Bond Futures Delivery Notices
The majority of bond futures positions are opened and closed through an offsetting transaction before the delivery process begins. The Montréal Exchange statistics show that approximately 15% of open positions actually result in delivery of bonds. The following text details the delivery process for participants wishing to settle their contracts through physical delivery of Government of Canada bonds.
The delivery process for bond futures contracts differs from other physical delivered contracts. This process entails the delivery of the underlying bonds by the short position holder to the long position holder. The delivery process is executed on a first in, first out (FIFO) basis.
Days and dates
The bond futures can be settled by delivery of the Government of Canada bonds, which meet the delivery standards, according to a predetermined process as specified by MX. Delivery of the CGZ, CGF, CGB and LGB is a process allowing two days for settlement, which provides time for parties to futures contracts – the buyer, the seller and CDCC (the clearing corporation) – to make necessary arrangements for delivery.
First declaration day
On the sixth business day preceding the first business day of the delivery month, the members of the CDCC (the clearing members) declare to CDCC all their long positions in chronological order. It is according to this list that CDCC determines the oldest long position for assignment. Assignment functions on a first-in first-out basis (FIFO). The following diagram shows the process of the CGB.
| Days eligible for delivery (i.e. "D" days) Business days of delivery month | |||||||
|---|---|---|---|---|---|---|---|
| d-6 | d-2 | d-1 | d | D-7 | D-2 | D-1 | D |
| First declaration day | First notice day * | First assignment day | First business day of delivery month First delivery day |
Last trading day | Last notice day | Last assignment day | Last business day of delivery month Last delivery day |
* After this day, long position holders risk being assigned for delivery.
"d-2" Delivery process: delivery notice (d-2), assignment notice (d-1) and delivery day (d)
Sellers of CGB contracts initiate the delivery sequence at any time during a period that begins two business days prior to the first business day of the delivery month. While deliveries continue until the end of the month, trading in the deliverable contract stops on the seventh business day preceding the last business day of the delivery month. Sellers have the right to select the specific issue that they will deliver, as long as the issue satisfies the delivery criteria specified by MX.
- d-2
Delivery notice day - The delivery process begins when, on the second business day preceding any business day of the delivery month, the seller (short) provides to CDCC, a delivery notice. Tender of the delivery notice on tender day must take place before 5:30 p.m. or before such time set by the clearing corporation, although the futures trading session end at 4:30 p.m..
- d-1
Assignment day - Before 7:30 a.m. on the next day, CDCC matches the clearing member holding the oldest long position with the clearing members submitting the delivery notice (short) and advises both parties. This assignment process is based on the chronological list of long positions submitted to CDCC by its clearing members.
- d
Delivery day - On delivery day, delivery and settlement are executed by book-entry system for Government of Canada bonds.
It is anticipated that most holders of Government of Canada Bond futures positions will liquidate their long and short positions prior to the last day of trading. However, all positions that have not been closed out prior to the end of trading will result in a delivery.
Delivery notice: information provided by the seller (short) to CDCC
- A notification that the seller intends to make delivery.
- The identification of the Government of Canada bonds that the seller intends to deliver, i.e. the coupon and maturity of the Government of Canada bonds to be delivered.
Assignment information provided by CDCC, to the oldest long customers on the assignment day
The information below is transmitted by CDCC to the Canadian Depository for Securities Limited (CDS), which acts as the agent for CDCC in the settlement and delivery procedures.
- A notification that a seller will make a delivery to him on delivery day.
- The identification of the clearing member that will make the delivery on behalf of the seller.
- The identification of the Government of Canada bonds which the long customers will receive, i.e. the coupon and maturity of the bonds to be received.
- The delivery settlement price amount to be paid on delivery day.
