Settlement
Also written Settlement process · Final settlement
The step where the obligations computed by clearing are actually discharged — commodities against funds on a delivery-versus-payment basis, or cash against the settlement price.
In plain language
Settlement is where the money and the goods change hands.
For a cash-settled contract that is one transfer: the difference between the settlement price and where you were marked yesterday. For a delivery contract it is two flows moving together — a warehouse receipt travelling one way and funds travelling the other, neither released until the other arrives. That simultaneity is delivery versus payment, and it is what removes the risk that one side pays and the other does not perform.
The netting rules are asymmetric and the exam knows it. Commodity obligations are netted at the client level and grossed up at the member level. Funds obligations are netted at the member level, which cuts the number of bank transfers sharply.
How it works
Three delivery logics are available on Indian commodity futures, set per contract in the specification:
| Logic | What happens at expiry |
|---|---|
| Compulsory delivery | Every open position must give or take delivery |
| Both options | Delivery happens only if buyer and seller both opt for it; otherwise cash settled at the Due Date Rate |
| Cash settlement | Every open position settles in cash against the Final Settlement Price |
Once delivery obligations are assigned, the seller raises the bill on the buyer at the Final Settlement Price, inclusive of GST — never at the price the trade was originally struck at. The difference between the two was already paid across in daily mark-to-market. The settlement of DVP is made for the full tax-paid invoice value, and exchanges accept the GST rate the seller provides and guarantee settlement at that rate without testing whether the rate is correct.
Obligations from expiring Options on Goods are merged into the futures delivery obligations of the same day, and devolved Options on Futures become futures positions that settle through the futures cycle. Index futures and index options, being cash settled, settle purely in funds.
A worked example
A cash settlement, end to end.
A trader is long one lot of MCX BULLDEX index futures. Lot size 50 units. He bought at 15,000, giving a contract value of 1 x 50 x 15,000 = Rs 7,50,000.
He holds to expiry. On expiry day the index Final Settlement Price is determined after 5:00 pm, from the weighted average traded prices of the constituent futures between 4:00 pm and 5:00 pm. It comes in at 15,120. The previous day's daily settlement price was 15,060.
Final cash settlement = (15,120 - 15,060) x 50 = Rs 3,000
credited on the following morning. Every rupee of the move from 15,000 to 15,060 had already been settled on earlier days through MTM; only the last leg is left for final settlement.
No warehouse, no receipt, no GST invoice, no delivery period margin — index futures carry none of it. Had this been one lot of gold instead, the same expiry would have obliged the short to hand over a kilogram of quality-certified gold against Rs 50,00,000 plus GST.
Why NISM asks about it
Chapter 7 (Clearing, Settlement and Risk Management), sections 7.2, 7.3 and 7.13, with the index and options variants in section 7.12. Expect "transactions involving transfer of ownership of commodities are settled on ____ basis" (delivery versus payment) and questions on which obligations are netted at which level.
Common exam traps
- Commodities net at the client level and gross up at the member level; funds net at the member level. The two halves follow different rules and the exam asks for the difference.
- The bill is always raised at the Final Settlement Price, whatever price the trade was struck at. Candidates who invoice at the traded price double-count the MTM.
- Both options is not the same as compulsory delivery. Under both options, one side declining is enough to force cash settlement at the Due Date Rate.
- The exchange guarantees financial settlement, not gross delivery settlement. It compensates the aggrieved party; it does not conjure the goods.
- Exchanges do not verify the GST rate the seller supplies — they guarantee settlement at whatever rate is given.
- Index futures and index options have no delivery period margin, because there is nothing to deliver.
Where this is taught
Free preparation for NISM Series XVIRelated terms
- Final Settlement PriceThe price at which a commodity derivative is finally settled at expiry — a simple average of the polled spot prices of the expiry day and the two days before it.
- ClearingThe daily accounting step that reconciles what every party owes and is owed on its open and closed positions, and turns a day of trades into one net obligation per member.
- Compulsory deliveryA delivery logic under which every position still open at expiry must give or take physical delivery — neither side can elect to settle in cash.
- Due Date RateThe rate at which an expiring commodity contract is finally settled — the Final Settlement Price, normally the simple average of the polled spot prices of the expiry day and the two preceding days.
- Staggered delivery periodThe window before expiry in which buyers and sellers holding open positions may mark an intention to give or take delivery, spreading deliveries out instead of stacking them on expiry day.