Brokers apply it to retail accounts approaching first-notice-day in a deliverable contract, to accounts under-margined after a loss, and sometimes to a whole product when the firm no longer wants exposure to it. Exchanges apply it to contracts being delisted.
For the trader it is an abrupt loss of optionality. Averaging in, hedging with an offsetting month, or rolling into the next contract all require opening a position, and none of them is available. The only permitted action is to get flat.
Example: a broker flips crude oil positions to liquidation-only three business days before first notice. A trader long 2 CLZ contracts on that day cannot roll into CLF as a spread; they must sell the December leg first and buy January as a separate, unprotected trade.
Related: first-notice-day, auto-liquidation, first-position-day, roll, house-requirement