Business Day Convention - ISDA Definition

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2006 ISDA Definitions
A Jolly Contrarian owner’s manual™

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Section Business Day Convention in a Nutshell

Use at your own risk, campers!
Section 4.12. Business Day Convention.
(a)“Business Day Convention” means one of the following conventions for adjusting dates that would otherwise fall on non-Business Days.
(i) “Following”: the following Business Day;
(ii) “Modified Following” or “Modified”: the following Business Day, unless it would fall in the next calendar month, in which case the most recent preceding Business Day; and
(iii) “Preceding”: the most recent preceding Business Day;
(b) if no Business Day Convention is specified for that date but one is specified for a Swap Transaction, that Business Day Convention will apply.

Full text of Section Business Day Convention

Section 4.12. Business Day Convention.
(a) “Business Day Convention” means the convention for adjusting any relevant date if it would otherwise fall on a day that is not a Business Day. The following terms, when used in conjunction with the term “Business Day Convention” and a date, shall mean that an adjustment will be made if that date would otherwise fall on a day that is not a Business Day so that:
(i) if “Following” is specified, that date will be the first following day that is a Business Day;
(ii) if “Modified Following” or “Modified” is specified, that date will be the first following day that is a Business Day unless that day falls in the next calendar month, in which case that date will be the first preceding day that is a Business Day; and
(iii) if “Preceding” is specified, that date will be the first preceding day that is a Business Day.
(b) The Business Day Convention applicable to a date that is specified in these 2006 Definitions or in a Confirmation to be subject to adjustment in accordance with an applicable Business Day Convention shall be the Business Day Convention specified for that date in these 2006 Definitions or in that Confirmation or, if a Business Day Convention is not so specified for that date but a Business Day Convention is specified for a Swap Transaction, shall be the Business Day Convention specified in the Confirmation for that Swap Transaction.

2021 ISDA Interest Rate Derivatives Definitions

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Content and comparisons

Each year, bankers, lawyers, travelling salespersons and like-minded pedants gather in the MTM Grand, Las Vegas to discuss the minutiae of business day definitions before repairing to the bar to network and drink themselves into a stupor at the annual business day convention.

From Hunter Barkley’s forthcoming FWMD thriller, The ISDA Protocol:

The business day convention winds down. The final panel Q&A wraps up: five hundred delegates hit the bar hard: TARGET chit-chat is thirsty work. The MTM Grand is buzzing. The house band plays flat-stick Cajun washboard scat. They play it loud. It kicks an angsty groove.

Waiters boogie-woogie through the crowd. They flog cold beers and live crabs on overhead trays. Nippers gnash. Punters chug Satoshi Extra-Dry. It’s an on-chain open bar. The vodka luge hits peak. Daycount chit-chat hits peak. The accordion swing-jive hits peak: breakneck BPM.

Stage left: the Negotiator cuts a track through the hullaballoo. And then sees her. Hullaba-helloooo.

The counter scene is chaos. His bar presence is zilch. All the same he catches her eye — just. There’s a flicker and its gone. She looks down. She looks away. She flushes red. There: she steals another look through that tumbling fringe.

He knows it: this is his moment.

He rams a Tortuga chaser: that bad boy gives him wings. He rocks up. “Is this guy boring you?”

She stares straight at him. “Not yet.”

She blows her fringe. She contrives boredom. “Weren’t you in the day count fraction break-out session?”

The Negotiator grins. “Actually, —”

“You’re a funny guy. Are you following me?”

He cracks out his *innocent face*. “I was here first —”

She looks him up and down. She scoffs, but vibes playful. She runs a finger round the rim of his glass. Their eyes lock again. “O.K., so you were preceding me?”

“I figured you’d wind up here, so I just made sure I was in place.” He shrugs. “Call it modified following you.”

He pops an olive.

She spits her drink.

The zydeco wails. They get close. She’s nervous. She bites her lip. She looks about. She gasps – clocks something, someone, over her shoulder.

She leans in. She whispers in his ear – lips touch his lobe. It’s hot. “Have you got something for me, big boy?”

He whispers back. His lips touch her lobe. It’s infernal. “Well, do you want something?”

“Honey, I’ll take anything. No questions asked.” She runs a finger down his gilet.

“Anything?”

She takes a step back. That half-cocked smile. “Come find me. Come find yourself.”

“When?”

“End of the month. For business.”

“End of month — ?” The Negotiator glanced at his wrist: a Rolodex Perpetual. Top of the range.

“Nice piece.”

“So, tomorrow?”

“Work it out, big boy,” she says, and winks, and drifts away, upon a raging current of sales bullshittery and lofted canapés. “Actually –”

As she floats away she tosses something. He snatches it. It’s a room-key. Punched into the plastic: HACIENDA 547. She floats away.

“Wait – what’s your name?”

She floats on. Through the chatter, a frail, tight-point whisper, hits him broadside: “Marissa.”

He reaches out but she’s gone, her wake dissolving into an angry sea.

He says it to himself: “Marissa.”

A Bus-boy rocks by with bacon-wrapped scallops in newsprint party hats. He leans in casually, as he goes. “Careful with her, sir: She’s an agent.”

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Summary

How one adjusts the calculation period for a given interest period to account for the fact that it ends on a non-working day, and that therefore the interest payment can’t be made on schedule.

There are two things you might wish to adjust here: one is settlement date for the interest payment — that is, the day on which the interest payment is actually made, the other is the duration of the interest period — that is the day on which the interest period in question is deemed to end.[1]

Unlike day count fractions, business day conventions are not applied in a standardised way across the industry: they are not tied to specific currencies or anything like that: it comes down to the basic preference of the institution calculating the interest rate.

That said, fixed rate products are a lot less bother than floating rate products, and tend to be unadjusted.

  • Fixed rate products - yeah whatever: Folks tend to be fairly sanguine about interest payments for fixed rate interest products, since nothing really hangs on when a period begins or ends (you make it up over the life of the product: if this period is thirty one days, the next one will be twenty nine, and the present value of the difference between getting a payment now for 31 days and a payment in a month for 29 days, and just getting two payments for 30 days each. You can’t pay your interest payment on a non-work day, so just pay it on the next business day, but the calculation period runs to the originally scheduled day. You lose a day or two’s interest on the interest, but you’ll make that up next time.
  • Floating rate products - hold on tiger: Floating rate products are a bit more nuanced because there is some path dependency here. The end of an interest calculation period determines not just the point at which you pay interest (and perhaps the number of days for which you pay it), but also the time at which you set the interest rate for the following period. Since interest rates are — or, at least, in the good old days were — volatile, the product is path dependent and a matter of a couple of days can make a difference to the overall amount of interest paid for the life of the product. Butterfly wings flapping in Amazon rainforests and all that.

Business day conventions for your reading pleasure

End of month - no adjustment business day convention: All cashflows are assumed to be distributed on the final day of the month (even if it is not a workday).
End of month - previous business day convention: All cashflows are assumed to be distributed on the final day of the month unless it is not a workday, in which case it’s the previous business day.
End of month - following business day convention: All cashflows are assumed to be distributed on the final day of the month unless it is not a workday, in which case it’s the next business day.

The many gorgeous, multi-hued variations on the business day can be enjoyed as follows:

ISDA extended universe

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See also

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References

  1. Which, to state the bleeding obvious, is also the date by reference to which the next period starts.