Business Day Conventions

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The following is a detailed explanation of Business Day Conventions. These rules are used to determine whether payment or settlement dates for financial contracts, bonds, options, swaps, and other instruments need to be adjusted based on market business days. If the payment date or settlement sunset falls on a non business day (such as a weekend or holiday), a valid business day needs to be selected based on predefined date adjustment rules.

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1. Following (0)

• Rule:
  • If the payment or settlement date is a non-business day, the date is adjusted to the next business day.
• Use Case:
  • When payments or settlements need to be processed as soon as possible.
• Example:
  • If the payment date is December 28, 2024 (Saturday, a non-business day), under the Following rule, the payment date is adjusted to December 30, 2024 (Monday, the next business day).
• Feature:
  • The date is always moved forward to the nearest business day.

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2. Preceding (1)

• Rule:
  • If the payment or settlement date is a non-business day, the date is adjusted to the previous business day.
• Use Case:
  • When transactions need to be completed before a non-business day.
• Example:
  • If the payment date is December 28, 2024 (Saturday, a non-business day), under the Preceding rule, the payment date is adjusted to December 27, 2024 (Friday, the previous business day).
• Feature:
  • The date is always moved backward to the nearest business day.

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3. Modified Following (2)

• Rule:
  • If the payment or settlement date is a non-business day:
    • First, move to the next business day.
    • If the next business day falls in a new month, adjust to the previous business day.
• Use Case:
  • When adjustments to the next month’s date need to be avoided.
• Example:
  • If the payment date is December 31, 2024 (Tuesday, a non-business day), and the next business day is January 2, 2025 (Thursday):
    • Under the Modified Following rule, the payment date is adjusted to December 30, 2024 (Monday, the previous business day).
• Feature:
  • Avoids crossing into a new month, ensuring the date remains in the same month.

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4. Modified Preceding (3)

• Rule:
  • If the payment or settlement date is a non-business day:
    • First, move to the previous business day.
    • If the previous business day falls in the previous month, adjust to the next business day.
• Use Case:
  • When adjustments to the previous month’s date need to be avoided.
• Example:
  • If the payment date is January 1, 2024 (Monday, a non-business day), and the previous business day is December 29, 2023 (Friday):
    • Under the Modified Preceding rule, the payment date is adjusted to January 2, 2024 (Tuesday, the next business day).
• Feature:
  • Avoids crossing into the previous month, ensuring the date remains in the same month.

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5. IMM (4)

• Rule:
  • IMM (International Monetary Market) rules define specific quarterly contract dates, typically the third Wednesday of March, June, September, and December.
  • If the payment date does not align with an IMM date, it is adjusted to the nearest IMM date.
• Use Case:
  • Financial derivatives (e.g., futures, swaps) and IMM-standardized contracts.
• Example:
  • If the payment date is March 19, 2024 (Tuesday, not an IMM date), under the IMM rule, the payment date is adjusted to March 20, 2024 (Wednesday, the third Wednesday).
• Feature:
  • Adjusts dates to align with standardized quarterly contract dates.

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6. Actual (5)

• Rule:
  • No adjustment is made; the payment or settlement date remains the originally scheduled date, even if it is a non-business day.
• Use Case:
  • When payments or settlements must strictly follow the original date.
• Example:
  • If the payment date is December 28, 2024 (Saturday, a non-business day), under the Actual rule, the payment date remains December 28, 2024, with no adjustment.
• Feature:
  • The date remains unchanged, which may result in payments being made on non-business days.

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7. LME (6)

• Rule:
  • LME (London Metal Exchange) rules are specific to metal options and futures contracts. Settlement dates falling on non-business days are adjusted to the nearest business day, as defined by the LME contract.
• Use Case:
  • Metal futures, options, and related transactions.
• Example:
  • If the payment date is December 28, 2024 (a non-business day), the LME rule adjusts the date to the nearest business day, typically the next or previous business day, depending on the contract.
• Feature:
  • Flexible rules based on specific LME contract requirements.

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Summary

Overview Table

Convention	Description	Use Case	Adjustment Direction
Following (0)	Adjusts to the next business day.	Short-term money markets, loan settlements	Moves forward to the next business day.
Preceding (1)	Adjusts to the previous business day.	Bond payments, bill settlements	Moves backward to the previous business day.
Modified Following (2)	Adjusts to the next business day, but if it crosses into a new month, moves to the previous business day.	Bond payments, loan interest payments	Avoids crossing into a new month; moves forward unless it crosses a month boundary, then moves backward.
Modified Preceding (3)	Adjusts to the previous business day, but if it crosses into the previous month, moves to the next business day.	Bond and loan payments	Avoids crossing into the previous month; moves backward unless it crosses a month boundary, then moves forward.
IMM (4)	Adjusts to the nearest IMM date (third Wednesday of March, June, September, December).	Financial derivatives (futures, swaps), standardized contracts	Adjusts to the nearest IMM date.
Actual (5)	No adjustment; the date remains the originally scheduled date, even if it is a non-business day.	Certain fixed payment or settlement contracts	No adjustment; the date remains unchanged.
LME (6)	Adjusts to the nearest business day according to LME-specific rules.	Metal futures, options	Adjusts based on LME contract requirements.

Factors to Consider When Choosing a Date Adjustment Rule

1. Market Conventions: Different markets have different standards (e.g., Following is common in money markets, while Modified Following is common in bond markets).
2. Contract Requirements: Some financial instruments have specific payment rules (e.g., IMM standards).
3. Cross-Month Risk: To avoid complications in accounting due to crossing into a new month, Modified Following or Modified Preceding is often used.
4. Practical Considerations: If the payment system allows processing on non-business days, the Actual rule may be chosen.

By selecting the appropriate date adjustment rule, the certainty of payment or settlement dates can be ensured while balancing market efficiency and contractual requirements.