DVP

Delivery versus Payment (DvP) is a settlement mechanism used in securities and related markets to ensure that the transfer of a security occurs only if the corresponding payment is made. By linking the two legs of a trade, DvP helps reduce principal risk, the risk that one party delivers the security but does not receive payment, or vice versa.

How it works: In a DvP arrangement, the securities leg and the cash leg are settled in a coordinated way. Settlement often takes place in a central securities depository (CSD) or through a central counterparty (CCP) and may occur in central bank money or other risk-free funds. In real-time gross settlement (RTGS) systems, each trade is settled individually and immediately in a DvP manner. In net settlement arrangements, multiple trades are netted so that a single net payment and a single net delivery occur, while still preserving the principle that delivery and payment are linked.

Legal and operational features: DvP requires clearly defined settlement finality, precise delivery instructions, and robust risk controls to prevent mismatches. It relies on trusted settlement infrastructure, including depositories, custodians, and payment systems, and is often supported by securities laws and market rules that ensure irrevocable transfer once completed.

Usage and scope: DvP is widely used in equity, debt, and derivative markets worldwide. It is typically implemented through systems operated by national or regional CSDs and payment infrastructures, sometimes with the backing of central banks to provide settlement in central bank money. Variants exist, including DvP with gross settlement and DvP with net settlement, each balancing speed, liquidity, and credit risk considerations.

Overall, DvP enhances market integrity and reduces settlement risk by ensuring that the delivery of securities and payment are, in practice, coordinated and final.