The IPS contract represents the price differential between South Asia Crude Palm Oil (Fastmarkets) futures (IPF) and USD Malaysian Crude Palm Oil futures (CPO). Since both contracts settle against calendar-month averages, the final IPS settlement reflects the average difference between the two benchmarks over the month.

The contract allows participants to trade basis risk directly. In this context, basis risk refers to the gap between Malaysian export prices and the delivered cost of palm oil in India. That gap can widen or narrow due to freight costs, regional supply-demand conditions and import economics, even when outright palm oil prices remain relatively stable.

Because both legs settle against calendar-month averages, the final IPS settlement reflects the average spread at settlement rather than the price on any single day.

This helps reduce the impact of short-term volatility and temporary price swings, resulting in a settlement price that better reflects ongoing market conditions accumulated over the course of the month. 

Notably, the IPS contract is listed on a quarterly expiry cycle. Unlike outright palm oil contracts, which are commonly used to hedge individual cargoes or specific monthly purchases, the IPS contract is designed to manage basis risk over a longer period.

The difference between delivered prices in India and Malaysian export prices is influenced by factors that often evolve gradually over several months rather than within a single cargo cycle.

As a result, the quarterly structure allows participants to manage the CFR–FOB basis over a broader business period. Many importers and refiners purchase, sell and manage margins across several months rather than on a cargo-by-cargo basis.

The quarterly structure also helps concentrate market liquidity into fewer contract months, rather than spreading it across twelve separate monthly spreads. This creates a more efficient market for participants seeking to manage the relationship between the delivered cost of palm oil in India and Malaysian export prices.

More detailed information can be found in the CME–Fastmarkets South Asian Vegetable Oil Futures white paper.

Since its launch on March 2, 2026, the IPS spread has traded within a range of USD 103.7/MT, moving from a low of USD 33.8/MT to a high of USD 137.5/MT in just three months.

This highlights an important point: The CFR–FOB basis is not a fixed freight adjustment. It can widen or narrow significantly as freight costs, regional supply-demand balances and import economics change.

The spread fell to its March low before rebounding sharply and reaching a peak in early April. It then gradually narrowed as market conditions stabilised.

Even over a short trading history, the IPS spread has demonstrated that basis risk can be substantial and can move independently of outright palm oil prices. The contract provides importers, refiners and traders with a dedicated tool to manage that risk.

An important nuance when deploying the IPS contract for hedging is its settlement mechanism. 

The daily settlement price of the futures is determined by exchange staff based on relevant market data, including, but not limited to, pricing data from market participants such as broker quotes, cleared prices the settlement prices of related products and any other pricing data from sources deemed reliable by staff.

The final settlement price of the contract is an averaged quantity rather than the spot value of the spread, because it is determined as the difference between two averaged quantities. 

The contract settles against the difference between the calendar-month average settlement values of South Asia Crude Palm Oil (Fastmarkets) futures (IPF) and USD Malaysian Crude Palm Oil futures (CPO).

In simple terms:

IPS Final Settlement = IPF Price – CPO Price

Where IPF and CPO are averaged quantities at settlement

For example, assume that on settlement day:

The South Asia Crude Palm Oil (Fastmarkets) futures settlement price is USD 1,180/MT.

The USD Malaysian Crude Palm Oil futures settlement price is USD 1,075/MT.

The final IPS settlement would be:

USD 1,180/MT – USD 1,075/MT = USD 105/MT

This approach ensures that the final settlement reflects the average relationship between delivered palm oil prices in India and Malaysian export prices over the course of the month, rather than short-term fluctuations close to the expiry. 

To better understand the impact of averaging on IPS settlement, it is helpful to first examine how each leg of the spread settles, beginning with the IPF contract.

The IPF contract settles against the arithmetic average of the daily Fastmarkets South Asia Crude Palm Oil price assessments published throughout the calendar month.

Consequently, the running monthly average gradually converges towards the final settlement as additional daily prices are incorporated.

The CPO futures contract is also designed to reflect a monthly average price. Its final settlement is calculated from the average of daily USD-converted prices of the third contract month of FCPO futures over the calendar month.

