The importance of overnight funding adjustments
By Claire Hunte
13:25, 30 April 2018
An overnight funding adjustment is an interest charge we have to make when you hold a leveraged position open overnight.
CFDs are leveraged instruments where you deposit only part of the money (margin) needed to open the position. The rest of the funds are provided by Capital.com. During the day there’s no charge to you for this borrowing. But to keep a CFD position open overnight, we charge a fee to cover the cost of the money we’re lending you.
How much that fee is varies depends on the risk of the particular asset you are trading with your leveraged funds. But remember, you only incur this fee if you don’t close your position before the overnight funding adjustment time begins.
You need to watch out for the closing time. It is usually either 21.00 or 22.00 UTC on the same day that you opened your position, but changes depends on summer time clock changes. Newer assets, such as cryptocurrencies, have different trading hours. Don’t get caught out.
It is important to remember that we don’t charge any fees if you close your position before the overnight funding adjustment time.
Where to find the rates?
To find the overnight funding adjustment for your specific trade look at that instrument’s individual page. Both the mobile app and the web version offer detailed descriptions of all the available markets, along with daily overnight funding adjustment rates for each asset.
Bear in mind the overnight rates differ between assets, depending on the risk of holding that asset overnight. Each is calculated differently and the most volatile assets – the ones that present the greatest risk – may see the overnight rate change as the price fluctuates.
Due to the way the rate is calculated and the differing risks, there are also different overnight rates for long and short positions.
Fees differ for long and short
Using the Capital.com platform, you can go long and short, in other words, buy and sell. Overnight funding adjustments differ for the two positions: if you go long, you always pay the interest yourself.
If you have an open short position, the interest can sometimes be credited to your account, reducing the profit on your short position. The amounts differ due the way the interest charge is calculated on credit and debit amounts for short and long positions.
The different prices are detailed clearly on each instrument’s page.
How do we calculate fees?
Let’s illustrate how Capital.com calculates the overnight funding adjustment amount. The simplest example is for shares. The rates for shares and indices are calculated the same way.
Here’s the formula used:
Trade Size x Closing Price x (3% +/- LIBOR) / 100% / 365 (or 360)
Trade Size is, for example, the number of shares.
Closing Price is the instrument’s value at 22:00 (UTC).
LIBOR is a one-month interbank interest rate. This is the interest rate that major banks charge to lend each other funds, so it is the base level that brokers have to pay to access the money they lend you.
3% is the broker’s interest. This is what Capital.com charges to cover the risks of holding a client’s position overnight.
Whether we divide by 365 or 360 depends on the currency: the formula for GBP shares uses 365; 360 is used for other currencies.
If we look at one share as an example – Apple – the Apple share page on Capital.com lists the information (30 April 2018) as:
- Long position overnight funding adjustment -0.0164%
- Short position overnight funding adjustment -0.0058%
- Overnight funding adjustment time 21:00 (UTC)
If the share price closed at 162 and you had CFDs for 10 shares, you would pay $0.26 to hold a long position open overnight and $0.09 for a short position.
Currency pairs example
Overnight funding adjustment for Forex CFDs are calculated as:
Trade Size x (0.7% +/- tom-next rate%)
Tom-next is short for 'tomorrow to next day'. This is the difference between the interest rates of the two currencies paired with one another.
Again, each available currency pair has its overnight rates for holding open long and short positions clearly listed. For example, the EUR/GBP pair shows (30 April 2018)
- Long position overnight funding adjustment -0.0071%
- Short position overnight funding adjustment -0.0021%
- Overnight funding adjustment time 21:00 (UTC)
Commodities example
Overnight funding adjustment adjustment for a commodity CFDs are based on the holding costs of the underlying front and next future contract on that commodity.
Again, each available commodity asset has its overnight rates for holding open long and short positions clearly listed. For example, Brent Crude shows (30 April 2018):
- Long position overnight funding adjustment -0.0344%
- Short position overnight funding adjustment -0.1006%
- Overnight funding adjustment time 21:00 (UTC)
Cryptocurrencies example
Cryptocurrencies are extremely volatile markets, which means Capital.com takes on extra risks for holding your crypto positions overnight.
Overnight funding adjustment depend on the volatility rate of a cryptocurrency and can be reviewed and changed daily. The trading hours also differ. If we take the example of Bitcoin we get the following (30 April 2018):
- Long position overnight funding adjustment -0.1000%
- Short position overnight funding adjustment -0.0500%
- Trading hours (UTC) Mon - Sat: 00:00 - 21:00 / 21:15 - 00:00 / Sun: 00:00 - 20:00
Awareness is key
Overnight funding adjustment can change suddenly and can turn a profitable trade into a loss-making trade if you are not careful. If you are fully aware of the overnight funding adjustment and factor them in to your trading calculations, they can work well for you.
But never just forget and face overnight funding adjustment you were not expecting.
Remember: there are no guarantees in trading. Be aware of risks.
Markets in this article