Delivery Notice
A delivery notice is a formal document submitted by the holder of a short futures position to the exchange clearinghouse, announcing the intention to fulfill a futures contract through physical delivery of the underlying asset. The notice initiates the delivery process and is assigned to the oldest outstanding long position by the clearinghouse, obligating that long to accept delivery.
Key takeaways
- Delivery notices are submitted on or after first notice day, which is defined in each contract's specification and typically precedes the last trading day by several sessions.
- Once assigned, the long who receives a delivery notice cannot easily exit the obligation without absorbing significant costs, making holding long positions into the delivery period risky for traders who cannot accept physical delivery.
- Treasury bond and note futures have a 'wild card' notice feature: the short can submit a notice up to a few hours after the futures market closes, at the previous day's settlement price, creating an option to deliver when spot market prices are favorable.
- The clearinghouse acts as central counterparty, matching delivery notices from shorts to longs according to established rules (typically oldest position first).
- Delivery notices are a key driver of basis behavior near expiration as market participants scramble to avoid unwanted assignment.
Explanation
The delivery notice system is the administrative mechanism through which the physical settlement of futures contracts is initiated and coordinated. Understanding the rules governing delivery notices is critical for any futures market participant who carries positions into the delivery period, as the consequences of inadvertent assignment can be operationally burdensome and financially costly.
The delivery calendar for each futures contract defines three key dates. First notice day is the earliest date on which a short position holder may submit a delivery notice; this date falls before the last trading day, creating an overlap period during which both trading and notice submission are possible. Last notice day is the final date for submitting notices. Last trading day is the final day on which the futures contract trades; after this date, all remaining open positions must be settled by delivery.
The 'wild card option' embedded in Treasury futures delivery is one of the most extensively studied features in derivatives markets. CBOT Treasury bond and note futures allow the short to submit delivery notices after the 2 pm close of futures trading, at the settlement price established at market close, until approximately 8 pm. Because Treasury cash markets trade continuously into the evening, the short can monitor post-close price movements and deliver only if cash bond prices fall (making delivery more profitable relative to the fixed futures settlement price). This optionality has measurable value and influences futures pricing, particularly in the final weeks before expiration.
For commodity futures, delivery notices include additional documentation: warehouse receipts (confirming the commodity is stored at an approved facility), grading certificates (attesting to quality grade), weight certificates, and shipping documents. The clearinghouse verifies these documents before completing the matching process. Modern electronic delivery systems have streamlined this paperwork-intensive process considerably.
Example
A commodity trading firm holds a short position in 100 NYMEX crude oil futures contracts (100,000 barrels at $80.00/barrel) heading into expiration. On first notice day, the firm submits delivery notices for all 100 contracts, announcing its intention to deliver crude oil at Cushing, Oklahoma pipeline interconnects. The clearinghouse assigns these notices to the holder of the oldest outstanding long position—a refinery hedger who has been long since August and is prepared to accept physical delivery. The refinery receives the delivery notices and, per exchange rules, must complete the payment and take delivery within two business days, paying $80.00/barrel × 100,000 barrels = $8,000,000, less any applicable location differentials, in exchange for the crude oil title and pipeline scheduling confirmation.
Related terms
At The Money Automatic Exercise Bond Calendar Spread Delivery Exchange Futures Contract Hedger Intrinsic Value Last Notice Day Option Physical Settlement