Beyond Custody, What Other Risk Is Amplified by Physical Settlement?

Liquidity risk is often amplified by physical settlement. If the underlying asset is illiquid, the process of sourcing or offloading the asset upon settlement can be difficult, leading to price slippage and adverse transaction costs.

Operational risk is also higher, as the complex logistics of securely transferring the physical asset must be executed flawlessly. Cash settlement simplifies the process, reducing both liquidity and operational hurdles.