Forex settlement and carrying costs

In the spot forex market, trades settle in two business days. For example, if you short 100,000 euros on Tuesday, technically, you should deliver 100,000 euros on Thursday.

However, to avoid this position maintenance headache, most forex brokerages automatically roll over all open positions (i.e., “swap” the trade forward) to the next settlement date two business days in the future, at 5 p.m. ET daily.

Rollover fees are the overnight “carrying costs” assessed to forex positions. They are based on the difference between two currencies’ interest rates, and they can affect any position you hold past the 5 p.m. ET closing/rollover time.

Interest-rate fees are either added to or subtracted from your account depending on whether the interest rate on the long currency in your pair is higher or lower than the short currency’s interest rate.

For example, if you buy the euro/U.S. dollar rate (EUR/USD), you’re effectively long the euro and short the dollar. If you hold the trade past 5 p.m. ET, you might receive a small credit as the firm rolls your position forward one day and applies the difference between the long currency’s (euro) higher interest rate and the short currency’s (U.S. dollar) lower rate. Conversely, if you short the EUR/USD rate, your account would be debited the same amount.

It’s important to read the fine print and see how a particular FX dealer applies rollover fees. Some firms always charge rollover fees, but they might only credit rollover fees to customers who maintain a certain account size. Day traders who never hold positions overnight avoid rollover fees. Also, currency futures, such as those traded on the Chicago Mercantile Exchange, are not subject to rollover fees.