What is Delivery Versus Payment (DVP)?
Delivery Versus Payment (DVP) is a pivotal method in the securities industry that guarantees the transfer of securities only after payment has been made. DVP dictates that the buyer’s payment for securities must be completed before or simultaneously with the delivery of the security.
This settlement method is viewed differently from the buyer’s and seller’s perspectives. From the buyer’s standpoint, it is referred to as Delivery Versus Payment (DVP), while the seller sees it as Receive Versus Payment (RVP). The stringent DVP/RVP requirements were established to safeguard institutions from paying for securities before they are held in negotiable form. DVP is also recognized as Delivery Against Payment (DAP), Delivery Against Cash (DAC), and Cash On Delivery.
Key Takeaways
- Delivery versus payment ensures that payment is made before or at the same time as the transfer of securities.
- This process is designed to mitigate the risk of securities delivery without payment or vice versa.
- The widespread adoption of this system followed the October 1987 market crash, aiming to secure the settlement processes.
Understanding Delivery Versus Payment (DVP)
The delivery versus payment system ensures that delivery will occur only if payment occurs. It connects a funds transfer system and a securities transfer system. Operationally, DVP is a sale transaction of negotiable securities (exchanged for cash payment) and can be processed using standard financial messages such as SWIFT Message Type MT 543 (ISO15022 standard).
Utilizing standard message types minimizes risk in financial transactions and promotes automatic processing. Ideally, the asset’s title and payment are exchanged concurrently, which is often achievable in central depository systems like the United States Depository Trust Corporation.
How Delivery Versus Payment Works
A major source of credit risk in securities settlement is the principal risk associated with the settlement date. The core principle of the RVP/DVP system is to minimize this risk by requiring simultaneous delivery and payment. This ensures payments accompany deliveries, reducing principal risk and the likelihood of withheld deliveries or payments during financial market stress, and lessening liquidity risk.
By law, institutions must demand assets of matching value for the delivery of securities. Typically, the buying customer’s bank receives the securities delivery while payment is made simultaneously by bank wire transfer, check, or direct credit to an account.
Special Considerations
After the significant drop in equity prices in October 1987, Group of Ten central banks enhanced settlement procedures to prevent securities from being delivered without payment. The DVP methodology essentially eliminates the counterparties’ exposure to principal risk, making it a secure settlement process.
Related Terms: Receive Versus Payment (RVP), Delivery Against Payment (DAP), Cash On Delivery (COD), bank wire transfer.
References
- Fannie Mae. “Comparison of Delivery vs. Payment (DVP) and Delivery vs. Free (DVF or Free)”. Page 1.
- Keith Dickinson. “Financial Markets Operations Management”, Pages 211-215. John Wiley & Sons, 2015.
- Cornell University, Legal Information Institute. “12 CFR § 3.136 - Unsettled transactions.”
