uTrade AlgosThe square off process in the commodity market is essentially the act of closing an existing trade or position. Here’s a breakdown based on the provided information:
Key Aspects of the Square Off Process:
1. Intraday Square Off:
- This involves closing a trade within the same trading day.
- Specific cutoff times are set for different commodity types to ensure positions are closed before the market closes.
- These times vary depending on the type of commodity being traded, and also if there are sun-outages.
2. Auto Square Off (MTM Based):
- This is an automated process where positions are closed when the Market-to-Market (MTM) loss reaches a predefined threshold (in this case, 50% of the available net worth).
- This serves as a risk management measure to prevent excessive losses.
3. Margin Square Off (Shortage):
- If a trader’s account lacks sufficient margin to maintain their positions, the brokerage’s Risk Management System (RMS) can square off those positions.
- This can happen at any time, and margin calls or notifications may not always be provided.
- The risk team will close positions proportionally to reduce the margin shortfall.
4. Physical Delivery:
- For commodities with mandatory physical delivery, positions must be squared off before the delivery intention period begins.
- This is to avoid the obligation of taking or making physical delivery of the commodity.
- The MCX exchange has specific “Tender Periods” for deliverable contracts, and client positions must be squared off prior to the start of those periods.
- New positions are also blocked prior to the tender period starting.
In essence, the square off process is a crucial risk management tool that allows traders to manage their positions and avoid unwanted outcomes.