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I have read that some contracts, specially those on ICE, have a physical delivery, rather than financial settlement like indices futures contract, so I'm wondering:
If for some reason I'm still holding a lean hogs contract with physical delivery when it finally expires, I am now having to pay for the remainder of the contract and have the obligation to find a home for 50,000 pounds worth of living pigs?
Does the brokers have any measures to prevent newbie traders to be the proud owner of 125 metric tons of corn?
What happens if I default on my obligation to adquire the physical, underlying asset of the contract?
I understand that upon expiration and after the exchange delivers the first notice, most speculators roll over to the next contract, or at least offset their positions on the expiring contract, drastically reducing the liquidity, thus making the b/a spread go sky-high, and making it increasingly harder to get rid of a contract you have?
I have been trading physically delivered commodities for 30 years, and this worst case scenario has never happened to me. And more than once I have forgotten or neglected to roll over positions.
Most (all?) brokers will get you out before you get into trouble like this, at least the dozen or so brokers I have worked with have done this. Of course, they usually charge you a big commission ("desk" charge) to get you out.
If your broker does not get you out, I'm sure there are ways to get out of physical delivery, but they all will cost you $$$.
I would recommend talking to your broker, and seeing what their policy and procedures are on all this.
You are not going to receive any corn unless you have available funds to pay for it. You are not going to have to deliver any corn unless you already have it in an approved storage facility. Receipt/delivery is simply a matter of exchanging cash in your account for warehouse receipts. There's a funny idea that someone will pull up to your yard and start dumping tons of grain (or letting loose thousands of hogs, even funnier), but this doesn't happen. The exchange is not organized idiotically.
I believe that Kevin is correct here:
Your broker will tell you what they will do. It may cost you, but no one is going to let it get to the point of absurdity.
Bob.
When one door closes, another opens.
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Late to the conversation but let me add my input.
Lots of talk about expiration, make sure you check FIRST DELIVERY or FIRST NOTICE. For many contracts this is after expiration but for some contracts it is before. For example with Gold (GC & MGC) and Silver (SI & SIL) first delivery is at the beginning of the contract month and expiration is at the end of the contract month. So you could be delivered to before the contract expires!!
Brokers - some brokers do not have the ability to go to delivery, so they will always close you out, often days in advance. Other brokers, especially the bigger ones, that tend not to be retail orientated, have clients that go to delivery often, hence they may wait for instructions from you. As already mentioned it would be good to talk to your broker and find out. I have been involved in going to delivery before and I can tell you that if you have an open position going into expiration and plan to go to delivery your broker will be in active communication with you well before expiration. The problems occur when you accidently open a position and end up going to delivery.
Regarding margin release - It differs by contract. For example CME/NYMEX have "HH" which is a financial version of their NG/Natural Gas contract. It financially settles against the last day closing price of NG. That day the margin is released - meaning their is no margin requirement the evening of expiration. ICE have a similar product "H" or Henry Hub LD1 but the margin for that product isn't released until the day after expiration - meaning you have to post margin even though the contract has expired.
With regards to delivery. If you go to delivery, the first thing that happens is that you will be margined 100% of the notional value of the contract whether you are the buyer or the the seller. So if you have 1 lot of crude, the margin requirement will go from $4,500 or whatever it currently is to $60,000 on the day of expiration!
Taking Delivery - This isn't as easy as you would think. An oil tanker doesn't show up in front of your house. To take delivery you will often need to have intermediary logistical contracts in place. To take delivery of Crude, you need a storage contract at Cushing OK. I believe to take delivery of meats you need acccess to Slaughter Houses. To take delivery of gold you need a Warehouse contract etc etc. Which leads to...
ADP or Alternative Delivery Procedure - Even if you do go to expiration / delivery "most" people do NOT go to delivery "through the exchange process". Obviously if you did it in error you have no way of actually delivering. Even if you did it intentionally the requirement to post 'full notional value' makes it undesirable. Hence there is what is called an Alternative Delivery Procedure. This is where two matched counterparties agree to meet they delivery requirements outside of the exchange system. So for the error trade this means you will pay somebody to let you out, for the people wanting delivery, it means they will enter a bi-lateral delivery agreement. As far as I know, the only reason this wouldn't happen, is if you were so concerned about the credit risk of the counterparty that you want to keep the exchange involved for credit protection.