What is the following modified?
Modified tracking is a form of date succession that occurs when a contractual transaction day falls on a holiday. If this occurs, the date is generally moved forward or backward to match one business day. When contracts are signed between parties in different regions with different banking days, then the following modified is applied according to the holidays of the party making the payment, as they will require banking services to initiate the transaction.
- Amended below, it alters the official date specified in a contract when it falls on a holiday or bank holiday.
- To rectify said date, the effective date of the contract is generally advanced or retrograde to the nearest business day.
- Modified tracking also helps establish transaction dates when national or bank holidays do not coincide with stock market holidays.
Understanding Modified Tracking
An example of modified tracking is the business day convention. This implicit rule states that if the payment date for a swap or other contractual transaction does not fall on a banking day, the next modified date will be the next banking day. The exception to the rule is if the banking day is extended to a new month; in this case, the parties will use the banking day prior to the payment date.
Modified tracking and exchanges
A swap is an example of a contractual arrangement in which a payment date could be changed based on the terms of the modified following. A swap is a derivative contract; In this contract, two parties exchange financial instruments, which generally involve cash flows based on a notional principal amount.
Each cash flow comprises a tranche of the swap. One cash flow is generally fixed, while the other is variable (for example, based on a benchmark interest rate). Swaps are not traded on exchanges. Instead, swaps are OTC contracts between companies or financial institutions, whereby both parties agree on a payment date as part of the contract. If the payment date falls on a public holiday, the modified tracking could advance it or delay it in time so that it falls on a business day and the contract is completed.
Modified tracking and bank holiday
Sometimes it is necessary to modify the tracking if a transaction is set to take place on a holiday. Although holidays and stock holidays do not always coincide, both can make it difficult to make a payment.
U.S. bank holidays generally include the following: New Years Day (January 1), Martin Luther King Day (the third Monday in January), President’s Day (the third Monday in February), Fallen (the last Monday in May), Independence Day (July 4), Labor Day (the first Monday in September), Indigenous Peoples’ Day / Columbus Day (the second Monday in October), Veterans Day (November 11 or the nearest weekday if November 11 falls on a weekend), Thanksgiving Day (the fourth Thursday in November), and Christmas Day (December 25).
Of these, five days may change each year: Martin Luther King’s Day, President’s Day, Memorial Day, Labor Day, Columbus Day, and Thanksgiving Day. Thus, modified tracking makes it easy to manage derivative contractual payments without explicitly listing each payment date and exceptions within a contract.