Payment versus Payment (PvP)
Payment versus payment (PvP) is a settlement mechanism for foreign exchange in which the final transfer of one currency happens if, and only if, the final transfer of the other currency happens too. It removes the principal risk of paying first.
Also called: PvP · payment-versus-payment · PvP settlement
In an ordinary currency trade each side sends its payment separately through its own country's system, and one inevitably arrives before the other. PvP links the two legs so that neither can complete alone. If one party cannot pay, the other's payment is not released and it keeps its money.
The main PvP system is CLS, which settles trades in 18 currencies across accounts it holds at each currency's central bank. Some central banks also link their RTGS systems to offer PvP for particular currency pairs, as Hong Kong does between its dollar, US dollar, euro and renminbi systems.
PvP removes Herstatt risk but not every risk. A trade that fails to settle still has to be replaced at the current market rate, and participants must have funds in place at the required time. The G20 cross-border payments programme treats wider PvP coverage, especially for emerging-market currencies, as a priority, and atomic settlement on tokenised ledgers is being explored as another way to achieve the same result.
Commonly confused with
| Term | How it differs |
|---|---|
| Delivery versus payment | Delivery versus payment (DvP) links a securities transfer to its cash payment. PvP links two currency payments to each other. |
See also
- Herstatt RiskHerstatt risk is the risk in a foreign exchange trade that one party pays the currency it sold but never receives the currency it bought, because the counterparty fails in between. The full principal amount is at stake.
- CLSCLS is the specialist institution that settles foreign exchange trades between major banks on a payment-versus-payment basis. Launched in 2002 and owned by its member banks, it settles 18 currencies and removes the risk of paying one side of a trade without receiving the other.
- Settlement RiskSettlement risk is the risk that a payment or trade does not complete as expected because a party fails to deliver what it owes, on time or at all, after its counterparty has already performed.
- Payment FinalityPayment finality is the point at which a transfer of funds becomes irrevocable and unconditional: it cannot be recalled by the sender, reversed by the system or unwound if a participant becomes insolvent. Before that point a payment is still a promise.
- RTGSRTGS stands for real-time gross settlement: a system that settles each payment individually and finally in central bank money, rather than offsetting many payments against each other and settling only the difference at the end of a cycle.