Delivery Versus Payment (DVP)

Demystifying Delivery Versus Payment (DVP) in Securities Settlement

Understanding the Essence of DVP

Delivery versus payment (DVP) stands as a pivotal settlement method in the securities industry, ensuring that the transfer of securities occurs only upon receipt of payment. This article delves into the intricacies of DVP, shedding light on its significance, operation, and historical context.

Deciphering Delivery Versus Payment

At its core, DVP dictates that buyers must tender payment for securities either before or concurrently with the receipt of the security. This settlement mechanism, also known as delivery against payment (DAP) or cash on delivery, emerged in response to regulatory measures prohibiting payment for securities before their acquisition in negotiable form.

Exploring the Dynamics of DVP

DVP serves as a crucial link between funds transfer and securities transfer systems, ensuring the synchronized exchange of assets and payment. By employing standardized message types like SWIFT, DVP facilitates efficient and secure settlement, mitigating risks associated with credit and liquidity.

Unveiling the Mechanism of DVP

The operational essence of DVP lies in its ability to mitigate credit risk by mandating simultaneous delivery and payment. By enforcing the exchange of securities only upon receipt of payment, DVP minimizes the likelihood of default and enhances market integrity. Moreover, regulatory mandates compel institutions to uphold parity in asset exchange, bolstering the security and reliability of the settlement process.

The Evolution of DVP

In the aftermath of the 1987 market crash, global central banks collaborated to fortify settlement protocols, aiming to eradicate principal risk inherent in securities transactions. The adoption of DVP mechanisms represents a pivotal step in enhancing market resilience and safeguarding against financial instability.