Delivery versus payment (DvP) is the mode of settlement system that stipulates that cash payment must be made prior to or simultaneously with the delivery of the security. The system ensures that unless the funds are paid, the securities are not delivered and vice versa and it completely eliminates the settlement risk in transactions. The delivery versus payment system describes three types of DvP settlements viz. viz., DvP I, II and III.
In DvP I method the securities and funds legs of the transactions are settled on a gross basis, that is, the settlements occur transaction by transaction without netting the payables and receivables of the participant.
In DvP II method, the securities are settled on gross basis whereas the funds are settled on a net basis, that is, the funds payable and receivable of all transactions of a party are netted to arrive at the final payable or receivable position which is settled.
In DvP III method, both the securities and the funds legs are settled on a net basis and only the final net position of all transactions undertaken by a participant is settled.
The application of principles of Real Time Gross Settlement (RTGS) in the context of securities settlement is also called Delivery Vs Payment System. RTGS represents settlement of any transaction involving claims and counter claims instantly on gross basis, thereby obviating the need for clearing arrangement. However, the liquidity requirement in a gross mode is higher than that of a net mode since the payables and receivables are set off against each other in the net mode. However, RTGS mechanism eliminates default risks.
