DVP full form is Delivery Versus Payment. It is a settlement system used in banking that ensures that the delivery of securities and payment for those securities occur simultaneously. In other words, DVP ensures that the seller of securities receives payment and the buyer of securities receives the securities they paid for.
How Does DVP Work?
DVP works by coordinating the transfer of securities and payment between two parties. It is a process that involves a number of steps. The buyer and seller agree on the terms of the transaction, including the type of securities being traded and the price. Once the terms are agreed upon, the seller delivers the securities to the buyer, and the buyer pays for those securities. This occurs simultaneously, meaning that the buyer only receives the securities if payment is made, and the seller only receives payment if the securities are delivered.
Types of DVP
There are two types of DVP: Standard DVP and Reverse DVP.
Standard DVP
Standard DVP is the most common type of DVP. It involves the transfer of securities from the seller to the buyer, and the transfer of payment from the buyer to the seller, occurring simultaneously.
Reverse DVP
Reverse DVP is less common than Standard DVP. It involves the transfer of payment from the buyer to the seller first, followed by the transfer of securities from the seller to the buyer.
Advantages of DVP
DVP offers several advantages over other settlement systems. These include:
- Reduced settlement risk: With DVP, the risk of settlement failure is greatly reduced, as delivery of securities and payment occur simultaneously.
- Increased efficiency: DVP reduces the time and cost associated with settlement processes.
- Increased transparency: DVP provides a clear and transparent process for settlement.
Risks Associated with DVP
While DVP offers several advantages, it also carries some risks. These risks include:
- Credit risk: The buyer may default on payment, or the seller may default on delivery of securities.
- Operational risk: Errors in the settlement process can occur, leading to settlement failure.
- Market risk: Changes in market conditions can impact the value of the securities being traded.
DVP vs. Other Settlement Systems
DVP is just one settlement system used in banking. Other systems include:
- Free of Payment (FoP): This settlement system involves the transfer of securities without payment.
- Payment Versus Delivery (PvD): This settlement system involves the transfer of payment without delivery of securities.
- Payment Versus Payment (PvP): This settlement system involves the simultaneous transfer of payments between two parties.
While each of these settlement systems has its own advantages and disadvantages, DVP is generally considered to be the safest and most efficient.
DVP in International Transactions
DVP is commonly used in international transactions. It provides a secure and efficient way to settle trades between parties of different countries, as it ensures that both the delivery of securities and payment occur simultaneously.
This helps to reduce the risk of settlement failure and increases transparency in the settlement process.
DVP in Securities Trading
DVP is widely used in securities trading, particularly in the equities market. It ensures that the buyer receives the securities they paid for and the seller receives payment for those securities. DVP helps to reduce settlement risk and increase the efficiency of the settlement process.
DVP in Forex Trading
DVP is also used in Forex trading, where it is known as Delivery Versus Payment Foreign Exchange (DVP-FX). In DVP-FX, the delivery of one currency occurs simultaneously with the payment for another currency. This ensures that both parties receive what they paid for and reduces settlement risk.
DVP in Derivatives Trading
DVP is also used in derivatives trading, particularly in the futures and options market. It ensures that the delivery of the underlying assets occurs simultaneously with the payment for those assets. This reduces settlement risk and increases the efficiency of the settlement process.
DVP Regulations
DVP is subject to regulations in many countries. These regulations aim to ensure the safety and efficiency of the settlement process. For example, the European Union’s Central Securities Depositories Regulation (CSDR) requires that DVP be used in the settlement of securities trades.
DVP Best Practices
There are several best practices that should be followed when using DVP. These include:
- Ensuring that all parties to the transaction understand the terms and conditions of the DVP settlement process.
- Performing due diligence on counterparties to reduce the risk of settlement failure.
- Ensuring that all documentation related to the transaction is accurate and complete.
- Implementing robust operational procedures to reduce the risk of errors in the settlement process.
DVP and Blockchain Technology
Blockchain technology has the potential to revolutionize the settlement process in banking, including the use of DVP. Blockchain technology offers a secure, transparent, and efficient way to settle transactions, which could reduce settlement risk and increase efficiency.
Conclusion
DVP is a settlement system used in banking that ensures that the delivery of securities and payment for those securities occur simultaneously.
DVP offers several advantages, including reduced settlement risk, increased efficiency, and increased transparency. However, it also carries some risks, including credit risk, operational risk, and market risk.
DVP is subject to regulations in many countries, and there are several best practices that should be followed when using it. Finally, blockchain technology has the potential to revolutionize the settlement process in banking, including the use of DVP.