Notice of Intention to Deliver
What Is a Notice of Intention to Deliver?
A Notice of Intention to Deliver is a formal notification provided by the holder of a short futures position indicating their intent to fulfill the contract by delivering the physical underlying asset.
A Notice of Intention to Deliver, often simply called a "delivery notice," is a critical document in the futures market that signals the transition from a speculative financial instrument to a physical transaction. It is the formal declaration by a trader holding a short position (the seller) that they intend to honor the terms of the futures contract by physically delivering the underlying asset—whether it be bushels of corn, barrels of oil, or bars of gold—rather than closing out the position with an offsetting trade. In the vast majority of futures trading, contracts are "liquidated" or "offset" before expiration, meaning traders buy or sell to close their positions for a cash profit or loss. Physical delivery is rare, accounting for a small percentage of total volume. However, the *possibility* of delivery is what tethers the futures price to the spot price of the commodity. When a seller decides to go through with delivery, this notice is the trigger. The notice initiates a sequence of events involving the exchange's clearinghouse. Once the clearinghouse receives the notice from the short seller, it must find a matching buyer (a long position holder) to take delivery. This process effectively converts the standardized futures contract into a specific delivery obligation, detailing exactly what will be delivered, where, and when.
Key Takeaways
- It is a formal document issued by the seller (short position) in a futures contract.
- The notice confirms that the seller will deliver the physical commodity to the buyer.
- It must be issued typically two business days before the delivery date.
- The clearinghouse assigns this delivery notice to the oldest long position holder.
- Most futures traders close positions before this stage to avoid physical delivery.
How the Notice Process Works
The process begins as the futures contract approaches its delivery month. A trader holding a short position who wishes to deliver the physical commodity must submit the Notice of Intention to Deliver to the clearinghouse. 1. **Submission:** The short seller's brokerage firm submits the notice to the exchange's clearinghouse. This must be done by a specific deadline, often two business days prior to the actual delivery date, though rules vary by exchange (e.g., CME, ICE) and commodity. 2. **Assignment:** The clearinghouse receives the notice. Since the clearinghouse acts as the buyer to every seller and the seller to every buyer, it must now "assign" this delivery obligation to a long position holder. 3. **Allocation:** The assignment is typically done based on the "oldest long" method. The trader who has held their long position for the longest time is first in line to receive the delivery notice. 4. **Notification:** The selected long trader is notified that they have been assigned a delivery. At this point, the long trader must prepare to pay the full contract value and accept ownership of the goods (e.g., warehouse receipts or shipping certificates). Crucially, the "First Notice Day" is the first day a seller can issue this notice. Many speculators will exit their long positions the day *before* First Notice Day to ensure they are never assigned a delivery.
Key Elements of the Notice
The Notice of Intention to Deliver is not a vague promise; it is a specific instruction containing vital details: * **Contract Details:** Specifies the exact futures contract (e.g., December Corn). * **Quantity:** The number of contracts and the total volume of the commodity (e.g., 5 contracts = 25,000 bushels). * **Grade/Quality:** Confirms the quality of the asset being delivered. If the seller delivers a grade higher or lower than the standard, price adjustments (premiums or discounts) may apply. * **Location:** The specific exchange-approved warehouse or delivery point where the transfer will occur. * **Date:** The intended date of transfer of ownership (usually the transfer of warehouse receipts rather than physical shipping).
Important Considerations for Traders
For the average retail trader, receiving a delivery notice is usually a mistake to be avoided. Most retail brokerage accounts are not set up to handle physical delivery of 1,000 barrels of crude oil or 5,000 bushels of wheat. If you are holding a long position into the delivery month, you are at risk of being assigned. If you receive a notice, you are legally obligated to pay the full contract value (which is highly leveraged, meaning the full value is much higher than the margin you put up) and accept the goods. To avoid this, brokers often have a "forced liquidation" policy where they will automatically close out client positions a few days before First Notice Day. However, the ultimate responsibility lies with the trader. If you are a short seller, you must only issue this notice if you actually have the physical commodity in an exchange-approved facility ready for transfer.
Real-World Example: Corn Futures
A farmer, "GreenAcres LLC," has hedged their crop by selling 10 corn futures contracts on the CBOT, expiring in December. As harvest concludes, they decide to deliver the corn rather than buy back the contracts. On **First Notice Day (Nov 29)**, GreenAcres instructs their broker to issue a Notice of Intention to Deliver. The contract size is **5,000 bushels** per contract. Total Delivery: 10 contracts × 5,000 = **50,000 bushels**. The Clearinghouse receives the notice and identifies "Speculator Sam" as the holder of the oldest long positions. Sam receives the notice the next morning. Sam is now obligated to pay for 50,000 bushels of corn. If the settlement price is $6.00/bushel, Sam must pay **$300,000** ($6.00 × 50,000) within 24 hours. In return, he receives warehouse receipts giving him ownership of corn stored in an Illinois silo.
Warning: The Risk of Accidental Delivery
Retail traders must be extremely vigilant about "First Notice Day." If you hold a long position past this date, you could be assigned a delivery notice. Even if you don't want the commodity, once assigned, retendering (selling) the delivery notice to someone else is a complex, costly process that often results in significant financial loss. Always roll or close positions before the delivery window opens.
Other Uses/Contexts
While primarily associated with physical commodities (grains, energy, metals), the concept of "delivery" exists in other markets, though the mechanics differ. * **Currency Futures:** Delivery involves the actual wire transfer of the foreign currency into a bank account. * **Bond Futures:** The "cheapest-to-deliver" bond concept applies, where the seller chooses which specific bond (from a basket of eligible bonds) to deliver to satisfy the contract. * **Cash-Settled Futures:** Note that for indices (like the S&P 500 E-mini), there is *no* notice of intention to deliver because these contracts are cash-settled. The concept does not apply.
FAQs
First Notice Day is the first day a delivery notice can be issued for a specific futures contract. It varies by contract but is typically one to three business days before the start of the delivery month. Traders wishing to avoid delivery must close positions before this date.
No. If you are holding a long futures position and are assigned a delivery notice by the clearinghouse, you cannot refuse it. You are contractually obligated to pay for and accept the underlying asset. This is why managing contract expiration dates is crucial.
This is a "delivery default." Your broker will likely liquidate your position immediately and you will be liable for any resulting losses, fees, and penalties. It is a serious situation that can result in significant financial liability beyond your account balance.
Not exactly. Options have an "Exercise Notice." If you hold a call option and want to buy the underlying futures contract, you issue an exercise notice. However, for physical commodities, the option typically exercises into a futures contract first, which then follows the futures delivery process.
The exchange clearinghouse determines this. The most common method is matching the seller's notice to the buyer with the "oldest long position" (the trader who has held the open buy contract for the longest time).
The Bottom Line
The Notice of Intention to Deliver is the mechanism that keeps the futures market grounded in reality, linking paper contracts to physical goods. For the commercial hedger (farmer, miner, energy producer), it is a vital tool for selling inventory. For the speculator, it is a signal to exit the market. Understanding this notice—and specifically the dates associated with it—is a fundamental part of risk management in futures trading. Traders who do not intend to handle physical commodities must ensure they are out of their positions before the delivery process begins.
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At a Glance
Key Takeaways
- It is a formal document issued by the seller (short position) in a futures contract.
- The notice confirms that the seller will deliver the physical commodity to the buyer.
- It must be issued typically two business days before the delivery date.
- The clearinghouse assigns this delivery notice to the oldest long position holder.