Intent to Deliver
What Is Intent to Deliver?
Intent to Deliver is a formal notice provided by the holder of a short futures position indicating their intention to settle the contract by delivering the physical underlying asset.
In the world of futures trading, an "Intent to Deliver" (often called a Notice of Intention to Deliver) is the trigger that turns a financial contract into a physical transaction. It is a formal document or electronic notification submitted by the seller (the party holding the short position) to the exchange's clearinghouse. This notice states that the seller is ready and willing to deliver the actual underlying commodity—be it 1,000 barrels of crude oil, 5,000 bushels of corn, or a specific amount of U.S. Treasury bonds—to satisfy the contract obligations. This typically happens during the "delivery month" of the contract. For the vast majority of traders (speculators), this is a scenario to avoid. Most futures traders are interested in price profit, not owning physical wheat or gold. Therefore, they will "roll" or close their positions before the First Notice Day to ensure they are not assigned a delivery notice. However, for commercial hedgers (farmers, miners, manufacturers), the Intent to Deliver is a critical business mechanism for selling their production.
Key Takeaways
- Intent to Deliver is a notice served by the seller (short) to the clearinghouse in a physically settled futures contract.
- It initiates the physical delivery process, typically occurring during the delivery month.
- Most futures contracts are offset before this stage; only a small percentage result in actual delivery.
- Upon receiving the notice, the clearinghouse assigns the delivery obligation to the oldest outstanding long position.
- Traders who do not wish to take delivery must close their positions before the "First Notice Day."
- The process is strictly regulated by exchange rules regarding timing, quality, and location of delivery.
How the Delivery Process Works
The delivery process follows a strict timeline defined by the exchange (e.g., CME, ICE). 1. **Position Day:** The short holder notifies their brokerage of the intent to deliver. 2. **Notice of Intention:** The brokerage submits the formal notice to the Clearinghouse. 3. **Assignment:** The Clearinghouse selects a counterparty to receive the delivery. This is usually done based on the "oldest long" position—the trader who has held the buy contract the longest without closing it. 4. **Notification:** The assigned long trader receives a "Delivery Notice." At this point, the long trader is obligated to pay the full contract value and take ownership of the asset. 5. **Delivery Day:** The physical transfer of ownership (often via warehouse receipts or shipping certificates) occurs, and payment is exchanged. It is important to note that the seller generally has theto decide when to deliver during the delivery month, which gives the short position a slight strategic advantage (the "delivery option").
Important Considerations for Traders
If you are a speculative trader holding a long position, receiving a delivery notice is usually a major error. It requires you to come up with the full cash value of the contract (which is often highly leveraged) and arrange for logistics (storage, insurance, transport) of the physical good. Brokers act as a safety net here. Most retail brokerages will forcefully liquidate (sell) any open futures positions a few days before the "First Notice Day" to prevent their clients from accidentally getting matched with an Intent to Deliver. However, professional traders must manage this risk themselves.
Real-World Example: Treasury Futures
Consider a trader who is short 10 contracts of 10-Year U.S. Treasury Note futures expiring in September. As the contract approaches expiry, the trader decides to deliver the bonds rather than buy back the contract. On "Position Day," the trader submits an Intent to Deliver to the exchange. They specify exactly which bonds (CUSIPs) they will deliver from the "cheapest-to-deliver" basket allowed by the contract. The Clearinghouse receives this notice and identifies that an investment bank has held a long position in September T-Notes for 3 months—the longest of any open interest. The Clearinghouse assigns the delivery to the bank. The bank is now obligated to pay the invoice price, and the trader transfers the Treasury bonds to the bank's account.
Types of Settlement
Not all futures result in physical delivery.
| Type | Mechanism | Example Assets | Intent to Deliver Applies? |
|---|---|---|---|
| Physical Delivery | Asset is transferred | Oil, Gold, Corn, Bonds | Yes |
| Cash Settlement | Cash difference paid | S&P 500 (ES), Eurodollar | No |
FAQs
It must be filed according to the exchange's schedule, typically starting from "First Notice Day" up until the last trading day of the contract. The exact timing depends on the specific commodity specifications.
No. If a long trader is holding a position after the notice deadline and is assigned a delivery notice, they are legally obligated to accept the delivery and pay for the goods. Refusal would constitute a default.
If you are a retail trader, your broker will likely intervene before this happens. If it does happen, the broker will typically sell the physical asset immediately on your behalf (retendering), often charging significant fees and potential losses for the logistical trouble.
No. Only "physically settled" contracts involve intent to deliver. "Cash settled" contracts (like S&P 500 E-minis) simply credit or debit the account balance at expiration based on the final price, with no physical transfer involved.
The Clearinghouse assigns the delivery. The most common method is "First In, First Out" (FIFO), meaning the oldest open long position gets the delivery first. However, some exchanges use a random lottery system.
The Bottom Line
For futures traders, understanding "Intent to Deliver" is critical for avoiding unwanted logistical headaches. Intent to Deliver is the formal notification process that initiates the physical transfer of commodities or bonds to settle a futures contract. While this mechanism ensures the price of futures converges with the spot market, it is primarily the domain of commercial hedgers. Speculators must be vigilant to exit or roll their positions before the "First Notice Day" to ensure they are not assigned a delivery obligation. Receiving an unexpected delivery notice forces a trader to pay the full contract value and manage physical assets—a costly mistake. Always know the expiration and notice dates of any contract you trade to manage this risk effectively.
Related Terms
More in Futures Contracts
At a Glance
Key Takeaways
- Intent to Deliver is a notice served by the seller (short) to the clearinghouse in a physically settled futures contract.
- It initiates the physical delivery process, typically occurring during the delivery month.
- Most futures contracts are offset before this stage; only a small percentage result in actual delivery.
- Upon receiving the notice, the clearinghouse assigns the delivery obligation to the oldest outstanding long position.