Overnight Funding Explained

With all our derivative products, you trade on margin. This means that you can open and hold a position with just a small percentage of the position’s overall value on your account. For instance, let’s say that you buy £10 per point of a Rolling Cash stock index priced at 5,500 which carries an initial margin requirement of 5%.

The value of the trade is £55,000 (£10 x 5,500).

But because this stock index has an initial margin requirement of 5%, you only need to have £2,750 on your account to open this position.

Effectively we lend you the funds for this position, and because of this, we charge you interest on an overnight basis for long positions. And, depending on interest rate levels, we may pay you interest overnight on short positions.

How we calculate overnight interest

We calculate overnight interest based on the 1-month interbank rate for the currency of the market you trade-in. For example, the UK 100 stock index is valued in British pounds, so interest is calculated using the UK’s 1-month interbank rate. The US 500 is valued in US dollars, so interest is calculated using the US 1-month interbank rate, even if you are trading in pounds per point rather than dollars.

Marc Aucamp

Content Writer

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LONG POSITIONS

If you trade on UK markets, we use the 1-month LIBOR (London Interbank Offer Rate) and add 2.5%.

Say 1-month LIBOR is 3.5%, we calculate the interest rate by adding 2.5% to 3.5% totalling 6.0%.

FOR EXAMPLE:

You have bought £2 per point of the UK100 Rolling Cash index at 7250.

The total value of this trade is:

7250 x £2 = £14,500

You only need a small percentage of this in your account to open your position.

If you still hold this position at 10 pm London time, we charge overnight interest.

So, if UK100 is valued at 7265 at this point,

the calculation is as follows:

7265 x £2 x 6.0/100 x 1/365* = £2.388

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SHORT POSITIONS

There are two possibilities, depending on whether the 1-month interbank rate is below 2.5% or not.

If the 1-month interbank rate is 1.0%, we subtract this from the 2.5% charge, meaning the overnight interest rate will be 1.5%.

FOR EXAMPLE:

You have sold £5 per point of the US500 rolling cash index at 4080.

The total value of this trade is:

4080 x £5 = £20,400

Remember you only need to have a small percentage of this in your account to open this trade.

If you still hold on to this position at 10 pm London time, we charge overnight interest.

Say the US500 is valued at 4020 at 10 pm,

the calculation is as follows:

4020 x £5 x 1.5/100 x 1/360* = £0.838

Bear in mind that the S&P 500, on which our US 500 is based, is valued in US dollars. This means that we will use the US 1-month interbank rate to calculate overnight funding.

*There are 365 days in the financial year for UK100 and UK equities, and 360 days for all others.

However, in the case of short positions, should the 1-month interest rate be above our charge of 2.5%, then your account will be credited rather than debited.

For example:

If the 1-month interbank rate is 4%, we will subtract our charge of 2.5%, and you would receive a credit based on the value of your trade at 1.5% adjusted for one day.

Overnight interest is a little different for Forex trades.

Here we use the difference between the interest rate of the first currency and the second, then apply our charge of 2.5%.

Let’s use the GBPUSD currency pair as an example.

If the GBP interest rate is 2% and the USD is 5% then the difference is 3%.

If you had bought GBPUSD

You would be charged 3% plus our 2.5% charge for each day you hold the position at 10 pm London time. So, an interest rate of 5.5% would be applied to the position, adjusted for one day, and debited from your account.

If you had sold GBPUSD

Instead, you would be credited 3% minus our 2.5% charge for each day you hold the position at 10 pm London time. So, an interest rate of 0.5% would be applied to the position, adjusted for one day and credited to your account.