Delivery versus payment or DvP is a common form of

settlement Settlement may refer to: *Human settlement, a community where people live *Settlement (structural), the distortion or disruption of parts of a building * Closing (real estate), the final step in executing a real estate transaction *Settlement (fin ...

for

securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...

. The process involves the simultaneous delivery of all documents necessary to give effect to a transfer of securities in exchange for the receipt of the stipulated payment amount. Alternatively, it may involve transfers of two securities in such a way as to ensure that delivery of one security occurs if and only if the corresponding delivery of the other security occurs. This is done to avoid

settlement risk Settlement risk is the risk that a counterparty (or intermediary agent) fails to deliver a security or its value in cash as per agreement when the security was traded after the other counterparty or counterparties have already delivered security ...

such as where one party fails to deliver the security when the other party has already delivered the cash when settling a securities trade.

History

The market crash of October 1987 drew global attention to potential weaknesses in the standards applied for clearance and settlement. Numerous studies resulted, among which was one from the

Group of Thirty The Group of Thirty, often abbreviated to G30, is an international body of financiers and academics which aims to deepen understanding of economic and financial issues and to examine consequences of decisions made in the public and private sect ...

which pioneered standards for providers of securities settlement services. The report included nine recommendations, one of which was that "Delivery versus payment (DvP) should be the method for settling all securities transactions with systems in place by 1992." In December 1990, the

Committee on Payment and Settlement Systems The Bank for International Settlements (BIS) is an international financial institution owned by central banks that "fosters international monetary and financial cooperation and serves as a bank for central banks". The BIS carries out its work thr ...

(CPSS), consisting of representatives from the major central banks, initiated further study of DVP. Its report in September 1992 found three ways of achieving DvP: # Transfer of securities and funds done on a trade-by-trade basis, with final transfer of securities occurring at the same time as the final transfer of funds; # Transfer of securities on a gross basis, with final transfer of securities occurring throughout the day, but funds transfer on a net basis at the end of the day; # Transfer of both securities and funds on a net basis, with final transfers occurring at the end of the day.

Operational perspective

From an operational perspective DVP is a sale transaction of negotiable securities (in exchange for cash payment) that can be instructed to a settlement agent using SWIFT Message Type MT 543 (in the ISO15022 standard). Use of such standard message types is intended to reduce risk in the

of a financial transaction, and enable automatic processing. Ideally, title to an asset and payment are exchanged simultaneously. This may be possible in many cases such as in a central depository system such as the United States

Depository Trust Corporation The Depository Trust & Clearing Corporation (DTCC) is an American post-trade financial services company providing clearing and settlement services to the financial markets. It performs the exchange of securities on behalf of buyers and sellers ...

Non-DvP

Non-DvP settlement processes typically expose the parties to

. They are known by a variety of names, including ''free delivery'', ''free of payment'' or ''FOP'' delivery, or in the United States, ''delivery versus free''.https://www.fanniemae.com/content/fact_sheet/dvp-dvf-comparison.pdf FOP settlement involves delivery of the securities without a simultaneous transfer of funds – hence 'free of payment'. Funds may either be remitted by other, mutually agreed means, or payment may not be made at all. This is the case in the transfer of securities gifted or inherited, or, in a country retaining paper securities certificates, in the dematerialisation of such securities, by transfer FOP into the name of the electronic custodian, with beneficial ownership retained by the transferor.

References

External links

ISO 15022 - Business Elements: Delivery versus payment
{{DEFAULTSORT:Delivery Versus Payment Securities clearing and depository institutions Central securities depositories Banking technology Society for Worldwide Interbank Financial Telecommunication Settlement (finance)

History

Operational perspective

Non-DvP

See also

References

External links