Delivery Notice

Delivery notice is a written notice submitted to a long futures contract holder informing them of the requirement to accept delivery of the physical commodity on a specified date from the short futures contract holder. This notice, delivered through the clearing organization, is separate and distinct from the warehouse receipt or other instruments that will be used to transfer title.

First Notice Day

"First notice day is the day in which the buyer pf a futures contract can be called upon by the exchange to take delivery of the underlying commodity". On this day, the exchange estimates the number of traders that are expected to make delivery of the commodity and distributes delivery notices to long futures on a first-in basis. Traders that hold long positions into the first notice day run the risk of being delivered upon but might not be depending on the amount of time that the position has been open.

For example, a trader that has been long a futures contract for few weeks will receive a delivery notice before a trader that has established a position the day before first notice day.

Issue of the Delivery Notice

A short position holder can offset with long trade any day until the last trading day, However, if a short position holder decides to deliver, they must issue the delivery notice during the delivery notice period. The notice period starts a few days before the beginning of the delivery month and ends just a few days before the delivery month. It allows the clearinghouse to process the delivery notice.

Once the clearinghouse member gets the notice from the seller of the contract, the clearinghouse has to determine customer with an established long position will be assigned the delivery notice to take delivery of the cash commodity. The method under which notice is assigned to a buyer who is long futures from exchange to exchange. The notice can be assigned to the buyer with the oldest open long position or the largest net long position. The assignment process continues throughout the delivery period. Additionally, on the last notice day, all open long positions are matched with open short positions and delivery is assigned. All open contracts are settled by the end of their term.

Delivery Notice

Delivery notice contain specific details regarding the delivery including:

• The date when delivery will be made;
• The location where delivery will be made;
• The quantity or weight to be delivered;
• The grade (basis, premium or discount) to be delivered.

In some exchanges, it is required that the buyer accept delivery of the commodity and not allow the buyer to offset the delivery requirement by selling the same futures contract. In this case we call it stopped delivery notice.

Examples of Delivery Notice

• The most common example of a delivery notice is when a long futures contract holder receives a notification from the short futures contract holder that they must accept delivery of the physical commodity specified in the contract on a certain date. This notice typically includes details such as the amount and type of the commodity to be delivered, the date it must be accepted, and the location for delivery.
• Another example of a delivery notice is when a long futures contract holder receives notification from the short futures contract holder that the contract will be closed out prior to the expiration date of the contract, and that the long futures contract holder must now accept delivery of the physical commodity specified in the contract. This notice typically includes details such as the amount and type of the commodity to be delivered, the date it must be accepted, and the location for delivery.
• A third example of a delivery notice is when a long futures contract holder is informed that the contract has been breached by the short futures contract holder and that delivery must be accepted on the specified date. This notice typically includes details such as the amount and type of the commodity to be delivered, the date it must be accepted, and the location for delivery.

Advantages of Delivery Notice

Delivery notices are an important aspect of long futures contract agreements, and they offer several advantages. Specifically, they provide:

• Increased transparency between the two parties, allowing them to better track the progress of their contract and ensure that all terms are being met.
• Clear instructions on when and how delivery should be made, which can help to reduce confusion and potential conflicts.
• A way to ensure that delivery is made on time, as both parties will be aware of when delivery should occur and can make the necessary arrangements.
• The opportunity to make any necessary adjustments to the delivery if circumstances change, such as a delay in the arrival of the goods.
• A way to ensure that the long contract holder is aware of their legal rights and obligations under the contract and can take appropriate action if the short contract holder fails to meet their obligations.

Limitations of Delivery Notice

Delivery notices are a necessary part of the futures contract process, but they come with certain limitations. These include:

• The notice does not guarantee that the delivery will be completed on the designated date. In some cases, delivery may be delayed due to factors outside of the control of either party.
• Delivery notices do not guarantee that the quality of the commodity meets the specifications of the contract. The short futures contract holder is responsible for ensuring the quality of the commodity, and the long futures contract holder is responsible for inspecting the quality upon delivery.
• Delivery notices do not guarantee the quantity of the commodity being delivered. The long futures contract holder is responsible for ensuring the quantity of the commodity is accurate upon delivery.
• Delivery notices do not guarantee that the price of the commodity is correct. If the price of the commodity has changed between the time of the issuance of the notice and the time of delivery, the long futures contract holder is responsible for paying the difference.

Other approaches related to Delivery Notice

Delivery Notice is an important document for both long and short futures contract holders. It is a written notice sent to the long futures contract holder informing them of the requirement to accept delivery of the physical commodity on a specified date from the short futures contract holder. Other approaches related to Delivery Notice include:

• Payment of the cash settlement: This is when the long and short futures contract holders agree to settle the contract with a cash payment instead of delivering the physical commodity.
• Rollover of the contract: This is when the long and short futures contract holders agree to extend the contract and keep the open position, as opposed to closing it out by delivery. This involves paying the difference between the prices of the original contract and the new contract.
• Exchange of futures for physicals: This is when the long and short futures contract holders agree to exchange the futures contract for a physical commodity.

In summary, Delivery Notice is a written notice sent to the long futures contract holder informing them of the requirement to accept delivery of the physical commodity on a specified date from the short futures contract holder. Other approaches related to Delivery Notice include payment of the cash settlement, rollover of the contract, and exchange of futures for physicals.

Footnotes

Delivery Notice — recommended articles

Revolving letter of credit — Evergreen clause — Contract note — Executed agreement — Outright Forward — Waybill — Retender — Shipping guarantee — Certificate for payment

References

• Garner C. (2012), Trading Commodities, Commodity Options and Currencies, FT Press, Upper Saddle River
• Shaik K. (2014), Managing Derivatives Contracts: A Guide to Derivatives Market Structure, Contract Life Cycle, Operations, and System, Apress
• The Securities Institute of America, (2015) Wiley Series 3 Exam Review 2015 + Test Bank: The National Commodity Futures Examination, John Wiley and Sons, Hoboken

Author: Michał Dembowski