Delivery Versus Payment (DVP)

What Is Delivery Versus Payment (DVP)?

Delivery versus payment (DVP) is a securities industry settlement method that guarantees the transfer of securities just occurs after payment has been made. DVP specifies that the purchaser's cash payment for securities must be made prior to or simultaneously as the delivery of the security.

Delivery versus payment is the settlement cycle according to the purchaser's viewpoint; according to the vender's viewpoint, this settlement system is called receive versus payment (RVP). DVP/RVP requirements arose in the fallout of institutions being prohibited from paying money for securities before the securities were held in negotiable form. DVP is otherwise called delivery against payment (DAP), delivery against cash (DAC), and cash on delivery.

Grasping Delivery Versus Payment (DVP)

The delivery versus payment settlement system guarantees that delivery will happen provided that payment happens. The system acts as a connection between a funds transfer system and a securities transfer system. According to an operational point of view, DVP is a sale transaction of negotiable securities (in exchange for cash payment) that can be told to a settlement agent utilizing SWIFT Message Type MT 543 (in the ISO15022 standard).

The utilization of such standard message types is intended to reduce risk in the settlement of a financial transaction and consider automatic processing. In a perfect world, the title to an asset and payment are exchanged all the while. This might be conceivable much of the time, for example, in a central depository system, for example, the United States Depository Trust Corporation.

How Delivery Versus Payment Works

A critical source of credit risk in securities settlement is the principal risk associated with the settlement date. The thought behind the RVP/DVP system is that part of that risk can be taken out assuming the settlement technique expects that delivery happens provided that payment happens (at the end of the day, that securities are not delivered prior to the exchange of payment for the securities). The system assists with guaranteeing that payments go with conveyances, accordingly lessening principal risk, restricting the chance that conveyances or payments would be withheld during periods of stress in the financial markets and diminishing liquidity risk.

By law, institutions are required to demand assets of equivalent value in exchange for the delivery of securities. The delivery of the securities is commonly made to the bank of the buying customer, while the payment is made at the same time by bank wire transfer, check, or direct credit to an account.

Delivery versus payment (DVP) is a settlement method that expects that securities are delivered to a particular beneficiary solely after payment is made.

Special Considerations

Following the October 1987 worldwide drop in equity prices, the central banks in the Group of Ten attempted to fortify settlement procedures and take out the risk that a security delivery could be made without payment, or that a payment could be made without delivery (known as principal risk). The DVP strategy reduces or wipes out the counterparties' exposure to this principal risk.

Features

• The cycle is intended to reduce the risk that securities could be delivered without payment or that payments could be made without the delivery of securities.
• The delivery versus payment system turned into a broad industry practice in the consequence of the October 1987 market crash.
• Delivery versus payment is a securities settlement process that expects that payment is made either before or simultaneously as the delivery of the securities.