• Tomorrow‑next (tom‑next or tom‑next) is an FX rollover: a short‑term swap that postpones settlement by rolling a currency position from “tomorrow” (T+1) to “next” (T+2) so the trader avoids physical delivery.
– The tom‑next swap reflects the one‑day interest‑rate differential between the two currencies and can be either a small debit (cost) or credit to the holder depending on which currency pays the higher rate.
– Tom‑next trades are executed in the interbank market (for large players) or provided automatically by brokers for retail clients as an overnight swap/roll.
– Understand conventions (business‑day counting, day‑count basis), holiday/Weekend effects, margin and counterparty risk before using tom‑next.
What is Tomorrow Next (Tom‑Next)?
Tom‑next is a short‑term foreign‑exchange transaction that simultaneously offsets a spot trade and creates a forward trade that settles one business day later. Practically, a trader who would otherwise have to settle a spot FX trade (usually T+2) rolls the position so settlement is deferred by one day—“tomorrow” becomes the new spot and “next” is the following business day. It’s a widely used mechanism to keep FX positions open beyond the normal spot settlement date without taking actual delivery of the currencies.
Why traders use tom‑next
– Avoid physical delivery of currency when their intent is speculative or hedging, not settlement.
– Capture (or pay) the daily interest differential between two currency rates (the carry).
– Maintain a position overnight or across settlement dates with minimal transaction friction.
How Tom‑Next Works — Concept and Mechanics
1. Standard spot settlement: Most FX spot trades settle in two business days (T+2). If you open a position and do nothing, you would be required to buy/sell the actual currency on that settlement date.
2. Rolling the position: To avoid settlement, traders instruct their counterparty (bank or broker) to roll the position tom‑next. The dealer executes an FX swap: one leg is tom (settles T+1) and the other is next (settles T+2). Net effect: the trader’s position is extended by one day.
3. Swap cost/credit: The price difference (swap points) reflects the interest‑rate differential between the two currencies for the one‑day period. If you are long the higher‑yielding currency you typically receive a credit; if you are long the lower‑yielding currency you typically pay a debit.
4. Settlement conventions: Swap amounts are usually tiny relative to the notional but follow money market conventions (day‑count basis—often ACT/360 or ACT/365—market business‑day calendars and holiday adjustments).
Practical steps to execute a tom‑next rollover
1. Know the settlement timetable
• Confirm your broker’s/desk’s spot convention (normally T+2) and their rollover cut‑off times (local server time).
2. Check interest rates and swap points
• Ask your broker/dealer for the tom‑next quote (in swap points or an adjusted price). For an OTC or institutional trade, the forwards desk or STIR desk will quote the swap.
3. Calculate the cost or credit (approximate)
• Approximate one‑day forward adjustment: forward ≈ spot × (1 + r_domestic × t) / (1 + r_foreign × t)
• For a short one‑day t use t = 1/360 (or 1/365 depending on convention).
• Swap points ≈ spot × (r_domestic − r_foreign) × t (use correct day‑count).
• Example: spot 1.1000, domestic r = 2.5% (USD), foreign r = −0.5% (EUR), t = 1/360 => swap ≈ 1.1000 × (0.025 − (−0.005)) / 360 ≈ 0.0000917 (≈0.92 pip).
4. Confirm margin and liquidity
• Ensure you have sufficient margin to carry the position overnight. Large notional rolls can require additional collateral.
5. Place the rollover instruction
• For institutional traders: send the tom‑next instruction to your dealer, confirm the quoted swap points and ticket details.
• For retail traders: many brokers automatically roll positions at their daily cutoff and post a swap/roll fee or credit to your account—check the broker’s rollover policy and costs.
6. Confirm booking and accounting
• Ensure the swap is booked (trade ticket shows tom/next legs or a rollover remark). Reconcile P&L and daily valuation.
7. Monitor and repeat as needed
• If you want the position for multiple nights, repeat the roll each day or let the broker automatically rollover per their practice.
Example (numeric)
– Position: Long EUR/USD, spot = 1.1000, notional = €1,000,000
– Interest rates: EUR = −0.50% p.a., USD = 2.50% p.a. (difference = 3.00% p.a.)
