Does the Exercise of a Physically-Settled Option Require MTM?

The exercise of a physically-settled option itself does not directly require marking-to-market. When the option is exercised, the resulting transaction is either the purchase or sale of the underlying asset at the strike price.

If the option is on a futures contract, exercising it results in a long or short futures position, which is then subject to the daily marking-to-market process of the futures market. The option premium itself is not MTM daily.