What Is a Modified following?

A modified following commonly is part of a contract in which money is being exchanged and the date of the exchange can be altered if it is not a banking business day. This usually deals with contracts about exchanges, be it exchanges of money or other financial instruments. This is common and most people do not expect money to be exchanged if it is not a banking day, so this feature typically is implied rather than written. The only reason for this feature is to make a contract easier to create, because the people making the contract do not have to ensure the day is a banking day and less work is required overall.

When a contract is made for a financial exchange, the contract may state a specific date or it may state that money will be transferred 10 days after the contract is signed, for example. Regardless of the wording, a modified following enables leeway with the date if it falls on a holiday or other day when no banking occurs. For example, if there is a holiday 10 days after the contract is signed, then the receiving party will expect the money on the next business day and there will be no legal problems created by the delay.

The modified following feature is almost exclusively used in contracts concerning exchanges. Most of these exchanges are for money, but they may be for other financial instruments such as bonds, futures or stocks. The bank rarely will be involved in dealings outside of finances, so there typically would be no reason to have this feature if the contract does not involve money.

Few people expect money to be transferred on a day when the bank is not open, because the bank will not be able to process the request. This usually is commonsense, so the modified following term is rarely added in writing. It usually is implied, instead, but some contracts may state it anyway just to ensure that there is no confusion over dates.

Convenience is the main reason for using a modified following feature. If this could not be used, then whoever is writing the contract would have to ensure the date in the contract is a banking day, and there may be legal repercussions if the bank is closed on the exchange day. This means a modified following ensures that the transferring party is not sued and makes it easier to write up the contract.