I am a bit confused about how futures contracts are settled. I know that usually contracts are either cash-settled or physically settled. For CME WTI crude oil futures contracts, how does settlement work? If I don't want to take physical delivery, how do I indicate that? Is there a date before which I must close all the positions in order to avoid physical delivery? What happens if I hold an open contract until the last trading day? I know that there is a 3-minute window (2:28pm - 2:30pm) on some day during which a VWAP of the price is taken as some sort of mark? What does that do? Could someone help me understand the rules?
CME WTI crude oil futures contracts, how does settlement work?
They are physically settled. CME does offer financially-settled oil contracts that are much more lightly traded, but the WTI contracts that went negative are physically-settled by definition.
If I don't want to take physical delivery, how do I indicate that?
It's built into the contract - you don't have a choice. If you don't want physical delivery, then you have to sell your futures contract before it expires (which is a reason prices went negative - lots of sellers and very few buyers).
What happens if I hold an open contract until the last trading day?
If you hold it at the end of the last trading day, then you are contractually obligated to take physical delivery of the oil at the price at which you entered the contract.
I know that there is a 3-minute window (2:28pm - 2:30pm) on some day during which a VWAP of the price is taken as some sort of mark? What does that do?
That's the settle price. An average price is taken so that a single trade at the last second doesn't directly affect the final settlement price. settlement price is measured every trading day (not just the day of contract settlement) and is used to measure the profit/loss of a contract. If the settle price is less than what you entered in then you "lost" money because you could have bought the oil for a lower price. It's also used for oter derivatives based on the futures price (like options and swaps).
Thanks so much for the detailed answers! I have a small followup question - is the settlement day the same as the last trading day for CME WTI? Does trading ends at 1:30pm (CT) on the last trading day? Apr 25, 2020 at 19:00
Go to the futures calendar.
For instance, gold has a settlement of May 27, a first-notice of April 30, and a first delivery of May 1 . So a discount futures broker that does not arrange delivery would close out positions on April 29.
Then oil has a settlement of May 19, a first-notice of May 21, and a first delivery of June 01. Oil is deliverable while mini-oil is financially settled on May 18.
If the delivery is wanted then a futures broker is needed that arranges delivery.