Understanding Futures Contract Expiration and Settlement

Contract expiration is a vital aspect of futures trading that traders and investors need to understand. Every futures contract has a limited lifespan depending on its expiration date. The expiration date is the final trading day that the contract can be traded. The expiration day for each futures contract varies and is defined in the contract specifications. For example, the final trading day for BMD Crude Palm Oil Futures (FCPO) is at noon on the 15th day of the delivery or the spot month, while for the BMD FBM KL Composite Index Futures (FKLI), it is on the last business day of the spot-month contract.

Depending on the contract specifications, the final settlement methodology for a futures contract can be either by physical delivery or cash settlement. Physical delivery is commonly used for physical commodity contracts such as agricultural commodities. BMD FCPO final settlement is through physical delivery, and sellers can deliver physical crude palm oil to buyers via the registered Port Tank Installations (PTIs) located at Port Klang, Butterworth and Pasir Gudang.

On the other hand, the cash settlement methodology is more often used in equity index and financial futures contracts such as interest rates futures.However, cash settlement can also be used in commodity-based contracts as well.FKLI is a cash-settled contract,and no

For cash settled contract, traders can hold until the contract expires and the contract will be cash settled based on price difference. Futures traders can also rollover the futures position into the next available contract month. Rollover involves the simultaneous liquidation of the expiring contract and opening a new contract in the next available contract month. More often than not, most of the futures contracts traded are closed out before expiration, and only a relatively small percentage of contracts are physically delivered.