Physical Versus Cash Settlement in Currency Interest Rate Swaps

# Physical Delivery of Single Currency Fixed-Floating IRS


# Physical Delivery of Single Currency Fixed-Floating IRS












In trade data of South American single currency fixed-floating IRS (e.g. BRL with floating rate BRLCDI with deliverable USD) there are many physically settled IRS. What does physical delivery / settlement mean in case of such IRS in contrast to cash delivery?

Descriptions of BRL IRS that fit the trade data can be found at e.g. CME.

## Answer by p.vitzliputzli (score 0, accepted)

https://quant.stackexchange.com/a/40766

I have come to the conclusion that this has to be a reporting error. The CFI code and the delivery field are contradicting each other and there are some other hints I can't comment on.

## Answer by Attack68 (score 1)

https://quant.stackexchange.com/a/40761

The link you posted does not contain the word "physical" in it, however with respect to the Brazilian interest rate swaps it does mention "non-deliverable currency."

An interest rate swap is a defined series of coupons or cashflows so the only question remaining is then how to settle those cashflows, with respect to currencies that may be lesser liquid or have onshore/offshore regulations stipulated.

In your link's case the CME has defined the IRS as being "non-deliverable" meaning non-deliverable of BRL and instead all cashflows must settle in USD and they specify the source of the FX conversion rate (BRL-PTAX spot rate). Additionally they stipulate any specific fees written into the contract must be denominated in dollars.

I strongly suspect there is a local market which settles, on an uncleared basis in BRL, and it is entirely possible this is colloquially referred to as a "physical basis", since there is no other definition of physical that really exists for IRS.

## Answer by Scott Skiles (score 0)

https://quant.stackexchange.com/a/40749

Physical delivery means that the underlying contract will be delivered when the contract expires. This is as opposed to financial settlement, where parties settle up on the difference in value gained or lost. In the case of currencies, physical delivery may be useful in case a party wants to guarantee the delivery of a specific currency at a future date.

## Answer by dm63 (score 0)

https://quant.stackexchange.com/a/40750

I think physical means that BRL currency amounts will be delivered on each fixed and Floating rate payment , whereas cash means that each payment is translated into USD at the then current BRL/Usd exchange rate.

## Answer by Joshua Kalina (score 0)

https://quant.stackexchange.com/a/40790

With FXO or IRS, the deliverable in question is the currency. With FX that is difficult to source for settlement, a synthetic market is created to settle transactions in USD (this can be arbitrarily any currency however as its an OTC transaction, but most dealers and market-data assume USD).

NonDeliverable Forward markets (and by extension FXO and IRS) are usually created by restrictive Central Monetary policies where offshore delivery of their currency is prohibited.