Delivery versus payment and payment versus payment

Delivery versus payment, or DvP, is a settlement mechanism that makes securities delivery conditional on the corresponding payment. Payment versus payment, or PvP, makes the final payment of one currency conditional on the final payment of the other currency in a foreign-exchange transaction.

Both mechanisms address principal risk: the risk of delivering the full value owed while failing to receive the corresponding value.

DvP links securities and money

Take a purchase of securities for $2.5 million. Without linked settlement, the seller could deliver the securities and then lose the whole $2.5 million receivable if the buyer fails before paying.

Under DvP, final securities delivery occurs only if the corresponding payment occurs. If the buyer cannot supply the money, the seller does not complete a one-sided delivery under that mechanism.

The trade can still fail to settle. Conditional exchange prevents one form of loss; it does not manufacture missing securities or cash.

PvP links two currency payments

Take an exchange of dollars for euros. The dollar payer faces principal risk if its dollar payment becomes final before the euro payment is secured. A payment message confirming an instruction does not establish that the other currency has arrived finally.

PvP links the two final payments. Where the relevant currencies and transactions can use the arrangement, neither party pays away principal without the corresponding linked payment.

The funding obligations remain in two currencies. Net economic exposure after an FX trade does not mean that the participant needs only one net cash balance for settlement.

Conditional exchange does not eliminate replacement cost

Suppose a buyer agreed to pay $2.5 million for securities now worth $2.6 million. If the seller defaults before a DvP exchange completes, the buyer retains its $2.5 million. Buying equivalent securities elsewhere can nevertheless cost an additional $100,000.

That $100,000 is replacement-cost exposure. It is distinct from losing the entire payment through a completed, unreciprocated transfer.

The participant also bears operational and timing costs. It might need alternative funding, miss an onward delivery, or replace the transaction in a less liquid market.

Netting and finality require separate descriptions

Netting reduces obligations by offsetting eligible amounts. DvP and PvP specify the conditional relationship between settlement legs. A system can combine these mechanisms, but reducing an amount does not by itself make the remaining exchange conditional.

Settlement finality determines when a transfer becomes irrevocable and unconditional under the relevant legal and system framework. A complete description therefore names the assets, the linked legs, the settlement design, and the point of finality. “Both instructions were sent” establishes none of those conditions by itself.