How to Understanding Forex Rollover Credits And Debits

Trades made with brokers in the spot foreign exchange (forex) market are subject to receiving interest or being debited interest if positions are held overnight. This is known as rollover interest. This article will explain why rollover occurs and how traders can profit (or understand the debits) from it. We’ll also take a look at the tax considerations of rollover interest.

What Is Rollover Interest?
Rollover interest is paid or debited to traders who have open currency positions at 5pm EST each day the trade is open. Trades opened before 5pm EST and held until after this time are considered to be held overnight and thus are subject to interest credit or debits depending on the position the trader has open.

Whether a credit or debit is applied to the trader’s account is determined by which country’s currency the trader bought or sold relative to another country’s currency. All currencies trade in pairs, meaning one country’s currency is always relative to another country’s currency. An example of this is the EUR/USD. Therefore, the amount of interest received by the trader for holding the EUR/USD pair overnight will be determined by the difference in interest rates prevailing in each location when the rollover occurs.

In most cases, retail forex brokers automatically roll over trades. Retail brokers do this to prevent traders, most of whom are speculators, from having to deliver actual currency to the party on the other side of the trade. Settlement, which is the day the trader would have to deliver actual currency to the person on the opposing side of the trade, is two days after the transaction took place. With brokers rolling over positions, trades can be left open without actual delivery of the full value of the currency position taking place. If rollover did not occur, the trader would be required to deliver the face value of the currency. This is because the forex market is where we trade contracts in which one currency is exchanged for another; this is to be delivered in two business days. (For more on settlement and other forex topics, take a look at our Forex Tutorial.)