What does {term} mean Modified Following

Modified following is a facet of date rolling that occurs when a payment day falls on a holiday. If this occurs the date is usually pushed forward or backward so that it coincides with a business day. Modified following is used to streamline the exchange process.

BREAKING DOWN Modified Following

An example of modified following is the business day convention. This implied rule states that if the payment date on a swap or other contractual transaction does not fall on a banking day, the modified following date will be the next banking day. The exception to the rule is if the banking day extends into a new month; in this case, parties will use the banking day that precedes the payment date.

Modified Following and Swap

A swap is an example of a contractual agreement in which a payment date could be changed as per the terms of modified following. A swap is a derivative contract; in this contract two parties exchange financial instruments, generally involving cash flows based on a notional principal amount.

Each cash flow comprises of one leg of the swap. One cash flow is generally fixed, while the other is variable, (e.g. based on a a benchmark interest rate). Swaps do not trade on exchanges; instead, swaps are over-the-counter contracts between businesses or financial institutions. Because of this, a payment date is agreed upon among both parties as part of the contract. If the payment date falls on a holiday, modified following could push it to ahead or back in time so that it does fall on a business day, and the contract completes.

Modified Following and Bank Holiday

Modified following is sometimes required if a transaction is set to occur on a bank holiday. While bank holidays and stock market holidays do not always coincide, either could make it difficult for payment to take place.

In 2018, bank holidays (according to the Federal Reserve Bank of Chicago) are as follows: January 1 (New Year’s Day), January 15 (Martin Luther King Day), February 19 (President’s Day), May 28 (Memorial Day), July 4 (Independence Day), September 3 (Labor Day), October 8 (Columbus Day), November 12 (Veteran’s Day), November 22 (Thanksgiving Day), and December 25 (Christmas Day).

The 2018 Nasdaq holiday calendar is: January 1 (New Year’s Day), January 15 (Martin Luther King Day), February 19 (President’s Day), March 30 (Good Friday), May 28 (Memorial Day), July 3 (1 pm early market close in the U.S.), July 4 (Independence Day), September 3 (Labor Day), November 22 (Thanksgiving Day), November 23 (1pm early market close in the U.S.), December 24 (1pm early market close in the U.S.), and December 25 (Christmas Day).