Delivery Notice

A delivery notice is the legal document by which a holder of a short futures contract formally declares to the exchange their intent to deliver the underlying commodity to settle the contract. Once submitted, the delivery notice sets in motion an irreversible sequence: the exchange matches the short to a long holder, specifies the delivery location and timeline, and obligates both parties to complete the exchange. For commodity traders and hedgers, the delivery notice marks the boundary between financial trading and physical logistics.

Why delivery notices exist

A futures contract on a physical commodity (crude oil, corn, gold, etc.) is a promise to deliver or receive real goods. The delivery notice transforms that promise from theory into legal obligation. Without it, shorts could hold positions indefinitely and never actually deliver anything—which would defeat the purpose of a commodity market.

The notice accomplishes several things simultaneously. First, it confirms that the short has actual goods available (or will obtain them) and is ready to deliver. Second, it removes ambiguity—it specifies which long holder receives the goods, where the goods will be located, and when the transfer will occur. Third, it locks both parties into the transaction; neither can unwind without permission, and even then, only within narrow windows.

The timeline and eligibility rules

The delivery notice can only be issued after first notice day—the earliest date a short is permitted to notify the exchange of delivery intent. The notice must arrive before the last trading day of the contract month, creating a window of a few days to two weeks depending on the contract.

Not every holder can issue a delivery notice. The short must be a clearing member (a firm approved by the exchange) or acting through one. Retail traders cannot file directly; their brokers do it on their behalf. And the short must hold a valid short position—you cannot deliver more contracts than you have shorted.

Some contracts require the short to demonstrate that they possess deliverable goods. For example, a gold futures contract might require a delivery notice showing that the gold is stored in an approved vault and is in the correct form (bars of a certain weight, purity, and shape). The exchange publishes a list of approved warehouses and vaults; delivery from non-approved locations is not permitted.

The matching and notification process

Once a delivery notice is filed with the exchange, the clearing house matches it to a waiting long position. The typical rule is first-in-first-out: the oldest long position (the one that has been waiting longest) receives the goods.

The exchange then notifies both the short and the matched long of the delivery details: the commodity’s location, the quantity, the grade or specification, and the date the transfer will occur. The short has an obligation to deliver; the long has an obligation to accept and pay.

Importantly, the long does not have much choice. They signed up for a futures contract expecting possible delivery, and the system is designed to ensure that refusal is not an option. If you do not want to take delivery, you should have closed your position before the delivery notice window opened.

Specification and grading

Many commodity futures allow delivery of multiple grades or types of the underlying. Crude oil futures, for example, allow delivery of various crude grades, though the most common is West Texas Intermediate. Similarly, corn futures allow both yellow and white corn, provided they meet moisture and quality standards.

The delivery notice specifies which grade or variety is being delivered. If the delivered commodity is not the “par” grade (the standard), the price is adjusted up or down. A higher-quality grade might command a premium; a lower-quality grade incurs a discount. This adjustment is set by exchange rule and published in advance.

The short has incentive to deliver the cheapest acceptable grade, which is why most futures delivery is of commodity at the lower end of the quality spectrum. Conversely, longs prefer quality, but the futures price is set to reflect the par grade, so they have no financial incentive to wait for premium goods.

Location and delivery procedures

The delivery notice specifies an approved location (warehouse, elevator, terminal, etc.) where the commodity will be transferred. The short bears the cost of transporting goods to that location. The long must arrange pickup or storage management once the goods are transferred.

Once the notice is issued, the short has a set number of business days (typically 5–10 days, depending on contract) to deliver the goods to the specified location. The delivery must be verified by warehouse officials or inspectors appointed by the exchange.

For some contracts, delivery is decentralized: any approved warehouse can be specified, giving the short flexibility to use the facility nearest to their supply. For others, a single or small number of delivery points are allowed, which centralizes risk and ensures liquidity. London metals futures, for example, use a limited set of approved warehouses.

The cost of delivery

Delivery is not free. The short incurs the cost of inspection, sampling, transportation to the specified location, and warehouse handling fees. The long must pay for insurance and storage during the holding period. These costs are typically reflected in the basis—the difference between the futures price and the cash (spot) price.

In a contango market (futures trading above spot), the futures price is high enough to compensate the short for the cost of carrying (storing and financing) the commodity. When a delivery notice is issued, the short is effectively executing the carry trade in reverse: delivering to a long who will bear the carrying costs thereafter.

In a backwardation market (futures trading below spot), carrying is expensive and delivery is attractive. The short will deliver early to avoid financing costs, and the long is willing to accept because the futures price already compensates for the burden.

When delivery notices are not issued

In most periods, delivery notices are rare. Most futures contracts are closed out before expiration—traders either profit-take or cut losses without ever touching the physical goods. Delivery notices are issued only when shorts genuinely intend to deliver and longs genuinely intend to take physical possession.

In bull markets where prices are rising, longs may be reluctant to take delivery early if they expect further price gains. Shorts may also hold off if they believe carrying costs (financing) will be offset by price appreciation. Delivery notices cluster only in the final days before expiration, when avoidance is no longer feasible.

For financial futures (equity indices, bond indices, interest rate contracts), physical delivery is often not possible or permitted. These contracts are cash-settled instead—the exchange calculates the final cash value and credits or debits accounts with no physical exchange.

See also