How Does a Physically-Settled Contract Reduce the Risk of Rehypothecation?

A physically-settled contract, especially when held in a segregated account with a trusted custodian, reduces rehypothecation risk because the underlying asset is required for final delivery. The assets are typically kept separate from the broker's own funds and are earmarked for the contract's fulfillment, making it harder for the broker to reuse them.

Cash-settled contracts rely only on margin, which is more fungible and easier to rehypothecate.