How Does a “Delivery Default” Occur in Physical Settlement?

A delivery default occurs when the party obligated to deliver the underlying asset (the seller of the futures contract) fails to do so on the settlement date. This can happen due to operational failure, a lack of the asset, or intentional non-compliance.

The clearinghouse typically steps in to cover the position, often by sourcing the asset on the open market or imposing a penalty on the defaulting party.