
• Interest Charges: If your account goes into a negative balance due to insufficient margins, an interest of 24% per annum will be charged.
• Selling Delivered Units: Units delivered through physical settlement can only be sold after T+1 day, once they are credited to your Comris Account.