Expiry-day square-off right

It might seem like a broker should always close out a client's position before a contract expires, to avoid surprises. The workbook makes clear that is not automatically true.

A member has the right, not the obligation, to leave an existing position open on the last day of a contract. Unless the client clearly says "square this off," the member is under no duty to do so on the client's behalf.

Among the rights of members while dealing with clients, the workbook lists: "Not to square off of an existing position on the last day of the contract unless the client expressly intimates to square off the same." Members are expected to cooperate with the client and explain the implications of not squaring off — but this is explicitly framed as a right of the member, not an obligation. A client cannot presume the member will square off the position simply because no instruction was given.

The workbook explains why this matters particularly in commodities: the declared Final Settlement Price can land at unexpected levels against recently traded prices, due to volatility in the underlying spot market — and physically settled commodity derivatives contracts can involve significant storage and other costs associated with delivery, which a client may or may not actually want to take on.

A client holds an open long position of 5 lots of a base metal futures contract, worth roughly Rs 12,50,000 (illustrative), as it approaches expiry, but gives no instruction to the broker either way. On the last trading day, the broker takes no action and leaves the position open, exercising its right not to square off.

The contract subsequently expires and, because it is physically settled, the client is assigned a delivery obligation on those 5 lots — paying roughly Rs 12,50,000 against delivery, plus storage and transport costs he had not planned for. He cannot later claim the broker was obligated to close the position on his behalf; the workbook is explicit that absent his express instruction to square off, the broker's inaction was within its rights, and the client bears the consequence of not having given clear instructions in time.

Chapter 10, in the "Rights of members while dealing with the client" section, sets this out as a distinct right, immediately after the member's right to purchase and debit a client's account on delivery failure. Expect a question testing whether a member is obligated to square off a client's position on the last day absent instruction — it is not; that is a right, not a duty.

• This is a right of the member, not an obligation — a client cannot assume a position will be squared off automatically on the last day if they gave no instruction.
• The client must "expressly intimate" a wish to square off — silence or ambiguity does not trigger any duty on the member's part to act.
• The rationale is specific to commodities: unpredictable Final Settlement Price levels and real storage/delivery costs on physical settlement, distinguishing this from a purely cash-settled financial derivatives context where the stakes of an unsquared position are typically lower.