Tomorrow Next (Tom/Next): Essential Guide to Forex Overnight Trading Fees

Have you ever kept a forex trade open overnight and seen a small fee or payment on your account called "swap" or "rollover"？ That's the result of an important market process called Tomorrow Next (Tom/Next). Understanding this process isn't just for big financial companies; it's important knowledge for any serious individual trader. Simply put, Tom/Next is a transaction used in the forex market to delay the settlement of an open spot trade by one business day. It works by closing your position for tomorrow's settlement date and opening the same position again for the day after.

This guide will explain Tom/Next completely, changing it from a confusing charge into a predictable part of your trading plan. We will cover:

• What Tom/Next is and what it does.
• How it works step by step.
• A practical guide to calculating the Tom/Next rate.
• How traders use this knowledge to help their trading.

Basic Concepts

To really understand Tom/Next, we need to start with the basics. This process isn't a random fee but a logical solution to a basic feature of the spot forex market: the settlement requirement.

The Main Definition

At its core, Tom/Next (or T/N) is a type of foreign exchange swap. It is a two-part transaction where a trader effectively moves a position from one day to the next. The important point to understand is that this is not a new trade meant to make profit or loss from market movement. Instead, it is a way to delay settlement. Its only purpose is to let you keep your market position overnight without having to physically settle the trade.

Understanding the Terms

The name "Tomorrow Next" directly describes the two parts of the transaction and their settlement dates, known in the industry as value dates.

• "Tom" (Tomorrow): This refers to the next business day, or T+1 (Trade Date plus one day). This is the value date for the first part of the swap, which closes your existing open position that was due for settlement.
• "Next" (The Next Day): This refers to the business day after tomorrow, or T+2 (Trade Date plus two days). This is the value date for the second part of the swap, which re-opens your position, pushing the settlement date forward.

Why It Matters

The standard settlement rule for most spot FX trades is T+2, meaning the actual exchange of currencies is scheduled to happen two business days after the trade is made. For an individual trader, this rule is mostly hidden, but its effects are significant.

If you hold a position beyond the market's daily cut-off time (usually 5 PM New York time), you would technically be required to deliver or receive the full currency amount. For a trader with a one-lot EUR/USD position, this would mean delivering $108,000 to receive €100,000, for example. Since individual forex trading uses margin and not for physical delivery, this is not practical.

Tom/Next is the automatic process that prevents this physical delivery. It systematically delays the settlement date by one day, every day, allowing the trader to keep their open position and market exposure. For most individual traders, this background process is known simply as the "overnight rollover" or "swap."

How It Works

A Tom/Next transaction is not just a fee; it is an actual set of trades done on your behalf by your broker in the interbank market. Understanding this two-part process is key to seeing how the related costs or credits are created. Let's break down the process for a long EUR/USD position held overnight.

1. The "Tom" Part (Closing the Position): The system makes a trade to sell your EUR/USD position for settlement on the next business day (T+1). This action effectively closes your original position, removing your delivery obligation for that day. The profit or loss on your position up to that point is finalized.

2. The "Next" Part (Re-opening the Position): At the same time, the system makes a trade to buy the exact same amount of EUR/USD back, but this time for settlement on the following business day (T+2). This re-establishes your long exposure to the market, effectively rolling your position forward.

Understanding Swap Points

Importantly, the two trades are not made at the exact same price. The price for the "Next" part is adjusted slightly from the "Tom" part. This difference is the Tom/Next swap rate, and it is expressed in swap points. These points are either added to or subtracted from the current spot price to create the forward price for the new position.

These points are not random; they come directly from the interest rate difference between the two currencies in the pair for a one-day period.

• If you are long a currency with a higher interest rate than the currency you are short, you will generally earn the swap points, resulting in a positive rollover (a credit to your account).
• If you are long a currency with a lower interest rate, you will pay the swap points, resulting in a negative rollover (a charge to your account).

This cost or gain is the market's price for borrowing one currency to hold another for one day.

Calculating the Rate

The Tom/Next rate isn't random. It's a real number that comes from actual money market rates. While your broker shows the final rate, understanding the calculation helps you predict costs and opportunities.

Main Factors

The swap rate you see on your platform is based on three main parts:

• Interest Rate Difference: This is the main driver. It's the difference between the overnight interbank interest rates of the two central banks involved. For instance, the difference between the Federal Reserve's Secured Overnight Financing Rate (SOFR) for the USD and the European Central Bank's Euro Short-Term Rate (€STR) for the EUR.
• The Spot Exchange Rate: The current market price of the currency pair is needed to convert the interest calculation into a final value.
• Broker's Fee: Your broker adds a small spread (markup) to the interbank rate. This is their fee for providing the rollover service and makes their profit.

Step-by-Step Example

Let's walk through a realistic example to see how this works in practice.

• Scenario: We are holding a long 1 standard lot (100,000) EUR/USD position overnight.

• Assumptions (Example):

• Current EUR/USD Spot Rate: 1.0800

• Euro's overnight interest rate (€STR): 3.90%

• US Dollar's overnight interest rate (SOFR): 5.30%

• Broker's Fee: 0.20% (applied to both sides of the transaction)

• The Logic:

  When we are long EUR/USD, we are effectively buying EUR and selling USD. This means we are holding (and should earn interest on) the EUR, while at the same time borrowing (and must pay interest on) the USD. The net result of this interest exchange is our swap cost or credit.

• The Calculation:

1. Interest Paid (on the short USD position):

   First, determine the USD value of the position: 100,000 EUR * 1.0800 = $108,000.

   The interest rate we pay on the borrowed USD is the central bank rate plus the broker's fee: 5.30% + 0.20% = 5.50%.

