• Overnight Financing Explained – Traders Guide

    WHAT IS OVERNIGHT FINANCING?

    The most obvious cost of spread betting is the spread itself. But there is also another cost – the financing adjustment. This is applied to “cash” and “spot” markets, but not futures markets. This is because the financing is included in the price of the futures itself.

    WHEN DO YOU PAY OVERNIGHT FINANCING?

    You pay (or receive) ‘Overnight Financing’ when you hold a “cash” or “spot” spread bet through to the end of the trading day, which with Spread Co is 22:00 London time. Overnight financing is the interest that you have to pay, or that is credited to you, based on the type and value of your position. This is because whenever you trade a product on margin, you are effectively borrowing or lending all the funds (not just the margin) to conduct the trade or bet.

    EURUSD EXAMPLE

    Let’s say you bought £1 per point at a price of 1.10554

    If you leave the trade to run and at 22:00 London time and the EURUSD is trading at 1.11253, your financing charge will be worked out on the basis that you have a bet worth £11,125.30 (£1 x 11125.3).

    Let us say for the purposes of this example that the interest rate applied to the EUR (including any additional “haircuts” charged by our broker) is lower than the USD one, then your account would be debited to take this into account.

    If you had sold a currency with a lower interest rate than the second-named currency in the pair (once again taking into account any additional “haircuts” charged by our broker), then you would receive a credit to your account.

    UK100 EXAMPLE

    If you buy £10 per point on the Cash UK100 at 6,100, you would need to have £3050 in your account in order to make this bet (as our margin requirement is 5% for the UK100).

    But this £3050 gives you control of £61,000-worth of the UK100 index (6,100 x £10).

    So, for each day you hold this position, we charge you the interest on the total value of the bet.

    OVERNIGHT FINANCING WITH SPREAD CO

    At Spread Co, we aim to keep the cost of holding a position low. For example, our financing charge for long index and equity positions, conducted in GBP, is LIBOR +2%, a competitively low rate.

    If you conducted the trade or bet in USD or EUR, then US LIBOR or EURIBOR is used, respectively.

    For short positions, our financing rate is based on LIBOR for bets in GBP, US LIBOR for bets in USD, and EURIBOR for bets in euros. Typically, we would credit you based on the total value of your overnight position using, for example, LIBOR minus 2%. However, this can only result in a credit to your account when the appropriate interest rate is above 2%. When interest rates are low, some companies insist on charging you for short positions. We make no charge for short index positions at Spread Co.

    DAILY FINANCING CALCULATION:

    D = B x P x I / 365

    D = Daily financing
    B = Bet amount
    P = Underlying index price at 10pm (London time)
    I = Difference between Spread Co annual interest rates of the two currencies in the pair

    A 360 divisor is used for bets in USD or EUR

    If an FX position is held beyond 22:00 London time on a Wednesday there will be a 3 day rollover charge/credit. In the FX world, everything settles on a T+2 basis. E.g. At the end of Wednesday, T+2 would be a Saturday. However, as banks are not open you cannot settle the currency until Monday. If there is a currency holiday on Monday, then the rollover charge/credit will be for 4 days, to the next settlement day.

    Disclaimer: Spread Co is an execution only service provider. The material on this page is for general information purposes only and nothing contained herein constitutes (or should be taken to constitute) financial or other advice which should be relied upon. It has not been prepared with your personal circumstances, financial situation, needs or objectives in mind, therefore any actions taken or not taken by any person on the basis of this material is done entirely at their own risk. Spread Co accepts no responsibility whatsoever for any such actions, inactions or resulting consequences. No opinion expressed in the material shall amount to (or be taken to amount to) an endorsement, recommendation or other such affirmation of the suitability or unsuitability of any particular investment, transaction, strategy or approach for any specific person. This material has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. As such, this communication is not subject to any prohibition on dealing ahead of the dissemination of investment research. Nonetheless, Spread Co operates a conflict of interest policy to prevent the risk of material damage to our clients.