Overnight financing explained

The most obvious cost of spread betting is the spread itself. But there is also another cost – the financing adjustment.

 
 

 

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.

 

Example 1

Using the EURUSD as an 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. If so, 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.

Considering the UK100 (FTSE100): If you buy £10 per point on the Cash UK100 at 6,100, you would need to have £250 (25 x £10) in your account in order to make this bet, as our Notional Trading Requirement (NTR) is 25 for the UK100. But this £250 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 positions at Spread Co.

Daily financing is calculated as follows:

D = B x P x I / 365

Where:

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.

 
 
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Spread Co Limited is a limited liability company registered in England and Wales with its registered office at 22 Bruton Street, London W1J 6QE. Company No. 05614477. Spread Co Limited is authorised and regulated by the Financial Conduct Authority. Register No. 446677.

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