Q. What is financing?
A: Financing is the cost of borrowing or lending that is attributable to a position you may hold. When you open a spread bet, the cost of running that bet to its expiry date is factored into the quoted price. A futures price like June FTSE already contains financing (or the cost of carry) in its price – hence you would typically see a futures price trading above the cash price. A rolling product however, is financed on a daily basis – if you are long you pay financing / if you are short you receive financing.
So if you buy the equivalent of £10,000 of Vodafone Rolling bet you may only need to deposit £1,000 but most providers will charge you funding on the full £10,000 on a daily basis. Spread Co charge 2 above and below the SOFR (Secured Overnight Financing Rate). If SOFR is 5% the annual charge would be 7% [(7/100 x £10,000)]/365 which equates to £1.92 per day. The argument is that the £9,000 that you did not have to deposit can sit on an interest bearing account to mitigate a large part of the financing cost. Bear in mind also that you can also go short (effectively lending the equivalent of £10,000 of Vodafone). For that you would actually receive financing of 5% – 2%.
Note: When SOFR is at a particularly low rate, you may have to pay the financing fee on short positions as well as long. The positive side of this is that with today’s ultra-low interest rates, a £20,000 spread bet position on Vodafone may only cost up to £440 in financing charges to hold over a twelve month period. This isn’t much when you consider that you can run this position with, just £3,000 in your spread trading account.
Q. Is there a financing overnight fee if I roll over a position and decide to hold it overnight?
A: You do pay financing overnight if you spread bet on the spot market, however not on futures. Which to use – whether rolling daily bets or futures depends on the timescale of trading whichever suits you better.
If you take a long spread trade and roll it overnight then you will have to pay an interest fee since you are in effect borrowing funds to invest. This fee is normally a small percentage above the interbank overnight cash rate but it can be add up over long periods of time.
If you take a short spread trade and keep rolling it overnight, then you normally receive an interest credit at a rate that is just below the interbank overnight cash rate, although in some cases you may actually end up owing money (particularly in the very low interest environment we are in)
Q. Does spread betting carry a financing charge if i go long on a position?
It was my understanding that I’m only charged a financing charge on cfds not spread betting and in spread betting all charges are included in the spread. Or am I missing something?
A: On spread betting if you use the rolling daily cash bet you will be charged the financing rate each day you are long. If you use the quarterlies those costs are already incorporated into the price.
The rolling daily cash bets have a tighter spread than the quarterlies.
For instance for Spread Co the overnight financing for a rolling position can be calculated using this formula:
F = [ (Price / U) x Stake x I] / B
F = Overnight Financing
P = Closing price
U = Bet unit risk
S = Stake
where I = applicable interest rate and B= day basis (365)
Interest rate on long bets: RFR + 2%
Interest rate on short bets: RFR – 2%
If you had been long £1 on GBP/USD Rolling Daily last night this is an example of the charge incurred:
(1 * 2.0156 * -1 / 36500 / 0.00010000) * 1
Interest:(-1%) Mid:(2.0156)
Pipsize:(0.00010000) (1 days)
-0.55
You would have been debited £0.55.
If you had been short £1 on GBP/USD Rolling Daily last night this is an example of the charge incurred:
Sell 1 of X GBP/USD Rolling Daily
(1 * 2.0156 * -3 / 36500 / 0.00010000) * 1
Interest:(-3%) Mid:(2.0156)
Pipsize:(0.00010000) (1 days)
-1.66
Although you are normally credited the rolling charge when you are short, as this has returned a negative number you would have been debited £1.66.
Q. But why is the rolling fee charged on rollover?
A: Because of the leverage aspect every product must either have a rollover or a separate funding charge. Debit for longs, credits for shorts. Excessive borrowing charges on specific stock lending can sometimes eradicate the short side credit.
If there is a provider out there not levying this charge then they are either charging the client somewhere else in the contract or about to issue some bad end of year figures.
The only time you won’t see the charges is on a longer term bet like a quarterly, where these are just a future and the funding aspect is factored into the opening spread. Check out near and far quarters of the same product to see the funding difference over the two periods. Be aware of any dividends due as they will also be factored in.
With regards to spread betting, daily funding is typically 2.5 to 3%. It is a nice little hidden cost that most clients don’t notice. Having said that, historically low interest rates have made margin trading much cheaper than it used to be, and with most providers charging around 2.5% over SOFR on long positions, this would work out at just 3.8% per annum so it is perfectly feasible to hold a spread bet over a longer term period. Note that generally quarterlies hardly carry any funding premium and will overtake a daily in regards to cheaper funding.
Q. How is financing calculated?
A: Financing Charges are as follows:
By definition a bet has an expiry, so if you want to keep a position open for longer than the expiry date you will need to roll the position over. To roll a position some providers like IG have a minimum rollover charge which varies depending on the type of bet and market you are trading on.
For example if you are trading on daily Vodafone the deposit for a trade, if it had no stop would be as follows:
Deposit needed for this position: Amount per Point x Deposit Factor
£10 x 10% of Share Price
£10 x 10% of 136
= £136
To rollover this position it would be calculated as follows:
Close at official closing price. Re-open with no spread but with a funding charge. The funding charge is as follows:
If Long you Pay UK SOFR + 2.5%.
If you are Short you Receive UK SOFR – 2.5%. (Please note that as SOFR is very low at present a client may have to Pay even if Short).
Example: Vodafone closed at 140 and you were Long
140 (0.5%* + 2.5%) = 4.2
4.2 / 365 = 0.012
At £10 per point this would cost £0.12 to rollover.
The new opening level would be 140.012.
* Please note that 0.5% is an estimate of UK SOFR.
Q. Is financing and cost of carry the same thing?
A: The cost of carry is what is referred to as Fair Value. This is made up of the interest and dividends payable before the end of a futures contract [futures price is spot price plus interest less dividends (as dividends aren’t credited to you with a spread bet) then finally adjusted for spread].
Financing is different from cost of carry. The overnight financing rate is the spread betting provider’s charge for holding a position overnight. This is based on base interest rates in the countries with which the market you are trading on is associated then +/- 2.5% (for Bux Markets) depending on whether you are long or short. If the result of the formula above is positive then any long positions would be debited and short positions credited. If the result of the formula is negative then the opposite will occur.
Q. What is SOFR?
A: SOFR (Secured Overnight Financing Rate) is a benchmark interest rate used primarily in the United States. It reflects the cost of borrowing cash overnight collateralized by U.S. Treasury securities in the repurchase (repo) market. SOFR has become a widely accepted alternative to the London Interbank Offered Rate (LIBOR) due to its transparency and stability.
Key Features of SOFR:
- Based on Real Transactions: SOFR is derived from actual transactions in the overnight Treasury repo market, making it more robust and less prone to manipulation than LIBOR, which is based on bank estimates.
- Risk-Free Nature: Since it is based on secured lending (with U.S. Treasury securities as collateral), SOFR is considered a near risk-free rate.
- Daily Updates: The rate is published daily by the Federal Reserve Bank of New York.
- No Credit Risk Component: Unlike LIBOR, SOFR does not include a credit risk premium, as it represents secured loans rather than unsecured bank-to-bank lending.
Applications:
- Replacing LIBOR: SOFR is a key component of the transition away from LIBOR, which is being phased out due to its vulnerabilities.
- Loan and Bond Markets: Many financial products, including adjustable-rate mortgages, corporate loans, and floating-rate notes, now reference SOFR.
