how delivery versus payment works
a significant source of credit risk in securities settlement is the principal risk associated with the settlement date the idea behind the rvp dvp system is that part of that risk can be removed if the settlement procedure requires that delivery occurs only if payment occurs in other words that securities are not delivered prior to the exchange of payment for the securities the system helps to ensure that payments accompany deliveries thereby reducing principal risk limiting the chance that deliveries or payments would be withheld during periods of stress in the financial markets and reducing liquidity risk by law institutions are required to demand assets of equal value in exchange for the delivery of securities 2 the delivery of the securities is typically made to the bank of the buying customer while the payment is made simultaneously by bank wire transfer check or direct credit to an account delivery versus payment dvp is a settlement method that requires that securities are delivered to a particular recipient only after payment is made special considerationsfollowing the october 1987 worldwide drop in equity prices central banks in the group of ten strengthened settlement procedures to eliminate the risk that securities were delivered without payment the dvp procedure reduces or eliminates the counterparties exposure to this principal risk 3