You have two options there:
1) Either Use authentication: You would need to create a user account in exchange.
2) Do not use authentication: Leave authentication unchecked and configure exchange to relay the emails from CWMS.
"- What exactly means ' Ensure that the mail server can recognize this user' ?"
"- What happens if Username and Password are not specified ?"
It means if you are enabling authentication - create a user account for CWMS in the exchange. If not then have the exchange server configured to relay CWMS emails. Its simple just allow the ip address of CWMS in exchange to accept and relay the email.
If not done it means you wouldn't receive emails from CWMS and as you know emails are primary way of CWMS communicating with users.
Simple way is to leave authentication disabled and configure relay. I have done this couple of times in past without issues.