To illustrate this, the chart above compares the June 2025 CPO futures price with the corresponding USD-converted third-month FCPO contract. While the FCPO contract reacts more sharply to daily market movements, the CPO contract follows a noticeably smoother price path as it reflects the market's expectation of the eventual monthly average.

The IPS contract settles against the difference between the monthly average settlement values of the IPF and CPO contracts.

The chart above compares IPS spreads calculated using averaged and unaveraged prices from each leg. Importantly, the values shown do not represent daily IPS futures prices. Only the final settlement price for the averaged prices above will match the official IPS futures settlement price, and close to expiry, the futures prices will approach that settlement price. 

The averaging mechanism makes the IPS contract particularly useful for market participants whose physical exposure is accumulated over time rather than on a single day.

Since the IPS contract expires quarterly and settles using monthly averages, a single hedge can more closely match this ongoing procurement pattern than repeatedly entering and exiting shorter-dated hedges.

In other words, for participants with regular purchasing programmes, the IPS contract provides a hedge that more closely reflects how physical price exposure develops in practice.

The South Asia Crude Palm Oil (Fastmarkets) vs USD Malaysian Crude Palm Oil futures spread is primarily traded through the over-the-counter (OTC) market. While listed on our infrastructure, most transactions are privately negotiated and cleared through ClearPort.

In practice, the most common route is through an interdealer broker (IDB) such as ICAP.

The process is straightforward. An importer, refiner, or trader contacts a broker, who matches them with a counterparty willing to take the opposite side of the spread. Both parties agree on the spread level, volume, and contract month. This is known as a block trade. 

The minimum trade size is 10 contracts, equivalent to 100 metric tons, and the agreed spread must reflect prevailing market conditions. Once executed, the trade must be reported to ClearPort within 15 minutes.

CME Clearing then becomes the central counterparty to both sides of the transaction. This removes direct counterparty exposure, with CME Clearing guaranteeing the trade, managing margin requirements and handling daily mark-to-market settlements. The result is a flexible and secure framework for managing basis risk.

For full details on block trades, position limits, the approved IDB list, and margin requirements, visit the CME South Asia Vegetable Oil (Fastmarkets) Futures FAQ page.

Arrow Traders Private Limited (AT), an Indian palm oil importer, purchases crude palm oil from Malaysia and supplies it to domestic refiners. Rather than selling palm oil at a fixed outright price, AT prices its sales using a fixed margin over the Malaysian CPO price.

Selling Price = Malaysian CPO Price + USD 200/MT

Because the Malaysian CPO price is passed directly to the customer, AT is not exposed to changes in the outright palm oil price. Instead, its profitability depends on whether the cost of importing palm oil into India remains below the fixed USD 200/MT margin it charges.

This leaves AT exposed to movements in the spread between Fastmarkets South Asia Crude Palm Oil prices and Malaysia CPO prices. If the spread increases, it reflects a higher cost of importing palm oil into India, which erodes AT’s profit.

At the time the order is confirmed, the IPS spread (the difference between the South Asia crude palm oil (IPF) price and the Malaysian CPO price) is USD 100/MT

To protect this margin against a potential increase in import costs, AT buys 10 IPS contracts, equivalent to 100 MT, locking in the spread at USD 100/MT.

Figures are illustrative and are intended to demonstrate how changes in the CFR–FOB basis affect procurement margins.

Although Malaysian CPO prices increase by USD 80/MT, the selling price increases by the same amount because it is linked directly to Malaysian CPO. However, the IPS spread widens from USD 100/MT to USD 220/MT, increasing AT's import cost by USD 120/MT.

1. Transaction costs will apply and have been excluded from the above example for simplicity.
2. Futures positions require the posting of initial and maintenance margins with CME clearing brokers; associated margin requirements and cost of capital are not reflected in the above illustration.

Without the IPS hedge, the wider spread turns AT's expected profit margin of USD 100/MT into a loss of USD 20/MT. The gain on the long IPS position offsets the increase in import costs, restoring the profit margin to USD 100/MT.

