Value Date: What It Means in Banking and Trading

What Is a Value Date?

The term value date is commonly used to describe the date at which a transaction settles. It is also used to denote a future date that is used for determining the present value of a product or security that fluctuates in price. It is the date at which funds, assets, or money's value becomes effective. Value dates are used to determine the payment of financial products and accounts where there is a possibility for discrepancies due to differences in the timing of valuations.

Understanding Value Dates

As noted above, the term value date refers to the date when a financial transaction is settled. It is also used as a date in the future to figure out the current value of an asset whose price fluctuates. This date is commonly used for different financial accounts and products, such as forward currency contracts, option contracts, and the interest payable or receivable on personal accounts.

Value dates are used in both banking and trading. In banking, the value date is the date at which funds become available for use by a customer. For instance, this date occurs when a held check goes through the clearing cycle and is available. In trading, the value date is the date at which a trade or transaction is settled. This means the value date for a stock sale is T+1 or one business day after the trade is initiated. We explain these in more detail below.

Types of Value Dates

In Banking

When a payee presents a check to the bank, the bank credits the payee’s account, but it could take days until the bank receives the funds from the payor’s bank. This is assuming that the payor and payee have accounts with different financial institutions.

If the payee has access to the funds immediately, the receiving bank runs the risk of recording a negative cash flow. To avoid this risk, the bank estimates the day it will receive the money from the paying institution and holds the funds in the payee’s account until that day. The bank effectively posts the amount of the deposit for a couple of days, after which the payee can use the funds. The date the funds are released is referred to as the value date.

Likewise, when a wire transfer is made from an account in one bank to an account in another bank, the value date is the date on which the incoming wire becomes available to the receiving bank and its customer.

In Trading

The value date is used when there are discrepancies in the difference of asset valuation timing. In forex trading, the value date is the delivery date when counterparties agree to settle their obligations by making payments and transferring ownership.

Due to differences in time zones and bank processing delays, the value date for spot trades in foreign currencies is usually set for two days after the transaction date. This means the value date is the day that the currencies are traded—not the date on which the traders agree to the exchange rate.

The value date is also used in the bond market to calculate accrued interest on a bond. Calculation of accrued interest takes into account three key dates:

• Trade date
• Settlement date
• Value date

The trade date is the date when a transaction is executed. The settlement date is the date on which a transaction is completed. The value date is usually, but not always, the settlement date. The settlement date can only fall on a business day—if a bond was traded on Friday, the transaction will be deemed complete on Monday, not Saturday. The value date can fall on any day as seen when calculating accrued interest, which takes into account every day of a given month.

The value date is also used when evaluating coupon bonds that make semi-annual interest payments. For example, in the case of savings bonds, the interest is compounded semi-annually, so the value date is every six months. This removes any uncertainty for investors since their calculations of interest payments will be the same as the governments.

The Bottom Line

A transaction is a financial agreement between two or more parties, including the sale and purchase of assets. In the financial world, transactions settle on what is called the value date. This date can be the same as the day it is initiated, as with certain bank-to-bank transfers within the same institution, or on a future date, which is common in the trading world. As an investor, it's important to know how the value date applies to your transactions because it can help you avoid financial errors.