Delivery versus payment links securities delivery with the corresponding funds transfer so one occurs only if the other occurs.
Delivery versus payment (DVP) is a securities-settlement mechanism that links delivery of securities with the corresponding funds transfer so delivery occurs if and only if payment occurs. The linkage is designed to prevent one party from finally delivering its side while the other party keeps both the cash and the securities.
Without effective linkage, a seller could deliver securities and then fail to receive payment, losing the full principal value of the assets. A buyer could similarly pay and fail to receive the securities.
DVP conditions each final transfer on completion of the corresponding leg. This reduces principal risk, but the parties can still face losses or costs if a trade fails before settlement, if market prices move, or if cash and securities are not available on time.
The BIS framework describes three common models:
| Model | Securities transfer | Funds transfer | Typical finality pattern |
|---|---|---|---|
| DVP Model 1 | Gross, transaction by transaction | Gross, transaction by transaction | Both legs become final obligation by obligation |
| DVP Model 2 | Gross | Net | Securities transfers occur throughout the cycle; funds settle net at the end |
| DVP Model 3 | Net | Net | Final securities and funds transfers occur on a net basis at the end of the cycle |
The models trade off liquidity use, transaction throughput, and the risk created while obligations await final settlement. A model number alone does not show whether a particular system is safe; prefunding, credit, collateral, loss allocation, queue management, and default procedures also matter.
flowchart LR
A["Seller provides securities"] --> C{"Both settlement conditions met?"}
B["Buyer provides funds"] --> C
C -->|"Yes"| D["Securities become final to buyer"]
C -->|"Yes"| E["Funds become final to seller"]
C -->|"No"| F["Neither linked leg becomes final"]
The trade confirmation records execution. It does not, by itself, prove that either settlement leg became final.
Assume a buyer agrees to purchase 1,000 shares at $42.50 each. The settlement obligation is $42,500 before any fees or taxes.
| Settlement record | Securities available | Cash available | DVP result |
|---|---|---|---|
| Initial positioning | 1,000 shares | $40,000 | No linked transfer; cash is $2,500 short |
| Buyer adds funding | 1,000 shares | $42,500 | Both conditions can be met |
| Final DVP settlement | 1,000 shares delivered | $42,500 paid | Buyer receives shares and seller receives cash |
The initial shortfall prevents the seller from finally delivering the shares while remaining unpaid. Once the missing $2,500 is available and all other conditions are satisfied, the two linked legs can become final under the system’s rules.
DVP controls the exchange of principal, but it does not remove the consequences of delay. If the trade ultimately had to be replaced under the governing process after the market price rose to $43.20, acquiring 1,000 shares at the new price would cost $700 more than the original $42,500 contract value. That hypothetical difference illustrates replacement-cost risk, not a loss produced by the DVP transfer itself.
| Method | Linked legs | Primary use |
|---|---|---|
| DVP | Securities and funds | Securities settlement |
| Payment versus payment | One currency and another currency | Foreign-exchange settlement |
| Delivery versus delivery | One security and another security | Securities exchange |
| Free of payment | Securities only | Transfers without a linked funds leg, such as some collateral or custody movements |
Free-of-payment does not automatically mean improper. It can be appropriate when payment occurs outside the system or no payment is due. It requires separate controls because the infrastructure does not protect the cash leg through DVP linkage.
This article provides general financial education. Settlement rights, finality, custody, and loss allocation depend on the system rules, contracts, security, and jurisdiction.