DVP (Delivery versus payment)
Delivery versus payment (DVP) is a settlement mechanism that links the transfer of securities to the transfer of cash, so that delivery happens if and only if payment happens. It removes principal risk in securities settlement and is the standard for trades settled in central securities depositories and TARGET2-Securities (T2S).
Roles that need it
What it is
Delivery versus payment (DVP) is a way of settling a securities trade in which the securities leg and the cash leg are linked. The seller’s securities move to the buyer only if the buyer’s cash moves to the seller, at the same moment or under a binding conditional link. If one leg cannot happen, neither does.
The Committee on Payments and Market Infrastructures (CPMI) describes three models. In model 1 each trade settles gross, securities and cash together. In model 2 securities settle gross and cash settles net at the end of a cycle. In model 3 both legs settle net. T2S (TARGET2-Securities), the Eurosystem settlement platform, settles DVP in central bank money, trade by trade, in real time.
The opposite is free of payment (FOP), where securities or cash move alone.
Why it matters
Without DVP a seller could deliver securities and never receive the money, or a buyer could pay and never receive the securities. This principal risk can equal the full value of the trade. The Principles for financial market infrastructures require securities settlement systems to eliminate it through DVP.
DVP also shapes daily work. Both legs need resources at the right place and time: securities in the seller’s account and cash or credit in the buyer’s. A lack on either side makes the instruction fail, which under the Central Securities Depositories Regulation (CSDR) leads to cash penalties.
Worked example
Illustrative numbers. A fund buys 10,000 bonds at a price of 99.50, with 1,200 euro of accrued interest. The settlement amount is 10,000 x 100 x 0.995 + 1,200 = 996,200 euro, for a nominal of 1,000,000.
On the intended settlement date the CSD checks the seller’s securities account (at least 1,000,000 nominal) and the buyer’s cash account (at least 996,200 euro, including any credit line). Both are available, so the system moves the bonds and the cash in one step and the settlement is final.
If the buyer has only 900,000 euro, nothing moves. The seller keeps the bonds, the instruction stays pending, and the buyer’s side is the cause of the fail.
Who uses it
Settlements Analysts instruct DVP trades, monitor pending items and resolve mismatches. Custody Operations Analysts settle on behalf of clients in local markets. Treasury Operations Analysts make sure cash or central bank credit is available for the settlement cycles. Middle Office Analysts and Investment Operations Analysts check trade details before instructions go out. Depositary Oversight Analysts check that fund assets are delivered against payment.
Common confusions
DVP is a settlement mechanism, and it says nothing about when settlement happens; the settlement cycle (T+2, T+1) sets the date. DVP also differs from payment versus payment (PVP), which links two cash legs in different currencies, as in foreign exchange. Finally, DVP removes principal risk but leaves replacement cost risk: if a trade fails, the counterparty may still have to buy or sell again at a worse price.