Offsetting Contracts, Settlements and Delivery

The whole unit on one sheet: how a position gets offset, who controls delivery, and what actually changes hands when delivery happens.

How Does a Trader Offset a Position?

• Offsetting closes a long or short position with an equal and opposite trade in the same commodity, delivery month, and exchange. A long offsets by selling; a short offsets by buying back.
• Open interest falls only when both sides are closing. If a closing trader trades against a new trader entering, open interest is unchanged; it rises only when a new buyer and a new seller both open.
• Most positions are offset before delivery, because speculators want the price gain or loss in cash, not the physical commodity.

Who Controls Delivery, and When?

• The short controls the delivery decision: whether to deliver and, within contract rules, the timing, grade, and location. The long is the passive party.
• First notice day (FND) is the first day delivery notices can be issued. A long who does not want the physical must offset before first notice day.
• As the spot month (the contract nearest expiration) approaches, speculators typically exit, commercials remain, liquidity thins, and speculative position limits get tighter, not looser, because deliverable supply is the binding constraint.

What Does the Clearinghouse Guarantee, and What Doesn't It?

• Through novation, the clearinghouse becomes the buyer to every seller and the seller to every buyer, so no trader faces another trader directly.
• It guarantees financial performance, not the physical act of delivery. It matches a delivering short to a long, usually the oldest long, and assigns the notice, but it never takes title to the goods.
• A transferable delivery notice lets the assigned long pass it along by retendering (selling an offsetting contract); a non-transferable notice locks delivery to the first long assigned.

What Actually Changes Hands at Delivery?

• Physical delivery moves a document of title, a warehouse receipt or shipping certificate, not a truckload of the commodity across a trading floor.
• Cash-settled contracts, like stock-index and rate futures, have no delivery instrument at all; the position settles to the final settlement price in cash.
• An exchange for physical (EFP) is a privately negotiated, off-exchange swap of a futures position for the matching cash position. It is a permitted exception, not an illegal trade, and it still must be reported to the exchange.

Which Gotchas Trip Students Up?

• The short chooses whether and how to deliver; the long only reacts. A choice that has the long "declaring delivery" or "choosing the grade" is backwards.
• The clearinghouse guarantees the money, not the commodity. If a short fails to deliver, the clearinghouse makes the long financially whole; it does not itself produce the goods.
• Only a transferable notice can be retendered. A non-transferable notice leaves the first long assigned stuck with delivery.
• An EFP is legal and must be reported, even though its futures leg is negotiated privately rather than on the open market.

One-Breath Recap

Most futures positions close by offsetting, a long selling or a short buying back an equal and opposite contract, which drops open interest only when both sides are closing; the short controls whether, when, at what grade, and where to deliver, so a long who wants no part of delivery must offset before first notice day, and speculative position limits tighten as the spot month nears; the clearinghouse, standing between every buyer and seller through novation, guarantees financial performance but never the physical act of delivery, matching a delivering short to the oldest long and letting a transferable notice be retendered while a non-transferable one sticks; and physical delivery moves a warehouse receipt or shipping certificate, never the commodity itself, while an exchange for physical is a permitted, reportable exception that swaps futures for cash positions at once.

Need more than the recap? Read the full Offsetting Contracts, Settlements, and Delivery unit.