How a futures contract settles
Settlement is the process that ends a futures contract: either the seller hands over the physical commodity at an approved delivery point and the buyer pays for it, or the exchange closes the position against a published final price and only the difference in cash moves. Most contracts never reach either ending, because most holders offset their positions before expiry. The rules for the endings still govern the price all the way through, which is why they are worth knowing.
What happens in the last weeks of a contract’s life?
A futures contract is standardized in every dimension except price: quantity, grade, delivery months, delivery points and the deadlines that run the endgame. The ICE Futures US Cocoa contract is 10 tonnes quoted in US dollars per tonne; London Metal Exchange copper is 25 tonnes in dollars per tonne; ICE Brent Crude is 1,000 barrels in dollars per barrel (exchange contract specifications, checked September 2026). Because every lot is identical, the exchange’s clearing house can stand between every buyer and every seller, which is what lets a position be closed by trading rather than by negotiation.
From the moment a position opens, it is marked to the market. Each day the clearing house revalues it at the settlement price and moves cash between the two sides: variation margin. Nobody waits until expiry to find out what they owe. This daily flow is why a physical trader who is hedging correctly can still have a financing problem: the paper leg pays or costs money now, while the physical leg pays on shipment.
The endgame runs on three dates. The first notice day is the first day a short can declare an intention to deliver, so anyone unwilling to receive the commodity closes or rolls before it. The last trading day ends price discovery for that month. The delivery period is when goods and money actually move. Rolling means closing the near month and opening a further one, which is a real transaction at a real price difference, and it is where a contango or backwardation curve stops being an abstraction.
Physical delivery does not usually mean a truck. In exchange-traded metals and softs it means the transfer of a warehouse warrant or receipt: a document giving title to a specific lot in an approved warehouse, graded and weighed by licensed inspectors. The short chooses which eligible lot to tender, subject to the contract’s premiums and discounts for grade and origin, and the exchange assigns it to a long. Because the short chooses, the futures price tends to reflect the cheapest deliverable grade, and better material trades at a premium in the physical market rather than on the screen, which is where the basis between a local cash price and the futures price lives.
Two escape hatches complete the picture. Parties who want to exchange the physical commodity on their own terms can register an exchange for physical, swapping their futures positions alongside a private cargo deal. And some contracts never deliver at all: iron ore, freight and several energy contracts are cash settled against a published index, which the exchange treats as the final price. Cash settlement removes the warehouse but keeps the discipline, because the index is built from physical transactions.
Schematic of one contract month: the dashed branch is the exit most positions take, and the solid branch is the one that disciplines the price.
A worked example
Take cocoa, where the contract is small enough to price out in a sentence. ICE Futures US lists Cocoa (ticker CC) at 10 tonnes per lot, quoted in US dollars per tonne, with ICE Futures Europe listing London Cocoa at the same 10 tonnes in pounds (exchange contract specifications, checked September 2026). The World Bank benchmark, which averages the New York and London markets, was $5.95 per kilogram in August 2026 (World Bank Pink Sheet). That is $5,950 per tonne, so one lot stood for roughly $59,500 of cocoa, and a grinder covering a 500-tonne purchase needs 50 lots.
Now run the same lot through the price range of the last three years, because that is what variation margin does. Cocoa averaged $3.28 per kilogram across 2023, reached a monthly record of $10.75 per kilogram in January 2025, and was back to $5.95 in August 2026 (World Bank Pink Sheet). The same 10-tonne lot was worth about $32,800, then $107,500, then $59,500. A short hedger holding 50 lots through the rise had to fund the difference in cash, day by day, long before any beans were delivered or any chocolate was sold. That cash-flow mechanism, not any change in the harvest, is what forces some hedgers to reduce positions in a fast market.
The other two contracts in this example scale differently. LME copper is 25 tonnes, and at $14,326 per tonne in August 2026 one lot represented about $358,150 (World Bank Pink Sheet for the price, exchange specifications for the size). ICE Brent is 1,000 barrels, and at $90.9 per barrel in the same month one lot was about $90,900. Copper and cocoa end in warehouse warrants; Brent’s expiring futures can end in cash settlement against an index or in an exchange for physical, which is why a barrel of a specific crude grade rarely changes hands on the exchange itself.
One caution about all three numbers. The World Bank series are monthly averages of benchmark quotations, not the exchanges’ own daily settlement prices, so they are the right size but not the exact figure any clearing house used on any day. The underlying prices are on the cocoa price page and the copper price page, the contract specifications are listed on the cocoa origins page, and the relationship between these prices and the physical market is the subject of spot vs futures.
Frequently asked questions
What does it mean for a futures contract to settle?
Settlement is how the contract ends. Either the seller delivers the physical commodity at an approved point and the buyer pays the contract value, or the exchange closes the position against a published final price and only the cash difference changes hands.
Do most futures contracts end in delivery?
No. The large majority are offset before expiry by taking the opposite position, which the clearing house nets to zero. Delivery still matters because the possibility of it is what keeps the futures price tied to the physical market.
What is a first notice day?
The first day on which the holder of a short position may serve notice that it intends to deliver. Traders who do not want the physical commodity close or roll their positions before that date, which is one reason volume moves to the next month in a predictable pattern.
How big is one cocoa futures contract?
The ICE Futures US Cocoa contract covers 10 tonnes and is quoted in US dollars per tonne. At the World Bank benchmark of $5.95 per kilogram in August 2026, that is $5,950 per tonne, so one lot represented about $59,500 of cocoa.
What is variation margin?
The daily cash flow that keeps a futures position marked to the market. Gains are credited and losses debited each day, so a hedger who is right on the physical market but short on cash can still face large daily payments while the position is open.
What is cash settlement?
Ending a contract against a published reference price instead of by delivery. It suits commodities that are awkward to deliver into a warehouse, such as iron ore or freight, and it removes the need for approved storage while keeping the price link to the physical index.