A spot transaction is a bilateral agreement to exchange one currency against another currency. When you engage in a FX spot transaction, you agree to the terms here and now. The actual transaction, however, is not settled until one or two business days after the trade date, depending on which currency pair is traded.
So, why doesn't a spot transaction settle on the trade date? Well, for the same reason GBPUSD is called "a cable"; it is all down to history. In older times, before the age of computers and fast telecommunications, everything in banking was processed and executed manually. So was the case for trading foreign exchange.
To process, execute and deliver all sorts of trades the counterparties dealt with during a trading day required a fair amount of time and effort. With some currency pairs the processing time was one business day, but most of the time it took two days to settle a trade. This tradition has stuck over the years, and the market still adheres to these rules. Obviously, in today’s world executing these transactions and everything pertaining to them could be done in seconds with the push of a button. However, old market conventions prevails.
Here are some examples of currency pairs and their corresponding value dates:
1. For USDCAD, USDTRY, USDRUB and USDPHP value date is T+1, meaning one business day going forward from today (T).
2. For everything else the value date is T+2, meaning two business days going forward from today (T).
Business day is key to assessing when the transaction will settle. If you do a EURNOK spot trade on a Friday, the value date is two business days counting from Friday. This means that the funds will settle on the Tuesday after. Likewise, if one of the currencies country of origin has a bank holiday between the trade date and the value date, the transaction will settle a day later than it otherwise would have.
With Just FX Analytics you can track live spot rates between all G10 currencies in millisecond resolution to make real-time trade decisions before each trade: