First day notice (FND) is the day buyers of futures contracts receive notice of delivery, warning them of the possibility of taking possession of the merchandise specified in the contract. Futures markets exist to transfer commodity price risk from hedgers to speculators, and most futures contracts require delivery as part of the expiration process. Traders who hold long positions through FND may be subject to receiving a delivery notice, and delivery is not automatic. The solution is to exit long positions before FND.
A first day notice (FND) is the day that buyers of futures contracts can receive notice of delivery. This is your warning that the title holders may have to take possession of the merchandise specified in the contract. It is a problem to avoid and not the purpose of trading commodity futures.
Futures markets are not a normal or desirable method of transferring ownership of commodities. Futures markets exist solely to transfer commodity price risk from those who don’t want it (hedgers) to those who seek to profit from it: speculators. In order to keep commodity prices in line with actual market prices, most futures contracts require delivery as part of the expiration process. Without a provision for delivery, the price would be merely notional and the contracts could not fulfill their economic function.
On the first day of notice, buyers are forced to put their money where their position is. A trader who is buying the commodity in the hope of increasing the value of it and wishes to remain in this “long position” simply sells his position and rewards in the next calendar month. Those forgetful or unlucky enough to hold their long positions through the FND are subject to receiving a delivery notice.
Delivery is not automatic on the first day of notification; The rules vary from exchange to exchange. After the delivery notice is issued, the long trader’s problems can multiply. You may be required to post the full cash value of the contract immediately. Trading liquidity wanes, and prices can become extremely volatile because most other traders have exited their contracts.
Elegant departures after the first day’s notice are sometimes possible. It might be possible, for example, to simply sell the position, but in some markets, trading ceases before the first day’s notice. Some exchanges allow the trader to retain the contract; in effect, selling it for a fee well in excess of a normal commission. Again, details vary by market.
If all else fails, the actual delivery takes place. For a trader who is in the business of whatever he is trading, this might not be a problem. For example, a gas station owner might have the ability to transport, store, and/or insure 42,000 gallons of unleaded gasoline, but most dealers do not.
The simple solution to the dangers of first day notice is to exit long positions the day, or week, before the FND. Brokers try to keep their clients out of trouble like first day notice and possible delivery. The ultimate responsibility, however, rests with the merchant.
Smart Asset.
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