Assume that ABC Edible Oils Ltd. (ABC) imports approximately 1,000 MT of crude palm oil from Malaysia every month under long-term supply agreements.

Since its physical procurement contracts are directly linked to Malaysian CPO prices, ABC hedges its outright exposure to commodity price risk by taking a long position in Malaysian CPO futures. This provides the closest hedge to the underlying commodity it purchases.

However, the company remains exposed to changes in import costs. If Malaysian CPO prices fall while landed prices in India rise, it can incur losses on its Malaysian CPO hedge while procurement costs increase at the same time.

Thus, hedging with Malaysian CPO futures alone does not eliminate procurement risk. While the futures position locks in the underlying Malaysian palm oil price, the company remains exposed to changes in the cost of importing the cargo into India. 

If the delivered cost of importing palm oil into India increases by more than Malaysian CPO prices, procurement margins are reduced. The IPS contract helps offset this remaining exposure by hedging the widening spread. 

Consider a scenario in which ABC agrees to supply 1,000 MT of crude palm oil to an Indian refiner at a fixed selling price of USD 1,250/MT,

Figures are illustrative and are intended to demonstrate how changes in the CFR–FOB basis affect procurement margins.

On the day of delivery, Malaysian CPO prices increased by USD 15/MT, the delivered South Asia CPO price rose by USD 35/MT, while the IPS spread widened by USD 20/MT.

1. Transaction costs will apply and have been excluded from the above example for simplicity.
2. Futures positions require the posting of initial and maintenance margins with CME clearing brokers; associated margin requirements and cost of capital are not reflected in the above illustration.

ABC's Malaysian CPO futures position successfully offsets the USD 15/MT increase in the underlying commodity price. However, because the delivered South Asia CPO price rises by a further USD 20/MT relative to Malaysian CPO, the company still experiences a higher landed procurement cost.

Without the IPS hedge, this additional USD 20/MT increase reduces the procurement margin to USD 25/MT from USD 45/MT.

The gain on the IPS position compensates for the increase in import-related costs, preserving the original procurement margin of USD 45/MT.

Trading IPS futures requires posting margin with CME Clearing, which acts as a performance bond. There are three components.

Initial margin is the deposit required when the position is opened. For IPS, this is USD 880 per contract. For 10 contracts (100 MT), the initial margin is USD 8,800. This is not a cost; it is collateral that is returned in full when the position is closed.

Maintenance margin is the minimum balance that must be maintained in the account. For IPS, this is USD 800 per contract, or USD 8,000 for 10 contracts. If the account balance falls below this level, a margin call is triggered.

Variation margin reflects daily mark-to-market. Gains are credited, and losses are debited each day based on price movements in the IPS spread.

A margin call is triggered when losses cause the margin account balance to fall below the maintenance margin requirement of USD 8,000.

Assume a participant buys the IPS spread at USD 130/MT and holds a position of 10 contracts, equivalent to 100 MT. The initial margin requirement is USD 8,800.

If the spread falls to USD 40/MT, the position incurs a loss of USD 90/MT. Across 100 MT, this results in a variation margin debit of USD 9,000.

The loss is deducted from the margin account, reducing the balance from USD 8,800 to negative USD 200. Because the account balance is now well below the maintenance margin requirement of USD 8,000, a margin call is issued.

To maintain the position, the participant must deposit USD 9,000, restoring the account balance to the initial margin level of USD 8,800. This payment is typically required within hours. Failure to meet the margin call may result in the clearing broker liquidating the position, leaving the participant unhedged.

If the spread does not change, no margin call occurs, and the margin balance stays unchanged. If the spread rises in the participant’s favour, gains are credited daily to the margin account through variation margin. Excess funds above the required margin level can be withdrawn.

For Indian importers and refiners, changes in the South Asia–Malaysia spread can materially affect procurement margins. 

The IPS contract provides a dedicated tool to hedge this basis risk separately from outright palm oil price exposure, helping market participants manage import costs with greater precision.

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