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UK Regulators issue “Guidance” on securities settlement risk

On 2 June 2021, the PRA and FCA published an open letter reviewing good practice in relation to the commonly-used Delivery vs Payment (DVP) mechanism. DVP is a long-standing market convention, requiring that cash payment for securities is made either very shortly before or simultaneous with delivery of securities. Although an effective mitigant for a range of risks (credit, replacement cost, liquidity and wider systemic), its purpose is to eliminate principal risk- securities cannot be delivered until payment is received. Although the system, and its opposite from the counterparty’s side Receive vs Payment, has been market convention since the 1987 crash, the UK Regulators have observed a number of defaults during periods of high volatility. The following “good practices” apply to all transactions with DVP clients, including electronic trading platforms:

On-boarding of new accounts

  • Over and above the existing KYC and AML checks, firms should undertake more comprehensive measures to establish the bona fide identity of their DVP clients
  • Every firm should have a risk-based policy framework, developed and overseen by a credit function independent of the front office. Every client should have at least a basic credit profile, aligned to the firm’s risk appetite. The framework should require more extensive analysis for higher-risk accounts, and consideration should be given to the periodic refreshment of data
  • At account opening, an accountable individual within the firm should formally sign off on the new client’s expected trading strategy, including anticipated  trade size, type and frequency

Credit Risk Framework

  • Every client account, including those for which DVP is not applicable, should be subject to a pre-settlement credit limit, derived from a risk-based hierarchy/matrix developed and owned by the independent credit function

On-going oversight of clients

  • This should include the following elements: clear internal ownership of the client account, a monitoring system to assess trading activity against expectations, pre-set parameters to alert and escalate instances of material deviation, coverage of financial crime and money-laundering risks

Client exposure monitoring

  • An automated monitoring system is required to reconcile pre-settlement exposures to individual client account risk limits. All limit exceptions, are to be systematically escalated to the independent credit function. Settlement fail reports should incorporate relevant details in relation to pre-settlement exposure. For individual clients transacting electronically, the system should incorporate triggers and trading halt parameters for aggregate exposures in excess of risk limits
  • Market risk exposure on failed trades should be closely monitored, their risk should be mitigated by appropriate close-out policies

Escalation procedure

  • The trade fail management process must be robust, linked to automated risk-monitoring system, enabling rapid escalation to front office and independent control functions. Pending resolution of failed trades, the process should include points at which trading restrictions/halts can be imposed on individual accounts


Given how long DVP/RVP has been standard market convention, it may seem surprising that the PRA/FCA consider it necessary to “encourage” firms to incorporate these minimum standards. However, the guidance is a result of a review across a number of firms. The regulators expect Chief Risk Officers to outline what steps they have taken in response to the letter by the end of Q4 2021. If these systems and processes are not firmly in place already, affected firms should regard their implementation as a priority.

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