One of the settlement methods in overseas FX is “rollover.” If you’ve had experience with other financial transactions, you may have heard the term “rollover.” But what does rollover mean in the context of FX?

If you aim to target swap points in FX trading, understanding the rollover mechanism is essential. This explanation will make it easy to understand, even for beginners who are just starting FX trading.

What is Rollover?

Rollover refers to the process of carrying over an unsettled position’s settlement date to the next day or beyond. It is an automatic process where the settlement date for a position you hold is extended for long-term holding to the next day or beyond.

In FX trading, it is a general rule that settlements must occur two business days after the trade. For example, if you purchase USD/JPY and wish to hold the position for more than two business days, normally you would need to close the position and buy again. However, repeating the process of closing and re-entering positions every day can be cumbersome, and you would have to keep an eye on the FX market constantly.

So, why is it so easy to trade FX? This is because FX brokers automatically carry out the rollover process for you. For example, if you have a short position, the broker will close it by buying and then maintain the short position again. In other words, as an FX trader, you do not have to close and re-enter positions every day.

Rollover is a feature offered by both domestic and foreign FX brokers, allowing traders to hold positions for the desired period without issues. It plays an essential role in making FX trading more accessible and easier for everyone.

Timing of Rollover

Some beginners might mistakenly believe that rollover happens at midnight, when the date changes. However, since the FX market operates 24 hours a day, 365 days a year, trading continues all around the world even during the late hours in Japan. So, when does rollover actually occur?

Rollover happens at the close of the New York market, which is 7:00 AM Japan time (6:00 AM during Daylight Saving Time). At this time, swap points are applied to any unsettled positions.

Daylight Saving Time (DST) is a system used in the US, Europe, Oceania, and other major developed countries during the spring to fall period. Since overseas FX involves trading foreign currencies, it’s important to be aware of DST.

Click here for details on IS6FX trading hours
>>IS6FX Trading Time

Additionally, trades executed between midnight and 7:00 AM Japan time are considered to have occurred on the previous day, while trades executed after 7:00 AM Japan time are considered to have occurred on the same day. This time frame might differ from conventional trading hours, so be mindful of it when trading.

The Structure of Rollover

In the foreign exchange market, there are two types of transactions: “spot transactions” (immediate delivery) and “forward transactions” (future delivery).

Though referred to as the foreign exchange market, there is no physical exchange like a stock exchange. FX traders use computers or smartphones to engage in trades from anywhere around the world. The most active trading times are often named after the financial centers, such as New York Time (NY Market) and Tokyo Time (Tokyo Market).

Spot transactions have a settlement date (value date) that occurs two business days after the trade. The value date can vary depending on the country, and even national holidays can affect the settlement date. Therefore, it’s important to always be aware of the settlement date for the currency pair you’re trading.

Rollover allows you to carry over positions without having to settle them. If you don’t want to settle the position on the regular settlement date, you can use rollover to extend the settlement date and hold the position for a longer period without concern for settlement deadlines. You can choose to settle the position through opposite transactions whenever you like.

Settlement refers to the payment for the exchange of foreign currency. For example, if you buy 10,000 USD at 100 yen per dollar, you would pay 1 million yen to receive the 10,000 USD. This currency exchange is referred to as settlement in FX, although the terminology may be different from other types of transactions.

For margin trading, rollover is repeated automatically until you decide to close the position. Rollover is a system that is suitable for people who want to invest in FX for the long term.

The Relationship Between Rollover and Swap Points

When you hold a position overnight using rollover, swap points are applied. Even if there is a weekend involved, swap points accumulate based on the number of days the position is carried over.

For example, if you hold an FX position on Wednesday, the settlement date will generally be on Friday, two business days later. If you carry the position over to Thursday, the settlement date will be pushed to the following Monday due to the weekend.

For a transaction on Thursday, swap points for three days will be generated on Friday and settlement will occur on Monday. This also depends on the number of days to roll over, so that is why swap points seem to fluctuate greatly after holidays and public holidays.

Swap means “to exchange,” and in FX trading, this refers to the exchange of one currency for another. Swap points are the result of the difference in interest rates between the currencies being traded. If you buy a currency with a high-interest rate and sell one with a low-interest rate, you receive swap points. Conversely, if you sell the high-interest currency and buy the low-interest currency, you end up paying swap points.

Swap points adjust the interest rate difference at the time of rollover. Even if you hold a position in the same pair of currencies, the swap points can change if the interest rates fluctuate. It is important to remember that you may expect to receive swap points but end up having to pay instead if the interest rate changes.

Also, when there is an imbalance in the supply and demand of currencies, the interest rate differential may not be reflected. When the interest rate of the currency you sold is higher than the interest rate of the currency you bought, you may have to pay swap points. Don’t forget that the interest rate differential at the time of rollover has a big impact.

Interest rates vary by currency, so if you carry over a position without settling it, you will have to adjust for the interest rate difference. Swap points fluctuate depending on changes in the interest rate situation in each country. Therefore, the swap points you receive now are not necessarily the ones you will receive in the future. Be sure to carefully consider the timing of rollovers and settlements to avoid situations where you were expecting to receive them but then had to pay them instead.

Conclusion

Rollover in FX refers to carrying over a position and is used to delay settlement or maintain a position for a long period of time.

FX trading is settled at the closing price of the New York market every day, and positions and margin are updated. When positions are carried over via rollover, swap points are applied, so traders who aim to hold positions long-term should carefully consider rollover when trading.