What it means
When securities are bought and sold, the usual arrangement is delivery versus payment (DVP), in which the securities and the cash are exchanged together so neither side is exposed. An FOP instruction removes the cash leg, so only the securities move.
It is used when no sale is taking place or when the money is settled by another route. Common uses include transferring holdings between two accounts owned by the same investor, moving assets from one custodian (the institution that safeguards securities) to another, and posting securities as collateral.
Gifts of shares and movements within a corporate group are also handled this way. The key risk is that one side can perform without the other.
If a seller delivers securities FOP in expectation of being paid by bank transfer later, the buyer might fail to pay, leaving the seller out of pocket. For that reason, FOP instructions to settle a real sale are treated with caution and are often subject to extra approvals.
Operations teams therefore check FOP instructions carefully. They confirm that both accounts exist, that the quantities and security identifiers match, and that the instruction is signed by an authorised person.
Many firms require the reason for the transfer to be recorded for audit and anti-money-laundering purposes. The related receive free and deliver free instructions are simply the receiving and sending sides of the same idea.
Which term appears on a statement depends on whether the account is gaining or losing the securities. Systems and reports use several labels for the same idea, including deliver free, receive free and free delivery.
The labels differ between custodians and countries, so it is sensible to confirm what a particular statement or message means before acting on it.
In practice
Real-world examples.
Example
An investor moves 1,000 shares from her account at one broker to an account at another broker. Because she is not selling, the transfer is sent FOP and no cash is exchanged. The new broker simply receives the shares and records the original purchase date and cost.
Example
A hedge fund posts $5,000,000 of government bonds to a bank as collateral for a derivatives contract. The bonds move FOP to the bank's collateral account, and no payment is made for them. When the contract ends, the bonds are returned FOP.
Example
A family business transfers shares in a listed company to a trust as part of its succession planning. The shares are delivered FOP and the lawyers handle valuation and any tax reporting separately. In each case the securities simply change account, and any price is dealt with elsewhere.
Case study
Seen in the real world.
Calder and Wynn is a fictional investment boutique that moved its client custody to a new provider. The operations manager sent 140 FOP instructions to move securities across, planning to complete the transfer over a weekend. On Monday, 12 instructions had failed.
The failures traced back to mismatched security identifiers and to two accounts that had not been fully opened at the receiving custodian. In this illustrative story, no money was lost, because no cash was involved, but clients saw missing holdings on their statements for two days.
The manager introduced a pre-check in which every instruction was matched against the receiving custodian's account list before it was sent. The next batch of 90 instructions settled with no failures. She also asked the receiving custodian to confirm each batch in writing, so that the operations team had a single reconciled list of what had arrived and what was still outstanding.
Watch out
Common mistakes.
- Using an FOP instruction for a sale and relying on a separate payment arriving later, which exposes the seller to non-payment.
- Assuming that no cash means no record is needed, when FOP transfers still have to be documented for audit and tax.
- Confusing FOP with a gift or a loan, when it only describes how the securities move and says nothing about why.
Questions
People also ask.
What is the difference between FOP and DVP?
FOP moves securities without cash, while DVP exchanges securities and cash at the same time.
Does FOP mean the transfer is free of charge?
Not necessarily. The word refers to payment for the securities, and custodians may still charge a fee for processing the instruction. It is wise to ask for the fee schedule before moving a large portfolio, because charges are sometimes set per line of securities.
Who uses FOP instructions most?
Custodians, brokers, asset managers and treasury teams handling transfers, collateral and account changes. Individual investors meet them whenever they move a portfolio from one provider to another, even if they never see the instruction itself.
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