   Daily interest cost: $108,000 * (5.50% / 360) = $16.50.

2. Interest Earned (on the long EUR position):

   The interest rate we earn on the EUR we hold is the central bank rate minus the broker's fee: 3.90% - 0.20% = 3.70%.

   Daily interest earned: 100,000 EUR * (3.70% / 360) = €10.28.

3. Convert Earned Interest to USD:

   To find the net effect, we convert the earned interest back to the quote currency (USD): €10.28 * 1.0800 = $11.10.

4. Net Swap Cost:

   Net Swap = Interest Earned - Interest Paid

   Net Swap = $11.10 - $16.50 = -$5.40.

In this scenario, holding a one-lot long EUR/USD position overnight would result in a charge of $5.40. The use of 360 days is a common day-count method in money markets.

Positive vs. Negative Swaps

In our example, the interest rate of the currency we were borrowing (USD) was much higher than the currency we were holding (EUR). This resulted in a negative swap, or a net cost to the trader.

If we were to reverse the position and go short EUR/USD, the situation would flip. We would be selling EUR and buying USD. This means we would earn the higher USD interest rate and pay the lower EUR interest rate. This would result in a positive swap (a credit), though it would still be reduced by the broker's fee on both sides of the transaction.

Understanding The Terms

The world of forex settlement has several similar-sounding terms. Understanding the exact difference between them is a mark of a knowledgeable trader and is important for avoiding confusion when dealing with different platforms or reading financial analysis.

Strategic Uses

Understanding Tom/Next is more than just theory; it has direct and useful effects on your trading strategy, cost management, and risk assessment.

Carry Trade Foundation

A carry trade is a popular long-term strategy where a trader seeks to profit mainly from the interest rate difference itself, rather than from short-term price movements.

• How it works: A trader will buy a currency with a high interest rate while at the same time selling a currency with a low interest rate (e.g., shorting JPY to buy MXN).
• The Goal: The main objective is to hold the position for a long period—weeks, months, or even years—and collect the positive daily swap payments. Over time, these credits can add up to a significant return.
• The Risk: The carry trade is far from risk-free. The strategy is only profitable if the exchange rate stays stable or moves in the trader's favor. A sharp, negative move in the spot price can easily wipe out months of accumulated swap gains. It is a strategy that bets on both yield and relative price stability.

Managing Trading Costs

For traders whose strategies do not rely on collecting swaps, such as day traders or short-term swing traders, Tom/Next is mainly a cost to be managed.

• Avoiding Swaps: The simplest way to manage swap costs is to avoid them entirely. If your trading strategy is intraday, make sure all positions are closed before the market cut-off time (usually 5 PM ET). This means you will never have a rollover charge or credit.
• The Triple Swap Day: Because the forex market is closed for spot settlement on weekends, a special adjustment is made mid-week. Positions held over Wednesday night are charged or credited for three days of interest (to account for Wednesday, Saturday, and Sunday). This is known as the triple swap.
• Strategic Impact: This has a big effect on your costs. If you are in a position with a negative swap, holding it over Wednesday will be three times as expensive as any other weekday. On the other hand, if you are earning a positive swap, you will receive three times the credit. This is an important factor to include in your weekly trade planning and risk management.

A Liquidity Tool

On an institutional level, Tom/Next and other FX swaps are important tools for corporate treasurers and fund managers. They use them to manage short-term currency needs, hedge cash flows for specific dates, and effectively borrow or lend currencies for short periods without taking on long-term exchange rate risk. This reinforces the basic role Tom/Next plays in the foundation of global finance, far beyond the scope of individual speculation.

Finding Rates on Platforms

The theoretical calculation is useful for understanding, but in practice, your broker provides the final, all-inclusive swap rate directly on your trading platform. Knowing where to find this information is important for accurate trade planning. Here's a universal guide for most platforms, such as MetaTrader 4/5 (MT4/MT5) and cTrader.

1. Open your 'Market Watch' window. This is the main list of currency pairs and other instruments offered by your broker.
2. Right-click on the currency pair you are interested in (e.g., AUD/JPY).
3. Select 'Specification' or 'Properties' from the menu that appears. This action will open a new window containing detailed contract specifications for that specific instrument.
4. Look for 'Swap Long' and 'Swap Short'. These are the two key values you need.

• Swap Long: This is the rate you will be charged or credited for holding a long (buy) position overnight.
• Swap Short: This is the rate for holding a short (sell) position overnight.

1. Understand the Value: The rate is often shown in 'points' or sometimes as an annual percentage. A negative value indicates a charge (debit), while a positive value indicates a credit. Always check these rates before entering a position you plan to hold overnight, especially over a Wednesday.

From Concept to Trader

Tomorrow Next is far more than a piece of market jargon. It is the basic engine that allows the 24/5 spot forex market to function, enabling traders to hold positions for days, weeks, or years without the obligation of physical delivery. By moving beyond a surface-level understanding of the "swap" fee, you transform a mysterious trading cost into a predictable variable that can be managed, forecasted, and even used as part of a coherent strategy.

Key Points to Remember:

• Tom/Next is a rollover mechanism: It delays a trade's settlement by one day through a simultaneous two-part swap transaction.
• It's driven by interest rates: The cost or credit, known as swap points, comes directly from the interest rate difference between the two currencies, plus a broker fee.
• Knowledge is strategic: Understanding Tom/Next is important for managing costs, planning for the triple-swap day on Wednesday, and implementing advanced strategies like the carry trade.
• Check your platform: Always know the specific Swap Long and Swap Short rates for the pairs you trade by checking the instrument's specifications before you commit to an overnight position.

Understanding these core market mechanics is an important step in your evolution from being a simple market participant to becoming a truly informed and confident forex trader.