Other costs, apart from the spread, you need to take into account when dealing in CFDs are the daily financing charges. Financing charges represent the cost of borrowing the capital that is needed in order to open a position. CFDs positions that remain open over-night are subject to those charges, incurred on daily basis.
A long position attracts the financing charges, as effectively, by depositing initial margin, you borrow capital from us to cover the rest of it (i.e. the difference between the initial margin and the total value). For short position, on the other hand, financing interest may be credited to your account, as the opposite applies, meaning, you lend capital to us.
Positions held at our designated ‘financing time’ are subject to a financing charge or financing credit (collectively, financing transactions). In addition, positions that are held on Friday at this time will attract a three day financing charge/credit to account for the weekend.
Note: Positions on futures do not incur such treatment.
For non-FX products, Long positions attract a financing charge; short positions may receive a financing credit (subject to underlying interest rates). For FX products, a financing credit or debit will apply and the nature of the transaction is dependent on the underlying interest rates of the constituent currencies within the FX pair.
A financing transaction is calculated based on the notional value of a position and the Effective Financing Rate. The Effective Financing Rate is commonly the 1 week deposit rate of the asset currency (or currency 2 – currency 1 for FX products), plus (for long positions) or minus (for short positions) a financing ‘spread’ (currently 2.5%*)ⱡ.
The simplified equations to calculate long and short financing transactions are as follows:
Daily Financing Transaction = -[value of trade x Effective Financing Rate x 1/360**]
Daily Financing Transaction = [value of trade x Effective Financing Rate x 1/360**]
Note: Where the 1 week deposit rate < financing ‘spread’, a charge will result for both long and short positions.
Additionally, as financing represents the amount of leverage that is financed by us, as one trades with lower leverages, the financing charge will decrease (for long positions) or the financing credit will increase (for short positions).
1. An example of a long financing transaction:
Let’s assume a client has a long position in 2,000 shares (equivalent) of company XYZ. At our daily financing time, this stock is valued at £20. If the current 1 week deposit rate for GBP is 1%, the calculation of a daily long financing charge would be as follows:
Daily (Long) Financing Charge: -(2,000 x £20) x (1% + 2.5%) x 1/365 = -£3.84
Let’s assume that the client has traded this stock on a margin requirement of 10%. As such, the client will only be charged 90% of the amount calculated above (so £3.45 is charged to the client’s account).
2. An example of a short financing transaction:
Let’s assume a client has a short position in 500 shares equivalent of company ABC. At our daily financing time, this stock is valued at $300. If the current 1 week deposit rate for USD is 5%, the calculation of a daily short financing credit would be calculated as follows:
Daily (Short) Financing Credit:(500 x $300) x (5% - 2.5%) x 1/360 = +$10.42
Let’s assume that the client has traded this stock on a margin requirement of 25%. As such, the client will only receive a financing credit of 25% of the amount calculated above (so $2.60 is credited to the client’s account).
It is worth noting that those charges do not apply for any CFDs with an expiry date (such as for example CFDs on Futures) as the price in the underlying takes that already into account.
*Note that SGD and HKD denominated products are charged at the rate of 4.5% p.a. plus relevant interbank rate. Bitcoin products are charged at a rate of 25%. Social Trading products incur an additional 0.5% charge.
**or 365 for GBP denominated assets
ⱡ If the calculated financing charge is lower than 0.01 (0.10 for DKK or SEK) units in the account base currency a minimum fee of 0.01 (0.10 for DKK or SEK) will apply. Note: this does not apply in the case of zero leveraged long positions where financing charges will always be zero.