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Should we define equivalence of two atomic values in Group By so that it is the same definition used for equivalence in distinct-values()?
The simple answer is yes. But it's not quite as simple as that, because of transitivity problems: see erratum E44 http://www.w3.org/XML/2007/qt-errata/xpath-functions-errata.html#E44 In fact distinct-values() provides rules for partitioning a set of atomic values into groups that, except in edge cases, satisfy the principle that all the values in a single group are equal, while the values found in one group are not-equal to the values found in another group. xsl:for-each-group uses the same rules (but not by reference), and XQuery 1.1 grouping should do likewise.
I'm closing this as WONTFIX, as decided in today's WG telcon. There's no proposal, this is editorial in nature, it's not urgent, and it's a potential time swamp. We are willing to reopen if someone produces a clean proposal.