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 commodities to the futures holder. By contrast, most futures contracts are settled in cash such that 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 a commodities futures contract.
- It notifies the recipient that the contract seller will make physical delivery of the underlying commodities.
- 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 a large and import part of the modern financial system. Through them, institutional customers such as manufacturing companies can purchase the commodities they need to supply their daily operations. At the same time, financial buyers can use the commodities futures markets to speculate on commodity prices and to engage in other activities such as risk hedging.
One of the great advantages of the commodities futures markets is that they are run centrally through a central clearinghouse system. Rather than dealing directly with one-another, buyers and sellers submit their 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 all specified in a single format.
If two parties agree to a commodities futures contract and elect not to settle that contract in cash, then the seller of the contract—that is, the one 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.
In essence, this document simply informs the buyer that the seller intends to fulfill their obligations by physically delivering the underlying commodities 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 are those that can be sold to another party, so that the right to receive delivery of the goods is transferred to someone else. This provision can be 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, on the other hand, are generally only purchased by commercial customers who have need of the physical commodities for their regular business operations. For example, a coffee roasting company might purchase coffee bean futures contracts with non-transferable delivery notices, since they will have no difficulty receiving and using the underlying commodity.