FINRA Series 7Processes and Confirms TransactionsMedium
An institutional customer settles securities transactions through its custodian bank rather than directly with the executing broker-dealer, with securities and payment exchanged simultaneously through the custodian. What is this settlement arrangement called?
- ACash settlement
- BDelivery versus payment (DVP) / Receive versus payment (RVP)
- CRegular-way settlement
- DWhen, as, and if issued settlement
Show answer & explanationAnswer & explanation
Correct answer: B. Delivery versus payment (DVP) / Receive versus payment (RVP)
DVP/RVP arrangements are commonly used by institutional customers who settle trades through a custodian bank; securities delivery and payment occur simultaneously through that custodian rather than directly with the broker-dealer.
Why the other options are wrong
- A. Cash settlement means same-day settlement between the customer and broker-dealer directly.
- C. Regular-way settlement refers to the standard T+1 timeframe, not the custodian mechanism.
- D. WI settlement applies to securities that have been authorized but not yet issued (e.g., new issues, splits).
DVP/RVP Settlement
A settlement method where an institutional customer's custodian bank exchanges payment for securities simultaneously with the broker-dealer, rather than the customer paying/receiving directly.
- Common for institutional accounts
- Reduces credit risk via simultaneous exchange
- Distinct from regular-way settlement timing rules
Memory trick: DVP: Deliver Vs. Pay — bank handles both hands at once.