Delivery Versus Payment (DVP)
Candlefocus EditorIn the traditional sense, it is a settlement system used by banks and brokerages that involves a simultaneous exchange of cash and securities. Since the payments are simultaneously exchanged in the settlement process, DVP guarantees the status having funds available to make the payment before transaction. This, in turn, reduces the risk of a payment not being made on time or a delivery of the securities not being made.
The first use of DVP dates to the late 1970s when the Chicago Mercantile Exchange (CME) introduced a process for trading securities which required delivery versus payment. The practice of DVP gained further attention in the aftermath of the October 1987 stock market crash. It was then that the U.S. Securities and Exchange Commission issued its 1997 regulations on Delivery Versus Payment (Regulation T) in order to increase the safety and soundness of the settlement process.
The settlement process involved in delivery versus payment is generally done in two parts. First, the buyer initiates the transfer by making a payment to the seller. The payment is reflected in the form of a securities-backed loan, a money-market fund or other forms of liquid funds. Next, the seller delivers the securities to the buyer. Once the delivery is completed, the securities are then transferred to the buyer’s account.
Besides providing greater protection to the parties involved in a securities transaction, Delivery Versus Payment also helps to reduce risk. This is because the buyer and seller using the system have enhanced delivery and payment assurance at the same time. Furthermore, since both parties have ensured that each will receive their part of the transaction, there is less chance of failed trades due to a lack of sufficient funds.
Delivery versus payment continues to be a popular method of settling securities transactions today. While ensuring the completion of a trade, it reduces the potential for counterparty risk and is believed to be one of the safest systems in the markets today.