What is a Delivery Notice
A delivery notice is a notice written by the holder of the short position in a futures contract informing the clearinghouse of the intent and details of delivering a commodity for settlement. The clearinghouse will then send a delivery notice to the buyer, or long position holder of the pending delivery.
The delivery notice is one element of the futures contract which follows a standard format. It will identify details of quantity, grade, delivery location, and delivery date.
BREAKING DOWN Delivery Notice
Some futures contracts allow a range for the basis grade of the underlying commodities, so a delivery notice is essential for both the long and short position holders. The notice will provide an explicit written contract describing the specifics for such a delivery. The terms and structure of a future contract often follow a standard format containing some essential and common elements. Still, these deals may involve unusual arrangements or products, so tailoring them to the preferences of all the parties involved is standard.
Exchange Oversight of Delivery Notices
The exchange where the futures contract sells will determine the type of delivery notice which is allowable for the securities they market. Notices can be transferable or non-transferable. Futures contracts which specify a cash settlement will not receive a delivery notice.
- Transferable notices route through a clearinghouse to inform the buyer of the seller's intent to deliver. The buyer may accept the delivery, or they may sell the notice to another person in the market. The resell process is known as retendering and will have limitations set on it by the marketplace.
- Non-transferable notices also route through the clearinghouse. However, with this type of notice, the buyer must take delivery of the commodity underlying the contract. Since the buyer must take possession of the property, there may be tax implications.
Limitations on Delivery Notices
The delivery notice is a standard element of a typical futures contract. However, the parties involved rarely actually have to complete the terms outlined in the delivery notice. Only a small fraction of futures contracts result in the physical transfer of tangible goods.
Clearinghouses will notify a trader with an open position as a contract approaches maturity. At this time most traders will purchase an offsetting position to close out the trade. This transaction is known as liquidating or reversing the trade and will zero out the trader's account. The trader will sell or buy an offsetting position, which in effect passes the potential exchange or delivery of the commodities on to the new buyer. The transaction essentially dissolves the original deal through the sale, or purchase, of an equal number of contracts, zeroing out the trader's account. These offsetting contracts must be of the same delivery month and must occur on the same exchange.
Traditionally, futures contracts state that the transaction is complete with the delivery of the underlying commodity. This date and location of the drop-off are specified in the contract and governed by the rules of the exchange. A warehouse receipt certifies possession of a commodity in a licensed warehouse recognized for delivery purposes by the 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.