Support: Tom Next Procedures

In spot forex trading, each transaction carries an assigned value date, which is the date that the buying or selling actions will realize their value and demand a settlement of payment. This typically falls two (2) business days after the transaction was executed. The profits or losses produced by the buying and selling actions will then settle into the specific cash account.

When you take a position in a foreign currency it is implied that you will take actual delivery of the currency in two days. However, most traders are speculating and have no intention of taking delivery on the currency. This is where the Tomorrow Next Day procedures come into play.

If a trader opens and closes a position during the same business day, the value dates will be the same for each transaction. The trader’s positions will not be carried over into the next day because payment for his purchase or receipt for his payment has already been transacted and will settle on the same value date.

However, if a trader holds a position past the close of the current business day, that position must be covered and carried over into the next day, unless actual delivery of the currency is desired. Tomorrow Next Day (Tom Next) procedures allow the trader to do this. The client’s position is closed out at a predetermined closing rate and reestablished at a new opening rate, assigning the newly opened position a new value date and allowing the client to hold this position another day without taking delivery of the currency. The rates used to convey the new entry prices are known as 'Tomorrow Next Day' rates.

A swap procedure is performed on all current open positions everyday at 3 PM (15:00 EST). All open positions are closed out at a closing rate, which is the particular currency’s rate during this time frame. During the swap procedure, all open positions are closed at the closing rate, and any profits or losses that are a part of Floating P/L are moved into Unrealized P/L.

The closed position is then reestablished at a new opening rate, which is determined by the price at which the position was closed out plus or minus an interest payment. Generally, this swap happens instantly and demands either a small interest payment by the trader, dependant upon which foreign currency the trader is holding.

In other words, you are holding the currency that you have bought and selling the opposite side, and you are borrowing the currency you have sold and buying the opposite side. For example, if you are long the USD/JPY, this means you have bought and are holding the USD and have sold and are borrowing the JPY. If you hold the currency with the higher rate of interest then you will receive an interest payment. If you hold the currency with the lower rate of interest you will have to pay that rate. These payments are paid or received during the establishment of the new opening rate, in the form of a better or worse new price after the swap. Account minimums apply to receive interest payments on your GFT trading account.

Let's look at an example of this process.

Trader A buys 100,000 USD/JPY at a price of 121.90 on June 12th. This means that the trader bought 100,000 USD and sold 100,000 US Dollars worth of Japanese Yen, which at a price of 121.90 is 12,190,000 Japanese Yen.

Foreign Exchange Confirmations

Foreign Exchange Open Positions

The transaction’s value date is June 14. This means that on June 14 Trader A's account would receive, or be credited, 100,000 US Dollars since he bought US Dollars and sold or debited 12,190,000 Japanese Yen.

However, what if the trader does not want to exit his position on the same day? The trader has bought 100,000 USD and must have the same amount of USD available in the account to pay for the 100,000 USD that was bought.

If the trader exits the position before the end of the day, the necessary amount of USD will be in the account to pay for the 100,000 USD that was originally bought. This is because both sides share the same value date. Thus the trader would have 100,000 USD that was sold at a particular rate to pay for the buy transaction of 100,000 USD that took place earlier in the day.

If the trader chooses not to exit the position before the day ends, the trader would not have any funds available in his account to pay for the 100,000 USD he bought, and the party holding the transaction must do it for him. Remember even if you sold USD, that means you bought JPY and would need to have the necessary amount of USD on deposit to pay for the JPY buy.

The mismatch occurs on June 14 when the 100,000 US Dollars that were bought on June 12 are credited to traders account, and the trader does not yet have the 100,000 US Dollars to pay for it because he has yet to buy back the 100,000 USD he originally sold.

The holding party, Global Forex Trading, takes all transactions that are left open for the day and closes them out at a closing price. This is defined by RCL on your statement. This is the amount that will be in your account on the same value date as your original transaction to pay for the amount bought.

As you can see below, the transaction defined by RCL was to sell 100,000 USD at 121.88, which means that the trader bought 12,188,000 Japanese Yen. In other words, the trader who originally bought 100,000 USD at 121.90, subsequently selling 12,190,000 JPY has just sold 100,000 USD at 121.88, subsequently buying 12,188,000 JPY. In this example since the trader sold 12,190,000 Japanese Yen and bought back only 12,188,000 Japanese Yen, he has lost 2,000 Japanese Yen. When these two transactions arrive at their value date, the trader will sell 12,190,000 Japanese Yen and receive back only 12,188,000 Japanese Yen.

Foreign Exchange Confirmations

As mentioned above, the trader chose to remain in the position. Once the original transaction has been closed out for the day, it must be placed back into the forex market to pay for the original buy. This replacing the transaction back into the forex market is defined by ROP or Roll Open, and has a new value date of June 15th. Generally, the swap rate that determines the new reentry price is the Tom Next rate. , these are rates that represent a small interest payment that the trader will either: pay to hold the transaction over into the new day; or receive for holding the transaction over into the new day.

The currency you are holding or that you are long (bought) determines the paying or receiving of interest. If you are holding the currency that has the higher rate of interest you will receive a discount in the form of a certain number of pips. If you are holding the currency that has the lower rate of interest you will pay a premium in the form of a certain number of pips. In this case, since Trader A was holding or had bought the currency with the higher rate of interest, he received a discount. This can be seen in the price at which the transaction was closed out, 121.88, and at which it was reentered, 121.871. By examining the transaction we can see that the trader originally entered the position at 121.90, was closed out at 121.88, and reopened in the original direction, long, at 121.871. He received a discount by being placed back into the market at a better price than he was taken out at, selling at 121.88 and buying back at 121.871.

On June 15, the trader will have 100,000 USD credited back into his account, which he bought at a price of 121.871, which means he sold 12,187,100 Japanese Yen. This swap process will take place again if the trader chooses not to exit the position before the end of the day. In this case, the forex trader exits the market via a market order, selling 100,000 USD at a price of 121.63, and thus buys 12,163,000. The trader now has the 100,000 USD in the account to pay for the 100,000 USD that was bought for him at 121.871. Since he sold 12,187,100 Japanese Yen and only received back 12,163,000 Japanese Yen he lost 23,900 Japanese Yen.

Remember, if you choose to hold any open positions past the close of the business day, which occurs daily at 3:00 PM ET, those positions will be closed out and any profits credited or losses debited to your account. Your position will then be reopened at the exact price at which you were closed out, plus or minus a small premium paid by you or a small discount paid to you. The direction and volume will be the same as when you entered the position. The only difference is that you have realized any profits or losses up to that closing rate and are back in the market at the new open price.

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IMPORTANT NOTE: All mini account holders are required to pay interest during the daily roll process when they are on the side of the rollover that makes a payment in a standard GFT account. However, because it is not a standard account, interest will not be paid to a mini account holder when the account holder is on the side of the rollover that receives payment in a standard GFT account.

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