Day count conventions and accrual factors

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Day Count Conventions and Accrual Factors
Accrual factors or day count fractions are computed by dividing the number of days in the
deposit period by the number of days in a year. An accrual method or day count convention
is used to calculate an accrual factor, which represents the fraction of a year a given period
accounts for. There are two components that make up an accrual factor. The first
component uses a day count convention to determine how many days fall in the accrual
period, which will be the numerator in the calculation of the accrual factor. The second
component is a day count convention to determine the number of days that make up a full
period, which will be the denominator in the calculation of the accrual factor.
Interest Calculation
Typically, the total amount of interest that a depositor receives is calculated by multiplying
the applicable floating rate (say, LIBOR) by the amount of time (deposit tenor), as a
proportion of a year, for which the deposit has been active, known as the accrual factor or
daycount fraction. Interest payable is calculated via annual factor or day count fraction.
The number of days accrued shall be calculated from and including the last paid interest
coupon or the day from which interest is to accrue for a new issue, up to but excluding the
date of transaction.
Mathematically, if the accrual factor is denoted by α and the corresponding LIBOR by L, a
deposit of notional amount N will be paid at maturity along with an interest payment of:
Interest payment = N × α × L
Day Count Conventions
Convention of calculation differs from market to another and across countries.
Actual/365 (fixed)
The number of accrued days is equal to the actual number of days between the effective date
and the terminating date. The accrual factor is the number of accrued days divided by 365.
Actual/360
and the terminating date. The accrual factor is the number of accrued days divided by 360.

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Actual/365 (actual)
and the terminating date. Calculation of the accrual factor assumes the year basis to be 365
days for non-leap years and 366 for leap years. If a short stub period (< 1 year) contains a
leap day, the number of days is divided by 366; otherwise, the number of days is divided by
365.
30/360 (ISDA)
The number of accrued days is calculated on the basis of a year of 360 days with 12 30-day
months, subject to the following rules:
1. If the first date of the accrual period falls on the 31st of the month, the date will be
changed to the 30th.
2. If the first date of the accrual period falls on the 30th of the month after applying (1)
above, and the last date of the accrual period falls on the 31st of the month, the last date
will be changed to the 30th.
The accrual factor is calculated as the number of accrued days divided by 360.
30E/360 (30/360 ISMA)
1. If either the first date or last date of the accrual period falls on the 31st of a month, that
date will be changed to the 30th.
2. If the last day of the accrual period falls on the last day of February, the month of
February will not be extended to a 30-day month. Rather, the actual number of days in
February will be used.
30E+/360

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1. If the first date of the accrual period falls on the 31st of a month, it will be changed to
the 30th of that month.
2. If the last date of the accrual period falls on the 31st of a month, it will be changed to
the 1st of the next month.
Actual/Actual (ISMA-99)
This accrual method is primarily related to bonds. In the context of accrual factors, the time
in years is calculated as follows: if the period is less than one year the accrual factor is equal
to the actual number of days between the effective date (d_e) and the terminating date (d_t)
divided by the number of days in the period from (d_t – 1 year) to d_t (either 365 or 366).
If the period is greater than one year, the accrual factor is equal to the number of whole
years plus the accrual of a stub period calculated as above. In the context of bonds, there are
two ISMA-99 methods: Normal and Ultimo. The methods differ only in the assumption
made regarding coupon dates. The ISMA-99 Normal method assumes that regular coupons
fall on the same day of the month (non end-of-month), and the ISMA-99 Ultimo method
assumes that regular coupons fall on the last day of the month (end-of-month). The ISMA-
99 methods make a distinction between regular and irregular interest periods. Regular
interest periods are always an exact multiple of a number of months long, whereas irregular
interest periods require that notional interest periods be generated. The accrual factor for a
period is the number of accrued days falling in that period divided by the actual number of
days in the period. The overall accrual factor is then the sum of the individual interest
period accrual factors, multiplied by the year fraction of a regular interest period.
Actual/Actual (ISDA)
and the terminating date. The accrual factor is the sum of the accrued days falling in a non-
leap year divided by 365 and the accrued days falling in a leap year divided by 366.
30/360 (SIA)
1. If the last date of the accrual period is the last day of February and the first date of the
period is the last day of February, then the last date of the period will be changed to the
30th.

