DVP (delivery vs payment)

Delivery vs payment (DVP) is a way of controlling the risk to which securities market participants are exposed.

Delivery of securities (i.e. the change in their ownership) is done simultaneously with payment. This means that neither the buyer or the seller is exposed to the risk that the other will default.

It directly protects security market participants (such as brokers) rather than investors. This indirectly reduces the cost and risks of trading for everyone.

DVP is far from being a perfect system. Unless settlement is real time (done immediately on the trade being agreed) it means that, if there is a trade failure, trades will have to be unwound. If buyers are allowed to sell before settlement (as is usual), multiple trades may have to be unwound for a single failure. Being forced to unwind a trade can mean investors make a loss.

Major markets either use DVP with real time settlement, or a central counterparty to eliminate the risk of having to unwind trades.

Copyright Graeme Pietersz © 2005-2020