What is 'Delivery Versus Payment - DVP'
A securities industry settlement procedure in which the buyer's payment for securities is due at the time of delivery. Delivery versus payment (DVP) is a settlement system that stipulates that cash payment must be made prior to or simultaneously with the delivery of the security. Delivery versus payment is from the buyer's perspective; from the seller's perspective, this system is called receive versus payment (RVP). DVP/RVP requirements arose as a result of institutions being prohibited from paying money for securities before the securities were held in negotiable form.
Also known as delivery against payment (DAP), delivery against cash (DAC) and cash on delivery.
BREAKING DOWN 'Delivery Versus Payment - DVP'
A DVP settlement system ensures that delivery will occur only if a payment occurs. The system acts as a link between a funds transfer system and a securities transfer system. A significant source of credit risk in securities settlement is the principal risk associated with the settlement date. The idea behind the RVP/DVP system is that part of that risk can be removed if the settlement procedure ensures that delivery occurs only if payment occurs (in other words, that securities are not delivered prior to the exchange of payment for the securities). The system helps ensure that payments accompany deliveries, thereby reducing principal risk, reducing the chance that deliveries or payments would be withheld during periods of stress in the financial markets and reducing liquidity risk.
By law, institutions are required to demand assets of equal value in exchange for the delivery of securities. The delivery of the securities is typically made to the bank of the buying customer, while the payment is made simultaneously by bank wire transfer, check or direct credit to an account.
Following the October 1987 worldwide drop in equity prices, the central banks in the Group of Ten worked to strengthen settlement procedures and eliminate the risk that a security delivery could be made without payment, or that a payment could be made without delivery (known as principal risk). The DVP procedure reduces or eliminates the counterparties' exposure to this principal risk.