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2. If the first date of the accrual period falls on the 31st of a month or is the last day of
February, that date will be changed to the 30th of the month.
3. If the first date of the accrual period falls on the 30th of a month after applying (2)
above, and the last date of the period falls on the 31st of a month, the last date will be
changed to the 30th of the month.
The accrual factor is calculated as the number of accrued days divided by 360. Note that
these rules assume that the security follows the end-of-month rule. If the security does not
follow the end-of-month rule, then 30/360 (ISDA) should be used.
30/360 (BMA)
1. If the first date of the accrual period falls on the 31st of a month or is the last day of
February, the date will be changed to the 30th.
2. If the first date of the accrual period falls on the 30th of the month after applying 1)
above, and the last date of the accrual period falls on the 31st of the month, the last date
will be changed to the 30th.
The accrual factor is calculated as the number of accrued days divided by 360. Note that
prior to 1997, the BMA was known as the PSA, and this method was referred to as 30/360
(PSA).
30/360 (German)
1. If either the first date or last date of the accrual period falls on the 31st of a month, that
2. If either the first date or last date of the accrual period is the last day of February, that

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Bus/252
The number of accrued days is calculated as the number of market days in the accrual
period. The accrual factor is calculated as the number of accrued (market) days divided by
252.
Actual/365L
The number of accrued days is calculated as the actual number of days between the effective
date and the terminating date. This number is divided by 366 if the terminating date falls in
a leap year and 365 otherwise.
NL365
The number of days is calculated as the actual number of days between the effective date
and the terminating date without including any occurrences of the leap day, February 29th.
This number is divided by 365.
Comparison
The main differences between the various 30/360 methods is the treatment of dates landing
on the 31st of a month, or the end of February. The ISMA, ISDA, and 30E+/360 methods
make adjustments for dates landing on the 31st of a month, but not for dates landing on the
last day of February. The SIA, BMA, and German methods make adjustments for dates
landing on the 31st of a month, as well as for dates landing on the last day of February.

Day count conventions and accrual factors

ISDAInternational Swaps and Derivatives Association, Inc.
ISDA - BS:9951.1
EMU AND MARKET CONVENTIONS:
RECENT DEVELOPMENTS
1. Introduction
On 16th July, 1997, ISDA, along with a number of other trade associations, Cedel and Euroclear,
published a joint statement on market conventions for the euro. That joint statement was subsequently
supported by both the European Commission and the European Monetary Institute (now the European
Central Bank).
The joint statement was intended to focus attention on the need to establish a set of market conventions
for the euro. Conventions of the type dealt with in the joint statement tend to differ between currencies,
largely for historical rather than valid market reasons. It was inconceivable that the new single
currency should itself suffer from the mixture of market conventions which apply to the various
national currencies that it is due to replace.
At the time of publication, the joint statement reflected a broad market consensus view on what
standard market practice should be for new euro-denominated transactions entered into after 1st
January, 1999. It also advocated that for "legacy" instruments or transactions (those entered into
before 1999 in national currency units or the ECU, but maturing after 1st January, 1999) which
incorporated the old national currency conventions, no change should be made to update the
conventions.
The purpose of this memorandum is to bring the issue of harmonised market conventions for the euro
up to date in light of developments that have taken place since the publication of the joint statement
over a year ago.
A summary of the proposed market conventions for the euro financial markets is attached as Exhibit 1.
2. Legacy Transactions vs. New Euro-Denominated Transactions
The joint statement distinguished between the conventions applicable to new euro-denominated
transactions - whether entered into before or after 1st January, 1999 - and legacy transactions. The
importance of this distinction should not be underestimated.
The main objections to "reconventioning" (changing the terms of legacy transactions to bring them into
line with the new harmonised euro conventions) relate to the complexity of the reconventioning process
and the possibility of mismatches arising between financial contracts and related hedging
arrangements.
In the first place, reconventioning implies alteration of contractual terms. In principle, subject to any
relevant provisions of the governing law, this type of alteration would require the consent and
agreement of all parties to the transaction. While this may be relatively easily achieved for OTC
derivative transactions where there will only be two parties to the contract, the procedures required to
amend outstanding bond issues are likely to make the amendment process prohibitively complex.
Secondly, reconventioning of contracts raises the prospect of mismatches between contracts which
were intended to be closely matched. For example, in an asset swap structure, it is important that the

