What Is a Delivery Notice?
In the commodities futures markets, delivery notices are a document provided by the seller of a futures contract. The document serves as confirmation that the seller intends to honor their contract by physically delivering the underlying commodity to the futures holder. By contrast, when a futures contract is cash settled no physical delivery ever takes place.
Delivery notices are one of the key elements included in all futures contracts. These include the details of the quantity, grade, delivery location, and delivery date of the commodity.
- A delivery notice is a standard component of commodities futures contracts.
- It notifies the recipient that the contract seller will make physical delivery of the underlying commodity.
- Some delivery notices are transferable, meaning they can be sold to another party. This is useful for buyers who wish to speculate on commodity prices without taking physical delivery themselves.
How Delivery Notices Work
Commodities futures markets are an important part of the financial system. Institutional customers such as manufacturing companies can purchase commodities futures to supply their daily operations. At the same time, financial buyers use commodities futures to speculate on commodity prices and engage in other activities such as hedging risk.
One advantage of the commodities futures markets is they are run through a clearinghouse system. Rather than dealing directly with one another, buyers and sellers submit orders to a central exchange which then pairs compatible transactions. To increase speed and minimize costs, these transactions follow a standard contractual template, in which details such as the commodity's type, quantity, quality, delivery date, and delivery location are specified in a single format.
If two parties agree to a commodities futures contract and elect not to settle in cash, then the seller of the contract—i.e. the person who has promised to deliver the physical commodity to the buyer—must provide their counterparty with a delivery notice as the contract nears its delivery date.
This document simply informs the buyer that the seller intends to fulfill their obligations by physically delivering the underlying commodity rather than settling the contract in cash. The specific details of how and when the goods will be delivered are determined ahead of time by the exchange.
Real-World Example of a Delivery Notice
Depending on the rules of the commodities futures exchange, a given delivery notice may be transferable or non-transferable. Transferable delivery notices can be sold to another party, so that the right to receive delivery of goods is transferred to someone else. This provision is useful for speculative buyers who have no intention of physically receiving and storing the goods, such as a gold speculator who simply wants to profit from the anticipated rise in the price of gold.
Non-transferable delivery notices are generally purchased by commercial customers who need for their business operations the commodity being traded. For example, a coffee roasting company might purchase coffee bean futures with non-transferable delivery notices, since they will have no difficulty receiving and using the underlying commodity.