Physical Settlement

Overview

Physical Settlement is the completion of a contract or trade through delivery of the underlying asset, security, commodity, or instrument rather than payment of a cash difference. It differs from cash settlement and requires operational capability to transfer, receive, custody, and reconcile the underlying item.

Physical Settlement is closely connected to Cash Settlement, Trade Settlement, and Card Settlement. These concepts can appear in the same workflow, but they represent different records, decisions, controls, or stages.

Teams should keep instructions, execution evidence, finality, and accounting recognition as separate states linked by stable identifiers. This creates a traceable boundary between the market observation, the operational decision, and the final financial outcome.

Physical Settlement can appear in the same workflow as Cash Settlement, Trade Settlement and Card Settlement, but the records should remain separately identifiable. A relationship between them does not prove that pricing, execution, settlement, custody, or accounting has completed.

The scope of Physical Settlement should preserve its defining condition: It differs from cash settlement and requires operational capability to transfer, receive, custody, and reconcile the underlying item. Teams should document when that condition begins, which event changes it, and what evidence shows that execution, settlement, or measurement is complete.

Control evidence for Physical Settlement should cover obligation, counterparties, asset, amount, value date, conversion terms, finality evidence, and accounting result. The definition also indicates that in production, teams should define the authoritative record, identifiers, ownership, lifecycle rules, and evidence used to confirm the outcome. Keeping these details together makes later reconciliation and performance comparison possible without rewriting the original record.

Risk review should test for incorrect obligations, missed cutoffs, liquidity shortfalls, wrong assets, duplicate instructions, failed delivery, and premature finality. Exceptions should remain open until the evidence supports closure, and any manual adjustment should record its reason, approval, and resulting financial effect. This added control specifically concerns the completion of a contract or trade through delivery of the underlying asset, security, commodity, or instrument rather than payment of a cash difference.