Delivery Versus Payment
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Delivery versus payment (DVP) is a securities industry settlement method that guarantees the transfer of securities only happens after payment has been made. DVP stipulates that the buyer's cash payment for securities must be made prior to or at the same time as the delivery of the security.Delivery versus payment is the settlement process from the buyer's perspective; from the seller's perspective, this settlement system is called receive versus payment (RVP). DVP/RVP requirements emerged in the aftermath of institutions being banned from paying money for securities before the securities were held in negotiable form. DVP is also known as delivery against payment (DAP), delivery against cash (DAC), and cash on delivery.
Definition
Delivery Versus Payment (DVP) is a settlement method in the securities industry that ensures the transfer of securities only occurs after payment is completed. Under DVP, the buyer must pay for the securities either before or simultaneously with the delivery of the securities. This process is known as DVP from the buyer's perspective, while from the seller's perspective, it is referred to as Receive Versus Payment (RVP).
Origin
The concept of DVP originated from the need for security and efficiency in financial markets, particularly after institutions were prohibited from paying for securities before holding them in a transferable form. The implementation of DVP aims to reduce settlement risk and ensure the safety and reliability of transactions.
Categories and Features
DVP can be categorized into several types, including Delivery Against Payment (DAP), Cash Against Delivery (CAD), and Cash on Delivery. The common feature of these types is that they all require payment to be completed before or simultaneously with the delivery of securities, thereby reducing counterparty risk. The main advantage of DVP is its effectiveness in preventing delivery failures and financial losses, but its disadvantage may include higher liquidity requirements.
Case Studies
A typical case involves a large investment bank using the DVP system for cross-border securities transactions to ensure safe completion under different national legal frameworks. Another example is a financial institution using DVP in the domestic market to manage its securities portfolio, ensuring reduced risk during market volatility.
Common Issues
Common issues investors might encounter when applying DVP include increased liquidity demands and potential legal and operational challenges in cross-border transactions. A common misconception is that DVP can completely eliminate all risks, but in reality, it primarily reduces settlement risk.
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