Delivery Versus Payment (DVP): A Comprehensive Guide

Delivery versus payment (DVP) is a method of settlement for specifically the securities market. It basically guarantees the transfer of securities only after payment is made. It requires the buyer to fulfill their payment obligations before or immediately at the time of the delivery of the purchased security/securities.

The delivery versus payment method is also known as receive versus payment (RVP). DVP is basically from the buyer’s perspective since the name entails the “delivery” of purchased securities. In contrast, RVP is from the seller’s perspective, as the name entails “receipt” of payment for the delivery of bought securities.

The DVP method is typically settled via banksTop Banks in the USAAccording to the US Federal Deposit Insurance Corporation, there were 6,799 FDIC-insured commercial banks in the USA as of February 2014. . The delivery of securities is made to the buyer via their bank once a payment is received from the buyer.

Summary

• Delivery Versus Payment (DVP) is a method of settlement for specifically the securities market.
• The DVP method basically guarantees the transfer of securities only after payment is made. It requires the buyer to fulfill their payment obligations before or immediately at the time of the delivery of the purchased security/securities.
• The purpose of the delivery versus payment method is to avoid a few different types of risks.

Origin of DVP

The DVP method essentially gained popularity after the global market crash of October 1987. The event led the central banks of the G-10 countries to work out a security settlement method that ensured the maximum possible elimination of risk. It resulted in the introduction of the DVP method of security settlement as a risk prevention measure while trading securities.

Purpose of DVP

The delivery versus payment (DVP) method’s purpose is to avoid a few different types of risks. The following are the different kinds of risks a trading party may be exposed to when entering into a transaction in the securities market.

1. Credit risk

Credit riskCredit RiskCredit risk is the risk of loss that may occur from the failure of any party to abide by the terms and conditions of any financial contract, principally, is the possible inability of the buyer to settle their obligation in full value, either when due or any time thereafter.

2. Replacement cost risk

Replacement cost risk is the risk of loss of unrealized gains. Unrealized gain is determined by comparing the security’s market price at the time of default with the contract price.

The seller is exposed to replacement cost loss if the market priceMarket PriceThe term market price refers to the amount of money for what an asset can be sold in a market. The market price of a given good is a point of convergence is below the contract price, whereas the buyer is exposed to a replacement cost loss if the market price is above the contract price.

3. Principal risk

Principal risk is the risk of loss of the full value of securities or funds that the non-defaulting counterparty’s transferred to the defaulting counterparty. The buyer is at risk if it is possible to complete payment but not receive delivery, and the seller is at risk if it is possible to complete delivery but not receive payment.

4. Liquidity risk

Liquidity risk refers to the risk that the party involved will not settle an obligation for the full value when due but will do on some unspecified date thereafter.

5. Systemic risk

Systemic risk can be broadly explained as when the possible inability of one institution involved to meet its obligations when due will cause other institutions to fail to meet their obligations when due.

Eliminating the Risks

The DVP method essentially sees the elimination of the risks above as follows:

The delivery versus payment system easily avoids principal risk because it is essentially structured to avoid such events. When following the DVP method, the delivery of securities is only, and only, once payment is made. It eliminates principal risk.

Since DVP eliminates principal risk, the probability of not meeting delivery and/or payment obligations also decreases, reducing the possibility of liquidity risk.

More Resources

CFI offers the Commercial Banking & Credit Analyst (CBCA)™Program Page - CBCAGet CFI's CBCA™ certification and become a Commercial Banking & Credit Analyst. Enroll and advance your career with our certification programs and courses. certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

• Credit Risk AnalysisCredit Risk AnalysisCredit risk analysis can be thought of as an extension of the credit allocation process. After an individual or business applies to a bank or financial institution for a loan, the lending institution analyzes the potential benefits and costs associated with the loan.
• Due to AccountDue to AccountDue to Account is an accounting term that denotes a liability account. It is the amount of funds due to another party and is found in the
• LiquidityLiquidityIn financial markets, liquidity refers to how quickly an investment can be sold without negatively impacting its price. The more liquid an investment is, the more quickly it can be sold (and vice versa), and the easier it is to sell it for fair value. All else being equal, more liquid assets trade at a premium and illiquid assets trade at a discount.
• Replacement Cost vs Actual Cash ValueReplacement Cost vs Actual Cash ValueFor individuals looking to take out homeowner insurance, they need to know the difference between replacement cost vs actual cash value.