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Foreign Exchange: FX Fundamentals

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The spot market is the market for immediate delivery and settlement of currencies. In other words, if you want to buy a currency today, for delivery today, at a price made today, you buy it in the spot market.

The spot exchange rate is highly sensitive to changes in an economy’s fortunes. This is simply because it is the first step in all international fund flows - and spot deals can be done within a few seconds.

Major currency spot markets are the world’s most liquid cash markets and prices can change thousands of times a day as new buy and sell orders are executed.

The spot value date

In the spot market the exchange rate is agreed on the trade date (or ‘done’ date) with the date of exchange as soon as possible thereafter.

The standard time for ‘immediate‘ settlement is two business days after the trade date (T + 2). This is called the spot value date. (The only exception to this convention is USD/CAD which has a spot value date of T + 1).

This reduces settlement risk, allowing time for deal confirmation details and settlement system instructions to go through between counter-parties.

So, for example, a standard spot trade agreed on June 13 (dealt for 13 June) is said to be for value on 15 June; unless either financial centre has a holiday on the 14th or 15th, in which case it will be for value on the 16th. Weekends similarly extend the spot value date.

If a standard spot deal does not settle by the beginning of the second business day after the deal has been struck, interest will start to accrue against the party which has failed to deliver.

With the development of intra-day settlement systems (real-time gross settlement systems - RTGS) in the 1990s, deals may also be done to settle overnight ( T+1 ) for value-tomorrow; and for cash (T + 0), for value today.

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