The term "delivery versus payment" (DVP) refers to a settlement procedure used in the securities business that ensures shares are transferred only after payment has been received. Following DVP's rules, the purchaser of security must make a cash payment in advance of or concurrent with the deposit delivery.

From the buyer's point of view, settlement is accomplished by delivery in exchange for payment; from the seller's point of view, settlement is achieved through receiving in exchange for payment.

After financial institutions were prohibited from making cash payments for securities before the securities were kept in negotiable form, demand for DVP/RVP regulations grew. Delivery versus payment (DAP), delivery versus cash (DAC), and cash on delivery (COD) are all other names for DVP.

The Value Of Delivery Vs Cost (DVP)

The settlement mechanism based on a delivery versus payment guarantees delivery only if payment is made. The system connects two methods, one for transferring money and one for shared stocks.

For practical purposes, a settlement agent can be instructed to process a DVP sale transaction of negotiable securities. The goal of utilizing these standardized message formats is to facilitate the risk-free and automated processing of financial transactions during settlement.

When possible, it is preferable for the transfer of ownership and the receipt of money to occur concurrently. A central depository system, like the United States Depository Trust Corporation, offers the possibility of this happening.

The Methods Of Delivery and Payment

The main risk in securities settlement is the settlement date, which is a major source of credit risk. The settlement mechanism requiring delivery only if payment occurs is crucial to the RVP/DVP system since it mitigates this risk.

The system aids in ensuring that payments are made in tandem with deliveries, which helps to mitigate principal risk, the possibility of supplies or charges being withheld during times of market stress, and liquidity risk.

The Function Of The DVP

The objective of the delivery versus payment (DVP) method is to prevent a few different types of risks. When engaging in a transaction on the securities market, a trading party may be vulnerable to the following types of hazards.

Credit Hazard

The possibility that the buyer won't pay in full for the obligation when it's due or at any time is known as credit risk.

Cost Of Replacement Hazard

The potential for unrealized benefits to be lost due to replacement cost risk. At the moment of default, the security's market price is compared to the contract price to establish the amount of unrealized gain. If the market price is lower than the contract price, the seller is at risk of losing money, while the buyer runs the risk of losing money if the market price is higher than the contract price.

Principal Risk

The principal risk is the potential loss of all the value of the securities or monies transferred from the non-failing counterparty to the defaulting counterparty. If the customer can pay in full but not get the goods, they take the risk, and if the seller can deliver but not get paid, they take the risk.

Dangers Associated With Having Enough Money on Hand

The risk that a party will not pay in full when an obligation is due, but will do so at a later, indeterminate period, is known as liquidity risk.

Systemic Dangers

If one institution cannot pay its bills on time, it could have a domino effect on the other institutions, creating a systemic risk.

Getting Rid Of Dangers

The DVP approach essentially eliminates the hazards above in the following ways:The delivery versus payment system readily avoids the main risk because it is primarily structured to prevent such outcomes.

When using DVP, securities are only sent out for delivery after the full purchase price has been paid. It's a foolproof way to avoid losing money.

Since DVP removes the risk of default on principal, the risk of default on delivery and payment obligations is also reduced.

Summary

The terms "cash on delivery" (COD) and "delivery versus payment" (DVP) refer to two different payment terms and methods used in business transactions. Cash on a delivery transaction is one in which the buyer pays the seller immediately upon receipt of the goods or services being purchased. To clarify, delivery-versus-payment marketing involves securities for which the cash payment is due before or simultaneously with the delivery.