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ISDA - BS:9951.1
payment terms of the swap transaction exactly match those of the related bond. By changing the terms
of the bond, a risk of a mismatch with the payment terms of the swap arises.
Lastly, but possibly most importantly, any decision by issuers to redenominate or reconvention
outstanding bonds creates administrative difficulties for financial institutions.
Please refer to point 5 below for an example of how existing conventions are to be preserved in the
context of determining a floating amount under a swap.
3. Conventions for the Euro Bond Markets
The recommended conventions contained in the joint statement for euro-denominated bond issues are as
follows:
Day Count Basis: Actual/actual
Quotation Basis: Decimals
Business Days: TARGET operating days
Government Issuers
Support for these conventions has been encouraging and widespread; most notably among sovereign
issuers within the European Union. Evidence of the support shown has come from the redenomination
plans of EU members states in relation to their outstanding national currency denominated debt.
Despite the recommendation in the joint statement that outstanding bond issues should not be
redenominated, but unsurprisingly nonetheless, all 11 EU member states which are to participate in the
first wave have indicated that they will redenominate and reconvention marketable government debt at
the start of Stage 3. Information on their reconventioning plans has been published by the Brouhns
Group - an ad hoc working party of EU government and central bank officials established under the
auspices of the Monetary Committee.
The Brouhns research indicates that, although some governments are still discussing the point, all 11
member states currently intend to adopt an actual/actual day count fraction and TARGET business
days for all reconventioned bonds. The working party's research also confirms, where the relevant
government has made an announcement, that new bonds to be issued after Stage 3 begins in 1999 will
be on an actual/actual day count basis and with TARGET business days.
4. The Actual/Actual Day Count Convention
Although the actual/actual interest accrual convention is the recommended convention for bonds, there
is some debate as to what actual/actual means. There are at least three different interpretations of
actual/actual. It is anticipated, for example, that euro-denominated bonds will follow the ISMA
understanding of the actual/actual convention (which is also the US treasury convention). A second
method of calculating accrued interest on an actual/actual basis exists (known as the AFB method)
which, although similar in a number of ways, produces different results from the ISMA method. The
third approach is that included in the 1991 ISDA Definitions - the ISDA method.
This section explains the differences between the three methods for members’ benefit and explains
ISDA’s view on the use of the Act/Act daycount convention with respect to swaps.

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ISDA - BS:9951.1
Notional: £10,000
Fixed Rate: 10%
61 121days days
6 74444 84444 6 7444444 8444444
Payment Date
1st November,
2003
31st December,
2003
Payment Date
1st May, 2004
ISDA Method: £10,000 × 10% ×
61
365
121
366
72+





 = £497.
ISMA Method: £10,000 × 10% ×
182
182 2
00
×





 = £500.
AFB Method: £10,000 × 10% ×
182
366
27





 = £497.
The difference between the ISDA, ISMA and AFB methods can be reduced to a consideration of the
denominator to be used when calculating accrued interest. The numerator will, in all three cases, be
equal to the actual number of days from and including the last coupon payment date (or period end
date) to, but excluding, the current value date (or period end date). Under the ISDA approach,
however, the denominator varies depending on whether a portion of the relevant calculation period falls
within a leap year (for the portion of the calculation period falling within a leap year, the denominator
is 366 and for the portion falling outside a leap year, the denominator is 365 - the actual number of
days in the relevant portions is used as the numerator and the two fractions are added together). Under
ISMA Rule 251, the denominator is the actual number of days in the coupon period multiplied by the
number of coupon periods in the year (subject to exceptions in relation to irregular coupon periods).
Under the AFB method, the denominator is either 365 (if the calculation period does not contain 29th
February) or 366 (if the calculation period includes 29th February) - where a period of longer than one
year is involved, two or more calculations are made: interest is calculated for each full year, counting
backwards from the end of the calculation period, and the remaining initial stub period is treated in
accordance with the usual rule. When counting backwards for this purpose, if the last day of the
relevant period is 28th February, the full year should be counted back to the previous 28th February
unless 29th February exists, in which case, 29th February should be used.
Note: The term calculation period, when used in this document, bears the same meaning given to that
term in the 1991 ISDA Definitions: the period from, and including, one period end date (or the
effective date) to, but excluding, the next period end date (or the termination date).
Given this apparent inconsistency, and in order to clarify the use of the actual/actual convention in
swaps where it may be relevant, ISDA's EMU Market Practice and Operations Task Forces have
recommended that ISDA should update the menu of fixed rate day count fractions where they appear in
the 1991 ISDA definitions. The existing ISDA approach will be retained, to be known as

