Spot Settlement and Value Dates
Why a foreign-exchange trade agreed today doesn't finish until two business days later, and how that T+2 'spot' convention shapes forward pricing and cutoff times.
When two counterparties agree to exchange currencies "at market," the price they agree on today doesn't settle today. Almost every FX market quotes a spot rate for delivery on the spot value date, which is normally two business days after the trade date (T+2). The two-day gap exists because international payments route through different countries' banking systems and time zones, and settlement instructions need time to clear both sides of the exchange before money actually moves.
The value date is simply the day the currencies actually change hands. A trade done on a Monday for USD/JPY typically settles Wednesday; a trade done on a Wednesday would settle Friday, since weekends don't count as business days. Holidays in either currency's home country push the value date out further — if Tuesday is a US holiday, a Monday USD/JPY trade might not settle until Thursday. CAD and a few other currencies are an exception, settling T+1 against USD.
This convention matters beyond bookkeeping. Every FX forward price is built by adjusting the spot rate for the interest-rate differential between the two currencies over the period from the spot value date to the forward's value date, not from the trade date. Getting the value date wrong shifts the number of days used in that calculation, which throws off the forward points and the entire pricing chain built on top of spot.
Spot FX settles two business days after the trade (T+1 for some currencies), and this spot value date — not the trade date — is the actual starting point for every day-count calculation used to price forwards and swaps.
Further reading
- Moosa, International Finance (ch. on FX markets)