Once the clearing house has matched a short with a long, the two know each other's identity. An ADP lets them agree different terms — another grade, another location, another date, or a cash payment instead of the commodity — and notify the exchange that the delivery obligation is discharged.
It exists because standard delivery terms are a compromise that suits nobody perfectly. A refiner assigned crude at cushing might prefer barrels on the Gulf Coast and will pay for the swap.
The clearing house steps out of the way once an ADP is filed, so the parties take each other's credit risk rather than the exchange's. That is a material change from the usual novation protection.
Example: a short assigned 10 crude contracts at Cushing and a long who wants Houston barrels agree an ADP at a $1.20 per barrel differential, settling 10,000 barrels for $12,000 less than the invoice.
Related: delivery-notice, exchange-for-physical, novation, cushing, physical-delivery