What Is Delivery Versus Payment (DVP)?
Delivery versus payment (DVP) is a settlement method that links the transfer of securities to the transfer of funds so that delivery of the securities occurs if—and only if—the corresponding payment is made. From the buyer’s viewpoint it is called DVP; from the seller’s viewpoint it is the same principle called receive versus payment (RVP). DVP is used to remove or reduce the principal (settlement) risk that one counterparty could deliver securities without receiving payment, or pay and not receive securities in return [BIS; Investopedia].
Key takeaways
– DVP ensures simultaneous exchange of securities and money, reducing principal and liquidity risk.
– It is widely used in institutional markets and central securities depositories (CSDs) where transfers of legal title and funds can be coordinated.
– Standard messaging (e.g., ISO 15022 SWIFT MT formats such as MT543) and local settlement cycles (T+2, T+1, or same-day) support automated, low-risk processing.
– Opposite or alternative settlement forms include Free of Payment (FOP)—delivery without payment—and Cash on Delivery (COD) in commercial contexts; RVP is the seller’s perspective of the same underlying DVP principle.
– Regulatory and market reforms following market stress (notably after October 1987) pushed many markets to adopt strict DVP procedures to reduce settlement exposures [BIS; Dickinson; Investopedia].
How DVP works — step-by-step
1. Trade execution and confirmation
– Buyer and seller agree deal terms (price, quantity, settlement date).
– Broker/custodian confirms trade details; trade matching occurs to prevent later fails.
2. Settlement instruction and matching
– Both sides send settlement instructions to their custodians or settlement agents (often via SWIFT).
– The settlement agent/CSD matches instructions and checks available securities and funds.
3. Pre-settlement checks
– Custodian checks that the seller has the securities and that the buyer has the necessary cash or credit limit.
– Netting and position management may be applied where applicable.
4. Simultaneous exchange (the DVP step)
– On settlement date, the securities-transfer system and funds-transfer system coordinate so that legal title to securities is transferred only when funds are credited to the seller. Mechanisms vary:
– Centralized: A CSD or central bank payment-versus-payment (PvP) arrangement coordinates both legs atomically.
– Bilateral/agent-mediated: The custodian or clearing bank withholds delivery until payment confirmation arrives.
5. Confirmation and reconciliation
– Settlement confirmations are sent to both parties; reconciliations and position updates are performed. If either leg fails, the transaction is marked as failed and remediation begins.
Operational mechanics and messaging
– Standard message formats (e.g., ISO 15022 SWIFT MT 543 for settlement instructions related to securities transfers) reduce manual processing and errors [Investopedia].
– Many markets operate on standard settlement cycles (e.g., T+2 equities) and use CSDs (e.g., DTC in the U.S.) to facilitate DVP.
Mitigating settlement risk
DVP reduces principal risk, but participants should layer additional controls:
Operational and process controls
– Trade matching and affirmation (e.g., T+0/T+1 matching targets).
– Timely, standardized settlement instructions and use of electronic messaging.
– Reconciliation and exception management processes to catch mismatches early.
Counterparty and credit controls
– Pre-funding or use of intraday credit limits for cash legs.
– Collateralization or margin requirements where appropriate (e.g., cleared repo transactions).
– Use of central counterparties (CCPs) to transform two-sided exposure into single exposure to the CCP.
Infrastructure and legal measures
– Use of CSDs and payment-versus-payment (PvP) mechanisms when available to ensure atomic transfers of securities and funds [BIS].
– Clear contractual and legal frameworks that establish settlement finality and trusteeship.
– Adherence to local regulation that prevents delivery of securities before receipt of funds in negotiable form [Cornell LII; Dickinson].
Special considerations
– Cross-border settlement: Time-zone differences, currency conversion and differing local market rules may complicate DVP; PvP (payment-versus-payment) solutions and correspondent banking help mitigate that.
– Securities lending and repo markets: These transactions often use DVP-like mechanics but include reuse of securities, collateral and margin calls—operational workflows differ.
– Corporate actions: Dividends, splits, or reorganizations can affect positions and must be handled in parallel with settlement flows.
– Settlement fails: Causes include missing instructions, insufficient funds or inventory, and operational errors. Firms should have clear failed trade policies, allocation of responsibility and buy-in/close-out procedures.