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ISDA - BS:9951.1
"Actual/Actual (Historical)", the AFB approach will be introduced, to be known as "Actual/Actual
(Euro)". The ISMA approach will also be introduced, to be known as "Actual/Actual (Bond)". These
changes will be taken forward when ISDA revises and consolidates its existing interest rate swap
definition booklets in the course of 1999. In the meantime, members may wish to employ the
abovementioned reference names when entering transactions in order to distinguish between the three
approaches.
With the proliferation of different versions of the Actual/Actual day count fraction in ISDA definitions,
market participants are strongly advised to specify when dealing which method should apply.
Application of the ISMA actual/actual method raises particular issues in relation to irregular coupon or
calculation periods. ISMA has therefore indicated that irregular periods should be avoided. Where
irregular periods are unavoidable, as they will often be in relation to swap transactions, a recommended
approach (included within the ISMA Rules) is as follows:
Short first calculation period:
Where the first calculation period is shorter than the "regular" calculation period for a transaction,
interest accrual for that period using the ISMA approach is calculated as the actual number of days in
that period divided by the actual number of days in a notional calculation period of the required
"regular" length which ends on the last day of the first calculation period. In the example below,
assume regular annual coupons.
Notional: £10,000
Fixed Rate: 10%
365 days
6 74444444 84444444
150 366days days
6 7444 84444 6 744444444 844444444
184 182days days
6 7444 8444 6 7444 8444
Payment Date
1st July, 2000
31st December,
1999
Payment Date
1st July, 1999
Start of first
calculation period
1st February, 1999
Notional start of
first calculation
period 1st July,
1998

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ISDA - BS:9951.1
First Period:
ISDA Method: £10, £410.000 10%
150
365
96× ×





 =
ISMA Method: £10, £410.000 10%
150
365 1
96× ×
×





 =
AFB Method: £10, £410.000 10%
150
365
96× ×





 =
Second Period
ISDA Method: £10, £1, .000 10%
184
365
182
366
00138× × +





 =
ISMA Method: £10, £1, .000 10%
366
366 1
000 00× ×
×





 =
AFB Method: £10, £1, .000 10%
366
366
000 00× ×





 =
Long first calculation period:
Where the first calculation period is longer than the "regular" calculation period for a transaction,
interest accrual for that first period using the ISMA approach is calculated as the sum of two
calculations: one based on an assumed "regular" first calculation period (counting backwards from the
last day of the first calculation period), giving a notional payment date, and the second, using the same
approach as for a short initial calculation period in relation to the part of the actual calculation period
which falls before the notional payment date.

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ISDA - BS:9951.1
Notional: £10,000
Fixed Rate: 10%
184 days
6 744444 844444
153 181days days
6 744 844 6 744 844
334 184days days
6 744444 844444 6 7444 8444
First Period:
ISDA Method: £10, £915.000 10%
334
365
07× ×





 =
ISMA Method: £10, £915.000 10%
181
181 2
153
184 2
76× ×
×
+
×





 =
AFB Method: £10, £915.000 10%
334
365
07× ×





 =
Second Period
ISDA Method: £10, £504.000 10%
184
365
11× ×





 =
ISMA Method: £10, £500000 10%
184
184 2
× ×
×





 =
AFB Method: £10, £504.000 10%
184
365
11× ×





 =
Payment Date
15th January,
2004
Payment Date
15th July, 2003
Notional
payment Date
15th January, 2003
Start of first
coupon period
15th August, 2002
Notional start of
first calculation
period 15th July,
2002

