Physical vs Cash Settlement: How Futures Delivery Works, First Notice Day, and Cash-Settled Index Futures

A futures contract ends in one of two ways if it is held to expiry. Physically settled contracts end with the actual commodity or security changing hands: barrels of crude oil at Cushing, Oklahoma, bars of gold in an approved vault, or government bonds. Cash-settled contracts end with a final cash payment based on the difference between the last settlement price and an official final price, usually an index, so nothing is delivered.

In short: in physical settlement, sellers who still hold short positions deliver and buyers who still hold long positions take delivery, through a multi-day process run by the clearing house; the key date for most traders is first notice day, after which a long holder can be assigned a delivery. In cash settlement, open positions are simply marked one last time to a final settlement price, such as the special opening value of the S&P 500 on the third Friday of the contract month, and the cash moves. Most futures positions are closed or rolled before either happens.

The misconception: “someone will dump 1,000 barrels of oil on my lawn”

It is a popular joke, and it points to something real, but delivery does not work that way. Physical delivery happens at the locations, in the forms, and through the procedures set out in the exchange’s rulebook, between clearing members. A trader who held a long WTI contract into delivery would need arrangements to receive oil by pipeline or into storage at Cushing, or face serious costs and penalties. Retail brokers generally do not allow customers to get anywhere near that point, and will close positions ahead of the relevant dates.

Which contracts settle which way

Contract (exchange)	Settlement	What is delivered or used
E-mini and Micro E-mini S&P 500 (CME)	Cash	Special opening quotation of the S&P 500 on the third Friday
S&P/TSX 60 futures, SXF (Montréal Exchange)	Cash	Official final value of the index
VIX futures (Cboe Futures Exchange)	Cash	Final settlement value of the VIX
Bitcoin futures (CME)	Cash	CME CF Bitcoin Reference Rate (see bitcoin futures explained)
WTI crude oil, CL (NYMEX)	Physical	1,000 barrels of crude meeting the specs, delivered at Cushing, Oklahoma
Micro WTI, MCL (NYMEX)	Cash	Tied to the standard WTI contract
Brent crude (ICE Futures Europe)	Hybrid	EFP delivery into the physical market, with an option to cash settle against the ICE Brent Index
Gold, GC (COMEX)	Physical	100 troy ounce bar or three 1-kilo bars in an approved depository, transferred by warrant
Corn, ZC (CBOT)	Physical	Shipping certificates for 5,000 bushels at approved delivery locations
Treasury futures (CBOT)	Physical	Eligible Treasury securities, chosen by the short
Government of Canada bond futures, CGB (Montréal Exchange)	Physical	Eligible Government of Canada bonds

Cash settlement is used where physical delivery would be impractical (you cannot deliver an index) or where the market prefers it. Physical delivery is kept where it anchors the futures price to a real, deliverable market.

How physical delivery works

CME Group describes physical delivery as a three-business-day process run through the clearing house:

Position (intention) day. A short clearing member tells CME Clearing that a customer intends to make delivery. The clearing house matches that short with a long, usually the oldest open long position.
Notice day. The clearing house issues notices and invoices to both sides showing what will be paid and delivered.
Delivery day. The commodity (or a document of title to it, such as a warehouse receipt, shipping certificate, or vault warrant) moves from the short to the long, and payment moves the other way, at the same time.

The key point is who decides. In most physically delivered futures, the short chooses whether and when (within the delivery period) to deliver. The long is assigned. That is why, if you are long, the date that matters is not the last trading day but the first day you could be assigned.

First notice day and friends

For contracts with a delivery period, CME’s materials define a chain of dates:

First position day: two business days before the first delivery day. Longs who do not want to risk being matched for delivery need to be out by the close.
First notice day: the next business day; the first day a notice of delivery can be issued.
First delivery day: the first business day of the contract month for grains and Treasuries.

Worked example: March 2027 corn

All dates below follow the CME rules as described; holidays can shift them, so check CME’s calendar.

