What Is Delivery Versus Payment (DVP)?
Let me explain delivery versus payment, or DVP, directly to you. It's a settlement method where securities are released only after the agreed-upon funds have been successfully transferred. In this system, the exchange of securities and cash happens at the same time, so you, as the buyer, receive the assets only when the seller gets the payment. This setup creates a real safeguard against default.
From your perspective as the buyer, it's DVP, but if you're the seller, we call it receive versus payment, or RVP. These requirements came about after institutions were banned from paying for securities before they were in negotiable form. You might also hear DVP referred to as delivery against payment (DAP), delivery against cash (DAC), or cash on delivery.
Key Takeaways
Here's what you need to know about DVP: it's a securities settlement process where payment must be made before or at the same time as the delivery of the securities. The whole point is to cut down the risk that securities get delivered without payment or that payments go through without the securities showing up. This became a standard practice after the October 1987 market crash.
How Delivery Versus Payment (DVP) Works
DVP works by ensuring delivery happens only if payment does. It connects a funds transfer system with a securities transfer system. Operationally, it's a sale of negotiable securities for cash that you can instruct to a settlement agent via SWIFT Message Type MT 543, based on the ISO15022 standard.
These standard messages reduce risk in settling financial transactions and enable automatic processing. Ideally, the title to the asset and the payment swap hands at the exact same moment. This is feasible in systems like the United States Depository Trust Corporation.
Mitigating Settlement Risk
A big source of credit risk in securities settlement is the principal risk tied to the settlement date. The RVP/DVP system removes part of that risk by requiring delivery only if payment occurs, meaning securities aren't handed over before payment is exchanged.
This ensures payments go with deliveries, cutting principal risk, reducing the odds of withheld deliveries or payments during market stress, and lowering liquidity risk. By law, institutions must demand assets of equal value for securities delivery. Typically, securities go to the buyer's bank, and payment happens via wire transfer, check, or direct credit.
Special Considerations
After the worldwide equity price drop in October 1987, G10 central banks beefed up settlement procedures to wipe out the risk of securities being delivered without payment. The DVP procedure cuts or eliminates counterparties' exposure to this principal risk.
What Is the Opposite of Delivery Versus Payment?
The opposite of DVP is RVP, which is just DVP from the seller's viewpoint. Both mean payment must happen at the same time as delivery.
What Is Cash on Delivery?
Cash on delivery, or COD, is a transaction where you pay for goods or services right when they're delivered. Payment is usually cash, check, or electronic, not on credit where you'd pay later.
What Is Free of Payment?
Free of payment, or FOP, is a securities transaction where securities are delivered or received without any payment at the time. It carries settlement risk because there's no guarantee of payment, unlike DVP where securities move only when payment is made.
The Bottom Line
DVP makes securities transfers safe, low-risk, and fair by having both parts of the transaction happen at once. Its design reduces default and protects buyers and sellers alike, making it a key part of healthy financial markets.