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ISDA - BS:9951.1
Short final calculation period:
Where the final calculation period is shorter than the "regular" calculation period, interest accrual for
that period using the ISMA approach is calculated as the actual number of days in that period divided
by the actual number of days in a notional calculation period of the required "regular" length which
starts on the first day of the final calculation period.
Notional: £10,000
Fixed Rate: 10%
184 182days days
6 74444444 84444444 6 744444444 844444444
155 29 152 30days days days days
6 74444 84444 6 74 84 6 7444 8444 6 7444 84444
Penultimate Period:
ISDA Method: £10, £503.000 10%
155
365
29
366
89× × +





 =
ISMA Method: £10, £500.000 10%
184
184 2
00× ×
×





 =
AFB Method: £10, £504.000 10%
184
365
11× ×





 =
Payment Date
30th July,
1999
31st
December,
1999
Notional
maturity date
30th July,
2000
Maturity
Date 30th
June, 2000
Payment Date
30th January,
2000

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ISDA - BS:9951.1
Final Period
ISDA Method: £10, £415.000 10%
152
366
30× ×





 =
ISMA Method: £10, £417.000 10%
152
182 2
58× ×
×





 =
AFB Method: £10, £415.000 10%
152
366
30× ×





 =
Long final calculation period:
Where the final calculation period is longer than the "regular" calculation period for a transaction,
interest accrual using the ISMA approach for that final period is calculated as the sum of two
calculations: one based on an assumed "regular" final calculation period (counting forwards from the
first day of the final calculation period, giving a notional payment date, and the second, using the same
approach as for a short final calculation period in relation to the part of the actual calculation period
which falls after the notional payment date.
Quarterly payments
Notional: £10,000
Fixed: 10%
92 days
6 74444444 84444444
91 61 31days days days
6 74444444 84444444 6 74444 84444 6 744 844
32 120days days
6 7444 8444 6 74444444 84444444
Payment
Date 30th
November,
1999
Notional
maturity
date 31st
May, 2000
Maturity
Date 30th
April, 2000
Notional
payment
date 29th
February,
2000
31st
December,
1999

of 14
ISDA - BS:9951.1
ISDA Method: £10, £415.000 10%
32
365
120
366
54× × +





 =
ISMA Method: £10, £415.000 10%
91
91 4
61
92 4
76× ×
×
+
×





 =
AFB Method: £10, £415.000 10%
152
366
30× ×





 =
5. Conventions for the Euro Money Markets
Government Issuers
Although not all government issuers intend to reconvention outstanding money market instruments,
those which have indicated their intention to do so plan to conform with the recommended conventions
set out in the joint statement:
Day Count Basis: Actual/360
Business Days: TARGET operating days
Again, where the relevant government has made an announcement, research confirms that new money
market instruments issued by the 11 participating member states after 1st January, 1999 will also
conform with the recommended conventions.
Floating Rates of Interest
The disappearance of and alterations to relevant price sources has been an issue with which ISDA has
been closely involved because of its sensitivity for derivatives contracts.1 We now have details of the
two new price sources for euro interest rates due to come into effect at the end of 1998. The ACI and
EBF sponsored EURIBOR quotation will be a representative rate for euro deposits based on quotations
from a pan-European panel of banks. The BBA sponsored euro-LIBOR quotation will be a
representative rate for euro deposits based on quotations from a panel of 16 banks in the London
market.
Both EURIBOR and euro-LIBOR will conform with the market conventions recommended in the joint
statement. This means that both rates will be quoted on each TARGET open day for value two
TARGET days thereafter and that the day count fraction used to establish the rates quoted will be
actual/360.
Again, ISDA has attempted to facilitate the use of applicable conventions for transactions involving
floating rate euro payments. As noted above, the 1998 Supplement contains a business day convention
for the euro which meets the proposed euro conventions. In addition, ISDA will shortly publish
definitions for euro-LIBOR, EURIBOR and EONIA (the new overnight rate for the euro) for use in
euro transactions.
1 See ISDA's paper "EMU and Price Sources" published on 25th August, 1998.

