What Is 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. The first notice day can vary by contract and will 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.
- First notice day (FND) is a date specified in a futures contract after which time the owner of the contract can take physical delivery of the underlying asset.
- The first notice day and its specifications will be spelled out by the futures contract details.
- In practice, most derivatives traders close out or roll over their expiring positions to avoid the prospect of physical delivery.
Understanding First Notice Day
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.
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.
Derivatives contracts such as futures or forwards can be either cash-settled or physically delivered on the expiry date of the contract. When a contract is cash-settled, the net cash position of the contract on the expiry date is transferred between the buyer and the seller.
With physical delivery, the underlying asset tied to the contract is physically delivered on a predetermined delivery date. Let’s look at an example of physical delivery. Assume two parties enter into a one-year (March 2019) Crude Oil futures contract at a futures price of $58.40. Regardless of the commodity’s spot price on the settlement date, the buyer is obligated to purchase 1,000 barrels of crude oil (unit for 1 crude oil futures contract) from the seller. If the spot price on the agreed settlement day sometime in March is below $58.40, the long contract holder loses and the short position gains. If the spot price is above the futures price of $58.40, the long position profits, and the seller records a loss.