Fast-growing margin trading broker Capital.com is adding more clarity to the way that it calculates its funding or overnight swaps charges. Currently, the broker calculates its funding charges without specifying how those rates are derived, but going forward, details of the formulas and reference rates will be available.
Capital.com overnight financing charges
Funding charges are an integral part of CFDs, rolling spot Forex, and certain Spread Betting contracts that are not priced as futures, such as rolling bets.
The charges represent the cost of carry on margined positions.
Traders that hold long positions pay funding charges to the broker to cover their cost of carry on the underlying instrument, whilst those traders that hold short positions receive funding in lieu of their settlement proceeds.
Funding charges are only applicable to margin trades that are held open for longer than a business day.
- Want more info? Read our expert guide to overnight financing rates
When will Capital.com implement the changes?
Capital.com will apply new funding rates from the 16th of March and has emailed clients with details of the revised schedules.
The new funding charges are to be calculated based on a known premium or discount, to the relevant overnight funding rates.
So for example, a long CFD position on a US equity index that is dollar-denominated will attract funding charges based on the following calculation:
(Position size * index value) *the US Secured Overnight Financing Rate (SOFR) +/-4%
Whilst for commodities and Forex contacts Capital.com will reference rates used in the underlying markets.
That’s the Tomnext or tomorrow next-day funding rates in FX, and the appropriate futures contracts in the case of commodities.
- See which brokers charge the lowest overnight financing rates in our trading platform comparison table
What happens next?
Capital.com says that the new funding rate calculations should provide more traders with increased transparency around the charges and costs of a trade.
And it will email clients again on the 16th of March to remind them that the new rates will be going live.
The broker will also create a new fees and charges page on its website, which will contain further worked examples of trades under the new funding regime.
Capital.com’s move to clarify the methods and rates it uses to calculate funding charges is to be welcomed.
This a notoriously opaque area in the margin trading business, and in my experience many firms are unable, or unwilling, to explain how they calculate their overnight swaps rates.
Meaning that they amount to a hidden charge on a trader’s account.
Capital.com has come out from behind its website to explain the funding schedules and though +/- 4% premium sounds steep to me, clients can now make an informed choice about whether they want to pay those rates on their overnight trades.
- Find out more about this broker by reading our expert Capital.com review