It means the points were originally used for a non-
DVC reservation which was subsequently cancelled. For example, they may have been used to book a cruise, a stay at the GF, something from the Adventurer Collection or the something from the Concierge Collection.
Once you book something outside of the DVC resorts, the points become "reservation" points and cannot later be used to book a stay at any of the DVC resorts.
When you use points for one of the other Collections, DVC gives the equivalent number of nights/points to CRO to rent for cash. DVC uses the cash to pay for the non-DVC option and also lets CRO keep some of the cash to compensate them for acting as the TA. So that's why you can't later use those same points for a DVC resort - the time has already been used.
So if you cancel the original "outside" reservation, you must reuse the reservation points for something in one of the "Collections". (The
DCL and non-DVC WDW resorts are part of the Disney Collection). The only exception is that you cannot use reservation points for things in the the World Passport Collection / II exchange - that's because DVC has to deposit a DVC stay for the trade. And you already used the time to pay for your original/cancelled reservation. DVC just has the cash (or got it back when you cancelled).
Best wishes -