Daily Settlement

If a contract has a negative value to someone (they have a unrealized loss) and the person defaults, then the clearinghouse would have to make good on it.
To avoid this risk, the exchange does daily settlement: all gains and losses are realized daily and then contracts are reset at the daily settlement price – called `marking to market.’

Example

Suppose you bought 1 CME WTI contract for Dec, 2022 delivery on Jan 2, 2020. You bought it at $51.80. The contract closed (settled) that day at $51.97.
You made $\text{1,000 barrels} \times 0.17 \$/\text{barrel} = \$170$ on Jan 2. You received that money at the end of the day.

The settlement prices for subsequent days were \[\begin{align*} \text{Jan 3} \quad & \quad 51.72\\ \text{Jan 6} \quad & \quad 51.81\\ \text{Jan 7} \quad & \quad 52.13 \\ \text{Jan 8} \quad & \quad 51.31 \end{align*}\]
Suppose you sold 1 contract on Jan 9 at $51.50.

Here are the daily cash flows

\[\begin{align*} \text{Jan 2} \quad & \quad 51.80 & \quad \\ \text{Jan 2} \quad & \quad 51.97 & \quad +170\\ \text{Jan 3} \quad & \quad 51.72& \quad - 250\\ \text{Jan 6} \quad & \quad 51.81& \quad + 90\\ \text{Jan 7} \quad & \quad 52.13 & \quad +320\\ \text{Jan 8} \quad & \quad 51.31& \quad - 820\\ \text{Jan 9} \quad & \quad 51.50& \quad + 190 \end{align*}\]

The net is $-300 = \text{1,000} \times (51.50-51.80)$.

Cash Settled Contracts

Cash settled contracts are also settled daily.
On the last day, settlement is based on the spot price.
E.g., the E-mini S&P 500 futures contract is settled on the last day at the actual S&P 500 index level.