What is 'Delivery Notice'

Delivery notice is a notice written by the holder of the short position in a futures contract informing the clearing house of the intent and details of delivering a commodity for settlement.

BREAKING DOWN 'Delivery Notice'

The delivery notice is important for both the short and long positions of a futures contract. As some contracts allow a range for the basis grade of underlying commodities, the grade in the delivery notice must be properly identified. This notice provides for a clear written contract describing the specifics for such a delivery.

The terms and structure of a future contract often follow a standard format containing some basic common elements. Still, these deals often involve unusual arrangements or products, so they can be tailored according to the preferences of both parties involved. The delivery notice tends to be one of the elements of the contract that follows a routine format. It simply states the details of what we be delivered, and when and how that delivery would occur.

Limitations on delivery notices

The delivery notice is a standard, required element of a typical futures contract. However, in actual scenarios involving commodities contracts, the parties involve rarely actually have to address or complete the terms outlined in the delivery notice. The buyer and seller usually do not need to worry about this part of the process since these contracts are usually settled before the contract reaches this point or in a way that avoids the need for products to be presented or delivered. Only a small fraction of futures contracts actually result in the physical transfer of tangible goods.

Often the contract is terminated before the delivery point when the buyer sells an offsetting futures contract, which in effect passes the potential exchange or delivery of commodities on to the new buyer. An offset is also commonly called a reversing trade. This liquidates a purchase of a futures contract and essentially dissolves it through the sale of an equal number of contracts. A reversing trade can also liquidate a short sale of futures through the purchase of an equal number of contracts. These offsetting contracts must be of the same delivery month, and must occur on the same exchange.

It is important for buyers to review their contracts and pay attention to the terms, particularly focusing on any deadlines or delivery dates. Buyers must avoid forced delivery of the commodities, assuming they do not want to take possession of the product, by selling an offsetting contract.

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