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A first notice day (FND) is the day on which buyers of futures contracts can receive a notice of delivery. This is their warning that holders of such positions might have to take possession of the commodity specified in the contract. It's a problem to be avoided and not the purpose of commodity futures trading.
Futures markets are neither a normal nor desirable method of transferring ownership of commodities. Futures markets exist solely to transfer the price risk of commodities 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 provision for delivery, pricing would be merely theoretical, and the contracts could not fulfill their economic function.
On first notice day then, buyers are forced to put their money where their position is. A trader who is buying the commodity in hopes of it increasing in value and wishes to remain in this "long position" simply sells his position and rebuys in the next calendar month. Those forgetful or unfortunate enough to hold their long positions through the FND are subject to receiving a notice of delivery.
Delivery is not automatic on first notice day; rules vary from one exchange to the next. After the notice of delivery is issued, the long trader's problems can multiply. He or she might be required to post the full cash value of the contract immediately. Trading liquidity vanishes, and prices can become extremely volatile because most of the other traders have exited their contracts.
Graceful exits after first notice day are sometimes possible. It might be possible, for example, to simply sell the position, but in some markets, trading ceases before first notice day. Some exchanges permit the trader to retender the contract — in effect, sell it for a fee far in excess of a normal commission. Again, details vary by market.
If all else fails, actual delivery is made. For a trader who happens to be in the business of whatever he or she 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 traders do not.
The simple solution to the hazards of first notice day is to exit long positions the day — or week — prior to FND. Brokers attempt to keep their clients out of problems such as first notice day and possible delivery. The ultimate responsibility, however, rests with the trader.