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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.

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  • $\begingroup$ Let me know if I answered your question in enough detail. IRS is interest rate swap? Or something else? $\endgroup$ – Scott Skiles Jul 12 '18 at 23:43
  • $\begingroup$ IRS is an interest rate swap, yes! $\endgroup$ – p.vitzliputzli Jul 13 '18 at 7:02
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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.

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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.

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  • $\begingroup$ Given that we have non-deliverable single-currency interest rate swaps, I would guess that the participants are not interested in receiving the currency. There must be some other reason. $\endgroup$ – p.vitzliputzli Jul 13 '18 at 7:08
  • $\begingroup$ Can you link to the contract specs? Your description is all we are going off of right now. I think @dm63 is on the right track, but there would then be FX risk to consider. $\endgroup$ – Scott Skiles Jul 13 '18 at 13:12
  • $\begingroup$ I have added a link to CME's swap details for BRL. The description fits the trade data I am seeing, but doesn't state anything about physical settlement. $\endgroup$ – p.vitzliputzli Jul 13 '18 at 13:50
  • $\begingroup$ Thanks for including that pdf. It looks like BLR is financially settled, as the currency itself is not "physically" delivered. That is, BLR is non-deliverable and it is transferred into USD at 1:15pm EST or whatever. $\endgroup$ – Scott Skiles Jul 15 '18 at 1:32
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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.

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  • $\begingroup$ In this case, the deliverable is always USD, so I don't understand why they should deliver BRL instead. $\endgroup$ – p.vitzliputzli Jul 13 '18 at 7:05
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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.

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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.

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  • $\begingroup$ you will find it can't be deleted since people have invested time in attempting to help you find a solution. $\endgroup$ – Attack68 Jul 14 '18 at 20:14

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