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ISDA - BS:9951.1
Impact on Legacy Transactions
The principle advocated in the joint statement that conventions for legacy transactions should not
change extends, naturally, to swap transactions involving floating rate payments. The fact that existing
national currency price sources will be replaced by either EURIBOR or euro-LIBOR creates additional
concerns, however, where the new rates assume different conventions (for fixing periods and day count
fractions) from the existing rates. The approach taken in ISDA's EMU Protocol is to require that
existing fixing periods are maintained for legacy transactions and that, where the day count fraction for
the new rate differs from that of the old, an adjustment should be made to the new quoted rate to reflect
this difference. The intention is to minimise the impact of the change on legacy swap transactions.
Fixing periods:
The example set out below, assumes two swap transactions. In the first, the floating leg is determined
by reference to DEM-LIBOR. Until 1999, DEM-LIBOR will be quoted on each London banking day
for value two London banking days later. Where the 1991 ISDA Definitions are used, the contract will
reflect this two day "fixing period". In 1999, DEM-LIBOR will be replaced by euro-LIBOR which
will be quoted on each TARGET business day for value two TARGET business days later.
In the second example, the floating payment is determined by reference to FRF-PIBOR which is
currently quoted on each Paris banking day for value one Paris banking day later. FRF-PIBOR will be
replaced in 1999 by EURIBOR which, as with euro-LIBOR, will be quoted on each TARGET
business day for value two TARGET business days later.
In each case, market consensus (reflected in the provisions of the EMU Protocol) is to preserve the
existing fixing period. The table below shows how this approach impacts (including where national
holidays intervene).

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ISDA - BS:9951.1
Swap 1 (DEM-LIBOR) - Legacy Transaction
Swap 2 (FRF-PIBOR) - Legacy Transaction
`
[Rate
determination if
new convention
had been
followed]
Wednesday Thursday
Easter
Sunday
SaturdayGood Friday
(not a
London
banking day)
TARGET
Open
TuesdayEaster
Monday (not
a London
banking day)
TARGET
Open
Rate published
for value
Tuesday
Rate published
for value Good
Friday
RATE
DETERMINATION
(2 London banking
days preceding
Reset Date)
RESET
DATE
Rate published
for value
Thursday
Wednesday FridayThursday
Rate published
for value
Friday
TARGET open
Paris open
TARGET open
Paris open
TARGET open
Paris open
TARGET open
Paris open
RATE
DETERMINATION
(1 Paris banking day
preceding Reset Date)
[Rate determination if
new convention had
been followed]
RESET
DATE
Tuesday
l l l l

of 14
ISDA - BS:9951.1
Day count fractions:
Any adjustment to floating rates obtained from successor sources in order to reflect differences between
the assumed day count for the successor and the assumed day count for the original rate is likely to
have been carried out by the publisher of the successor rate. For example, the current day count for the
BEF-BIBOR rate is Actual/365 (Fixed). BEF-BIBOR is to be replaced by EURIBOR which will be
quoted with a day count of Actual/360. A converted EURIBOR rate will be displayed on the current
display page for BEF-BIBOR. When referring to the BEF-BIBOR rate on or after 4th January, 1999,
parties will be able to use the converted rate for calculations under legacy transactions which involve
BEF-BIBOR. This is the approach set out in Annex 2 to the ISDA EMU Protocol. However, it relies
on the publisher having made the appropriate conversion. Current indications are that converted
EURIBOR rates will be made available on Telerate page 249.
Where the publisher has not made the converted rate available, parties will have to carry out the
conversion themselves. In the case of BEF-BIBOR to EURIBOR, this will mean taking the
unconverted EURIBOR rate and multiplying it by a factor of 365/360. An example is set out below:
Unconverted EURIBOR rate: 10%
Conversion factor: 365/360
Converted EURIBOR rate: 10.139%
Note: Where converted rates are available on a screen page, they will be published using the same
number of decimal places as the original rate itself. For example, BEF-BIBOR is published
correct to three decimal places, the converted EURIBOR rate appearing in place of BEF-
BIBOR is published correct to three decimal places.
6. Euro Swap Conventions
The joint statement on market conventions did not explicitly set out the conventions applicable for euro
swaps. Thus, while it is clear that the floating leg of swaps will follow the euro money market
convention, there has been confusion as to the appropriate convention for the fixed leg of euro swaps
and, in particular, whether the bond market convention should apply to these. ISDA has therefore
consulted members on this point.
Following this consultation exercise, ISDA has now concluded that, while actual/actual may be the
appropriate common day count standard for the euro zone bond market, it is inappropriate as a standard
market convention for normal euro swap transactions. Instead, ISDA members’ current thinking is that
30/360 (annual) would be the most appropriate basis for calculating interest accrual on fixed payments
for euro-denominated swaps. (It should be noted that this is often referred to by traders as the “annual
bond method”. This is likely to continue to be the case, nothwithstanding the difference with the euro
bond market convention.)
The reason for adopting a 30/360 (annual) day count fraction is that existing DEM and ECU swaps
quote on this basis and that the emerging practice for the euro is to follow the same approach, as
reflected on broker screens. It is also envisaged that systems changes would be minimised if this
approach is adopted. Further, as swap and bond conventions need not be identical, euro money and
bond market conventions could therefore differ. The market conventions in the United States, for
example, are not identical.

