Tender period margin
Also written Delivery period margin · Tender period / delivery period margin
An extra margin charged at client level on all open positions once a contract enters its tender or delivery period — the higher of 20% of contract value, or 3% plus a five-day 99% VaR of spot prices.
In plain language
For most of a futures contract's life the exchange only has to worry about price risk, and a few per cent of margin covers it. In the last days before expiry a second risk arrives: somebody actually has to produce a tonne of something, and somebody actually has to pay for it.
That is a different kind of failure and it needs a different size of buffer. So once the contract enters its tender or delivery period — typically the last five to ten days — the exchange steps the margin up sharply, on both the buyer and the seller.
The seller has a way out. If he marks his delivery intention and produces a warehouse receipt proving he actually holds the goods, the margin is not charged to him. He has already demonstrated the thing the margin was insuring against.
How it works
The margin is levied at the client level and not at the member level, and it applies to all open positions for which a delivery match has not yet happened. It is payable by buyer and seller alike, and it sits on top of initial margin, daily margin, special margin and anything else already in force.
The start date and the quantum can be revised. The workbook lists the triggers for revising them: the state of stocks in the warehouse, the open interest still standing during the tender period, the chance of large rejections of stock at the warehouse gate because of poor crop quality, and speculative open interest sitting there without any delivery intention being tendered.
Release works two ways. If a trader squares off during the period, his margin is released. If he does not deliver, the margin is released only after final cash settlement, at which point delivery default penalty provisions bite.
Coverage by instrument is examinable:
| Instrument | Tender / delivery period margin |
|---|---|
| Commodity futures | Yes — on buyers and sellers |
| Index futures and index options | No — cash settled, nothing to deliver |
| Options on Futures | No — they devolve before the futures enter staggered delivery; they carry devolvement margin instead |
| Options on Goods | Yes — on buyers and sellers of ITM and CTM strikes, and of strikes expected to become ITM or CTM |
For Options on Goods the charge is dynamic. A strike that was ITM on E-4 and drifts out of the money may have its margin released; a strike that only turns ITM on E-2 is charged that day plus the backlog for E-4 and E-3. A trader opening a fresh position on E-2 inherits the whole backlog, and the trader who passed the position to him gets his released.
The formula
Tender / delivery period margin = higher of:
(a) 3% + 5-day 99% VaR of spot prices
(b) 20% of contract value
A worked example
The workbook's own gold illustration, run through.
A trader buys a gold June futures contract at Rs 45,000 per 10 grams. Lot size 1 kilogram.
Contract value = 100 units of 10 g x Rs 45,000 = Rs 45,00,000
Before the tender period:
| Charge | Basis | Amount |
|---|---|---|
| Initial margin plus minimum ELM | about 5% | Rs 2,25,000 |
| MTM if gold closes at Rs 44,900 | Rs 100 per 10 g | Rs 10,000 |
| Special margin, if imposed on one side | 1% | Rs 45,000 |
On the first day of the tender period:
Tender period margin at 20% of contract value = Rs 9,00,000
His blocked capital jumps from Rs 2,25,000 to Rs 11,25,000 — a fivefold increase — for holding exactly the same position he held the day before. Nothing about the price changed. What changed is that the contract is now days away from someone having to hand over a kilogram of gold.
If he squares off, the Rs 9,00,000 is released. If he is short instead and tenders a warehouse receipt for quality-certified gold, he is exempt. If he does neither, the money stays blocked until final cash settlement, and the delivery default penalty follows.
Why NISM asks about it
Chapter 7 (Clearing, Settlement and Risk Management), section 7.11.5, with the instrument-by-instrument coverage in section 7.12. The recurring question is the sample one in Chapter 7 — which margin does an Option on Goods not have (devolvement margin) — and its mirror for Options on Futures. Expect also the 20% figure and the client-level levy.
Common exam traps
- It is levied at the client level, not the member level. Grossing it at the member level gives the wrong number.
- Higher of 20% or 3% plus five-day 99% VaR — the 20% is a floor, not the rule itself.
- The seller is exempt only on producing a warehouse receipt with a delivery intention. Intending to deliver is not enough.
- Options on Futures have no tender period margin; Options on Goods do. And the devolvement margin runs the other way round. This pair is asked repeatedly.
- Buyers pay it too. It is not a seller-only charge, even though only the seller can be exempted by producing goods.
- A fresh position taken during the delivery period inherits the backlog of earlier days' delivery period margin, payable before the next morning.
Check yourself
1.Option on Goods does NOT attract which of the following margins?
- a)Initial Margin
- b)Devolvement Margin
- c)Delivery Margin
- d)SOMM
Show the answer
Answer: (b) Devolvement Margin
(This is a sample question from the NISM workbook.)
"OPTION ON FUTURES will attract DEVOLVEMENT MARGIN (BUT DOES NOT HAVE TENDER PERIOD/DELIVERY PERIOD MARGIN). OPTION ON GOODS WILL HAVE ALL THE ABOVE MARGINS OF FUTURES APPLICABLE AT ALL THE TIME ON OPTION SELLERS, INCLUDING TENDER PERIOD/DELIVERY PERIOD MARGIN."
The two products have exactly opposite exposures here, which is what makes this pair so examinable:
Options on FUTURES Options on GOODS ⚠️ Devolvement margin ⚠️ YES ⚠️ NO ⚠️ Delivery / tender period margin ⚠️ NO ⚠️ YES The logic behind each: an Option on Futures devolves into a futures position, and "buyers in Options on Futures are NOT CHARGED ANY MARGIN while sellers are charged SOMM" — whereas in futures both sides pay several margins. So "ITM options about to devolve carry THE RISK OF MARGIN SHORTFALL", and devolvement margin pre-funds that gap over E-2, E-1 and E.
An Option on Goods devolves straight into delivery and payment. There is no futures position to fund — but there is a real delivery obligation, so delivery period margin applies to both buyers and sellers in the last 3-5 days.
Initial margin and SOMM apply to both products, so options (a) and (d) are never the answer here.
Where this is taught
Free preparation for NISM Series XVIRelated terms
- Extreme Loss MarginA flat 3.5 per cent margin collected on cash-market positions to cover losses falling outside what the VaR margin is designed to capture.
- Initial marginThe deposit both the buyer and the seller of a futures contract must place before the position is accepted, sized to cover a 99% worst-case one-day loss on that position.
- 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.
- Delivery default penaltyThe SEBI-prescribed charge on a seller who fails to deliver against an expiring contract — a fixed percentage of the settlement price plus a replacement cost, most of which is paid over to the buyer.
- Options on GoodsA European option whose exercise devolves directly into delivery of and payment for the physical commodity, rather than into a futures position.
- 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.