Payment versus payment (PVP) is a type of settlement process used in financial transactions. In a PVP transaction, the delivery of one asset is contingent upon the simultaneous receipt of another asset. This means that both parties involved in the transaction must make their payments at the same time, with the delivery of each asset occurring only when the corresponding payment has been received.
The purpose of PVP is to reduce the risk of settlement failure and ensure that both parties are protected against credit risk. By requiring both parties to make their payments simultaneously, PVP transactions eliminate the risk that one party will make a payment but not receive the corresponding asset, or receive an asset but not make the corresponding payment.
PVP is commonly used in foreign exchange transactions, where two currencies are exchanged at the same time, and in securities transactions, where securities are exchanged for cash. It is also used in other financial transactions that involve the exchange of assets or payments.
There are several types of Payment versus Payment (PVP) systems that are commonly used in financial markets. Here are a few examples:
- Continuous Linked Settlement (CLS): CLS is a PVP system used in the foreign exchange market. It operates on a real-time gross settlement (RTGS) basis, which means that transactions are settled individually and immediately. CLS ensures that the delivery of one currency occurs simultaneously with the delivery of another currency.
- Delivery versus Payment (DVP): DVP is a PVP system used in securities transactions. It ensures that the delivery of securities occurs simultaneously with the delivery of cash. DVP is used to reduce settlement risk in securities transactions.
- Payment versus Payment Plus (PVP+): PVP+ is a more advanced version of the standard PVP system. It is used in the foreign exchange market to settle cross-currency transactions between multiple parties. PVP+ ensures that all payments are made simultaneously, reducing the risk of settlement failure.
- Dual-Currency Settlement (DCS): DCS is a PVP system used in the Asian market for settling foreign exchange transactions. It ensures that the delivery of one currency occurs simultaneously with the delivery of another currency, reducing the risk of settlement failure.
Overall, PVP systems are used in various financial transactions to reduce the risk of settlement failure and ensure that both parties involved in the transaction are protected against credit risk