What is a 'First Notice Day'

A First Notice Day (FND) is the day after which an investor who has purchased a futures contract may be required to take physical delivery of the contract's underlying commodity. First notice day varies by contract; it also depends on exchange rules. If the first business day of the delivery month was Monday, Oct. 1, first notice day would typically fall one to three business days prior, so it could be Wednesday, Sept. 26, Thursday, Sept.27, or Friday, Sept. 28. Most investors close out their positions before first notice day because they don't want to own physical commodities. According to Futures Magazine, less than 1% of futures contracts actually go to physical delivery.

BREAKING DOWN 'First Notice Day'

In addition to the First Notice Day (FND), the two other key dates in a futures contract are last notice day, the last day the seller can deliver commodities to the buyer, and last trading day, the day after which commodities must be delivered for any futures contracts that remain open. A hedger who is a producer can sell futures contracts to lock in a price for their output. Conversely, a hedger who is a consumer can buy futures contracts to lock in a price for their requirements.

A common way of closing a futures position and avoiding physical delivery is to execute a roll forward to extend the contract's maturity. Brokerage firms that allow futures trading with margin accounts may require investors to substantially increase the funds in their margin accounts after first notice day, to be sure they can pay for a delivered commodity.

Conventional wisdom says that best practices for all traders is to be out two trading days before FND. This way if there are any out trades or errors, traders still have a full trading day to get any issues fixed before FND. Traders who still want to be long can always roll forward into the next month. The thing that needs to be emphasized is that futures contracts are risk management tools. They are not intended to be procurement contracts.

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