Tom-Next and the Daily Roll: How Overnight Positions Are Financed

[Fairman]

Tom-Next and the Daily Roll: How Overnight Positions Are Financed

When a retail broker rolls your position overnight, it uses a mechanism with a name from the institutional world: tomorrow-next, usually shortened to tom-next.

A tom-next swap involves two legs. The trader buys or sells currency for settlement tomorrow, and simultaneously reverses it for settlement the next day. The effect is to roll the settlement date forward by one day without taking delivery. The price difference between the two legs reflects the interest difference for that day.

Dealers use this to move positions from one value date to the next. Retail brokers apply a similar adjustment to your account, adding a markup for themselves.

Understanding the mechanism clarifies where swap values come from. They are derived from interbank tom-next rates, which reflect interest rate differentials and market conditions. When funding is tight, tom-next rates can move sharply, and retail swaps may change with them, even if central bank rates have not moved.

Practical consequences: swap rates are not constant. They vary with market funding conditions, and can change substantially around holidays and quarter-ends.

Check swaps periodically, especially if you hold positions for days or weeks. Brokers update them at various frequencies.

If your strategy depends on carry, tracking the underlying differentials gives you an anticipatory view of changes.

Practical step: record the swap value of one pair on your platform weekly for a month and see how much it changes.

[Fairman]

Swaps changing around holidays is a good thing to know. If you see an odd swap charge one night, check the calendar first, it's often a multi day roll rather than a broker error. When a holiday in one of the currency's home countries shifts the settlement date, the roll can cover more than one day, so the charge or credit is bigger than usual. The Wednesday triple swap works the same way, because a trade rolled on Wednesday settles after the weekend. If you hold positions for days, it's worth keeping an eye on the swap line in the account history each week. Sudden jumps usually have a calendar reason, and if they don't, ask support.

[Fairman]

For carry trades, tracking the rate differential lets you see swap changes coming. When a central bank is expected to cut, the swap on the long side will usually get worse soon after. Sometimes it starts moving before the cut, because the interbank rates that swaps are based on price in the expected decision early. So if you're holding a long AUDJPY for carry and the market is pricing an RBA cut at the next meeting, the swap you earn may shrink before the announcement. Interest rate futures or a market probability tool show the expected path. A quick check each week tells you whether your carry is about to get thinner.