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ISDA - BS:9951.1
While 30/360 (annual) is now ISDA's recommendation for the fixed rate day count fraction in euro
swaps, ISDA also appreciates that in certain swap transaction (notably asset swap structures) there will
be a need for payments under the swap to match payments under an associated bond. Where the bond,
as anticipated for euro-denominated bonds, uses an actual/actual interest accrual basis, this means that
the swap too will have to have an actual/actual fixed rate day count fraction. Issues arising in
connection with the actual/actual day count convention, and ISDA's proposals in this regard, are
discussed above.
ISDA will continue to monitor market practice with regard to euro swap conventions and will review
the position in the course of 1999 to see whether practice in fact evolves to mirror bond market
conventions. It should be emphasised that the recommendation for a different euro swap market
convention than that employed for the euro bond markets does not alter ISDA’s support for the
recommendations of the joint statement as a whole.
Users of ISDA standard form documentation should note that the 1998 Supplement to the 1991 ISDA
Definitions facilitates the use of the new euro conventions by introducing a new definition of "Euro
Settlement Date". Parties who wish to enter into euro transactions can make use of the new definition
to provide that payment business days for the euro will match those on which the TARGET system is
open.
The joint statement did not recommend a standardised practice in relation to coupon frequency. It was
noted that annual coupons were prevalent in most EU countries, but that semi-annual coupons were
used in the United States, Japan, the United Kingdom and Italy. In light of further discussion on this
issue, swap market practitioners have recognised the benefits of harmonising conventions in relation to
coupon frequency. In line with the existing and proposed conventions for the European bond markets,
ISDA therefore recommends annual coupons for euro-denominated swaps.
7. Extension of the Harmonised Euro Conventions to Other Currencies
The benefits to be achieved by the adoption of harmonised market conventions for the new single
currency have led some to advocate their adoption for financial transactions in other currencies.
For example, the Bank of England will be introducing new standards for the calculation of the clean
price in secondary trading of UK gilts with effect from 1st November, 1998 and the London Stock
Exchange intends to make similar changes for registered non-gilt sterling denominated issues. These
new standards will adopt the actual/actual day count fraction.
There have been suggestions that the actual/actual day count fraction should become the market
convention for fixed rate issues in all currencies.
8. Conclusion
Support for the harmonised market conventions recommended in the joint statement has been
widespread and gratifying. The use of these conventions for all transactions involving the euro will
help in the development of a true financial market for the new currency.
ISDA will continue to work towards allowing users of its standard form documentation to use the new
conventions in euro-denominated swap transactions.
ISDA - 25 November 1998

ISDAInternational Swaps and Derivatives Association, Inc.
BS:9951.1
Exhibit 1
RECOMMENDED MARKET CONVENTIONS FOR THE EURO
Euro money markets
• Day count basis: actual/360
• Settlement basis: spot (two day) standard
• Business days: TARGET operating days should
form the basis for euro business days
Euro Swap Markets
• Floating day count basis: actual/360
• Fixed rate day count basis: 30/360
• Fixing period: two day rate fixing convention
• Coupon frequency: annual
Euro Bond markets
• Day count basis: actual/actual
• Quotation basis: decimals rather than fractions
• Coupon frequency: annual
• Settlement dates: the standard for internationally
traded cross-border transactions for the euro
should remain on a T+3 business day cycle
Euro foreign exchange markets
• Settlement timing: spot convention, with interest
accrual beginning on the second day after the
deal has been struck
• Quotation: 'certain for uncertain' (i.e. 1 euro = x
foreign currency units)
• Reference rate: the ECB (or NCBs) should be
responsible for the publication of daily closing
reference rates

Day count conventions and accrual factors

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