Direct settlement is one of three types of clearing used prior to the establishment of the Board of Trade Clearing Corporation in 1925. It involves bilateral reconciliation of contractual commitments. Direct settlement is obtained through delivery or by offset between the original counterparties.
In a system of direct settlement, there are three categories of possible outcomes. First, the specified terms of the contract can be performed. Second, the involved parties can settle the contract prior to deilvery by establishing a mutually agreed price at which both are willing to extinguish the pending liabilities of the other. This method is referred to as direct offset.
The third and last outcome involves one of the parties could failing to perform and the contract is settled on the basis of standing enforcement procedures.
- Origins Of The Modern Exchange Clearinghouse: A History Of Early Clearing And Settlement Methods At Futures Exchanges. Federal Reserve Bank of Chicago.