Delivery versus payment in securities settlement systems

The worldwide collapse of equity prices in October 1987 heightened the awareness of central banks of the potential for disturbances in settlements of securities transactions to spread to payment systems and to financial markets generally. Since then, central banks in the Group of Ten countries have been working with market participants and securities industry supervisors to strengthen settlement arrangements. In particular, most of the G-10 central banks have been actively involved in efforts to implement the Group of Thirty's recommendations for strengthening and harmonising settlement arrangements for corporate securities as well as in efforts to strengthen settlement arrangements for government securities.

In order to enhance central bank understanding of issues relating to securities settlement systems, the Committee on Payment and Settlement Systems reviewed and analysed arrangements in the G-10 countries at a meeting in Basle in December 1990. At that meeting the Committee identified a need for clearer understanding of the concept of delivery versus payment (DVP) and of the implications of the design and operation of systems intended to achieve DVP for credit and liquidity risks in securities settlements. Shortly thereafter, a study group, chaired by Mr. P. Parkinson, was formed to analyse these issues.

This report is the outcome of the study group's efforts. The group has developed a broad framework for analysing the types and sources of risk in securities clearance and settlement, including the concept and implications of DVP. Building on this framework, it has reviewed the design and operation of securities settlement systems in use or under development in the G-10 countries, identified common approaches to DVP and evaluated the implications of the various approaches for central bank policy objectives concerning the stability of financial markets and the containment of systemic risk. By publishing the report the Committee hopes to contribute to the understanding of these issues and thereby to facilitate ongoing efforts to strengthen securities settlement systems in the G-10 countries and in other countries.

This report should be viewed solely as the product of study by the Committee on Payment and Settlement Systems and does not necessarily represent the views of either the central banks of the G-10 countries or the Bank for International Settlements. Able assistance in editing, translating, and publishing the report was provided by the BIS.