Default subphase settings are the settings that are applied to newly created subphases. These settings can include the phase time tracking settings, member rates, and rate multiplier. The default value utilizes the value specified in the organization setting.
Learn more about organization default budget settings

The options are:
Use Project Settings: The newly created Subphases will have the same settings as the project.
Use Parent Phase Settings: The newly created Subphases will have the same settings as the parent phase.
Note for hours-only teams: Default subphase settings control what settings a newly created sub phase inherits. They are separate from sub phase budget roll-up, which controls whether sub phase budgets total up to the parent phase. Both can be in use at the same time. See Project Budget Settings - Hours Only View.