Settlement / Risk Management

DvP and PvP on Blockchain Networks

Delivery versus payment (DvP) and payment versus payment (PvP) make one side of a trade settle only if the other side does. Shared ledgers can enforce that rule inside a single atomic transaction.

Summary

Delivery versus payment (DvP) is a securities settlement mechanism that links a securities transfer and a cash transfer so that delivery happens if, and only if, payment happens. Payment versus payment (PvP) applies the same rule to foreign exchange: the final payment of one currency happens only if the final payment of the other currency happens too. Both exist to remove principal risk, which is the chance of handing over the full value of a trade and getting nothing back.

How it works

The textbook case is Bankhaus Herstatt. On 26 June 1974, German supervisors closed the bank in the middle of the German business day. By then it had received the Deutsche marks it bought from its FX counterparties, but New York had not opened yet, so it had not delivered the dollars it sold. Several institutions took losses and the US CHIPS system closed for 24 hours. The gap between paying and being paid has been called Herstatt risk ever since.

Settlement risk lives in that time gap. In FX, the two legs settle in different payment systems, often in different time zones, so a bank can be irrevocably committed to its outgoing payment hours before it knows the incoming one has arrived. A central bank survey reported by the ECB in 2007 found that a bank selling euro for dollars carried an average exposure of 30 hours. The industry answer was CLS, a multi-currency PvP system set up by major banks. It started operating in September 2002 as a direct result of the G10 central banks' strategy for reducing FX settlement risk.

CLS did not finish the job. The BIS estimates that $2.2 trillion of daily FX turnover was still exposed to settlement risk in April 2022, 31% of deliverable turnover, up from about $1.9 trillion in 2019. CLS settled $2.5 trillion through PvP in 18 currencies over the same period. The remainder sits outside PvP for concrete reasons: many emerging-market currencies are not eligible for CLS, some regional PvP arrangements only admit local banks, PvP windows do not always line up with peak liquidity, and banks net bilaterally on nearly a fifth of deliverable turnover.

In securities, DvP is standard practice at central securities depositories, yet the two legs still sit on different ledgers. The securities are held at the CSD and the cash in a central bank or commercial bank account, and the CSD coordinates the two. That works, but it ties settlement to operating hours and batch cycles, and cross-border trades inherit the same time-zone problem FX has.

A shared ledger changes the mechanics. When the asset and the cash are both tokens on one ledger, or on ledgers that can commit one transaction together, DvP and PvP become a property of the transaction itself. Both transfers commit or neither does, so there is no window in which one side has paid and the other has not. Fnality's Sterling Fnality Payment System began controlled live payments in December 2023 and received a settlement finality designation from the Bank of England in December 2024. It uses a representation of funds held at the central bank to support atomic settlement of DvP transactions. Partior offers atomic PvP for FX, with both currency legs exchanged simultaneously and irrevocably, 24/7.

Atomic settlement has a price. Both legs have to be in place when the trade executes: the seller needs the asset and the buyer needs the cash. That removes principal risk, but it gives up some of the netting that lets banks settle large gross flows with smaller net payments. The case is strongest where PvP is missing today, meaning non-CLS currencies, out-of-hours trades and tokenized securities that already live on-chain.

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