Introduction to FX Markets II

What is a value date and what is the standard for spot transactions?

Value dates are the dates on which FX trades settle i.e. date that the payment of each currency is made. The value date for spot transactions in most cases is two business days from the trade date (T) i.e. T+2. There are four exceptions: spot USD/CAD (T+1); USD/TRY (Turkish lira) – which can trade T+0 or T+1; the latter is standard; USD/RUB (Russian rouble): T+1 is widely accepted as the going value date for spot trades; and USD/PHP (Philippine peso) – T+1.

What is the value date convention for forward trades?

Settling trades on dates other than the spot date involves forward trades, where the exchange rate is adjusted by forward points to compensate for the interest rate differential between the two currencies. There are many standard tenors: one week, two weeks, one month, two months etc. All fixed tenors are calculated from the standard spot date. If the forward date falls on a weekend, settlement moves to the next business day (called modified following).

If the spot date falls on the last business day of the month, all tenors that are a multiple of months also fall on the last business day of that month (known as the target month). If the current spot date is Friday February 27th (= last business day), the value date for a six-month tenor is Tuesday August 31st. The period is a bit longer than six months. If the current value date for spot is January 31st, the one-month period will not go beyond the last working day of February, making it a shorter period. Forwards on values between standard tenors are known as ‘broken dates’.

How do holiday trading conventions work?

Settlement dates need to be business days for each of the currencies in a pairs trade. If one currency has a public holiday, it will settle on T+3.

If a country has a public holiday on T+1, delivery moves a business day later. If you trade a currency pair that normally settles T+2, for instance EUR/GBP and one of the currencies has a holiday on T+1, the spot date moves to T+3. The big exception is USD. If T+1 is a US holiday, the spot date remains T+2. A spot USD/JPY on July 3rd will settle at T+2, so July 5th if that is a working day even though July 4th is a US holiday. It will not be able to settle on the 4th, so if we trade spot USD/JPY on July 2nd, it will settle on the 5th. On a US holiday, no currency will settle, even a non USD currency.

What are the conventions for Latin American and Arab currencies?

The spot date is only affected if T+2 is a USD holiday. If T+1 is a US holiday, this does not normally prevent T+2 from being the spot date. Latin American currencies such as ARS, CLP and MXN are exceptions. If T+1 is a USD holiday, the spot date for these currencies is T+3.

Arab countries have their weekends on Friday and Saturday, so the spot value date for some Arab currencies for Wednesday trades is the following Monday. For AED, BHD, EGP, KWD, OMR and QAR, the spot date for Thursday’s trades is also Monday (it still leaves two working days for each currency). For the USD, it is Friday and Monday; for the Arab currency, Sunday and Monday. Tuesday is never a spot date for these currencies and they can only be traded as a broken date. The exception is SAR and JOD, where the spot date for Thursday’s trades is Tuesday.