One of the stories savvy brokers use for effect is the tale of a beginner Futures trader who accidentally left a position open and woke up to see several trucks worth of wheat delivered to their doorstep. The story’s perfect for piquing people’s interest as an introduction to Futures trading. However, we can almost certainly claim that it’s not something that has actually happened, or at least not in the way described above. Even so, it’s worth asking how these contracts are actually fulfilled in practice. Do traders have any reason to fear something along these lines happening to them?
The Futures Delivery Process for Commodities
Presumably, something like this had a much higher chance of occurring during the Futures market’s initial emergence. At the time, it was mostly used by those with a stake in the price of the respective asset to hedge their risk. Agricultural producers, farmers, grain merchants, and processing companies were the main parties to shape its development. Margin-based investing soon caught the attention of speculators, who eventually took control of the prices. Today these same profit-oriented speculators make up 95% of the market’s trade volume. Cases where one party actually owns wheat, oil, or any other commodity has become almost an exception.
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One has to wonder how traders make deals on physical assets under these conditions and the actual delivery of these assets. To get to the bottom of it, it’s important to take a closer look at the published details of these contracts in addition to the rules of the particular brokerages that provide them. In reality, most brokers fundamentally reject any involvement in the actual physical delivery of the contracts’ respective assets. Positions are automatically closed and settled in cash at the moment of expiry. This means there are zero risks of a carrier with a shipment of wheat knocking on your front door.
The Role of Clearing Houses in The Futures Delivery Process
If the broker is open to offering physical delivery, it becomes necessary to get an additional institution involved. The clearinghouse serves an imperative role in this process. It keeps track of changes in the ownership of contracts. It also keeps track of the various warehouses and depots that can serve as both the origin and destination of physical deliveries. It’s also worth pointing out that physical deliveries are only possible for front-month contracts, although traders can purchase contracts with expiries of up to a year and a half.
| Contract Month | Mar 2019 |
| Product Code | CH19 |
| First Trade | 15 Dec 2016 |
| Last Trade | 14 Mar 2019 |
| Settlement | 14 Mar 2019 |
| First Holding | 25 Feb 2019 |
| Last Holding | 15 Mar 2019 |
| First Position | 27 Feb 2019 |
| Last Position | 15 Mar 2019 |
| First Notice | 28 Feb 2019 |
| Last Notice | 15 Mar 2019 |
| First Delivery | 01 Mar 2019 |
| Last Delivery | 18 Mar 2019 |
The Delivery Process in Detail
The above table illustrates the specifics of a contract on corn Futures found on the CME’s website. The first date shows when you can purchase the contract. In this example, it was already on the market in December of 2016. However, its expiry was March 2019. The Settlement date coincides with the Last Trade day. That’s when the closing price is determined, which was also the settlement price of physical delivery.
First Holding marks the beginning of when position dates are accepted. This period lasts until the day after the contract’s expiry. The First Position date indicates the start of the time period over which the Clearing House accepts intents for deliverable contracts. It lasts just as long as the First Holding period. The day after, users get notified that they’ve been assigned a delivery. That’s when the Clearing House coordinates delivery location and the commodity stock’s quality with the warehouses. Once all of that is settled, the first delivery begins, and it needs to be completed by the fourth day after the contract’s expiry at the latest.
This lengthy process should explain how many steps a trader needs to finally receive their order. It’s also important to note that in most cases, delivery happens not by any means of transportation but rather by handing over the warehouse receipt. These receipts are negotiable securities that the warehouse issues. They act as proof of ownership of the stored commodity.
Final Thoughts
Going back to our original premise, it’s not enough to forget to close a position. Rather, one needs to proactively make a series of mistakes before any actual physical delivery can occur. Even then, it would most likely end in either receiving a paper trail in the mail or a digital document confirming the transaction. The reality is, unfortunately, nowhere near as exciting.