– Market stress: Liquidity scarcity can break the assumption that both legs will be available simultaneously; contingency liquidity sources and central bank facilities can be critical.
The opposite of delivery versus payment?
– Receive versus payment (RVP) is the seller’s perspective of the same principle—i.e., securities will be delivered only on receipt of payment. In functional terms RVP and DVP describe the two sides of the same settlement condition.
– Free of payment (FOP) is the practical opposite in one sense: securities are delivered without immediate payment (see below), which creates settlement risk [Investopedia].
What is cash on delivery (COD)?
– Cash on delivery (COD) in commercial trade refers to payment made at the time goods or services are delivered rather than on credit terms. In securities settlement, related terms such as “delivery against cash” or “delivery against payment” emphasize simultaneous exchange, so COD in the securities context aligns with DVP principles when payment is required at transfer.
What is free of payment (FOP)?
– Free of payment (FOP) is a transfer of securities without any simultaneous payment. FOP is commonly used for gift transfers, repositioning of securities between accounts, custodial safekeeping movements, and some corporate actions. FOP carries settlement risk when used with third parties because one side may not receive the expected payment later [Investopedia]. Use FOP only when counterparty risk is acceptable or when transfers are internal/non-commercial.
Practical steps — for implementing and operating DVP
For custodians, brokers and institutional investors:
1. Pre-trade and trade match
– Institute straight-through processing (STP) and automatic matching policies; target same-day affirmation where possible.
2. Standardize settlement instructions
– Use ISO messaging standards (e.g., MT 543 and other MT messages or ISO 20022 equivalents). Ensure fields (CSD, account, ISIN, settlement date, etc.) are complete and validated.
3. Verify resources before settlement
– Confirm securities availability in the seller account and pre-fund cash or ensure credit lines for the buyer before the settlement cut-off.
4. Route through appropriate settlement agents
– Use a central securities depository (CSD) where available; if cross-border, use correspondent banks and PvP services if currencies are involved.
5. Use netting and batching where possible
– Netting across multiple trades reduces liquidity needs and lowers the number of payments required.
6. Monitor and manage failed trades
– Have a defined failed trade escalation, rebooking, recall, or buy-in process; track failed trade metrics.
7. Reconciliation and control
– Daily reconciliation of anticipated versus executed settlements; investigate exceptions promptly.
8. Legal and contingency planning
– Verify legal finality and enforceability in jurisdictions involved; maintain contingency liquidity lines and disaster recovery plans.
For buy-side firms and corporate treasuries:
– Ensure custodial arrangements support DVP and confirm settlement cut-offs, currencies, and time zones.
– Maintain accurate standing settlement instructions (SSIs) with brokers and custodians.
– Include DVP requirements in master trading/clearing agreements.
Regulatory and market context
– Many regulators require institutions to avoid delivering securities without payment in negotiable form and require strong settlement risk controls [Cornell LII].
– Market infrastructures (CSDs, CCPs and real-time gross settlement systems) and international authorities (BIS, CPSS) provide guidance and standards to promote DVP/PvP adoption and reduce systemic risk [BIS].
The bottom line
DVP is a fundamental settlement principle that significantly lowers principal/settlement risk by ensuring securities and cash exchange simultaneously. It is supported by market infrastructure (CSDs, clearing systems), standard messaging and operational controls. Effective DVP implementation requires robust matching, pre-funding or credit controls, standardized instructions, and contingency arrangements—especially for cross-border transactions and during market stress. While FOP and non-DVP transfers are used for specific purposes, DVP remains a cornerstone of safe securities settlement in modern financial markets.
Sources and further reading
– Bank for International Settlements, “Delivery Versus Payment in Securities Settlement Systems.”
– Keith Dickinson, Financial Markets Operations Management, John Wiley & Sons, 2015, pp. 211–215.
– Cornell Law School, Legal Information Institute, 12 CFR § 3.136 (Unsettled Transactions).
– Investopedia, “Delivery Versus Payment (DVP)” (Julie Bang).
If you’d like, I can:
– Provide a sample DVP settlement checklist for custodians/brokers.
– Draft sample settlement instruction templates (MT 543/ISO 20022 equivalents).
– Walk through a worked example of an international DVP settlement with currency conversion and PvP.