What Is the Risk of a ‘Delivery Default’ in Physically-Settled Futures?

A delivery default occurs when the seller of a physically-settled contract fails to deliver the specified quantity and quality of the underlying asset to the buyer on the settlement date. This can happen due to logistical failures, insolvency, or an inability to procure the asset.

The clearing house has rules in place, often involving penalty payments or forced cash settlement at a punitive price, to compensate the non-defaulting buyer and maintain market integrity.