What is Delivery Versus Payment (DVP)?

Delivery Versus Payment (DVP) is a settlement process where the transfer of securities occurs simultaneously with the transfer of funds. This ensures that buyers receive their securities only after they have paid for them, and sellers receive payment only after they have delivered the securities.

DVP is often referred to by other names such as delivery against payment (DAP) or delivery against cash (DAC), all of which emphasize the simultaneous exchange of assets and funds. It’s important to distinguish DVP from Receive Versus Payment (RVP), which is essentially the same process but viewed from the seller’s perspective. While DVP focuses on ensuring the buyer receives securities after paying, RVP ensures the seller receives payment after delivering the securities.

How DVP Works

The operational process of DVP involves several key steps and systems. Here’s how it works:

• Standard Message Types: The process often uses standardized message types like SWIFT Message Type MT 543 to facilitate communication between parties involved in the transaction.

• Linking Funds and Securities Transfer Systems: DVP links two critical systems: funds transfer systems and securities transfer systems. This linkage ensures that both transactions are executed simultaneously.

• Simultaneous Exchange: The heart of DVP is the simultaneous exchange of title to an asset and payment. Central depository systems like the Depository Trust Corporation play a vital role in this process by holding and transferring securities electronically.

This synchronized approach minimizes delays and risks associated with traditional settlement methods.

Key Benefits and Risk Reduction

One of the primary advantages of using DVP is its ability to reduce various types of risk:

• Principal Risk: DVP eliminates principal risk by ensuring that securities are not delivered without payment and vice versa.

• Credit Risk: By linking funds and securities transfers, DVP reduces credit risk as counterparties do not have to worry about non-payment or non-delivery.

• Liquidity Risk: The simultaneous nature of DVP reduces liquidity risk because funds are available immediately upon settlement.

• Systemic Risk: By minimizing individual transaction risks, DVP contributes to maintaining financial market stability and reducing systemic risk.

These benefits make DVP an indispensable tool in modern securities trading.

Historical Context and Industry Adoption

The widespread adoption of DVP can be traced back to the October 1987 market crash, which highlighted significant vulnerabilities in traditional settlement processes. In response to this crisis, central banks and regulatory bodies, including the Group of Ten countries, strengthened settlement procedures to include DVP as a standard practice.

This move was instrumental in enhancing the security and efficiency of securities transactions globally.

Comparison with Other Settlement Methods

DVP stands out when compared to other settlement methods such as Delivery Versus Free (DVF):

• Timing: In DVF, securities are delivered without immediate payment, which introduces timing risks. In contrast, DVP ensures simultaneous exchange of assets and funds.

• Risk Management: DVP offers superior risk management by eliminating principal risk and reducing credit and liquidity risks. DVF does not provide these safeguards.

• Funding Costs: With DVP, funds are available immediately upon settlement, reducing funding costs compared to DVF where delays can incur additional costs.

These advantages make DVP a preferred choice for secure securities settlement.

Special Considerations and Legal Requirements

Institutions engaging in DVP transactions must adhere to specific legal requirements:

• Equal Value Exchange: Legal mandates often require that assets of equal value be exchanged during a DVP transaction.

• Regulatory Standards: Various regulations govern DVP transactions to ensure compliance with industry standards. These standards are designed to protect all parties involved in the transaction.

Compliance with these regulations is crucial for maintaining trust and integrity in the securities market.