How Does a Futures Contract’s Settlement Mechanism Relate to Loss Distribution?

The settlement mechanism (e.g. physically or cash settled) determines how the final PnL is calculated and distributed at the contract's expiry. For loss distribution, the settlement process ensures that all gains and losses are finalized.

In a cash-settled perpetual contract, the insurance fund/ADL/socialized loss system handles the distribution of deficits in real-time before settlement.