March 1, 2027 is a Monday, so the first delivery day for March 2027 corn (ZCH27) is Monday, March 1, 2027.
First notice day: one business day earlier, Friday, February 26, 2027.
First position day: two business days before first delivery, Thursday, February 25, 2027.
Last trading day: the business day before the 15th of the contract month. March 15, 2027 is a Monday, so trading ends Friday, March 12, 2027.

A long holder of ZCH27 who is still in the position after February 25 can be matched with a short who wants to deliver. A spec trader with no use for 5,000 bushels of shipping certificates would want to have closed or rolled the position before that. Many brokers require it several days earlier.

WTI and gold work a little differently

WTI crude oil: NYMEX lists the last trading day as the third business day before the 25th calendar day of the month before delivery. Positions still open after trading ends go into delivery during the delivery month, at Cushing. This is why the days just before WTI expiry matter so much: after them, only those who can actually handle oil can hold the contract.
COMEX gold: the rulebook allows delivery on any business day of the delivery month, and trading in the expiring month ends on the third last business day of the month. Delivery is made by transferring an electronic warrant for gold held in a COMEX-approved depository.

Delivery outside the standard process

Physical market participants often do not want the exchange’s standard delivery location, grade or timing. They can instead arrange an exchange for physical (EFP): two parties privately swap a futures position for a matching physical transaction, and report it to the exchange. The futures positions are closed and the commodity moves on terms the two sides choose. ICE’s Brent contract is built around this route: it is deliverable through EFP, with an option to cash settle against the ICE Brent Index at expiry. EFPs are one reason so little of the open interest in physical contracts ever reaches formal delivery.

How cash settlement works

Cash settlement is a final, ordinary mark-to-market. The exchange determines the final settlement price, and every open position is paid or charged the difference between the previous day’s settlement price and that final price. Then the contract ceases to exist.

Worked example: E-mini S&P 500 at expiry

CME says ES contracts settle in cash to the spot value of the S&P 500 on the third Friday of the contract month, using a special opening quotation computed from the opening prices of the index’s component stocks. For the December 2026 contract, that is Friday, December 18, 2026. Prices below are illustrative.

You hold one long ESZ26. Thursday’s daily settlement price is 6,010.00.
Friday’s final settlement value (the special opening quotation) is 6,022.40.
Final payment: (6,022.40 minus 6,010.00) x $50 = 12.40 x $50 = $620 credited.
The short on the other side is debited $620. Nothing else changes hands.

Notice that the final value is computed from opening trades in hundreds of stocks, not from the futures market itself, and it can differ noticeably from where the index or futures traded late Thursday or early Friday.

Why the settlement method matters for prices

Both methods force convergence: at expiry the futures price has to equal the spot price, because either the contract is paid off at the spot index value, or anyone could arbitrage a gap by buying spot and delivering it. The carry arithmetic is in how futures prices are set.

Physical delivery has a weakness, though. When only a few participants can actually take delivery, the final days can see extreme moves. The May 2020 WTI contract settled at minus $37.63 a barrel on April 20, 2020, the day before its last trading day, as holders without storage paid to get out. See negative oil prices in April 2020.

What can go wrong

Missing first notice day. A long in a physical contract can be assigned delivery, along with the costs that come with it. Brokers may force-liquidate positions near the deadline at unfavourable prices.
Thin trading near expiry. As most participants roll out, the expiring contract can become illiquid, and prices can move sharply.
Settlement surprises. For cash-settled index futures, the special opening quotation can differ from the price you expected, especially on volatile mornings.
Assuming all contracts behave alike. Even within one product family, the micro version may cash settle while the standard one is physically delivered.

Most traders avoid all of this by rolling ahead of time; see rolling futures contracts.

The short version

Physically settled futures end with real delivery through the clearing house, with the short usually choosing to deliver and the long being assigned; first notice day is the date longs care about most. Cash-settled futures end with a last mark-to-market against an official final price, such as the special opening value of the S&P 500. Either way, settlement forces futures and spot to meet at expiry, which is what makes futures prices meaningful in the first place.