– Day‑count: ACT/360, one business day t = 1/360
– Approximate one‑day swap = spot × (r_USD − r_EUR) × t
= 1.1000 × (0.025 − (−0.005)) × 1/360
= 1.1000 × 0.03 / 360 ≈ 0.0000917
– New effective price tomorrow (after applying swap) ≈ 1.1000 − 0.0000917 = 1.0999083
– For €1,000,000, the daily carry credit ≈ (€1,000,000 × 0.0000917) ≈ $91.70 (USD received) — signs depend on which currency you’re long.
Special considerations and risks
– Holiday and weekend effects: If tom‑next falls adjacent to a bank holiday or weekend in either currency’s market, the number of days carried and the swap amount changes—be careful around cross‑market holidays.
– Day‑count conventions: Money market instruments may use ACT/360 or ACT/365; using the wrong basis misstates the swap.
– Counterparty risk: In OTC markets, the dealer is the counterparty. If the counterparty fails, the roll may not be honored.
– Liquidity risk: Extremely large rolls or illiquid currency pairs may have wide swap spreads.
– Interest‑rate risk: If interest rates change unexpectedly, future roll costs change.
– Operational risk: Incorrect booking/time zone mismatches can leave you unintentionally exposed to settlement/delivery.
– Broker policies: Retail brokers may apply their own markup on swap rates and may net or post swap charges daily—check terms.
– Regulatory/tax and accounting treatment: Rolling and accruing swap receipts/payments have accounting and tax implications—coordinate with your accountant.
Tip
– For retail traders new to tom‑next, use demo accounts and review your broker’s rollover schedule and swap rates. If holding positions across weekends or holidays, explicitly calculate the total carry cost beforehand.
Is currency trading good for beginners?
– FX can be accessed by beginners but carries significant leverage and complexity (interest differentials, settlement, geopolitical drivers). Beginners should:
• Learn market mechanics (spot, forwards, swaps, settlement),
• Start with small size or a demo account,
• Use strict risk management (stop losses, position sizing),
• Understand rollover and overnight financing costs before holding positions beyond a trading day.
What are some of the risks involved with currency trading?
– Exchange‑rate (market) risk: Currency rates move on macro news, central bank decisions, and flows.
– Leverage and margin risk: FX is typically offered with leverage—small moves can produce large gains or losses.
– Liquidity risk: Some pairs or times of day have limited liquidity and wider spreads.
– Counterparty/credit risk: OTC trades depend on counterparties fulfilling commitments.
– Operational and settlement risk: Errors in settlement instructions, time zone mistakes, and holiday calendars can cause unexpected delivery obligations.
T+1, T+2, T+3 — settlement shorthand
– T denotes the trade date. T+n indicates the number of business days until settlement.
• T+1 settles one business day after the trade (common for certain FX and some stocks in some jurisdictions).
• T+2 (typical FX spot) settles two business days after trade date.
• T+3 settles three business days after trade.
– Example: a trade executed on Wednesday with T+2 settlement will settle on Friday (assuming Friday is a business day). If trade date is Friday and T+2 applies, settlement occurs on Tuesday because Saturday and Sunday are not business days.
Important operational items
– Know your broker’s rollover time/cut‑off (e.g., 5 pm New York is a common FX rollover timestamp).
– Confirm which day‑count basis your broker uses for calculating swap fees.
– Track whether your broker automatically rolls or requires instruction.
– For large institutional trades, coordinate with the dealer’s forwards/short‑term rates desk and ensure booking confirmation.
The Bottom Line
Tomorrow‑next is a simple but essential tool in FX markets to avoid physical settlement and to carry positions overnight. It involves executing a one‑day swap that embeds the interest‑rate differential between two currencies. While the mechanics are straightforward, practical use requires attention to day‑count conventions, holidays, broker/dealer policies, margin needs and counterparty risk. For retail traders, understand how your broker handles rollovers (and what fees they charge) before holding positions overnight; for institutions, coordinate with the forwards or STIR desk and confirm swap points and booking.
Sources and further reading
– Investopedia — Tomorrow Next:
– Bank for International Settlements (BIS) — OTC foreign exchange turnover (April 2022): data on market size and liquidity.