Settlement

Settlement is the process of closing out a futures position, either by delivering the physical commodity or by exchanging cash against a final reference price.

Settlement is how a futures contract ends. Most agricultural and metal contracts settle by physical delivery: the seller delivers an exchange-approved lot of the commodity and the buyer pays the final price. Many financial and some commodity contracts instead use cash settlement, where the difference between the contract price and a published reference price is simply paid in cash, with no commodity changing hands.

The choice matters for who can safely hold a contract to expiry. A trader with no way to store or handle physical wheat needs to close a delivery-settled contract beforehand, while a cash-settled contract can be held to the end without that concern. The clearing house oversees settlement for every contract, matching each buyer to a seller and guaranteeing that both sides perform. See how a futures contract settles.