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FRM Part II · FRM Exam Part II · Repurchase Agreements and Financing

Which feature best distinguishes a delivery-versus-payment (DVP) settlement of a repo from a free delivery of securities?

DVP links the delivery of securities to the payment of cash so that neither leg settles unless the other does. This removes principal settlement risk, whereas free delivery lets one party hand over an asset without receiving the offsetting payment. Market risk on collateral still requires haircuts.

  1. ADVP guarantees the collateral will not fall in value before maturity
  2. BDVP eliminates the need for any haircut or margin
  3. CDVP links the transfer of securities and cash so neither leg settles without the otherCorrect
  4. DDVP means the repo is settled only at maturity rather than at inception

Explanation

DVP makes the securities and cash transfers conditional on each other, removing principal settlement risk. It does not remove market risk on collateral, so haircuts and margin remain relevant. It applies to both opening and closing legs.

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