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Highlights:
- Free delivery involves the transfer of securities without the immediate exchange of payment.
- It is considered a credit agreement between the seller and the buyer's bank.
- This process contrasts with the delivery vs. payment method, where both securities and payment are exchanged simultaneously.
In the securities industry, there exists a unique procedure known as free delivery. This term refers to the transfer of securities sold, where delivery is made to the buying customer's bank without requiring immediate payment. Essentially, this method functions as a form of credit agreement, wherein the transaction is completed without the buyer having to pay upfront.
Free delivery can be understood as the opposite of "delivery vs. payment" (DVP), a procedure that ensures both securities and payment are exchanged simultaneously, providing security to both parties in the transaction. While DVP protects against the risk of either the buyer or the seller failing to meet their obligations, free delivery shifts the balance, relying on the trust between the involved parties.
This arrangement has its place in the market, especially when dealing with large institutions or trusted entities where the ability to provide credit is common. Free delivery allows for greater flexibility in the settlement of securities transactions, offering benefits such as improved liquidity for the buyer. However, it also carries the risk of non-payment, as the delivery occurs before any funds are received.
In summary, free delivery serves as a flexible mechanism for executing securities transactions, allowing buyers to receive securities without immediate payment. While it contrasts with the more secure delivery vs. payment model, it continues to be used in situations where the parties trust each other, or credit arrangements are in place to mitigate the associated risks. The decision to use free delivery hinges on the trustworthiness of the parties involved and the specifics of the transaction.
