Delivery Versus Payment (DvP)

Delivery versus payment (DvP) is a securities-settlement arrangement linking final delivery of securities to the corresponding cash payment on an if-and-only-if basis to address principal risk. In plain English, delivery and payment are reciprocal conditions of the exchange, not independent transfers supported only by a promise to pay later. This linkage does not require both legs to become final at the same instant in every settlement model.

How the Link Works

In a securities sale, the seller's delivery obligation is to transfer ownership of the securities to the buyer. The buyer's payment obligation is to transfer the corresponding cash to the seller. Final settlement means legally irrevocable and unconditional completion of the relevant transfer or discharge of the obligation. A matched instruction, a lock or an account display is not, by itself, proof of finality.

Principal risk is exposure to losing the full transaction value by irrevocably giving up one leg without receiving the other. Effective delivery versus payment linkage protects against that one-sided loss.

Payment versus payment (PvP) uses the same conditional-linking principle for a different exchange: final payment in one currency is conditional on final payment in another, and vice versa. DvP instead links securities with cash.

Hypothetical Settlement Example

Assume a hypothetical sale of 100 securities at $50 each, with no fees. The corresponding cash payment is 100 × $50 = $5,000. If the seller irrevocably delivers the securities without receiving payment, the full $5,000 transaction value is exposed to principal risk; it is not an inevitable realised loss. The buyer faces corresponding exposure if it irrevocably pays but receives no securities.

In a simple gross-settlement illustration of delivery versus payment, the arrangement makes completion of each transfer conditional on the corresponding transfer. If the buyer cannot supply the cash, the seller's securities are not finally released; if the seller cannot supply the securities, the buyer's cash is not finally released. The trade may fail to complete without either party suffering a one-sided principal loss. This illustration does not describe every DvP model.

Settlement Models and Timing

Delivery versus payment can use gross or net settlement: gross means settling obligations individually, while netting offsets obligations before settling the resulting amounts. Model 1 settles individual trades gross on both legs. Model 2 settles securities deliveries individually gross during the processing cycle and settles the net cash obligation at the end. Delivery is final before payment in this model, with the link maintained through the operator guaranteeing payment. Model 3 settles both legs net, rather than making separate gross transfers for each underlying trade.

The settlement cycle is the interval between trade execution and final settlement. It measures timing, whereas DvP describes how delivery and payment obligations are linked. Consequently, DvP does not necessarily mean immediate settlement after trading.

Risks That Remain

Delivery versus payment is not a guarantee of successful or risk-free trading. Its principal-risk protection depends on effective linkage; calling an arrangement DvP does not establish that protection.

• Replacement-cost risk: A failed trade may need to be replaced at an unfavourable price. This exposure can arise between execution and settlement and differs from losing the full value of a delivered leg.
• Liquidity risk: DvP does not supply cash or securities when needed, so a party may be unable to meet an obligation on time. The shortfall may be temporary rather than a permanent inability to pay or deliver.
• Legal risk: Loss can arise from uncertain or unexpected application of law or regulation. Technical conditionality alone does not establish legally effective finality or enforceability in every jurisdiction.
• Operational risk: Processing errors, system outages or other disruptions can delay or prevent settlement. Failure to complete an exchange does not necessarily mean a one-sided principal loss.